A Look Into Statutes of Limitations

Question: When is the four-year statute of limitations for suit on a debt not governed by the four-year statute of imitations?

Answer: When there is a foreclosure of real property involved.

In a case of first impression, the 14th Court of Appeals in Houston has ruled that following a non-judicial foreclosure sale, the four-year limitations period for breach of a personal guaranty is extended so that the limitations period ends two years after the date of the foreclosure sale.

Prior to this decision by the 14th Court of Appeals, there was a conflict in the limitations period in Section 16.004 of the Texas Practice & Remedies Code and Section 51.003(a) of the Texas Property Code.

Section 16.004 of the Texas Practice & Remedies Code provides that suit must be brought not later than four years after the day the cause of action accrues on a debt. An action on a promissory note and guaranty would normally be governed by this statute.

Section 51.003(a) of the Texas Property Code provides that any action brought to recover a deficiency must be brought within two years of the foreclosure sale.

This is what happened in the case of Sowell v. International Interests, 416 S.W. 3d 593 (Tex. App. [14th Dist.] 2013). On May 30, 2002, DSI–HP 2002, Ltd. (“DSI”) executed a promissory note payable to Bank One, N.A. (“Bank One”) in the original principal amount of $12,823,000 (the “Hobby Place Note”). The Hobby Place Note was secured by a Construction Deed of Trust recorded against a 596–unit apartment complex located at 11911 Martin Luther King, Jr. Blvd., Houston, Texas 77048 (the “Hobby Place Property”). The same day, Donald W. Sowell (“Sowell”) executed a Guaranty Agreement for the benefit of Bank One guarantying repayment of the Hobby Place Note and all renewals, rearrangements, and extensions thereof (the “Guaranty”).

The loan matured on November 30, 2004, and neither DSI nor Sowell paid the Hobby Place Note. On February 6, 2007, three years after the maturity of the Hobby Place Note, the lender (assignee of Bank One) conducted a non-judicial foreclosure, leaving a deficiency of over $8 million. The holder of the Hobby Place Note (assignee) then filed suit on February 4, 2009, five years after the maturity date of the Hobby Place Note.

The cause of action accrued on November 30, 2004, when the Hobby Place Note matured and was not paid. One would think that the holder of the Hobby Place Note must being suit within four years from that date (November 20, 2008). However, under Section 51.003(a) of the Texas Property Code, the holder of the Hobby Place Note must being suit within two years of the foreclosure sale. That bar date would be February 6, 2009.

Therefore, the limitations period against Sowell did not run until February 6, 2009, five years after the maturity date of the Hobby Place Note. In affirming the trial court’s judgment, the Court held that “[u]nder Section 51.003(a), the limitations period for [DSI’s] claims against Sowell under the Guaranty expired two years after the date of the foreclosure sale [February 6, 2007]. Because [DSI’s] filed suit within this period [February 4, 2007], the trial court did not err in concluding that International’s claims against Sowell were not barred by statute of limitations.” Sowell, 416 S.W.3d at 602.

Business Formation – Back to the Basics

So you want to form a business?  Be aware that while the formation of the correct business entity is important, how you get out of the business or how you get another owner out is even more important.

The actual formation of a business entity is easy and relatively inexpensive.  Too many people use online services to form a business, or even when using an attorney, don’t take the more important next step – creating the operative document that delineates the powers, authority, distribution of profits and payment of debts and finally how to deal with a change in “corporate” ownership.  This change could be bringing someone else into the company as a part owner/investor or having an owner leave either voluntarily or not.

The documentation filed with the Secretary of State’s office to initially form an entity does not, in itself, insulate the owners from personal liability. The actual operating agreement must be completed and executed, and the parties must adhere to its provisions to obtain personal liability protection.This important document is not usually obtainable through the online services, and when it is, the document is so generic it is of little practical use.  The governing document is called several things (i.e. shareholders agreement, bylaws, regulations, member agreement, partnership agreement, company agreement). Don’t get cheap in the organization of your business, concentrating on the organization documents, while ignoring the governing document.  If you do, chances are you will pay a lot more without it in litigation.  This is especially true when you have more than one owner.  When you have a single owner the document is important to guide the estate.

For the purposes of this blog post, we will call the governing document the Company Agreement because this is the term for the governing document for a limited liability company (LLC), which has become the most popular business entity because LLC’s do not have to follow corporate formalities.

The first consideration is the percentage of ownership and how it will be evidenced.  You do not have to actually invest money.  What is considered “time, toil, & talent” can also be a basis for the percentage of ownership.  Take for instance someone who wants to form a hair salon and spa business.  The initiator/investor is willing to invest his money, but he knows nothing about hair styling and salon management.  His other owner is the actual person doing the styling and running the operation.  It just so happens that his daughter is a new hair stylist and will be working in the business.   His “dream” is to obviously make a return on his money, but he also wants his daughter to someday become an owner and eventually take his place as an owner when he decides to “cash out”.

So with two owners, each one should own ½ of the business, right? That structure actually sets the owners up for deadlock, with each party essentially having veto power over any decisions. So let’s make it 51% to 49%, which works for the majority owner, but leaves the minority owner unprotected in most instances. The solution is to specifically craft the management decision-making power to fit the circumstances of the business. For example, the “talented” owner makes the day- to-day operations of the business, while the “money” owner has to consent to capital expenditures, cash calls, or sale of the business. The parties can also include an alternative dispute resolution process such as mediation or arbitration.

What if the business is based on some “unique” concept? Provisions that address confidentiality, non-competes and trademark licensing are a few matters that should be included in the Company Agreement.

If the owners of the business are individuals, the owners need to consider adding a buy-sell structure in the event of death, disability, divorce, or bad behavior. Agreeing on a valuation process at the beginning of the relationship avoids protracted disputes when such events later occur. Likewise, if the owners wish to admit additional owners, or sell out, a process should be clearly delineated in the Company Agreement.

As the adage says: “An ounce of prevention is worth a pound of cure.”

Inequality Scales