     Case: 11-10154       Document: 00511731058         Page: 1     Date Filed: 01/19/2012




            IN THE UNITED STATES COURT OF APPEALS
                     FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                     Fifth Circuit

                                                                               FILED
                                                                            January 19, 2012

                                         No. 11-10154                        Lyle W. Cayce
                                                                                  Clerk

RODNEY O. HAGGARD,

                                                     Plaintiff-Appellant
v.

BANK OF THE OZARKS INC.,

                                                     Defendant-Appellee



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


Before BENAVIDES and PRADO, Circuit Judges, and ALVAREZ, District
Judge.*
PER CURIAM:
        This appeal is from the grant of summary judgment in a diversity case in
which the Plaintiff-Appellant is a limited partner in a partnership that received
a loan from the Defendant-Appellee Bank. The dispute stems from a limited
guaranty agreement between the Bank and the Plaintiff-Appellant, who became
a guarantor of the loan received by the partnership. The parties agree that the
guarantor’s liability is limited to $500,000, and not the full liability of the loan,
which originally was $1.6 million. The central issue is whether the guaranty



       *
           District Judge of the Southern District of Texas, sitting by designation.
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agreement only requires payment from the guarantor once the balance of the
outstanding loan is $500,000 or less. The district court ruled that the payment
was immediately due regardless of whether the balance of the loan had been
reduced to $500,000. Because we find the language of the guaranty agreement
ambiguous, we VACATE the summary judgment and REMAND to the district
court. Further, we AFFIRM the district court’s denial of the motion for leave to
file a supplemental claim. Finally, we VACATE the order awarding attorney’s
fees.
        I.    BACKGROUND
        In 2007, Defendant-Appellee, Bank of the Ozarks, Inc. (“the Bank”), loaned
McKinney Meadows L.P. (“the Partnership”) $1,600,000 to purchase a tract of
real property in McKinney, Texas. The Partnership executed a promissory note
payable to the Bank and also granted the Bank a lien on the acquired property.
During this same transaction, Plaintiff-Appellant Rodney Haggard (“Haggard”),
who was a limited partner in the Partnership, executed a limited guaranty
agreement, which provided in part that:
        [T]he liability of the Guarantor hereunder is limited to the last to be
        repaid $500,000.00 of the principal balance of the loan and all
        accrued and unpaid interest thereon from time to time, it being
        understood that until the principal balance of the Loan is reduced
        to less than $500,000.00, there will be no reduction in the amount
        guaranteed hereunder and that the amount guaranteed hereunder
        will only be reduced on a dollar for dollar basis as the principal
        balance of the Note is reduced below $500,000.00.

The agreement further provided that in the event of a default the Bank was not
required to sue Haggard or the Partnership to enforce payment. Nor was the
Bank required to enforce its rights against any security prior to demanding
payment from Haggard.
        The Partnership defaulted on the note, and the Bank brought suit in the
Eastern District. That suit was dismissed when the parties entered into a

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                                      No. 11-10154

forbearance agreement, which provided that the forbearance period would expire
on March 30, 2010. On April 20, 2010, Haggard filed the instant suit, seeking
a declaratory judgment that the Bank could not pursue him as the guarantor
until the balance of the loan was reduced to $500,000. The Bank counterclaimed
for breach of the guaranty contract, seeking $500,000 in principal, plus interest
accrued on the entire balance, attorney’s fees, and costs. The Bank also filed a
third-party complaint against the Partnership for breach of the Note and
indemnification.      Both the Bank and Haggard filed motions for summary
judgment.
       On January 4, 2011, the Bank foreclosed its lien on the real property that
secured the loan. The Bank secured its title to the property with a bid of
$975,000. Haggard had previously submitted to the district court an appraisal
valuing the land at $2,300,000. On January 5, the Bank filed a status report
with the court, notifying it of the sale and asserting that the sale reduced the
deficiency to $717,999.99. On January 14, Haggard filed a motion for leave to
file a first amended complaint to add a supplemental claim.                    Haggard’s
supplemental claim was that under § 51.003 of the Texas Property Code, he was
entitled to an offset against his liability equal to the difference between the fair
market value of the property and the $975,000 from the foreclosure sale.1 That
same day, the district court granted in part and denied in part Haggard’s and
the Bank’s motions for summary judgment. The court held that Haggard owed
$500,000 in principal, and owed interest on that balance but did not owe interest
on the entire principal balance of the loan, which the Bank had claimed.2 In its
final judgment, the court certified the judgment as appealable under Federal
Rule of Civil Procedure 54(b), finding there was no just reason for delay. The

       1
         This claim was raised in the alternative in the event the district court denied his
request for declaratory judgment.
       2
           The Bank does not appeal this ruling.

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                                      No. 11-10154

court also granted the Bank’s request for attorney’s fees and costs. On February
7, the court summarily denied Haggard’s motion to file an amended complaint.
Haggard now appeals.3
       II.    ANALYSIS
              A.     Standard of Review
       This Court reviews summary judgment de novo, using the same standards
as the district court. Holt v. State Farm Fire & Cas. Co., 627 F.3d 188, 191 (5th
Cir. 2010). Summary judgment is proper when “there is no genuine dispute as
to any material fact and . . . the movant is entitled to judgment as a matter of
law.” Fed. R. Civ. P. 56(c). We view the evidence and all justifiable inferences
in the light most favorable to the nonmoving party. Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 255 (1986).
              B.     Guaranty
       Haggard contends that the district court erred by misconstruing the
language of the guaranty agreement and concluding that he is immediately
liable for $500,000. “A guaranty is an undertaking by the guarantor to answer
for the payment of some debt . . . of another person in the event of default.”
United States v. Vahlco Corp., 800 F.2d 462, 465 (5th Cir. 1986). To recover
pursuant to the guaranty, the Bank must establish “proof of (1) the existence
and ownership of the guaranty contract, (2) the terms of the underlying contract
by the holder, (3) the occurrence of the conditions upon which liability is based,
and (4) the failure or refusal to perform the promise by the guarantor.” Marshall
v. Ford Motor Co., 878 S.W.2d 629, 631 (Tex.App.–Dallas, 1994, no writ). Here,
the dispute is whether the terms of the guaranty agreement impose a condition
that Haggard becomes liable as a guarantor only after the principal balance is



       3
         The district court separately entered a default judgment against the Partnership as
a third-party defendant.

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                                       No. 11-10154

reduced to $500,000.         In other words, Haggard claims that the guaranty
expressly limits his liability to the last $500,000 due on the loan.4
       Pursuant to Texas law, a guarantor “is a so-called favorite of the law and
as such, a guaranty agreement is construed strictly in favor of the guarantor.”
Vahlco, 800 F.2d at 465.5 Further, “the primary concern of the reviewing court
is to ascertain the intent of the parties.” Resolution Trust Corp. v. Northpark
Joint Venture, 958 F.2d 1313, 1320 (5th Cir. 1992).                   “If the guaranty is
ambiguous, then the court must apply the ‘construction which is most favorable
to the guarantor.’” Id. (quoting Coker v. Coker, 650 S.W.2d 391, 394 n.1 (Tex.
1983)). “The starting point for analyzing the rights and duties of the parties to
a guaranty should be the language of the instrument itself.” Federal Deposit Ins.
Corp. v. Woolard, 889 F.2d 1477, 1480 (5th Cir. 1989).
       As previously set forth, the instant agreement, under the heading of
“Guaranty of Obligation,” provides in relevant part that:
       [T]he liability of the Guarantor hereunder is limited to the last to be
       repaid $500,000.00, of the principal balance of the Loan and all
       accrued and unpaid interest theron from time to time, it being
       understood that until the principal balance of the Loan is reduced
       to less than $500,000, there will be no reduction in the amount
       guaranteed hereunder and that the amount guaranteed hereunder
       will only be reduced on a dollar for dollar basis as the principal
       balance of the Note is reduced below $500,000.00.




       4
           “A guarantor’s liability on a debt is measured by the principal’s liability unless a
more extensive or a more limited liability is expressly set forth in the guaranty agreement.”
Simpson v. MBank Dallas, N.A., 724 S.W.2d 102, 110 (Tex.App.–Dallas, 1987, writ ref’d n.r.e.).
Here, it is undisputed that Haggard’s liability is limited to $500,000 and that his guaranty is
not measured by the principal’s full liability.
       5
         The guaranty agreement expressly provides that it is to be governed by the “laws of
the State of Texas.”

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                                    No. 11-10154

Haggard relies on the above language, asserting that his liability is “limited to
the last to be repaid $500,000.00, of the principal balance of the Loan.”6
Haggard points out that if he were to pay $500,000 prior to the balance being
reduced to $500,000, according to the agreement, he would still be liable for any
remaining balance under $500,000, because “the amount guaranteed hereunder
will only be reduced on a dollar for dollar basis as the principal balance of the
Note is reduced below $500,000.00.”
      Texas courts have recognized “two distinct types of guaranty: a guaranty
of collection (or conditional guaranty) and a guaranty of payment (or
unconditional guaranty).”            Cox v. Lerman, 949 S.W.2d 527, 530
(Tex.App.–Houston [14 Dist.], 1997, no pet.).         “A guaranty of collection is an
undertaking of the guarantor to pay if the debt cannot be collected from the
primary obligor by the use of reasonable diligence.” Id. (emphasis added).
Generally, a guaranty of collection (or conditional guaranty) requires that the
principal debtor be a party to the action seeking payment. Id. In contrast, a
guaranty of payment (or unconditional guaranty) does not require as a condition
precedent to its enforcement that the principal debtor be joined in the suit
seeking payment because the guarantor is “akin to a co-maker in that the holder
of the note can enforce it against either party.” Id.
      Relying upon certain language from paragraphs 4 and 5 of the guaranty
agreement, the district court concluded that the guaranty was an unconditional
one under Texas law. In relevant part, paragraph 4 provides that Haggard is
not released from his obligation to pay based upon any neglect or failure of the
Bank with respect to collecting the “guaranteed indebtedness” or foreclosing on
the lien. Paragraph 5 provides that the Bank does not have to bring suit against


      6
       It would appear from the summary judgment evidence presented in the district court
that Haggard negotiated with the Bank to have this limiting language in his guaranty
agreement.

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                                     No. 11-10154

the Partnership or foreclose on the lien in order to enforce payment by Haggard.
The language in the provisions apparently falls into the unconditional or
guaranty-of-payment category because the Bank does not have to first attempt
to collect from the Partnership.
       The district court rejected Haggard’s claim largely because it determined
that the guaranty was unconditional. However, our precedent indicates that
even when a guaranty is unconditional, the reviewing court must look to the
terms of the agreement to determine the obligation of the guarantor.7 Cf.
Vahlco, 800 F.2d at 466 (explaining that “absent an express waiver [in the
guaranty agreement], even an absolute and unconditional guarantor may assert
[affirmative defenses]”).
       More to the point, Haggard cites this Court’s opinion in NH Properties
Limited Partnership v. Mittleider, 267 F. App’x 375 (5th Cir. 2008)
(unpublished). In that case, the guarantor had guaranteed payment of rent
under a lease. Under the terms of the guaranty, Mittleider had guaranteed
payment “by Tenant of rent in the amount of $1,236,180.00 due under the lease
in the manner and at the time prescribed in the Lease, which is a portion of the
rent is [sic] payable from the date hereof until February 1, 2006. . . . ” Id. at 376.
Mittleider claimed that the quoted language meant that he guaranteed only that
the first $1,236,180.00 in rent would be paid during the prescribed period.
Because more than $2,000,000 in rent had been paid, Mittleider asserted that
he was not liable under the guaranty. This Court rejected Mittleider’s claim,
explaining as follows:      “As the district court noted, the Guaranty did not
specifically state that Mittleider ‘guarantees the first $1,236,180.00 or ‘only the
first $1,236,180.00 that becomes due’ or similar language, though this would


       7
         This Court has opined that the “redundant term ‘absolute and unconditional’ is an
unfortunate choice of language, because it connotes more than it denotes.” Vahlco, 800 F.2d
at 466.

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                                      No. 11-10154

have been a simpler way of conveying the interpretation Mittleider advances.”
Id. (emphasis added). In contrast to Mittleider, in Haggard’s guaranty, his
liability was expressly “limited to the last to be repaid $500,000, of the principal
balance of the loan.” Further, the guaranty provided that Haggard’s liability
would “only be reduced on a dollar for dollar basis as the principal balance of the
Note is reduced below $500,000.” Reasoning by analogy, Mittleider provides
support for Haggard’s interpretation of the guaranty agreement.
       On one hand, the district court and the Bank’s interpretation does not give
effect to the language that: (1) the guarantor’s liability “is limited to the last to
be repaid $500,000 of the principal balance of the loan”; and (2) “until the
principal balance of the Loan is reduced to less than $500,000.00, there will be
no reduction in the amount guaranteed hereunder and that the amount
guaranteed hereunder will only be reduced on a dollar for dollar basis as the
principal balance of the Note is reduced below $500,000.00.”8 On the other hand,
Haggard’s contention that the balance of the loan must be reduced either by the
Bank collecting or forgiving a portion of the loan is arguably in tension with the
guaranty provisions that the Bank does not have to first seek payment from the
Debtor or the collateral.
       As previously set forth, a “guaranty agreement is construed strictly in
favor of the guarantor.” Vahlco, 800 F.2d at 465. “If the guaranty is ambiguous,
then the court must apply the ‘construction which is most favorable to the
guarantor.’” Resolution Trust Corp., 958 F.2d at 1320 (quoting Coker, 650
S.W.2d at 394 n.1). We conclude that the language of the guaranty agreement
is open to different interpretations and thus ambiguous. Because the terms of



       8
         The Bank responds that this language prevents Haggard from attempting to receive
credit toward his $500,000 liability based on any principal payments made by the Partnership
or another guarantor. We do not find the Bank’s response persuasive because the language
contains no reference to payments made by others.

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                                       No. 11-10154

the guaranty are ambiguous, the district court erred by accepting the Bank’s
interpretation and granting summary judgment. Accordingly, we VACATE the
grant of summary judgment and REMAND to the district court.
              C.     Denial of Motion to Amend Complaint
      Haggard next contends that the district court erred in denying his motion
for leave to file a supplemental complaint. This Court reviews the denial of a
motion for leave to file a supplemental complaint for abuse of discretion. Burns
v. Exxon Corp., 158 F.3d 336, 343 (5th Cir. 1998). “Under Rule 15(d), the court
may permit a party to file a supplemental pleading setting forth transactions or
occurrences or events which have happened since the date of the pleading sought
to be supplemented.” Id.
      Haggard’s supplemental claim is that under § 51.003 of the Texas Property
Code, he is entitled to an offset against his liability equal to the difference
between the fair market value of the property and the $975,000 from the
foreclosure sale.9 It is undisputed that this set-off claim arose after the original
complaint. Nonetheless, the Bank contends that because Haggard expressly
waived any claim of set-off in the guaranty, allowing the claim to be filed would
have been futile, and thus it was not an abuse of discretion to disallow the claim.
The guaranty agreement provides that Haggard’s obligation shall not be
impaired or released, without written consent of the Bank, based on: “any
defenses, set-offs or counterclaims which may be available to Borrower or any
other person or entity.” The Bank argues that Haggard therefore waived his

      9
          Section 51.003(c) provides that:

      If the court determines that the fair market value is greater than the sale price
      of the real property at the foreclosure sale, the persons against whom recovery
      of the deficiency is sought are entitled to an offset against the deficiency in the
      amount by which the fair market value, less the amount of any claim,
      indebtedness, or obligation of any kind that is secured by a lien or encumbrance
      on the real property that was not extinguished by the foreclosure, exceeds the
      sale price.

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                                       No. 11-10154

set-off claim.    This Court has held that, under Texas law, a guarantor of
mortgage debt could waive the statutory right to offset against his liability for
deficiency, which was based on the difference between the fair market value of
the mortgage property at the time of foreclosure and the foreclosure sales price.
LaSalle Bank Nat’l Ass’n v. Sleutel, 289 F.3d 837, 840-42 (5th Cir. 2002). The
case at bar involves the same section of the Texas Property Code, § 51.003, that
was at issue in Sleutal.         We are unpersuaded by Haggard’s attempts to
distinguish Sleutel based on the difference in the wording of the waivers. The
language of Haggard’s guaranty agreement clearly states that the guarantor
relinquished any set-off claims unless the Bank gave written consent. Thus, the
district court did not abuse its discretion in denying leave to file a supplemental
claim.10
                     D.     Attorney’s Fees and Costs
       Haggard also contends that the district court erred in ruling that he was
responsible for attorney’s fees and costs.             Paragraph 15 of the guaranty
agreement provides as follows:
       If Guarantor should breach or fail to perform any provision of this
       Guaranty, Guarantor agrees to pay to Lender all reasonable
       costs and expenses (including court costs and reasonable
       attorneys’ fees to the extent enforceable under the laws of
       the State of Texas) incurred by Lender in the enforcement hereof.

       Thus, pursuant to the terms of the agreement, if Haggard breached the
guaranty agreement, he agreed to pay reasonable attorney’s fees and costs.
However, as set forth above, the district court erred in granting summary

       10
          We note that the same set-off claim is pending before Judge Lynn in a separate suit.
On November 10, 2011, Judge Lynn entered an order stating as follows: “The Court finds that
the Fifth Circuit’s consideration of arguments in a related case may impact this case.
Therefore, the Motions are GRANTED in part. The case is STAYED until May 10, 2012 subject
to further motions to stay, and all unelapsed deadlines are cancelled.” Haggard v. Bank of the
Ozarks, No. 11-CV-601 (N.D. Tex. filed Mar. 23, 2011).


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                                No. 11-10154

judgment on the Bank’s claim that Haggard had breached the guaranty
agreement. We therefore VACATE the award of attorney’s fees and costs.
     III.   CONCLUSION
     Accordingly, the district court’s grant of summary judgment is VACATED
and REMANDED for proceedings consistent with this opinion. Additionally, the
order denying leave to file the supplemental claim is AFFIRMED, and the award
of attorney’s fees and costs is VACATED.




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