United States v. First City Capital Corp.

United States Court of Appeals,
Fifth Circuit.
No. 94-20186.
UNITED STATES of America, Plaintiff,
v.
FIRST CITY CAPITAL CORP., Defendant.
U.S. SMALL BUSINESS ADMINISTRATION as Receiver for First City
Capital Corp., Plaintiff-Appellee,
v.
BARRON CONSTRUCTION COMPANY, Bert I. Barron and Brent Barron, et
al., Defendants,
Brent J. Barron, Defendant-Appellant.
May 31, 1995.
Appeal from the United States District Court for the Southern
District of Texas.
Before WISDOM, JONES and EMILIO M. GARZA, Circuit Judges.
WISDOM, Circuit Judge:
In this case, the plaintiff/appellee the Small Business
Administration ("SBA"), as receiver, sought to enforce a guarantee
agreement against the defendant/appellant Brent J. Barron almost
ten years after the maturity date of the underlying debt. The
district court granted summary judgment in favor of the SBA. The
court found that language in the guarantee agreement made a demand
for payment a condition precedent to suit on the guarantee
agreement, and that, therefore, the applicable statute of
limitations did not begin to run until a demand was made. Because
we find that the demand for payment was unreasonably delayed, we
conclude that any action to enforce the guarantee agreement is
barred under Texas law. Accordingly, we REVERSE and RENDER.
I.
On December 28, 1978, the Small Business Investment Company of
Houston, a Texas company that later changed its name to First City
Capital Corporation ("lender"), and Barron Construction Company, a
Texas corporation ("borrower"), executed a written agreement for a
loan of $50,000 for working capital (the "loan agreement").
Section II-A of the loan agreement specified that the loan would be
evidenced by a promissory note attached as Exhibit "A" to the loan
agreement. The loan agreement specified that this promissory note
would be in the principal sum of $50,000 bearing interest at 14
percent with the interest being paid in monthly installments
beginning February 10, 1979, and continuing monthly thereafter
"until paid in full". The loan agreement further specified that
the principal would be due and payable in monthly installments of
$892.85 each, with the first installment being due and payable on
July 10, 1979, and on the tenth day of each month thereafter "until
July 10, 1983 at which time the entire remaining balance owing on
said note will be due and payable". The loan agreement further
specified that the promissory note "shall be guaranteed in its
payment, unconditionally and without reservation, jointly and
severally by all the principals of borrower", and that "this [l]oan
[a]greement is to be construed in accordance with the laws of the
State of Texas".
On the same date, the borrower executed and delivered a
promissory note in the amount of $50,000 (the "note"). The note
contains the same provisions as the loan agreement except that the
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note does not contain any language specifying that the entire
remaining balance will be due and payable on July 10, 1983. The
note does expressly state that it shall be governed by Texas law
and that it was executed pursuant to the loan agreement of the same
date.
Also, on the same date, a separate agreement was signed by
Bert I. Barron and Brent J. Barron (the "guarantee agreement"). In
the opening paragraph of the guarantee agreement, the lender is
identified by name, the borrower is identified by name, and the
principal amount of the note guaranteed is specified as $50,000.
The guarantee agreement further provides that the note being
guaranteed "is attached hereto as Exhibit "A' and made a part
hereof for all purposes".
The lender's records reflect that the borrower never made
monthly installments of interest and principal as specified in the
note. The borrower made payments in various amounts at varying
intervals until December 22, 1983, when the last payment was made.
After these payments were applied, there was an outstanding balance
on the note in the principal amount of $27,752. Neither the
borrower nor any guarantor made any payments on the note after
December 22, 1983, and there is no evidence in the record of any
ratification, renewal, or extension agreement relating to the note.
On April 7, 1988, the United States of America, as plaintiff,
filed suit in federal district court under 15 U.S.C. § 687 against
the lender, First City Capital Corp., alleging (1) that the lender
violated various regulations issued by the Small Business
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Administration ("SBA") under the Small Business Investment Act, 15
U.S.C. § 661 et seq. (the "Act"); (2) that the lender was in
default on certain subordinated debentures which were guaranteed by
the SBA; (3) that the lender's license and franchise under the Act
should be forfeited; and (4) that the SBA should be appointed as
"permanent receiver of First City for the purpose of liquidating
all of defendant's assets and satisfying the claims of creditors
therefrom in the order of priority as determined by this court, and
pursuing all causes of action available to First City against third
parties".
On the same day, a stipulation of settlement was filed between
the United States and the lender, and an order was entered by the
district court granting the relief sought in the original
complaint. Some 15 months later, on July 31, 1989, the SBA, as
receiver of the lender, sent a letter by certified mail to Brent J.
Barron demanding payment of the principal balance of the note in
the amount of $27,750 and an additional sum of about $95,000 of
accrued interest thereon. There is nothing in the record to
indicate Brent J. Barron responded to this demand letter.
Three years and eight months later, on April 9, 1993, the
plaintiff SBA, as receiver, filed a complaint in district court
against Barron Construction Co., Bert I. Barron and Brent J.
Barron, as an ancillary proceeding to the original civil action
under which the SBA was appointed receiver. There was no service
of process served on Barron Construction Co. or Bert I. Barron.
The defendant Brent J. Barron was served and filed his answer on
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May 3, 1993. Subsequently, both parties filed motions for summary
judgment.
In its motion for summary judgment, the SBA argued that the
applicable statute of limitations had not run against Barron's
obligation on the guarantee agreement. The SBA argued that the
guarantee agreement contained a provision which made a demand for
payment a condition precedent to bringing suit on the guarantee
agreement. The SBA contends that, because of this condition
precedent, the applicable statute of limitations did not start to
run until the demand letter of July 31, 1989 was received. In
making this contention, the SBA relies on the following language in
the Guarantee Agreement:
If the promissory note above described shall become due and
remain unpaid, in whole or in part, the Guarantors, jointly
and severally, will, on demand (and without further notice of
dishonor, and without any notice having been given to the
Guarantors previous to such demands, of the acceptance by the
lender of this guaranty) pay to the Lender its successors or
assigns, at its office in Harris County, Texas, the full
amount due and owing on said promissory note ... (underline
added).
Barron, in his motion for summary judgment, argued that the
above language did not make a demand a condition precedent to suit,
and therefore, the applicable statute of limitations began to run
on July 10, 1983, the date the note was due and payable. Barron,
alternatively, argued that, even if a demand was a condition
precedent to suit on the guarantee agreement, the action was barred
under Texas law because the demand for payment was unreasonably
delayed.
The district court denied Barron's motion for summary
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judgment. The court found that the language in question made a
demand a condition precedent to suit on the guarantee agreement,
and that, therefore, the statute of limitations began running on
July 31, 1989, the date the demand was made. The district court,
however, made no finding regarding whether the demand had been made
within a reasonable time. The district court then granted the
SBA's motion for summary judgment and awarded the SBA $62,919, the
original $27,752 plus accrued interest. Barron appeals the
district court's decision.
II.
We review the district court's denial of summary judgment de
novo.1 In this case, we need not decide the issue whether the
language in the guarantee agreement is sufficient under Texas law
to create a condition precedent to suit on the guarantee agreement.
We find that, even if the above language makes a demand a condition
precedent to suit, the demand was unreasonably delayed, and,
therefore, under Texas law any action on the guarantee agreement is
barred.
Texas Law is the determinative law. All of the documents were
executed and delivered in Texas between corporations organized
under the laws of Texas and doing business in Texas. The loan
agreement and the note expressly made Texas law applicable, and the
loan agreement had a copy of the note attached thereto as Exhibit
"A" and incorporated therein for all purposes. Accordingly, the
1
Berry v. Armstrong Rubber Co., 989 F.2d 822, 824 (5th
Cir.1993), cert. denied, --- U.S. ----, 114 S. Ct. 1067, 127
L. Ed. 2d 386 (1994).
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applicable statute of limitations is Texas's four year statute of
limitations.2
In determining the reasonableness of a demand for payment on
the guarantee agreement under Texas law, the maturity date of the
underlying note is important. As indicated previously, the note in
this case states no final maturity date, but the loan agreement
specified that on July 10, 1983, "the entire remaining balance
owing on said note will be due and payable". On what date then was
the note due and payable? Under Texas law, when a guarantee
agreement is issued in connection with a promissory note, which is
attached to and made part of the guarantee agreement pursuant to a
loan agreement calling for the issuance of such documents, a Texas
court would construe all three documents together and utilize
portions of one document to explain and clarify any ambiguities
which may exist in another document.3 Because the note had no
final maturity date, we think that a Texas court faced with
resolving the ambiguity between the two instruments would construe
the language of the loan agreement as controlling and recognize
that the parties intended that all unpaid principal would become
due and owing on July 10, 1983. It is apparent, therefore, that
the note was due and payable on July 10, 1983, the final maturity
date in the loan agreement.
As a general rule of contract law, where a demand is a
2
Tex.Civ.Prac. & Rem.Code § 16.004(a)(3).
3
Neal v. Hardee's Food Systems, Inc., 918 F.2d 34, 37 (5th
Cir.1990).
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condition precedent to bringing suit on a guarantee agreement, the
statute of limitation does not begin to run until a demand is made.
The demand, however, must be made within a reasonable time.
Where a demand is a condition precedent to suit, the plaintiff
may not, by failing or refusing to perform the condition, toll
the running of the statute and reserve to himself the right to
sue within the statutory period from such time as he decides
to make a demand. On the contrary, it is the general rule
that in such a case a demand must be made within a reasonable
time after it may lawfully be made.4
In this case, the demand for payment on the guarantee
agreement could have been made any time, within a reasonable time,
after July 10, 1983. The demand did not come until July 31, 1989.
Under Texas law, where a demand is a condition precedent to suit on
a guarantee agreement, the demand must be made within a period
coincident with the statute of limitations on the underlying note.5
In this case, we have concluded the note was due and payable on
July 10, 1983. The applicable four year statute of limitations for
suit on the note therefore ran until July 10, 1987. Under Texas
law, this coincident four year statute of limitations established
the reasonable period of time in which a demand for payment could
have been made on the guarantee agreement. Because the demand was
not made within this reasonable period of time, any action on the
guarantee agreement is barred under Texas law. Accordingly, we
4
Aetna Casualty & Surety Co. v. State, 86 S.W.2d 826, 831
(Tex.Civ.App.—Fort Worth 1935, writ dism'd).
5
Gabriel v. Alhabbal, 618 S.W.2d 894 (Tex.Civ.App.—Houston
[1st Dist.] 1981 writ ref'd n.r.e.); Foreman v. Graham, 363
S.W.2d 371 (Tex.Civ.App.—Beaumont 1962, no writ); Dunn v.
Reliance Life and Accident Insurance Company of America, 405
S.W.2d 389 (Tex.Civ.App.—Corpus Christi 1966, writ ref'd n.r.e.).
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VACATE the final order of the district court in favor of SBA as
receiver, and REVERSE the decision of the district court denying
summary judgment in favor of Brent Barron, and we now RENDER
judgment that the SBA as receiver take nothing against the
defendant Brent Barron.
EMILIO M. GARZA, Circuit Judge, concurring in part and
dissenting in part:
I concur in the majority opinion except its holding that:
Under Texas law, this coincident four year statute of
limitations established the reasonable period of time in which
a demand for payment could have been made on the guarantee
agreement. Because the demand was not made within this
reasonable period of time, any action on the guarantee
agreement is barred under Texas law.
Maj. op. at ----. The majority misconstrues the issue: This is
not a question of limitations, but rather the reasonableness of the
delay in making a demand for payment.
Under Texas law:
[The] demand must be made within a reasonable time, which
depends upon the circumstances of each case, and ordinarily is
a question of fact for the jury. In the absence of mitigating
circumstances, a time coincident with the running of the
statute will be deemed reasonable, and if the demand is not
made within that period the action will be barred.
Foreman v. Graham, 363 S.W.2d 371, 372 (Tex.Civ.App.—Beaumont 1962,
no writ).1
1
See also Martin v. Ford, 853 S.W.2d 680, 682
(Tex.App.—Texarkana 1993, writ denied); Cummins & Walker Oil Co.
v. Smith, 814 S.W.2d 884, 886-87 (Tex.App.—San Antonio 1991, no
writ); Intermedics, Inc. v. Grady, 683 S.W.2d 842, 845
(Tex.App.—Houston [1st Dist.] 1985, writ ref'd n.r.e.); Gabriel
v. Alhabbal, 618 S.W.2d 894, 896 (Tex.Civ.App.—Houston [1st
Dist.] 1981, writ ref'd n.r.e.); Dunn v. Reliance Life &
Accident Ins. Co., 405 S.W.2d 389, 391 (Tex.Civ.App.—Corpus
Christi 1966, writ ref'd n.r.e.).
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The district court decided this case on cross-motions for
summary judgment. To support a finding that the SBA's demand "was
not made within [a] reasonable period of time," maj. op. at ----,
and in order to implicate the four-year statute of limitations as
a matter of law, Barron had to make at least a preliminary showing
that there is no genuine issue of material fact on the "absence of
mitigating circumstances." Barron submitted no evidence on this
issue. Accordingly, the question of reasonableness remains a
question of fact for the jury to decide, and I respectfully
dissent.
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