                                  United States Court of Appeals,

                                            Fifth Circuit.

                                            No. 91–1179.

                       Craig HALL, Plaintiff–Counter Defendant–Appellant,

                                                  v.

   RESOLUTION TRUST CORPORATION, as receiver of Commonwealth Federal Savings
Association, Defendant–Counter Plaintiff–Appellee.

                                            April 8, 1992.

Appeal from the United States District Court for the Northern District of Texas.

Before GOLDBERG, SMITH and DUHÉ, Circuit Judges

       GOLDBERG, Circuit Judge:

       This case is about a $7.2 million loan. Craig Hall, the borrower, brought this action against

Commonwealth Federal Savings Association, the lender (now under the receivership of the

Resolution Trust Corporation), alleging that Commonwealth unreasonably refused to accept Hall's

offer of a collateral substitution. Commonwealth counterclaimed, asserting its right to an acceleration

of all loan payments due. On motion for summary judgment, the district court entered judgment in

favor of the RTC (i.e., Commonwealth) and against Hall in the approximate amounts of $6.48 million

in principal, $3 million in interest, and $100,000 in attorney's fees. On appeal, Hall contends that

there existed genuine issues of material fact germane to the question of whether Commonwealth acted

reasonably in calling for additional collateral and accelerating the note. We affirm.



                                                  I.

       The intricacies of the loan transaction underlying this case are, beyond argument, complex but,

fortunately, largely irrelevant. In 1985, Commonwealth loaned Hall $7.2 million, evidenced by a

promissory note and a security agreement pledge. Commonwealth accepted common stock in

Resource Savings & Loan Association as collateral for the loan, and Hall later pledged additional

security in the form of his interest in certain collateral notes (the "Security Agreement"). The

Security Agreement provided as follows:
        If Secured Party [Commonwealth] should at any time be reasonably of the opinion that the
        Collateral is not sufficient or has declined or may decline in value ... then Secured Party may
        call for additional Collateral satisfactory to Secured Party, and Debtor [Hall] promises to
        furnish such additional security forthwith.

It also provided that the debtor, Hall, would be in default under the agreement if "[t]he Collateral

[became], in the judgment of Secured Party, unsatisfactory or insufficient in character or value."



        In March 1988, the parties modified the loan agreement by a document titled the "Master

Amendment to Stock Loan," which had a retroactive effective date of October 1, 1987. Among other

provisions, the Master Amendment modified the Security Agreement in two critical respects: First,

it provided that Commonwealth would permit Hall to substitute "for the promissory notes described

in the original Collateral Assignment ... one or more debenture promissory notes (satisfactory in form

to Commonwealth) held by Hall and executed by Hall Management Corporation and/or Hall Real

Estate Corporation in the approximate amount of $5,000,000." In other words, Hall could substitute

$5 million in debenture notes for the collateral notes he originally furnished. Second, it deleted the

default provision in the Security Agreement concerning unsatisfactory or insufficient collateral:

Commonwealth could no longer declare Hall in default by virtue of "[t]he Collateral [becoming], in

the judgment of [Commonwealth], unsatisfactory or insufficient in character or value."

Commonwealth, however, could still call for additional collateral under the terms of the original

security agreement—if it became "reasonably of the opinion that the Collateral [was] not sufficient

or ha[d] declined or [might] decline in value." Thus, the Master Amendment did not modify the

collateral call provision.



        By letter dated December 13, 1988, Hall offered to substitute a $6.45 million debenture note

for the Collateral Notes. Although the Master Amendment only required that Hall substitute

debenture promissory notes in the aggregate amount of $5 million, Hall offered $6.45 million, the

principal and interest then owing on the Hall Note. But in exchange, Hall requested the return of the

Resource Savings Stock. The Master Amendment made no mention of the Resource Savings stock:

that is, it did not require that Commonwealth relinquish that collateral as part of a proposed
substitution. At the time of the proposed substitution, Hall was current on all of the payments due

to Commonwealth.



        By letter dated March 28, 1989, Commonwealth rejected Hall's proposal, indicating that the

$6.45 million debenture note proffered by Hall was unsatisfactory because Commonwealth had

information that the debent ure was delinquent. Commonwealth also expressed concern about its

collateral position in view of the declining value of the Resource Savings stock and the deteriorating

financial condition of the makers of the promissory notes originally pledged by Hall under the

Collateral Agreement. Accordingly, Commonwealth exercised its right under the Security Agreement

to call for additional collateral. Commonwealth also indicated that there were "certain non-monetary

defaults under the loan documents that require attention."



        In response to Commonwealth's March 28 letter, Hall stopped making the loan payments.

This lawsuit followed.



                                                   II.

         We must decide in this appeal who breached the loan agreement. The district court

concluded that Hall did. The court found "that Commonwealth's exercise of its contractual right to

call for additional collateral was not a breach of the written agreement between the parties" and found

that "[t]he record before the court establishe[d] that RTC [was] enti tled to judgment on its

counterclaim on the note." Finding no genuine issues of material fact, the co urt entered final

summary judgment in favor of the RTC and against Hall.



        Hall takes the position that material issues of fact did exist on the record before the court,

entitling him to a trial by jury. In particular, he observes that the collateral call provision permitted

Commonwealth to demand additional collateral only if Commonwealth was "reasonably of the

opinion that the Collateral is not sufficient or has declined or may decline in value." The matter of
reasonableness, Hall contends, is fundamentally a jury question. Hall maintains that his proposal to

substitute the $6.45 million debenture note for the collateral previously tendered, which included the

Resource Savings stock, was in "substantial compliance" with the Master Amendment provision

concerning the substitution of collateral.



        The RTC, on behalf of Commonwealth, responds that the reasonableness of the call for

additional collateral was established as a matter of law based on the undisputed evidence before the

district court. Moreover, the RTC argues that it was under no obligation to accept Hall's proposal

for the substitution of collateral: the Master Amendment did not require that Commonwealth

relinquish its hold on the Resource Savings stock, and therefore, Commonwealth was within its rights

to reject Hall's proposal and Hall had no legal basis for ceasing to make the loan payments. We agree

with the RTC's position.



        The undisputed evidence in the record establishes that Commonwealth's decision to call for

additional collateral was based on information provided to it by Hall that Resource Savings'

regulatory capital had declined dramatically during the calendar year 1988, from a positive balance

of some $4 million in January 1988 to a deficit balance of some $25 million in January 1989, and that

Resource Savings' net income declined by more than $16 million between March 1988 and December

1988. Under Texas law, which governs this case, undisputed evidence of a significant impairment

in the prospect of satisfaction of a debt establishes, as a matter of law, the reasonableness of invoking

insecurity provisions under a security/loan agreement. See Finley, Inc. v. Longview Bank & Trust

Co., 705 S.W.2d 206, 208–09 (Tex.App.—Texarkana 1985, writ ref'd n.r.e.) (affirming summary

judgment because there was no material issue of fact regarding the good faith of the bank in

accelerating maturity: "We find that the uncontroverted sworn evidence that the debtor had

threatened bankruptcy is a sufficient basis to establish the bank's good faith."); Sparkman v. Peoples

Nat'l Bank, 580 S.W.2d 868, 869 (Tex.Civ.App.—Texarkana 1979, writ ref'd n.r.e.) (affirming

summary judgment in favor of bank because there were no material issues of fact regarding the bank's
good faith in accelerating the notes); accord United States v. Grayson, 879 F.2d 620, 623 (9th

Cir.1989) ("On this record, no rational trier of fact could conclude that [the lender] lacked a good

faith belief that the "prospect of payment or performance was impaired.' ") (applying federal law);

but cf. American Bank v. Waco Airmotive, 818 S.W.2d 163, 172 (Tex.App.—Waco 1991, no writ)

("The question of whether a party acts in good faith in accelerating maturity because of his belief that

the prospect of payment or performance was impaired ... must be resolved by the trier of fact.");

Ford Motor Credit Co. v. Powers, 613 S.W.2d 30, 34 (Tex.Civ.App.—Corpus Christi 1981, no writ)

(same). Hall's allegation that "Commonwealth's real motive was to circumvent the concessions it

made in the Master Amendment, force Hall into a purported "non-monetary default,' and then demand

new payment under the Hall note," does not find support in the record and, in any event, sidesteps

the undisputed evidence that the collateral was impaired.             The record makes clear that

Commonwealth's decision to call for more collateral was objectively reasonable and consistent with

the terms of the agreements, even as amended.



        Hall's proposal for substitution of collateral cannot be viewed, as Hall would have it, as

satisfaction of the call for additional collateral. Hall proposed to substitute the $6.45 million

debenture note for the collateral then held by Commonwealth, including the Resource Savings stock.

Yet under the terms of the agreement, Commonwealth did not agree to allow for the substitution of

that portion of the collateral; it merely agreed to permit Hall to substitute a debenture note for the

collateral notes, not the Resource Savings stock. Critically, Hall's December 1988 proposal did not

offer Commonwealth the option of exchanging the $6.45 million debenture note for the collateral

notes it was then holding. That the Resource Savings stock was essentially worthless at that time is

irrelevant. Cf. Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 108 S.Ct. 963, 969, 99 L.Ed.2d

169 (1988) (under bankruptcy laws, "a retained equity interest is a property interest ... [e]ven where

debts far exceed the current value of assets"). Commonwealth had the right to retain the resource

Savings stock as collateral securing the payment of the note.
        Hall mistakenly imputes to Commonwealth a duty, implied by the covenant of good faith and

fair dealing, to have accepted Hall's pro posal. In Hall's estimation, the proffered substitution of

collateral would have strengthened Commonwealth's collateral position. In essence, he argues that

he made a collateral substitution offer that Commonwealth could not refuse, regardless of the terms

of the agreements.



       Under Texas law, however, an "agreement made by the parties and embodied in the contract

itself cannot be varied by an implicit covenant of good faith and fair dealing." Exxon Corp. v. Atlantic

Richfield Co., 678 S.W.2d 944, 947 (Tex.1984); Adolph Coors Co. v. Rodriguez, 780 S.W.2d 477,

482 (Tex.App.—Corpus Christi 1989, writ denied). Only in limited circumstances where there exists

a "special relationship" between the parties—as between insurers and insureds, principal and agent,

joint venturers, and partners—will the duty apply. Cockrell v. Republic Mortg. Ins. Co., 817 S.W.2d

106, 116 (Tex.App.—Dallas 1991, no writ). Three Texas intermediate appellate courts have

explicitly "refused to overlay an implied duty of good faith and fair dealing duty in the

lender-borrower relationship." Id. at 116; Georgetown Assoc., Ltd. v. Home Fed. Sav. and Loan

Ass'n, 795 S.W.2d 252, 255 (Tex.App.—Houston [14th Dist.] 1990, writ dism'd w.o.j.); Victoria

Bank & Trust Co. v. Brady, 779 S.W.2d 893, 902 (Tex.App.—Corpus Christi 1989), rev'd on other

grounds, 811 S.W.2d 931 (Tex.1991). We join them in that respect. Insofar as Hall proposed that

Commonwealth accept a collateral substitute for the Resource Savings stock, Commonwealth could

properly refuse to accept that proposal because it differed from the Master Amendment's substitution

provision.



        We are not persuaded by Hall's argument that his substitution of collateral was in "substantial

compliance" with the terms of the agreement. See Telles v. Vasconcelos, 417 S.W.2d 491, 494

(Tex.Civ.App.—El Paso 1967, writ ref'd n.r.e.) ("[I]n all domains of the law, unless it is otherwise

provided, either expressly or by necessary implication, a substantial compliance with the specified

requirements [of a contract] is the legal equivalent of compliance.") (quoting Christy v. Williams,
292 S.W.2d 348, 352 (Tex.Civ.App.1956, err. dism'd w.o.j.). In the first place, as we have noted,

his request for the return of the Resource Savings stock made his substitution proposal materially

different from the substitution contemplated by the Master Amendment. Moreover, Hall cites no

authority, and we are aware of none, extending the substantial compliance doctrine to the arena of

loan and security agreements. As the RTC observes, the doctrine's application has been limited to

compliance with an insurance policy's pro of of loss requirement, e.g., Turrill v. Life Ins. Co., 753

F.2d 1322, 1324 (5th Cir.1985), and to construction contracts or personal services contracts. E.g.,

Measday v. Kwik–Kopy Corp., 713 F.2d 118, 124 (5th Cir.1983); Telles, 417 S.W.2d at 492.



       The plain language of the Master Amendment provided that Hall could substitute $5 million

dollars in debenture notes for the collateral notes. Hall did not propose such a substitution and

Commonwealth was within its rights to decline the proposal. We do not believe that in the face of

Hall's nonconforming collateral substitution proposal Commonwealth had a reciprocal obligation to

propose the substitution contemplated by the Master Amendment. We think that it is quite plain that

a party to a contract can simply reject a nonconforming proposal for modification of the contract.

Nothing further is necessary.



                                                 III.

        Concluding, as we do, that Commonwealth was entitled as a matter of law to call for

additional collateral, and had no obligation to accept Hall's proposed substitution for collateral, we

agree with the district court and the RTC that Commonwealth did not breach the agreements. In

reading the loan and security documents, we find no language exculpating Hall from his obligation

to pay the stipulated periodic payments.



       There being no legal basis for ceasing to make the loan payments as they became due, Hall

breached the loan agreements, and thus, the district court correctly held that the RTC could

accelerate the maturity of the loan.
The judgment of the district court is AFFIRMED.
