Mid-South Telecommunications Company v. Norman K. Best and Phillip W. Faris, Jr. ( 2006 )

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-04-00586-CV
Mid-South Telecommunications Company, Appellant
v.
Norman K. Best and Philip W. Faris, Jr., Appellees
FROM THE DISTRICT COURT OF TRAVIS COUNTY, 200TH JUDICIAL DISTRICT
NO. GN401565, HONORABLE ROSE SPECTOR, JUDGE PRESIDING
OPINION
This case presents the issue of when a creditor’s claim against a guarantor of a debt
accrues. Norman K. Best and Philip W. Faris, Jr. were among the guarantors of a loan from Mid-
South Telecommunications Company to VidiMedix Corporation. After VidiMedix defaulted on the
loan when it came due on December 31, 1999, Mid-South demanded payment from the guarantors.
Eventually, in May 2004, Mid-South sued Best and Faris, asserting a breach-of-contract claim for
failure to perform under the Guaranty. Mid-South sought summary judgment on that claim. Best
and Faris filed both a response and a cross-motion for summary judgment raising the four-year
statute of limitations. See Tex. Civ. Prac. & Rem. Code Ann. § 16.004(a)(3) (West 2002). The
district court denied Mid-South’s motion and granted that of Best and Faris, finding that Mid-
South’s claims were barred. For the reasons stated below, we will affirm.
BACKGROUND
The summary judgment record reflects the following. On January 27, 1999,
VidiMedix executed a “Convertible Promissory Note” (the “Note”) in favor of Mid-South for
$250,000. The Note was made payable on or before December 31, 1999. Paragraph 3 of the Note,
titled “Default,” provided that VidiMedix “will be deemed in default under this Note if [it] fails to
meet its payment obligations hereunder.” On the same date, in consideration for the loan and Note,
four guarantors, including Faris and Best,1 executed a guaranty under which
each of the undersigned guarantors . . . hereby severally, unconditionally and
irrevocably guarantees the prompt and complete payment of all amounts [VidiMedix]
owes to [Mid-South] under the Note, in strict accordance with its terms.
Each guarantor agreed to be liable for a specified pro-rata share of the unpaid debt and accrued
interest. Best and Faris’s shares were 8.1% and 2.36%, respectively. Further, each guarantor
explicitly waived any right to require Mid-South to proceed first against VidiMedix, to exhaust any
security held by VidiMedix, or to exercise any other remedy Mid-South might possess before seeking
recovery from them.
Paragraph 6 of the Guarantee provided:
One or more of the following shall constitute an Event of Default under the
Guaranty[:] if Guarantor purports to revoke or otherwise avoid any obligation under
this Guaranty; or if a Guarantor dies, becomes insolvent, commences or has
commenced against him an action under the United States Bankruptcy Code,
becomes subject to any criminal prosecution, suffers a judgment or judgments for the
1
The record indicates that each guarantor was a principal of VidiMedix. Faris was the
company’s president and CEO.
2
payment of money individually or in the aggregate in excess of $100,000, or suffers
any portion of his assets to be attached, seized or levied upon; or any circumstances
arising causing [Mid-South] in good faith, to become insecure as to the satisfaction
of any of Guarantors’ obligations under this Guaranty.
It is undisputed that VidiMedix defaulted on the Note when it became due on
December 31, 1999. On April 26, 2000, Michael Stephens, attorney for Mid-South, sent a letter to
VidiMedix (through Faris, its President and CEO) demanding payment of all principal and accrued
interest due on the Note. On the same day, Stephens also sent letters to both Faris and Best
demanding payment of their respective pro-rata percentages of principal and accrued interest for
which they were each liable under the Guaranty.2 Subsequently, on June 15, 2000, Michael L.
Patrick, Mid-South’s Executive Vice-President, wrote Faris, as VidiMedix’s president and CEO,
“relative to our concerns in how you, on behalf of VidiMedix, have handled our Note.” Patrick
stated that Mid-South had granted a three-month extension of the note’s due date to March 2000, that
VidiMedix had still not performed, that Faris had subsequently indicated that VidiMedix was
experiencing financial difficulties and would likely file for bankruptcy, and that Faris had advised
that the guarantors could not honor the Guaranty. Patrick added that Faris had been furtive and
misleading in his communications with Mid-South. Patrick suggested that if the guarantors would
restructure the Guaranty, “likely Mid-South will consent to converting the Note into eMedSoft.com
shares on the same basis as other Bridge Noteholders.”
2
The letter indicates that Stephens also enclosed a copy of the demand letter he had sent to
VidiMedix.
3
The record reflects further negotiations between Mid-South and the guarantors over
the ensuing four years. It is undisputed, however, that neither Faris nor Best ever performed their
obligations under the Guaranty. Mid-South ultimately filed suit against Faris and Best on May 17,
2004, for breach of contract based on their failure to perform under the Guaranty. Faris and Best
answered with a general denial and the affirmative defense that the four-year statute of limitations
barred Mid-South’s claims. See Tex. Civ. Prac. & Rem. Code Ann. § 16.004(a)(3) (suit on debt
must be filed not later than four years after cause of action accrues).
Mid-South moved for summary judgment as to both liability and damages on its
claims against Faris and Best. Faris and Best filed a cross-motion for summary judgment and a
response to Mid-South’s motion, relying on their limitations defense and their affidavits that neither
ever made payments in accordance with the Guaranty. Best and Faris contended that, as a matter of
law, Mid-South’s breach-of-contract claims against them accrued on December 31, 1999, the date
that VidiMedix defaulted on the Note. Mid-South countered that, under the terms of the Guaranty,
its claims accrued only upon an “Event of Default” defined in paragraph 6 of the agreement and that
Best and Faris failed to conclusively establish that such an event occurred earlier than four years
before Mid-South filed suit. According to Mid-South, the earliest evidence in the summary
judgment record of an Event of Default was its June 15, 2000 letter to Faris, which it characterized
as a memorialization of “circumstances arising causing [Mid-South] in good faith, to become
insecure as to the satisfaction of any of Guarantors’ obligations under this Guaranty.”3
3
Alternatively, Mid-South suggested that limitations did not begin to run until it filed its
petition on May 17, 2004.
4
The district court granted Best and Faris’s cross-motion for summary judgment,
finding that Mid-South’s claims were barred, denied Mid-South’s motion, and rendered a take-
nothing judgment in favor of Best and Faris. This appeal followed.
DISCUSSION
Mid-South presents a single issue on appeal: whether the district court erred in
determining that Mid-South’s breach-of-contract claim accrued more than four years before it filed
suit so as to be barred by limitations. See Tex. Civ. Prac. & Rem. Code Ann. § 16.004(a)(3).
Standard of review
We review the district court’s summary judgment de novo. Valence Operating Co.
v. Dorsett, 164 S.W.3d 656, 661 (Tex. 2005); Provident Life & Accident Ins. Co. v. Knott, 128
S.W.3d 211, 215 (Tex. 2003). When reviewing a summary judgment, we take as true all evidence
favorable to the nonmovant, and we indulge every reasonable inference and resolve any doubts in
the nonmovant’s favor. Valence Operating Co., 164 S.W.3d at 661; Knott, 128 S.W.3d at 215;
Science Spectrum, Inc. v. Martinez, 941 S.W.2d 910, 911 (Tex. 1997). Summary judgment is proper
when there are no disputed issues of material fact and the movant is entitled to judgment as a matter
of law. Tex. R. Civ. P. 166a(c); Shell Oil Co. v. Khan, 138 S.W.3d 288, 291 (Tex. 2004) (citing
Knott, 128 S.W.3d at 215-16). When, as here, both parties move for summary judgment and the
district court grants one motion and denies the other, we review the summary-judgment evidence
presented by both sides, determine all questions presented, and render the judgment the district court
should have rendered. Texas Workers’ Comp. Comm’n v. Patient Advocates of Tex., 136 S.W.3d
643, 648 (Tex. 2004); FM Props. Operating Co. v. City of Austin, 22 S.W.3d 868, 872 (Tex. 2000).
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Best and Faris’ summary judgment motion
We will consider first whether the district court erred in granting summary judgment
for Best and Faris. Best and Faris sought summary judgment on the ground that “[t]he statute of
limitations bars Mid-South’s claims.”4 There is no dispute that this case is governed by the four-year
statute of limitations for suits on debts, see Tex. Civ. Prac. & Rem. Code Ann. §16.004(a)(3), or that
this provision required Mid-South to bring its breach-of-contract action no later than four years after
the day its cause of action accrued. The parties’ dispute centers on the date on which Mid-South’s
cause of action accrued. When a cause of action accrues is a question of law. Moreno v. Sterling
Drug, 787 S.W.2d 348, 351 (Tex. 1990). A cause of action generally accrues at the time when facts
come into existence that authorize a claimant to seek a judicial remedy. Murray v. San Jacinto
Agency, Inc., 800 S.W.2d 826, 828 (Tex. 1990).
Best and Faris argue that Mid-South’s breach-of-contract claim accrued on December
31, 1999, when the Note matured and VidiMedix defaulted on its repayment obligation. Best and
Faris do not purport to adopt the date at which Mid-South’s claim under the Note against VidiMedix
accrued, nor are they attempting to incorporate any limitations defense that VidiMedix might have
asserted against such a claim. See, e.g., Beddall v. Reader’s Wholesale Distribs., Inc., 408 S.W.2d
237, 240 (Tex. Civ. App.—Austin 1966, no writ) (where guarantor can be sued independently from
principal obligor, guarantor cannot invoke principal obligor’s limitation’s defense); see also Willis
v. Chowning, 40 S.W. 395, 396-97 (1897) (in cases where surety could be sued without joining
4
Best and Faris also asserted as a summary judgment ground that a contractual waiver of
limitations within the Guaranty was void and unenforceable. Mid-South did not dispute this
proposition in the district court, nor has it attempted to invoke the waiver on appeal.
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principal, surety could not assert maker’s limitations defense on note); Western Casket Co. v.
Estrada, 116 S.W. 113, 113-14 (Tex. Civ. App.—El Paso 1909, no writ) (applying principles
announced in Willis to guarantors). Instead, to determine when Mid-South’s claim against them
accrued, Best and Faris recognize that we must look to the source of their obligations to Mid-
South—the terms of the guarantee. See Vastine v. Bank of Dallas, 808 S.W.2d 463, 464 (Tex. 1991);
Wiman v. Tomaszewicz, 877 S.W.2d 1, 6 (Tex. App.—Dallas 1994, no writ).
We construe a guaranty as any other contract. The construction of a contract is a
question of law for the court. Buys v. Buys, 924 S.W.2d 369, 372 (Tex. 1996). We examine the
entire document and consider each part with every other part so that the effect and meaning of one
part on any other part may be determined. Heritage Res. v. Nationsbank, 939 S.W.2d 118, 121 (Tex.
1996); Steeger v. Beard Drilling Co., 371 S.W.2d 684, 688 (Tex. 1963). We interpret the contract
by ascertaining the true objective intentions of the parties, based on the contract language. SAS Inst.,
Inc. v. Breitenfeld, 167 S.W.3d 840, 841 (Tex. 2005). We presume that the parties to a contract
intend every clause to have some effect. Heritage Res., 939 S.W.2d at 121; Ogden v. Dickinson
State Bank, 662 S.W.2d 330, 331 (Tex. 1983). We give words their plain, common, or generally
accepted meaning unless the instrument shows that the parties used them in a technical or different
sense. Heritage Res., 939 S.W.2d at 121.
Under the Guaranty, Best and Faris “unconditionally and irrevocably” guaranteed “the
prompt and complete payment” of VidiMedix’s obligations under the Note “in strict accordance with
its terms.” This type of language tends to denote an absolute guaranty, or one made contingent solely
upon the default of the principal obligor. See Universal Metals & Mach., Inc. v. Bohart, 539 S.W.2d
874, 877-78 (Tex. 1976). Under an absolute guaranty, a guarantor is primarily liable on the
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underlying obligation; thus, “[t]he terms of the note must be examined to ascertain the guarantor’s
obligations under his unconditional guarantee, for by that guaranty he agrees to pay the instrument
according to its terms if it is not paid when due.” Hopkins v. First Nat’l Bank at Brownsville, 551
S.W.2d 343, 345 (Tex. 1977); see Reece v. First State Bank of Denton, 566 S.W.2d 296, 297 (Tex.
1978).
Each guarantor also explicitly waived “all presentments, demands for performance,
notices of performance, protest, notices of protest, notices of dishonor, and notices of acceptance of
the Guaranty and its existence, creation, or incurring of new or additional indebtedness” and any
right to require Mid-South to proceed against VidiMedix, to exhaust any security interest held by
VidiMedix, or to seek any other remedy. See, e.g., Ocean Transp., Inc. v. Greycas, Inc., 878 S.W.2d
256, 267-68 (Tex. App.—Corpus Christi 1994, writ denied). Thus, demand was not an integral part
of the cause of action or a condition precedent to Mid-South’s right to enforce the Guaranty. See id.
Paragraph 6 defines an “Event of Default” under the Guaranty: if a guarantor
“purports to revoke or otherwise avoid any obligation under this Guaranty,” dies, becomes insolvent,
commences bankruptcy or has bankruptcy commenced against him, is criminally prosecuted, incurs
a money judgment greater than $100,000, has assets attached, seized, or levied upon; or “any
circumstances aris[e] causing [Mid-South] in good faith, to become insecure as to the satisfaction
of any of Guarantors’ obligations under this Guaranty.” Construing paragraph 6 in the context of
the Guaranty as a whole, see Columbia Gas Transmission Corp., 940 S.W.2d at 589, we find that
it operates to identify acts and omissions that constitute a failure to perform under the Guaranty, but
it does not limit the central promise that Best and Faris made concerning “the prompt and complete
payment of all amounts that Borrower owes [Mid-South] under the Note, in strict accordance of its
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terms.” In other words, Best and Faris made themselves bound, when guaranteeing the loan, to the
payment obligations of the Note. Paragraph 6, then, adds events that could constitute an event of
default on the part of a guarantor that do not arise from the terms of the Note itself. In the end, the
guarantors had a payment obligation immediately upon VidiMedix’s default and, from that point
forward, were in breach of that obligation as long as they failed to perform. Cf. Ocean Transp., 878
S.W.2d at 268.
All parties agree that VidiMedix defaulted on the Note on December 31, 1999. Best
and Faris became obligated to make payment under the terms of their guaranty agreements on that
date. Thus, Mid-South’s claim against Best and Faris accrued on December 31, 1999. Other than
its reliance on paragraph 6, Mid-South did not present any grounds for finding a later accrual date.
Accordingly, the district court did not err in granting summary judgment for Best and Faris and
denying Mid-South’s motion.
CONCLUSION
We affirm the district court’s grant of summary judgment in favor of Best and Faris.
Bob Pemberton, Justice
Before Justices B. A. Smith, Puryear and Pemberton
Affirmed
Filed: January 27, 2006
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