WESTERN-SOUTHERN LIFE ASSURANCE COMPANY, Plaintiff - Appellee Cross-Appellant
GEORGE W. KALEH, Defendant-Appellant Cross-Appellee
from the United States District Court for the Southern
District of Texas
REAVLEY, ELROD, and SOUTHWICK, Circuit Judges.
REAVLEY, Circuit Judge
case involves a lender who sued a guarantor for the breach of
three personal guarantees. George Kaleh signed the guarantee
agreements in conjunction with a real-estate-development
project, and Western-Southern Life Assurance Company financed
the project. After the borrowers defaulted on the underlying
loans, Western foreclosed on the property and sued Kaleh.
district court conducted a bench trial, found each claim
timely, and awarded Western some but not all of its various
forms of damages. Both Kaleh and Western appealed. After
sorting through numerous issues, we vacate and remand for
proceedings consistent with this opinion.
Kaleh and Paul Buchanan (Texas residents) solicited
Western-Southern Life Assurance Company (an Ohio resident) to
finance the development of "the Meritage, " a
luxury apartment complex to be built in Houston, Texas. Kaleh
and Buchanan formed three similarly-named entities for the
purpose of borrowing funds: Sedona Apartments, LP; Sedona
Apts GP, LLC; and Sedona Investors, L.P. The borrowing
entities then secured two loans from Western. The parties
segmented the loans in this manner to differentiate the
interest rates-a lower interest rate for the less risky loan
and a higher rate for the more risky loan.
Sedona Apartments, LP, which held title to the Meritage
property, signed the Construction Loan Agreement and a
corresponding promissory note (referred to collectively as
the "Construction Loan") in exchange for $22, 738,
000. The parties secured the Construction Loan by a deed of
trust for the Meritage property. Second, Sedona Apts GP, LLC
and Sedona Investors, L.P. signed the Mezzanine Loan
Agreement and a corresponding promissory note (referred to
collectively as the "Mezzanine Loan") in exchange
for $6, 139, 200. The collateral for the Mezzanine Loan is
disputed, see infra § B.3, but the loan
documents clarify the collateral was a pledge of 100% of the
membership interest in Sedona Apts GP, LLC and 100% of the
partnership interest in Sedona Investors, L.P, which together
accounted for 100% of the equitable interest in Sedona
Apartments, LP. The loan agreements each contained a Texas
Kaleh signed three personal guarantees. First, Kaleh
guaranteed the debt under the Construction Loan (the
"Construction Guarantee"). Second, Kaleh guaranteed
the debt under the Mezzanine Loan (the "Mezzanine
Guarantee"). Both guarantees further obligated
Kaleh's payment of (1) property insurance; (2) real
estate taxes; (3) unremitted security deposits; and (4)
attorney's fees incurred by Western. Finally, Kaleh
guaranteed completion of the project (the "Completion
Guarantee"), or more specifically, (1) completed
construction of the Meritage; (2) payment of labor and
service fees; (3) payment of budget overruns; (4)
presentation of the Meritage without liens; and (5) payment
of attorney's fees incurred by Western. Each guarantee
contained an Ohio choice-of-law clause.
April 16 and 17, 2009, Western sent the borrowers and Kaleh
notices of default on the two loans, stating an intent to
deem the notes due and payable if default went uncured. On
August 11, 2009, Western delivered notice of acceleration of
the debts. The following month, Western foreclosed on the
membership interests secured by the Mezzanine Loan, purchased
the interests, and took control of the property. Later, in
December 2009, Western foreclosed on the Meritage itself and
purchased the property for $18, 000, 000. Western then sought
to complete construction of the Meritage and incurred various
costs in doing so.
2010, Western demanded payment from Kaleh. Three years later,
on June 26, 2013, Western sued Kaleh for breach of the
guarantees, claiming damages for the unpaid balance of the
loans, post-foreclosure construction costs, settlement of
construction liens, unpaid insurance premiums, unpaid
property taxes, unremitted security deposits, and
attorney's fees. Western paid those attorney's fees to
Baker Botts (for assisting in the foreclosure and lien
settlements), Frost Brown & Todd (for assisting in the
foreclosure and related Ohio litigation), and Vorys, Sater,
Seymour, and Pease (for conducting the present litigation and
appeal). The district court held a bench trial and issued
findings of fact and conclusions of law.
court held all three of Western's breach-of-guarantee
claims were timely. The court then found liability on each
claim and awarded Western $2, 537, 561.78 for the unpaid debt
under the two loans (crediting the value of the property),
and $1, 306, 177.44 for unpaid liens, property taxes,
security deposits, and insurance premiums. But the court
denied Western a vast majority of its $925, 956 in
attorney's fees and all of its $619, 981 in
post-foreclosure construction costs.
appealed, challenging the timeliness of Western's various
claims. And Western cross-appealed, challenging the denial of
its attorney's fees and post-foreclosure construction
STANDARD OF REVIEW
wake of a bench trial, "findings of fact are reviewed
for clear error and legal issues are reviewed de
novo." In re Mid-S. Towing Co., 418 F.3d
526, 531 (5th Cir. 2005). "A finding is clearly
erroneous if it is without substantial evidence to support
it, the court misinterpreted the effect of the evidence, or
this court is convinced that the findings are against the
preponderance of credible testimony." Becker v.
Tidewater, Inc., 586 F.3d 358, 365 (5th Cir. 2009).
diversity case involves a couple of Erie guesses.
"When making an Erie guess, [o]ur task is to
attempt to predict state law, not to create or modify
it." SMI Owen Steel Co. v. Marsh USA, Inc., 520
F.3d 432, 442 (5th Cir. 2008) (alteration in original). We
look first to cases from the relevant state's Supreme
Court that, "while not deciding the issue, provide
guidance as to how the [Court] would decide the question
before us." Am. Int'l Specialty Lines Ins. Co.
v. Rentech Steel, L.L.C., 620 F.3d 558, 564 (5th Cir.
2010). And "we also consider those decisions of [the
state's] appellate courts in determining how the [state]
Supreme Court would rule on th[e] issue." Id.
The Governing Law
first stake out the governing law. Kaleh points to the
underlying loan documents as mandating Texas law across the
board, whereas Western offers the guarantees' Ohio
choice-of-law clauses as the operative provisions. The
district court forged its own path, applying Ohio substantive
law and Texas procedural law. We agree with the district
diversity action, we look to Texas (the forum state) for the
choice-of-law principles necessary "to determine which
substantive law will apply." Weber v. PACT XPP
Techs., AG, 811 F.3d 758, 770 (5th Cir. 2016). Texas
will enforce a choice-of-law clause unless (1) "the
chosen state has no substantial relationship to the parties
or the transaction and there is no other reasonable basis for
the parties' choice" or (2) the chosen law would be
"contrary to a fundamental policy of a state which has a
materially greater interest than the chosen state in the
determination of the particular issue and which . . . would
be the state of applicable law in the absence of an effective
choice of law by the parties." Exxon Mobil Corp. v.
Drennen, 452 S.W.3d 319, 324-25 (Tex. 2014) (quoting
Restatement (Second) of Conflict of Laws § 187(2)
(1971)). Neither side argues the choice-of-law clauses before
us are unenforceable under the preceding rubric. Nor do the
parties argue the clauses are nullified by an irreconcilable
conflict. Instead, we are left to pick between the two.
Supreme Court of Texas has yet to face the specific question
posed in this case, but we are nevertheless confident Texas
law dictates that the guarantees' choice of law governs
the substantive components of this lawsuit.We start with a
basic Texas principle: "A guaranty is a separate
contract distinct from the primary obligation."
Ashcraft v. Lookadoo, 952 S.W.2d 907, 913 (Tex. App.
1997). Kaleh offers no authority for deviating from that
principle and disregarding the law of the guarantees
(contracts he signed personally and which govern
Western's lawsuit directly) in favor of the law of the
loan documents (contracts he did not sign personally and
which supply only the underlying liability). And, in fact,
the intermediate Texas case to address this question head-on
holds contrary to Kaleh's proposition. See
Georgetown Assocs., Ltd. v. Home Fed. Sav. &
Loan Ass'n, 795 S.W.2d 252, 253-54 (Tex. App. 1990).
There, the court applied the chosen law of the guarantee over
a conflicting clause in the promissory note. See id.
at 253 ("[T]he Guaranty on its face selects Texas law,
and that choice should be respected. A plaintiff is entitled
to sue on whatever obligation it chooses-here, the
Guaranty."). Kaleh is thus bound by his guarantees, and
Ohio substantive law governs.
separate, however, is the question of what procedural law to
apply. Texas's rule is simple: "Even if a contract
contains a choice-of-law provision in which the parties have
agreed to apply the law of a different state, [Texas] as the
forum will apply [its] own law to matters of remedy and
procedure." Man Indus. (India), Ltd. v. Midcontinent
Express Pipeline, LLC, 407 S.W.3d 342, 352 (Tex. App.
2013) (quoting Autonation Direct.com, Inc. v. Thomas A
Moorehead, Inc., 278 S.W.3d 470, 472 (Tex. App. 2009)).
The district court was right to apply Texas procedural law.
The Timeliness of Western's Claims
tasked first with analyzing the timeliness of Western's
claims. Texas procedural law in hand, we look for a Texas
statute of limitations. The parties offer two candidates. The
first is Tex. Prop. Code § 51.003(a), which imposes a
two-year limitations period:
If the price at which real property is sold at a foreclosure
sale under Section 51.002 is less than the unpaid balance of
the indebtedness secured by the real property, resulting in a
deficiency, any action brought to recover the deficiency must
be brought within two years of the foreclosure sale and is
governed by this section.
Tex. Prop. Code § 51.003(a). And the second is Tex. Civ.
Prac. & Rem. Code § 16.004(a)(3), which contains a
generic four-year limitations period: "A person must
bring suit on [a debt] not later than four years after the
day the cause of action accrues." Tex. Civ. Prac. &
Rem. Code. § 16.004(a)(3).
Is section 51.003(a)'s two-year limitations period