M.N. Osborne and David A. Osborne v. William D. Mutzig and Mary K. Mutzig--Appeal from 150th Judicial District Court of Bexar County

MEMORANDUM OPINION
No. 04-02-00554-CV
M. N. OSBORNE and David A. Osborne,
Appellant
v.
William D. MUTZIG and Mary K. Mutzig,
Appellee
From the 150th Judicial District Court, Bexar County, Texas
Trial Court No. 2001-CI-01434
Honorable Michael P. Peden, Judge Presiding

Opinion by: Karen Angelini, Justice

Sitting: Alma L. L pez, Chief Justice

Sarah B. Duncan, Justice

Karen Angelini, Justice

Delivered and Filed: May 7, 2003

AFFIRMED

M. N. Osborne and David A. Osborne (the "Osbornes") appeal the trial court's summary judgment granted in favor of the defendants, William D. Mutzig and Mary K. Mutzig (the "Mutzigs"). The Osbornes assert two issues on appeal, contending: (1) the trial court erred in granting summary judgment based on the Osbornes' alleged failure to declare the Mutzigs' sublessee, Trinity, in default, and (2) the trial court erred in granting summary judgment based on the Mutzigs' affirmative defense of material alteration. We affirm the trial court's judgment.

Background

This case involves a personal guaranty provision and a breach of a sublease contract. On February 18, 1991, the Osbornes leased property from Lloyd Hobbs. That same year, on August 1, 1991, the Osbornes subleased the premises to Crestway Care Center, Inc. ("Crestway"), which was owned by the Mutzigs, to operate a 120-bed nursing home in Bexar County, Texas. In the sublease, the Mutzigs made personal guaranties, including a personal guarantee to cover Crestway's rent. On April 28, 1997, Crestway subleased (1) the property to Trinity Care Centers, Inc. ("Trinity"). The parties do not dispute that the Mutzigs' personal guaranties were not affected by the sublease.

On March 30, 1999, M. N. Osborne sent a letter to Crestway and William Mutzig notifying them that Trinity was late on its March rent payment. In the letter, M. N. Osborne stated that the Osbornes did not consider Trinity in default. M. N. Osborne further stated that if the Osbornes decided to declare a default of the lease, they would send the Mutzigs prior notice. On November 8, 1999, M. N. Osborne sent another letter to Crestway and William Mutzig notifying them that Trinity was late on its October rent payment and that payment responsibility would revert to Crestway if Trinity failed to pay. The letter stated that if the Osbornes decided to "declare a default of the lease, [they] would send [the Mutzigs] prior written notice to allow them the opportunity to cure any defaults." On February 15, 2000, Trinity notified the Osbornes in a letter that it could no longer afford to operate the facility and that the Osbornes should locate another sublessee. Mr. Osborne called Mr. Mutzig to ask him to help locate another lessee, which Mr. Mutzig declined to do. In late February or early March of 2000, the Osbornes found another sublessee, AMOS, to operate the nursing home and entered into a new sublease with it at a reduced rent. On January 31, 2001, the Osbornes sued the Mutzigs alleging breach of contract and seeking recovery of all breach of contract damages, attorney's fees, and costs.

The Mutzigs filed a traditional summary judgment on the basis that their guaranty obligations were relieved when the Osbornes materially altered the sublease by: (1) accepting Trinity's surrender of the nursing home without notifying Crestway or the Mutzigs; (2) resubletting the premises to AMOS without ever declaring Trinity in default; and (3) failing to provide the Mutzigs with written notice of Trinity's effective default of the sublease. (2) The Osbornes filed a response to the motion asserting that the Mutzigs failed to expressly and implicitly waive any notice provisions, were estopped from asserting lack of notice, and failed to provide any summary judgment evidence to establish they were prejudiced by any material alteration. After a hearing, the trial court granted the Mutzigs' motion for summary judgment. The Osbornes timely appealed.

Standard of Review

We review a summary judgment de novo. Ingalls v. Standard Gypsum, L.L.C., 70 S.W.3d 252, 255 (Tex. App.-San Antonio 2001, pet denied). Under traditional summary judgment standards, a defendant moving for summary judgment has the burden of establishing as a matter of law that no genuine issue of material fact exists as to one or more essential elements of the plaintiff's cause of action, or conclusively establish each element of an affirmative defense. Am. Tobacco Co. v. Grinnell, 951 S.W.2d 420, 425 (Tex. 1997); Nixon v. Mr. Prop. Mgmt. Co., 690 S.W.2d 546, 548-49 (Tex. 1985). If the defendant meets this burden, the plaintiff must then raise a genuine issue of material fact on an element to preclude summary judgment. Gonzalez v. City of Harlingen, 814 S.W.2d 109, 112 (Tex. App.-Corpus Christi 1991, writ denied). In reviewing a summary judgment, an appellate court accepts as true all evidence supporting the non-movant. Nixon, 690 S.W.2d at 549. All inferences are indulged in favor of the non-movant, and all doubts are resolved in his favor. Id.

Declaration of Default

1. Declaration of Default and Waiver

In their first issue, the Osbornes contend that summary judgment was improper on the basis that they failed to formally declare Trinity in default. Specifically, the Osbornes argue that the Mutzigs expressly waived any notice of nonpayment or nonperformance, which they assert includes any notice of default, by the sublessee. The two provisions of the sublease at issue are paragraph 1.20, the default clause, and paragraph 4.5, the personal guaranty clause. Paragraph 1.20, the default clause, states that Sublessor may declare a default in the event that Sublessee should:

(a) Fail to promptly pay the rent when the same is due and continue to fail to make such payment within fifteen (15) days following the receipt of written notice of such failure; or

(b) Fail to pay the monthly payment in any two (2) consecutive calendar months within fifteen (15) days of the due date thereof (being in advance on or before the first of the month); or . . .

(e) Voluntarily surrender or attempt to surrender its license to operate the Leased Premises as a nursing home facility; transfer or attempt to transfer the permit for the nursing home beds or the license to operate the Leased Premises as a nursing home facility to any other location; or attempt to discontinue the operation of the Leased Premises as a nursing home facility, or fail to abate or cure, within the time permitted by the regulatory entity for such cure or abatement any violation claimed which may revoke Sublessee's license to operate the nursing home; or fail to abate or cure, within the time permitted by the regulatory entity for such cure or abatement, any violation claimed which may cause Medicaid patients to be removed from the facility;

then Sublessor may declare a default by Sublessee under the terms of this Lease and Sublessor may terminate this Lease; immediately re-enter the Leased premises, by summary proceedings, force or otherwise without being liable for prosecution thereof; take possession of said Premises and remove all persons therefrom, and elect to either cancel this Lease or relet the Premises as agent for Sublessee or otherwise, . . . applying the same first to the payment of such expense as Sublessor may be put to in entering and letting, with the balance remaining to be applied to the payment of the rent payable under the Lease and the fulfillment of the Sublessee's covenants hereunder. . . .

The personal guaranty clause provides as follows:

[William D. Mutzig and Mary K. Mutzig] (Guarantors), do hereby jointly and severally personally guarantee the payment of the rental and the faithful performance of the covenants of the lease agreement by the Sublessee. If the rental payments are not paid by Sublessee when the same comes due, or in the event the Sublessee fails to perform its covenants and agreements contained in the lease agreement, then Guarantors shall perform the obligations of Sublessee thereunder and shall further reimburse Sublessor for its attorney's fees and costs incurred by Sublessor in enforcing the terms of this guaranty. Guarantor does hereby waive notice of Sublessee's nonpayment and nonperformance under this lease.

Notwithstanding the above, Guarantors may limit their personal liability under this guaranty to the extent provided below if, within thirty days of Sublessor notifying Guarantors that Sublessee is in default under the terms of this lease agreement and that the Sublessor is making demand upon Guarantors for performance by them pursuant to this guaranty, the Guarantors:

a) cause the Sublessee to voluntarily surrender to Sublessor the nursing home and all other property leased pursuant to the Lease Agreement in good condition and repair; and

b) Guarantor pays to Sublessor the sum of Three Hundred Thousand dollars ($300,000.00) plus any past due and unpaid rent. . . (emphasis added).

A guarantor is a favorite of the law; therefore, he is entitled to have his agreement strictly construed so that it is limited to his undertakings, and it will not be extended by construction or implication beyond the precise terms of the contract. Reece v. First State Bank of Denton, 566 S.W.2d 296, 297 (Tex. 1978); McKnight v. Va. Mirror Co., 463 S.W.2d 428, 430 (Tex. 1971). Where uncertainty exists as to the meaning of a contract of guaranty, its terms should be given a construction which is most favorable to the guarantor. Coker v. Coker, 650 S.W.2d 391, 394 n.1 (Tex. 1983). The interpretation of a contract is a question of law for the court. See Coker, 650 S.W.2d at 393. In construing a written contract, the court must ascertain the intent of the parties as expressed in the instrument. Id. Accordingly, "courts should examine and consider the entire writing in an effort to harmonize and give effect to all the provisions of the contract so that none will be rendered meaningless." Id. "No single provision taken alone will be given controlling effect; rather, all the provisions must be considered with reference to the whole instrument." Id.

The Osbornes contend that the personal guaranty clause should be read to mean that the Mutzigs expressly waived not only any notice of nonperformance or nonpayment, but that they also waived notice of a declaration of default. We disagree. By following the Osbornes' proposed interpretation, the first paragraph of the clause in which the Mutzigs guaranteed performance and waived notice of nonpayment of nonperformance would nullify the second paragraph, which expressly allows the Mutzigs to limit their guaranty liability if the Osbornes provide them with thirty days notice of a declaration of default. After applying the traditional rules of construction, we believe the guaranty clause can only be given one meaning as a matter of law. The guaranty clause clearly distinguishes between notice of nonpayment or nonperformance and notice of default. Looking at the entire guaranty clause in conjunction with the default clause, the Mutzigs expressly agreed to pay rent if the sublessee failed to perform. They also expressly waived notice of nonpayment or nonperformance. Despite this agreement and waiver of notice, however, the Mutzigs are entitled to limit their liability if the Osbornes provide them with thirty days written notice (3) of default. Thus, we hold as a matter of law that the Osbornes were required to give the Mutzigs formal written notice of any declaration of default to trigger the guaranty clause.

Looking at the totality of the record, the summary judgment evidence shows that the Osbornes failed to give the Mutzigs proper written notice of a declaration of default. Both the March and November letters expressly stated that the Osbornes did not consider Trinity in default and that they would provide the Mutzigs with written notice if they ever declared a default. In a pre-trial deposition, M. N. Osborne admitted that he never specifically declared Trinity in default. Although the Osbornes gave the Mutzigs oral notice of Trinity's nonpayment, this was not sufficient to give notice of a declaration of default. We hold that the Osbornes' failure to give written notice to the Mutzigs relieved them of their guaranty liability.

2. Declaration of Default and Estoppel

The Osbornes next contend that even if the Mutzigs had not waived notice of nonpayment or nonperformance, there is a genuine issue of material fact as to whether the Mutzigs are estopped from requiring strict compliance with any notice provision. Specifically, the Osbornes contend that they were induced into not declaring a default because the Mutzigs had actual notice that Trinity was unable to fulfill their obligations on the lease. The Osbornes further contend that they detrimentally relied upon the Mutzigs' actions because Mr. Mutzig had entered into negotiations to pay the Osbornes $300,000 under the personal guaranty clause. Estoppel arises when one party has been induced to change its position for the worse by relying on another. Commercial Union Ins. Co. v. Spaw-Glass Corp., 877 S.W.2d 538, 542 (Tex. App. -Austin 1994, writ denied); Muller v. Leyendecker, 697 S.W.2d 668, 674 (Tex. App.- San Antonio 1985, writ ref'd n.r.e.). Deception is the basis of estoppel, which prevents the person in the wrong from asserting an otherwise valid right. Id.; Enserch Corp. v. Rebich, 925 S.W.2d 75, 83 (Tex. App.-Tyler 1996, writ dism'd by agr.). When asserting the affirmative defense of equitable estoppel, a party must prove: "(1) a false representation or concealment of material facts; (2) made with knowledge, actual or constructive, of those facts; (3) with the intention that it should be acted on; (4) to a party without knowledge or means of obtaining knowledge of the facts; (5) who detrimentally relies on the representations." Johnson & Higgins of Tex., Inc. v. Kenneco Energy, Inc., 962 S.W.2d 507, 515-16 (Tex. 1998); J.C. Penney Life Ins. Co. v. Heinrich, 32 S.W.3d 280, 286 (Tex. App.-San Antonio 2000, pet. denied). Estoppel is generally a question of fact; however, it may be established as a matter of law where there is undisputed evidence as to material facts. Jones v. Ray Ins. Agency, 59 S.W.3d 739, 752 (Tex. App.-Corpus Christi 2001, pet. denied); Page Airways, Inc. v. Associated Radio Serv. Co., 545 S.W.2d 184, 192 (Tex. Civ. App.-San Antonio 1976, writ ref'd n.r.e.).

Looking at the record as a whole and in the light most favorable to the nonmovant, the Osbornes have failed to raise a material fact issue as to estoppel because there is no evidence anywhere in the record of misrepresentation, concealment, or deception on the part of the Mutzigs. Although Mr. Osborne had informed Mr. Mutzig that Trinity had not paid its rent and they entered into settlement negotiations at one time, the Mutzigs never misrepresented or concealed the fact that the Osbornes needed to provide them with written notice of a declaration of default. The Osbornes were parties to the sublease and knew of the personal guaranty clause and notice of default provision. Furthermore, Mr. Osborne admitted that he never gave the Mutzigs any notice that he was ever going to declare a default because such a declaration would increase both his and the Mutzigs' liabilities.

As to the fifth element of estoppel, the Osbornes' summary judgment proof is insufficient to raise a fact issue that the Osbornes justifiably relied on any representation by the Mutzigs to their prejudice. See Villages of Greenbriar v. Torres, 874 S.W.2d 259, 264 (Tex. App.-Houston [1st Dist.] 1994, writ denied). The Osbornes argue that Mr. Osborne believed that the Mutzigs would follow through with their agreement; thus, they did not believe that a more formalistic notice of Trinity's nonpayment and nonperformance was necessary. However, a look at the pre-trial depositions shows that Mr. Osborne never stated such a belief. In fact, Mr. Osborne testified that as soon as Mr. Mutzig found out that the Osbornes had resubletted the premises to another sublessee, he terminated negotiations. Mr. Mutzig never stated that because the negotiations were over that the Osbornes did not have to comply with the notice provision of the guaranty clause. Furthermore, the Osbornes do not show how they relied on any such representation. Because there is no evidence that Mr. Mutzig made any misrepresentations that would lead Mr. Osborne to believe that he did not need to give the Mutzigs formal written notice of a default, or that the Osbornes relied on any representations, the Osbornes have failed to prove the element of justifiable reliance.

The burden of proving estoppel and its essential elements is on the party asserting it, and the failure to prove any one or more of the elements is fatal. Concord Oil Co. v. Alco Oil & Gas Corp., 387 S.W.2d 635, 639 (Tex. 1965). Because the Osbornes have failed to establish the first and fifth elements of equitable estoppel or even raise a material fact issue as to either element, the Mutzigs are not estopped from requiring strict compliance with the notice and guaranty provision. Therefore, we hold that the trial court properly granted summary judgment as to the declaration of default issue.

Material Alteration

1. Waiver of Affirmative Defense of Material Alteration

In their next issue, the Osbornes contend that summary judgement was improperly granted because the Mutzigs failed to plead the affirmative defense of material alteration. The Mutzigs respond that the Osbornes waived the complaint regarding the defective pleading, and the material alteration defense was tried by consent.

Under Texas Rule of Civil Procedure 166a(c), issues that are not expressly presented to the trial court by written motion, answer, or response will not serve as grounds for reversal of a summary judgment on appeal. Tex. R. Civ. P. 166a(c); Roark v. Stallworth Oil & Gas, Inc., 813 S.W.2d 492, 495 (Tex. 1991). The failure to plead an affirmative defense under Texas Rule of Civil Procedure 94 is an issue that must be raised in the trial court, or it may not be urged on appeal. Tex. R. Civ. P. 94; Roark, 813 S.W.2d at 495. However, an unpleaded affirmative defense may also serve as the basis for a summary judgment when it is raised in the summary judgment motion, and the opposing party does not object to the lack of a Rule 94 pleading in either its written response or before the rendition of judgment. Roark, 813 S.W.2d at 495. Thus, unpleaded claims or defenses that are tried by express or implied consent of the parties are treated as if they had been raised by the pleadings. Id.; see Watts v. St. Mary's Hall, Inc., 662 S.W.2d 55, 58 (Tex. App.- San Antonio 1983, writ ref'd n.r.e.). The party who allows an issue to be tried by consent and who fails to raise the lack of a pleading before submission of the case cannot later raise the pleading deficiency for the first time on appeal. Roark, 813 S.W.2d at 495.

In the Mutzigs' original answer, they entered a general denial and asserted no affirmative defense of material alteration. Looking at the entire record, however, the Osbornes failed to raise the pleading defect in their response to summary judgement or at any time before the trial court rendered judgment. Therefore, the issue of material alteration, which was raised for the first time in the Mutzigs' motion for summary judgment, was effectively tried by consent. See id. Accordingly, the Osbornes have waived complaint and are prohibited from raising the defective pleading for the first time on appeal. See id.

2. Material Alteration and Prejudice

The Osbornes finally contend that even if the Mutzigs did not waive the issue of material alteration, the trial court erred in granting the Mutzigs' motion for summary judgment because they failed to establish that they were prejudiced by any material alteration. In their motion for summary judgment and on appeal, the Mutzigs argue that the Osbornes materially altered the sublease contract thereby increasing the Mutzigs' potential liability and relieving them of their obligation as guarantors. Specifically, the Mutzigs charge that the Osbornes materially altered the contract by not declaring Trinity to be in default and resubletting the premises to AMOS.

Guarantors are a favorite of the law and are bound by the precise terms of the contract they have secured and are not obligated to watch over the contracting parties to see that performance conforms to the terms of the contract. Vastine v. Bank of Dallas, 808 S.W.2d 463, 464 (Tex. 1991);Old Colony Ins. Co. v. City of Quitman, 163 Tex. 144, 352 S.W.2d 452, 455 (1961). Texas courts, therefore, apply the rule of strictissimi juris in reviewing guaranty agreements to avoid extending the guarantor's obligation by implication beyond the written terms of the agreement. Vastine, 808 S.W.2d at 464. As such, a guarantor may rely and insist on 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 by it. Id.

A material alteration is an alteration of the underlying debt that either injures or enhances the risk of injury to the guarantor. United Concrete Pipe Corp. v. Spin-Line Co., 430 S.W.2d 360, 365 (Tex. 1968); Austin Hardwoods, Inc. v. Venden Berghe, 917 S.W.2d 320, 326 (Tex. App-El Paso 1995, writ denied). Material alteration is an affirmative defense. Austin Hardwoods, 917 S.W.2d at 326. In order to succeed on a claim of material alteration, a contracting party must prove: (1) that there was a material change of the underlying contract; (2) made without the guarantor's consent, and (3) which is detrimental or prejudicial to the guarantor. See id. (citing Old Colony, 352 S.W.2d at 455-56 and Straus-Frank Co. v. Hughes, 138 Tex. 50, 156 S.W.2d 519, 521 (1941)).

Under the sublease, the default provision allowed the Osbornes to declare a default if the sublessee failed to pay rent or voluntarily surrendered or attempted to surrender its license. The sublease provided that only in the event of a default could the Osbornes either cancel the sublease or re-let the premises. The guaranty provision provided that upon notification of a default, the Mutzigs would pay "to [the] Sublessor the sum of Three Hundred Thousand dollars ($300,000.00) plus any past due and unpaid rent."

The Osbornes argue that summary judgment was improper because the Mutzigs presented no evidence that they were prejudiced by any material alteration. The Osbornes contend, instead, that the summary judgment evidence shows that all parties would have sustained greater losses if they had not re-sublet the facility to AMOS. We disagree. As stated above, the sublease provided that if the sublessee failed to pay rent, then the Osbornes could declare the sublesee in default. Thus, the Osbornes could either choose to cancel the sublease or re-let the premises only if they first declared the sublessee in default. Looking at the evidence in the light most favorable to the nonmovant, the Osbornes materially changed the sublease because they never declared Trinity in default and then resubleted the premises to AMOS. (4) The Osbornes' material change of the sublease prejudiced the Mutzigs in two ways. First, the Osbornes' failure to declare a default and resublet of the premises at a reduced rent exposed the Mutzigs as guarantors to liability for future rent deficiencies. Because the Osbornes did not declare a default, the Mutzigs would continue to be liable for future rent deficiencies until such time that the Osbornes decided to declare a default. Mr. Osborne testified that he charged Trinity $40,304.29 in rent before they vacated and charged AMOS, at a reduced rent, $27,600 a month for the same level of patient occupancy. Second, the Osbornes' actions prejudiced the Mutzigs significantly by depriving them of their right under the sublease to limit their guaranty liability. (5) The sublease clearly states that notwithstanding their guaranty obligations, the Mutzigs, as guarantors, "may limit their personal liability under this guaranty." The Osbornes' actions effectively negated the Mutzigs' ability to limit their liability under the sublease by simultaneously contracting with a new sublessee and refusing to declare a default. Thus, the Osbornes tried to keep the sublease in effect to collect the rent deficiencies without allowing the Mutzigs to limit their personal guaranty liability. Because the Mutzigs provided sufficient summary judgment proof that they were prejudiced by the material change to the sublease, to which they implicitly did not agree, we hold the trial court properly granted summary judgment as to the material alteration issue.

Conclusion

We affirm the judgment of the trial court.

Karen Angelini, Justice

1. The sublease signed by Crestway and Trinity ("Crestway-Trinity sublease") provided that the sublease did not relieve Crestway of its obligation on the sublease. The Crestway-Trinity sublease further provided that the Osbornes would give written notification to Crestway if Trinity defaulted at any time.

2. The Mutzigs' motion for summary judgment only raised one issue of affirmative defense of material alteration, which included the argument that the Osbornes failure to declare a default materially altered the sublease. Because both parties on appeal have separated the issues of declaration of default and material alteration into two distinct issues, we will address the two issues separately.

3. Paragraph 4.1 of the sublease agreement provides that "[a]ll notices required to be given pursuant to the terms hereof, or under law, shall be in writing. . . ."

4. In his deposition, Mr. Osborne stated he never declared Trinity to be in default. The March and November letters specifically stated that the Osbornes did not consider Trinity in default, and they would provide written notice to the Mutzigs if they decided to declare a default, which they did not do.

5. In their reply brief, the Osbornes argue that summary judgment was improper because the Mutzigs may not have been entitled to exercise the limiting provision of paragraph 4.5 because Trinity had filed for bankruptcy at some point after it left the facility. Paragraph 4.5 allows the guarantors to limit their liability in the event "[s]ublessee does not within 130 days . . . become subjected to a voluntary receivership or bankruptcy proceeding. . . ." There is no summary judgment evidence that states when Trinity entered into bankruptcy proceedings. The Mutzigs, however, are not required to prove they would have been able to successfully limit their liability under the guaranty clause; rather, the Mutzigs must prove whether they were prejudiced by the material alteration. Because we find that the Mutzigs' material change of the lease exposed the Mutzigs to future rent deficiencies, the fact that Trinity was in bankruptcy proceedings does not raise a fact issue as to material alteration and prejudice.