The debtor was a corporation that operated an assisted living facility firm. The debtor borrowed $44 million from the earnings of four bond sales to finance the construction of an assisted living facility. The debtor’s owner and president personally guaranteed the payments. Periodic payments for the loan were due on the first of June and December until the bonds reached maturity. Bank 1 was the Master Trustee of the loan, and Bank 2 became the Noteholder Representative (the trustees). The loan documents between the debtor and the trustees defined multiple conditions as “events of default” that would require the debt to be paid immediately. A payment dispute arose between the debtor and the construction firm it had hired to build the facility. The construction firm alleged that the debtor owed $1 million more than was agreed upon, resulting in the construction firm filing a lien against the debtor in March 2019. This event led Banks 1 and 2 to send a letter to the debtor stating that the construction lien constituted an event of default and that if the debtor failed to pay the lien within 30 days, an accelerated debt collection would occur. After 30 days, the banks notified the debtor that the amount due had been sent to collections and that Bank 1 would resign as trustee, appointing Banks 3 and 4 as co-trustees in its stead. The co-trustees sought to sell the property at a foreclosure sale, and the debtor sued to prevent the sale. The co-trustees counterclaimed, and Bank 2 filed a separate lawsuit against the debtor and its owner, which the court consolidated into one case. The trial court granted summary judgment for the co-trustees and Bank 2 and imposed damages on the debtor and its owner. On appeal, the court addressed (1) whether the appointment of the co-trustees was proper, (2) if Bank 2 had the capacity to sue, (3) if Bank 2 could enforce the guarantee contract, (4) whether Bank 2 had properly accelerated the debt, (5) whether the debtor’s claims were validly dismissed under Tex. R. Civ. P. 166(g), and finally (6) attorney’s fees.
In Senior Care Living VI, LLC v. Preston Hollow Cap., LLC, 695 S.W.3d 778 (Tex. App.—Houston [1st Dist.] 2024), the appellate court affirmed the trial court’s decision that the appointment of the new co-trustees was valid under the loan documents and that Bank 2 had standing to sue. Additionally, the appellate court reversed the decision to approve an accelerated collection of debt after concluding that the debtor did not receive adequate notice. The court’s approach in deciding the issues was grounded in its construction of the terms within the multiple loan documents signed between the debtor and its trustees. First, the court held that Bank 3 and 4 were properly appointed as co-trustees because the loan documents specifically allowed Bank 1 to resign and select a new trustee, even without the debtor’s consent. Second, the court affirmed that Bank 2 had the capacity to bring suit on behalf of itself and junior bondholders according to the loan documents and Bank 2’s pleadings. The debtor argued that Bank 2 had failed to meet the condition precedent of “provid[ing] written notice to the Master Trustee that it would exercise the rights” in the loan documents. However, the court found that no such condition precedent existed, and Bank 2 complied with the requirements of the loan document. In addition, the court found nothing in the loan documents that limited Bank 2 from suing only on behalf of senior bondholders. Thus, Bank 2 had standing to sue on behalf of the junior bondholders. Third, the court held that Bank 2 could not enforce the guaranty contract against the debtor’s owner because it was not a “[g]uaranteed party” under the contract terms. The court noted that such a contract “may not be extended beyond its precise terms by construction or implication.” Reece v. First State Bank of Denton, 566 S.W.2d 296, 297 (Tex. 1978). Next, the court held that the debt had not been properly accelerated. Its decision rested on the fact that the notices sent to the debtor were too ambiguous. Furthermore, the court emphasized that except in cases where the notice sent is “clear and unequivocal,” it would construe any notice of acceleration of debt in a manner to avoid the acceleration of debt. Schuhardt Consulting Profit Sharing Plan v. Double Knobs Mt. Ranch, Inc., 468 S.W.3d 557, 571 (Tex. App.––San Antonio 2014, pet. denied). The court also found that the lower court properly dismissed the debtor’s claims for “conversion and money had and received” under Rule 166(g) because the debtor could not raise a fact issue on any of its claims. Finally, the court vacated the award of attorney’s fees to Banks 2,3,4.
By Conor Doris: [email protected]
Edited By Maycee Redfearn: [email protected]
Edited By Ashley Boyce: [email protected]
Edited By Hayden Mariott: [email protected]