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BEAL BANK v. BIGGERS

TEXAS COURT OF APPEALS 227 S.W.3D 187 (TEX. APP. 2007)

Glenda Hensley Biggers was the sole shareholder and corporate secretary and Alton Biggers was the president of Clark Warehouses. In January 1993, Clark Warehouses executed a note to the Small Business Administration for $70,800. The note was signed by the Biggers in their capacities as president and secretary of the corporation. The Biggers also signed a Small Business Administration Guaranty as guarantor of the note. The Guaranty provided, in pertinent part:
The Undersigned hereby grants to Lender full power, in its uncontrolled discretion and without notice to the undersigned, but subject to the provisions of any agreement between the Debtor or any other party and Lender at the time in force, to deal in any manner with the Liabilities and the collateral, including, but without limiting the generality of the foregoing, the following powers: (a) to modify or otherwise change any terms of all or any part of the Liabilities or the rate of interest thereon (but not to increase the principal amount of the note of the Debtor to Lender).”
In September 1993, the Biggers executed a Modification of Promissory Note (Modification) that changed the principal amount of the loan to $130,800 and increased the monthly payment and term of the loan. The Modification stated, “It is further understood and agreed that all other terms, conditions, and covenants of the aforesaid Note, not otherwise modified hereby, shall be and remain the same.” The Biggers signed the Modification twice: once in their corporate capacity (secretary or president) and once as “Borrower.” However, the Biggers never signed the guarantors’ consent to the terms of the Modification.
Clark Warehouses filed for Chapter 7 bankruptcy in 1997. In 2000, the SBA sold the note and guaranties to Loan Participant Partners, Ltd., which contracted with Beal Bank to service the loan.
Beal Bank sued the Biggers to collect on the note. The trial court entered a judgment awarding the Bank $87,861.81 (principal and interest) and $7,500 in attorney’s fees but refused the Bank’s request for additional amounts reflecting the increase in the principal amount of the loan pursuant to the Modification. The Bank appealed.

JUSTICE NUCHIA In its sole issue, the Bank contends that the trial court committed error in failing to render judgment in favor of the Bank for the full principal and interest owing under the Note, including the increased principal under the Modification.
The Bank contends that, by seeking and consenting to the modification of the note and by signing the Modification twice, appellees became personally obligated as guarantors for the increased principal of the loan. The Bank argues that, to escape liability, appellees must prove that they did not consent to the increased amount.
Appellees do not deny that they consented to the Modification of the Note, nor do they deny that they signed the Modification. They contend that their consent to the Modification did not effect an increase in their personal liability, as demonstrated by the fact that they did not sign the Modification as guarantors. They also point out that the guaranties they signed for the original note specify that the Lender is not granted the power to increase the principal amount of the Debtor’s note, thus creating a specific, rather than a continuing, guaranty.
The Bank’s argument centers on appellees’ affirmative defense of material alteration. A material alteration that lacks the consent of the guarantor and harms the guarantor renders a guaranty void. However, the trial court’s judgment was not rendered on the appellee’s materialalteration defense. Rather, the trial court concluded that the appellee’s liability to the Bank was determined by the guaranty contract.
Texas case law recognizes that a guaranty may be continuing or specific. A continuing guaranty contemplates a future course of dealing between the lender and debtor, and the guaranty applies to other liabilities as they accrue. A specific guaranty applies only to the liability specified in the guaranty contract. A guarantor may require that the terms of his guaranty be followed strictly, and the guaranty agreement may not be extended beyond its precise terms by construction or implication. The questions, then, in this appeal are (1) what liabilities did appellees agree to guarantee and (2) did they agree to extend their obligation to the modified promissory note.
The guaranties executed by appellees granted to the lender the power to modify or change the terms of the note or the interest rate on the loan. However, the guaranties specifically excluded the power “to increase the principal amount of the note of the Debtor to Lender.” The guaranties contain no language that contemplates a future course of dealing between the debtor and the lender. Thus, appellees executed specific guaranties. Although appellees later sought to increase the principal amount of the loan from $70,800 to $130,800, agreed and consented to that amount, and signed the note twice—once in their corporate capacities and once as “Borrower”—they did not sign in the spaces provided for “endorsers, guarantors, and/or sureties on the above described Note.” Their consent to the additional $60,000 cannot be construed or implied to be a guaranty of the additional sum.
We hold that, under the facts of this case, appellees did not agree to be liable for the increased principal under the modified promissory note. Accordingly, we overrule the Bank’s sole issue.

CRITICAL THINKING

How did the judge arrive at his decision? Do you agree with the distinction the judge made between specific and continuing guaranties? Why or why not?

ETHICAL DECISION MAKING

How would you analyze the ethical behavior on both sides of this transaction? Was the Bank attempting to find a way around the failure to have the Biggers sign the consent to the Modification in their capacity as guarantors? Were the Biggers utilizing a technicality to avoid repayment of a legitimate debt of the business?