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Western-Southern Life Assurance Co. v. Kaleh

United States Court of Appeals, Fifth Circuit

January 12, 2018

WESTERN-SOUTHERN LIFE ASSURANCE COMPANY, Plaintiff - Appellee Cross-Appellant
v.
GEORGE W. KALEH, Defendant-Appellant Cross-Appellee

         Appeals from the United States District Court for the Southern District of Texas

          Before REAVLEY, ELROD, and SOUTHWICK, Circuit Judges.

          REAVLEY, Circuit Judge

         This 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.

         The 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.

         I. BACKGROUND

         George 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.

         First, 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 choice-of-law clause.[1]

         Next, 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.

         On 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.

         In June 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.[2] 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.

         The 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[3] and all of its $619, 981 in post-foreclosure construction costs.

         Kaleh 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 costs.

         II. STANDARD OF REVIEW

         In the 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).

         This 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. at 566.

         III. DISCUSSION

         A. The Governing Law

         We must 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 court.

         In this 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.

         The 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.[4]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.

         Entirely 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.

         B. The Timeliness of Western's Claims

         We are 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).

         1. Is section 51.003(a)'s two-year limitations period ...


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