Max J. Luther, III v. Federal Deposit Insurance Corporation--Appeal from 201st District Court of Travis County

IN THE COURT OF APPEALS, THIRD DISTRICT OF TEXAS,
AT AUSTIN
NO. 3-91-421-CV
MAX J. LUTHER, III

APPELLANT,

vs.
NCNB TEXAS NATIONAL BANK

APPELLEE,

 
FROM THE DISTRICT COURT OF TRAVIS COUNTY, 201ST JUDICIAL DISTRICT
NO. 489,245, HONORABLE F. SCOTT McCOWN, JUDGE

NCNB individually sued guarantors to enforce their obligations under separate guarantee agreements when Pilot Knob, Ltd., a limited partnership, defaulted upon on a loan held by the bank. The guarantors, Diane Finch and Max Luther III, responded with denials and counterclaims asserting, among other arguments, material alteration and unconscionability under the provisions of the DTPA. These two cases were consolidated for trial.

The trial court granted a directed verdict for NCNB on the counterclaim of unconscionability and submitted the defensive question of material alteration to the jury. The jury found for the appellants, but the trial court entered judgment n.o.v. in favor of NCNB. We will affirm in part and reverse in part the judgment of the trial court.

 
THE CONTROVERSY

In January of 1985, Pilot Knob purchased 391 acres in southeast Travis County. The partnership paid $900,000 cash down and borrowed $3,600,000 from Interstate Bank of Austin. The bank secured the loan by a deed of trust lien upon the property and limited guaranty agreements obtained from the various partners.

Under the loan agreement, all payments were to be credited first to interest and the balance to principal. When the first payment came due on January 4, 1987, Pilot Knob paid only the interest. In March of 1987 the bank loaned Pilot Knob additional funds. As consideration for the loan and in lieu of the scheduled principal payment, the partners put up letters of credit in proportion to their ownership in the venture. The letters of Finch and Luther were in the amounts of $41,308.00 and $66,625.00, respectively. In January 1988, the partnership again failed to make its scheduled principal payment and in February the bank called the letter of credit pledged by Dr. R. Jenkins, the managing partner. Interfirst applied the entire proceeds to the outstanding principal balance of the partnership note without any reduction of the current interest.

In March of 1988 the bank, now First Republic, renewed and extended the lien under a modification agreement. On July 4, 1988, the next due date, Pilot Knob was again unable to make its payment. In August 1988 the bank, now NCNB, sent a notice of default to Pilot Knob demanding payment of $351,204.87. In September NCNB accelerated the note, making an additional $241,803 payable immediately. The bank sent demand letters to all partners on October 28, 1988 and in mid December NCNB called the letters of credit pledged by Finch, Luther and the other partners. The bank applied the proceeds of these letters to the outstanding principal balance of the loan, once again failing to apply any of the proceeds to the accrued interest.

 
CONTENTIONS ON APPEAL

Finch and Luther bring 14 points of error. In their first four, they assert that the trial court improperly rendered judgment n.o.v. in favor of NCNB. The other ten points of error contest the court's directed verdict upon the DTPA issue, the court's failure to render judgment in their favor and the judge's refusal to submit a number of proposed jury questions and instructions in the jury charge on the issue of unconscionability.

 
DISCUSSION & HOLDING

1. Material Alteration

Finch and Luther contend that the trial court incorrectly entered judgment n.o.v. on the issue of material alteration. We agree. The jury found "the written provisions of the note between the bank and Pilot Knob, Ltd. [were] materially altered." A jury finding may only be disregarded if there is no support in the evidence or when the question is "immaterial." C&R Transport, Inc. v. Campbell, 406 S.W.2d 191, 194 (Tex. 1966). This court is required to review the record to determine whether there is "some evidence" to support the jury's finding. We view the evidence in the light most favorable to appellants' position, and must disregard all contrary evidence and inferences. Williams v. Bennett, 610 S.W.2d 144 (Tex. 1981); Henderson v. Travelers Insurance Co., 544 S.W.2d 649 (Tex. 1976). In order to sustain a judgment n.o.v., there must be no evidence upon which the jury could have based its finding. Douglas v. Panama Inc., 504 S.W.2d 776 (Tex. 1974).

We find that Finch and Luther submitted evidence of material alteration at trial and the jury verdict must be upheld. Texas courts apply the rule of strictissimi juris in interpreting guaranty agreements to refrain from extending guarantor's obligation by implication beyond the written terms of the agreement. Vastine v. Bank of Dallas, 808 S.W.2d 463, 464 (Tex. 1991). A material alteration occurs if the creditor and principal debtor vary the terms of their written contract without the consent of the guarantor. Id. The alteration must be one that either injures the guarantor or increases the risk of injury to the guarantor. Id. Finally, if the creditor and principal materially vary from the terms of their contract, a new contract is formed and the guarantor is not bound thereby. Id.

Finch and Luther specifically contend that NCNB was bound by the precise terms of the contract. Therefore, NCNB's application of the money obtained through the letters of credit to principal without first being applied to interest was a material alteration of the agreement without their consent and to their prejudice. They assert this alteration adversely affected their taxable status and that without this deviation from the agreement the partnership would have been in compliance with the terms of the contract, at least at that time.

It is clear from the language of Vastine that the bank was not empowered to change the terms of the agreement. The Supreme Court has also held that uncertainty as to the meaning of a contract of guarantee must be given a construction most favorable to the guarantor. Coker v. Coker, 650 S.W.2d 391, 394 (Tex. 1983). The record clearly demonstrates that the bank applied monies received from the appellants to principal. It is equally apparent that the contract required NCNB to apply such payments first to interest and then to principal. Additionally, Finch and Luther entered some evidence at trial pertaining to financial injury suffered as a result of NCNB's alteration of the agreement.

NCNB contends that the application of the material alteration doctrine does not apply because the agreement of the parties was a "continuous guarantee." A continuous guarantee maintains the responsibility of a guarantor for changes occurring within the scope of his agreement, but will not bind a guarantor to a contract that was materially altered without his consent and to his detriment. We sustain appellants' first four point of error.

2. Unconscionability.

We hold that the trial court correctly entered a directed verdict against Finch and Luther on their counterclaims under the DTPA because neither was a consumer in regards to NCNB. A person must be a consumer in order to bring suit under Section 17.50. Riverside National Bank v. Lewis, 603 S.W.2d 169, 173 (Tex. 1980). The Deceptive Trade Practices and Consumer Protection Act defines a consumer as "an individual, partnership, corporation, this state, or a subdivision or agency of this state who seeks or acquires by purchase or lease, any goods or services . . ." Tex. Bus. & Com. Code Ann. 17.45(4) (1987). It is well settled that merely borrowing money does not constitute seeking to acquire goods or services sufficient to trigger consumer status under the DTPA. Riverside, 603 S.W.2d at 169.

The guarantors contend they acquired services from the bank in conjunction with the financing, making the partners consumers under the DTPA. Finch and Luther offer La Sara Grain Co. v. First National Bank of Mercedes, 673 S.W.2d 558, (Tex. 1984), in support of this position. There the court stated "[s]ince the holding in Riverside, we have twice limited the case to its facts, emphasizing that Lewis sought only the extension of credit from Riverside, and nothing more." Id. at 566. Finch and Luther assert that the efforts to limit Riverside show an intent by the courts to qualify parties, like the partners, as consumers.

We disagree. In La Sara the appellant sought to obtain services that correspond to a checking account and for that reason the court found the appellant to be a consumer. Here, Finch and Luther merely sought to borrow money. It is equally apparent from the record that there was no acquisition of service involved in this transaction. To be consumers of service, the partners must have received "work, labor, or service purchased or leased for use, including services furnished in connection with the sale or repair of goods." Tex. Bus. & Com. Code Ann. 17.45(2) (1987). The only transaction between the bank and the appellants was the loan. This case involves nothing more than an extension of credit requiring the application of the Riverside doctrine.

We find that Finch and Luther were not consumers as defined under the DTPA. Therefor the guarantors have no standing to raise a claim of unconscionability under that statute. The trial court correctly granted a directed verdict in favor of NCNB and did not err by refusing to submit appellants questions and instructions numbered three through seven to the jury, relating to appellants DTPA claims. We overrule appellants fifth through fourteenth points of error.

CROSS-POINTS

NCNB raises six cross-points on appeal. The bank's first two points contend, in the event that we find error in the rendition of judgment n.o.v., that the trial court erred by submitting the material alteration question and instruction to the jury because the evidence was insufficient. The third and fourth points assert that if error is found in the judgment n.o.v., this court should enter judgment against Finch and Luther after the bank reapplies the letters of credit proceeds in conformity with the agreement. The last two cross-points were alternatively offered in case we found that the guarantors had consumer status.

We overrule all cross-points. We find sufficient evidence for submission of the material alteration issue for the same reason that we reversed the judgment n.o.v. NCNB's third and fourth cross-points are similarly denied by the doctrine of material alteration. Once a guarantee agreement is materially altered, the guarantor is no longer bound to it. The remaining points are moot because this court affirmed the directed verdict granted by the trial court upon the issue of consumer status.

 
CONCLUSION

Having found that the trial court erred in granting judgment n.o.v. for appellee, we reverse that portion of the judgment below and render judgment that appellee take nothing on its claims against appellants. In all other respects the judgment of the trial court is affirmed.

 

Jimmy Carroll, Chief Justice

[[Before Chief Justice Carroll, Justices Aboussie and Kidd]

Affirmed in Part; Reversed and Rendered in Part

Filed: June __, 1992

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