Opinion
Civil Action No. SA-03-CA-1127-XR.
February 6, 2006
ORDER
On this date, the Court considered Defendant Robert L. Levenson's motion for summary judgment (docket no. 51).
Background
Plaintiff filed this suit alleging that on or about December 28, 2000, Motzoli's Foods, Inc. (Motzoli's) signed a 20-year commercial lease with NovaSource Development, L.C. (NovaSource) to operate a restaurant on the NovaSource-owned premises. Subsequently, NovaSource (Landlord) and Motzoli's (Tenant) allegedly entered into a series of amendments to the lease. Plaintiff further alleges that Robert H. Mott, Robert L. Levenson, Bob L. Turner, Pasta Ventures, Inc., Kyle R. Mott and Troy L. Mott each gave their individual and/or corporate guarantee to landlord, NovaSource guaranteeing the full, prompt and complete payment by Tenant of all terms and obligations including the payment of rent. With regard to Mr. Levenson, Plaintiff alleges that under the initial lease term he gave his personal guarantee for 50% of the Guaranteed Obligations for a period of 7 years from the commencement date of the lease.
Plaintiff dismissed its claims against NovaSource. See Order dated Jan. 18, 2006, Docket no. 71.
Plaintiff voluntarily dismissed its claims against Bob L. Turner. See Order dated Dec. 15, 2005, Docket no. 61.
On June 18, 2004, this Court entered an Order dismissing Motzoli's and Pasta Ventures, Inc. pursuant to Plaintiff's request. See Docket no. 15.
Plaintiff alleges that effective December 18, 2002, it acquired the NovaSource property and thereafter Motzoli's breached the lease by failing to make rental payments, failing to pay property taxes, and vacating the property. Plaintiff seeks now to recover from Levenson damages resulting from the breach of the lease pursuant to the guarantee agreement.
Levenson seeks summary judgment arguing that the "guaranty was made subsequent to the original lease transaction, and is unsupported by any new consideration. Further, the lease agreement was amended several times after the guaranty was purportedly executed, each time without Levenson's consent."
Analysis
NovaSource and Motzoli's entered into a 20-year lease agreement on December 28, 2000. Levenson signed a Lease Guaranty on January 3, 2001. The Lease Guaranty states, in part, as follows:
For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and for the purpose of inducing NovaSource Development, L.C. ("Landlord") to enter into that certain Lease (the "Lease"), dated December 28, 2000 with Motzoli's Foods, Inc. ("Tenant"), the undersigned Robert Levenson ("Guarantor"), hereby guarantees to Landlord (subject to the limitations contained below) the full, prompt, and complete payment and performance by Tenant of all of the terms, obligations, and covenants of said Lease to be paid, kept, or performed by Tenant, including (without limitation) the payment of all rent and other changes [sic] thereunder, for the period of seven (7) years from the "Commencement Date" as defined in the Lease. Said terms, obligations, and covenants are hereinafter referred to as the "Guaranteed Obligations." The Guaranteed Obligations include (without limitation) attorney's fees and court costs incurred by Landlord in enforcing the obligations of Tenant under said Lease. The Guaranteed Obligations do not include any terms, obligations, or covenants accruing under the Lease more than seven (7) years after said Commencement Date.
Notwithstanding the foregoing, this Guaranty is limited to the extent of 50% of the monetary value of the Guaranteed Obligations. . . .
This Guaranty shall run in favor of and be enforceable by the Landlord and, if Landlord's interest in the Lease or the property affected by the Lease is assigned or transferred, then by Landlord's successors and assigns. . . .
Executed by the undersigned Guarantor on or as of the 3rd day of Jan., 2001.
This date was handwritten.
This day was handwritten.
This month was handwritten.
The date initially appears as 2000, then the last zero is scratched out and replaced with a one.
After Levenson signed the Lease Guaranty, NovaSource and Motzoli entered into three separate amendments dated February 8, 2001, September 24, 2001, and December 10, 2002. The amendments affected the term of the lease (shortened to 15 years), revised the lease to an "absolute triple net lease (once Landlord constructed the building all costs incurred for maintaining the premises including taxes shifted to Tenant), and revised the rental payments (evidently there was a clerical mistake in the original lease which called for rent of $12,375 per year rather than the contemplated $12,375 per month). Levenson states in an affidavit that he was not made aware of the amendments, that the amendments materially altered the lease to his detriment, and he did not consent to the three amendments.
Like any contract, a guaranty agreement must be supported by consideration. Hargis v. Radio Corp. of Amer., 539 S.W.2d 230, 232 (Tex.Civ.App.-Austin 1976, no writ). Consideration for a guaranty agreement is usually either the sufferance of a detriment by the creditor or a benefit conferred on the primary debtor. Id.
Despite claims by Levenson that he does not recall authorizing the Guaranty Agreement to be delivered, and Plaintiff attempting to argue that differing dates have been advanced as to when Levenson signed the Guaranty Agreement, for these summary judgment purposes the Court assumes the following: (1) Levenson signed the agreement on January 3, 2001; (2) it was given to the President of Motzoli's, Robert Mott; and (3) Robert Mott delivered the Guaranty Agreement to Shane Smoot, Managing Member of NovaSource.
Levenson stipulated that for these summary judgment purposes, it may be assumed that the guaranty was properly authorized, signed, and delivered on January 3, 2001.
When, as in the present case, a guaranty is entered into subsequent to the transaction that initially caused an obligation, most Texas courts have concluded that consideration independent of the obligation must support the guaranty. See First Commerce Bank v. J.V.3, Inc., 165 S.W.3d 366, 368 (Tex.App.-Corpus Christi 2004, pet. filed); Material Partnerships, Inc. v. Ventura, 102 S.W.3d 252, 262-63 (Tex.App.-Houston [14th Dist.] 2003, pet. denied) ("MPI had stopped shipping product to Sacos when MPI's owner wrote Lopez requesting Lopez's personal guaranty. After receiving Lopez's September 25 letter, MPI resumed shipping product to Sacos, sending additional shipments valued at approximately $200,000. Lopez's guaranty was supported by consideration."); Farmers Merchants State Bank of Krum v. Reece Supply Co., 79 S.W.3d 615, 618 (Tex.App. — Eastland 2002, pet. denied) ("The consideration was Farmers' promise to pay the amount "as agreed, seven (7) days after shipment" by Reece, Reece's detrimental reliance on Farmers' promise, and Reece's shipping the transformers."); F.D.I.C. v. Williams, 1996 WL 457448 (Tex.App.-Dallas Aug. 7, 1996, no writ); Gooch v. American Sling Co., Inc., 902 S.W.2d 181, 185 (Tex.App.-Fort Worth 1995, no writ); Fourticq v. Fireman's Fund Ins. Co., 679 S.W.2d 562, 564 (Tex.App. — Dallas 1984, no writ) ("If the promise of the guarantor is made contemporary to the promise of the primary debtor, the consideration which supports the primary debtor's promise also supports that of the guarantor. If, however, a contract of guaranty is entered into independently of the transaction which created the primary debt or obligation, the guarantor's promise must be supported by consideration distinct from that of the primary debt. Consideration for a guaranty agreement usually consists of either the sufferance of a detriment by the creditor or a benefit conferred on the primary debtor. We hold that there was no consideration supporting Fourticq's execution of the July 29, 1975, indemnity agreement because neither Fourticq nor Union General received any benefit, and Firemen's Fund did not relinquish anything or suffer any detriment, as a result of its execution.").
The Court agrees that there is no evidence that supports any new consideration distinct from the primary obligation.
However, in Windham v. Cal-Tim, Ltd., 47 S.W.3d 846 (Tex.App.-Beaumont 2001, pet. denied), that court concluded that "[u]nlike Fourticq . . . there is evidence in the record that Windham's guaranty was contemplated by and executed in the course of the original transaction. The lease agreement, and its amendment, comprised the entire agreement between Cal-Tim and Golf Stop. The guaranty comprised the entire agreement between Cal-Tim and Windham. Windham was both an officer and a director of Golf Stop, which was a family business. Windham had $120,000 invested in the enterprise. Harris testified that before the lease was entered into, Cal-Tim made it clear that a guaranty was required because the lease required an extensive build-out. Thus, a benefit inured to Windham by reason of his execution of the guaranty. Our review of the record reveals evidence supporting a finding that the guaranty agreement was supported by consideration. The evidence that the guaranty lacked consideration does not so greatly outweigh the evidence of consideration as to compel a conclusion that the judgment is clearly wrong and unjust." Id. at 850.
Plaintiff argues that Windham applies in this case. Plaintiff supports its opposition to Defendant's motion with excerpts from Levenson's deposition.
Those excerpts establish that Levenson has been either president or board chairman of a bank for over 40 years. Levenson calls himself an expert in lending and security practices, and is active in real estate development. Levenson first met Robert Mott in 1988, when Mott was an operator of various fast food franchises and Levenson sought his banking business. Mott approached Levenson in 1999 or 2000 seeking his participation in acquiring a Fazoli's franchise (Italian fast food). Levenson's son, Greg, gave a check to Mott for approximately $180,000 to $200,000 to pay certain franchise fees. Levenson also testified that he thought he was going to acquire a 25% interest in the new business and his son was going to acquire a 25% interest, but that he later discovered Mott "was a liar and a cheat" and they "withdrew." Nevertheless, Levenson "agreed [at some unknown point in time] with Mott that, look I would guaranty 50 percent for seven years of specific ones. This was started in Utah. This one, I guess, is in San Antonio. This was one of the last ones. . . ." On August 15, 2000, Levenson signed a certification indicating that an attachment [his personal financial statement] was correct.
Levenson claims Mott never paid back his son, Levenson's bank thereafter allegedly loaned Mott approximately $200,000 so that Levenson's son could be repaid.
Plaintiff also relies upon the deposition of Shane Smoot. Smoot testified that when he received the Levenson Guaranty he attempted to speak with Levenson directly but that Levenson would not return his calls. Thereafter, Smoot spoke with Greg Levenson who acknowledged that his father did sign the Guaranty.
As stated above, the prevailing rule in Texas requires that consideration independent of the obligation must support the guaranty. Despite protestations to the contrary, Levenson thought he was going to be an equity partner in the business, provided his personal financial statement indicating his strong financial position, knew or reasonably should have known that others would rely upon that information to consummate the transaction, but unfortunately for Plaintiff, NovaSource consummated the transaction without the Levenson Guaranty signed and delivered, and only procured the guaranty after the transaction closed and without new consideration being tendered.
Even if this Court is incorrect in failing to apply the more equitable result that would be reached under Windham, the Court also concludes that summary judgment is proper in favor of Levenson because at most Levenson agreed to guarantee the terms of the original lease. There is no evidence that Levenson approved or even knew of the existence of the later amendments. "Texas courts apply the rule of strictissimi juris in interpreting guaranty agreements to refrain from extending the guarantor's obligation by implication beyond the written terms of the agreement. It is well settled in Texas that a guarantor may rely and insist upon the terms and conditions of the guaranty being strictly followed, and if the creditor and principal debtor vary in any material degree from the terms of their contract, then a new contract has been formed and the guarantor is not bound to it." Vastine v. Bank of Dallas, 808 S.W.2d 463, 464 (Tex. 1991).
Unlike the guaranty signed by Bob L. Turner in this case, the guaranty agreement signed by Levenson does not provide that the "Lease may be modified from time to time." Accordingly, this Court cannot imply that Levenson has waived his suretyship defense of material alteration. Id.; U.S. v. Vahlco Corp., 800 F.2d 462, 465 (5th Cir. 1986) ("A guarantor under Texas law is a so-called favorite of the law and as such, a guaranty agreement is construed strictly in favor of the guarantor. Any modification of the terms of the underlying contract discharges the guarantor's obligation. `If the creditor and the principal debtor vary in any degree the terms of the contract, then a new contract has been formed, upon which new contract the [guarantor] is not obligated and cannot, therefore, be bound.' The assumption underlying this rule is that the guarantor has carefully assessed the risk to which he will be exposed by undertaking the guaranty. If the terms of the guaranteed indebtedness are changed, the risks to the guarantor change as well, and it would be unfair to require the guarantor to assume risks other than those he chose to assume.").
Turner's Guaranty went further stating: "Guarantor hereby authorizes the parties to make such modifications without its consent, provided such modifications do not materially add to Guarantor's financial obligations."
Levenson asserts that the three amendments made material alterations to the terms of the underlying lease. Among other things, the following terms were modified: the leased space could only be used as a Fazoli's Italian restaurant, Fazoli's is given certain rights to assume the lease, enter the premises and remove fixtures and furnishings, the tenant was required to pay building expenses, business interruption insurance was required, and rental payments were changed from $12,375 per year to $148,500 per year payable in equal monthly installments of $12,375.
Despite Plaintiff's valiant attempts to construe these modifications as not material and not detrimental to Levenson, the Court disagrees. Whether an alteration is material is a question of law for the court to determine, and not one for a jury to decide. Frost Nat'l Bank v. Burge, 29 S.W.3d 580, 588 (Tex.App.-Houston [14th Dist.] 2000, no pet.).
Although Levenson was aware from the beginning that a Fazoli's restaurant was planned, that does not mean he would have consented to a modification of the NovaSource lease that only a Fazoli's restaurant could be operated at the site. Further, although the original lease imposed certain insurance requirements, the amendment expanded the coverage requirements. Finally, Plaintiff argues that the rental amendment was merely a clerical correction. Id. at 589.
The court in Burge discussed the impact of a similar "clerical error" correction:
Burge[, as guarantor,] maintains that it was his understanding, at the time of the closing, that the Note was to mature in two years, and not one. Burge contends that the unaltered Note's December 28, 1995 maturity date which he saw at the closing served to confirm that understanding. Burge insists that, if there is any conflict between the Note and the other loan documents, the terms of the Note control. Burge also points to one Texas case which holds that a bank's alteration of a note's maturity date, even if innocently done, is a material alteration of the type which may discharge a surety. Unlike the cases cited by Burge, the Bank and H H agree, in this instance, that any change to the Note's maturity date was made solely to correct a clerical error so that the Note would reflect accurately the parties' original agreement. For that reason, the authorities that Burge relies upon are distinguishable from the facts present here. Texas courts have held that a change made to a document for the sole purpose of correcting an error of this nature, so as to allow the instrument to accurately reflect the parties' original intentions, is not a material alteration. Although none of these cases deal specifically with a promissory note's maturity date, or the relationship between a principal and a surety, their reasoning is persuasive. Here, the Bank and H H agree that the original contract was for a one-year note to mature on December 28, 1994, consistent with the deed of trust and CD. If true, the alteration merely corrected the Note to reflect that agreement. It is well-settled that "[a]n alteration that works no change, but which leaves the terms of the contract the same as before, does not vitiate it." If the disputed alteration did not change the legal effect of the underlying contract between the Bank and H H, then it was not a material alteration of the agreement between those parties as a matter of law. The conflicting evidence presented by Burge, the Bank, and H H creates a genuine fact issue about whether the parties intended a one-year note or a two-year arrangement. Although the issue of whether material alteration occurred is a question of law, the precise nature of the underlying contract is one which a jury must decide. Therefore, because a genuine issue of material fact remains, Burge did not meet his burden to show that he was entitled to a judgment on his defense of material alteration, as a matter of law, and summary judgment was not appropriate.Burge, 29 S.W.3d at 589.
Although the amendment to the rental payments may have been made to correct a clerical error between NovaSource and Motzoli's, there is no evidence to establish that Levenson was aware of the initial rental payments, much less the rental payment schedule per the amendment. Even if the Court is incorrect and fact issues exist as to whether Levenson met his burden to show that the amendment regarding rental payments was material, the Court nevertheless concludes that the amendments stating that the leased premises could only be used as a Fazoli's Restaurant during the term of the lease, and that the tenant incur all costs for maintenance, insurance and taxes are material and detrimental to Levenson. Levenson guaranteed payments to the Landlord. If the Fazoli's concept failed, it is reasonable to expect that Levenson would anticipate that the premises be put to other uses to make any rental obligations. Further, to the extent that increased maintenance, insurance and taxes affected Motzoli's operating costs, they posed a risk that Motzoli's may not meet its rental obligations. See U.S. v. Vahlco Corp., 800 F.2d 462, 465 (5th Cir. 1986) ("If the creditor and the principal debtor vary in any degree the terms of the contract, then a new contract has been formed, upon which new contract the [guarantor] is not obligated and cannot, therefore, be bound. The assumption underlying this rule is that the guarantor has carefully assessed the risk to which he will be exposed by undertaking the guaranty. If the terms of the guaranteed indebtedness are changed, the risks to the guarantor change as well, and it would be unfair to require the guarantor to assume risks other than those he chose to assume.").
Conclusion
Defendant Levenson's motion for summary judgment (docket no. 51) is GRANTED.
Defendant Levenson's motion for continuance (docket no. 72) is DENIED as moot.
The Court notes that all parties in this case have now been dismissed with the exception of Defendants Robert H. Mott, Kyle R. Mott, and Troy L. Mott. It appears that these defendants have been served, but have not filed any answers. Plaintiff is ORDERED to file with the Clerk within ten (10) days of the date of this order either a voluntary dismissal of these defendants or a request that a default be taken. Should Plaintiff fail to take such action, the Court may dismiss this case for failure to prosecute.
Troy L. Mott, Robert H. Mott, and Kyle R. Mott were served on May 4, 2004, June 6, 2004, and August 15, 2004, respectively. See docket nos. 8, 10, 19. Although none of the Motts have filed an answer, Robert H. Mott did appear in this action through the filing of a motion to quash his deposition on October 6, 2005. See docket no. 44.