International Interests, L.P. v. Hardy

United States Court of Appeals
Fifth Circuit

FILED
April 26, 2006
UNITED STATES COURT OF APPEALS
for the Fifth Circuit Charles R. Fulbruge III
Clerk

No. 04-21025

INTERNATIONAL INTERESTS, L.P.,

Plaintiff-Counter Defendant-Appellee,

VERSUS

CHARLES F. HARDY, III,

Defendant-Counter Claimant-Appellant.

Appeal from the United States District Court
for the Southern District of Texas

Before HIGGINBOTHAM, DeMOSS, and OWEN, Circuit Judges.

DeMOSS, Circuit Judge:

This is a diversity case in which Plaintiff-Appellee

International Interests, L.P. (“Int’l Interests”), a Texas

limited partnership, brought a deficiency action against

Defendant-Appellant Charles F. Hardy, III (“Hardy”), an Oklahoma

citizen, in federal district court to recover from Hardy the

deficiency owing on a note Hardy guaranteed. Hardy appeals the

district court’s holding that Ohio choice of law governs the
deficiency action. He argues that although Ohio law applies to

the guaranty agreement via an Ohio choice of law clause therein,

Texas law applies to the deficiency calculation under the deed of

trust that secured the underlying note and therefore he has a

right to a deficiency offset under section 51.003 of the Texas

Property Code that the district court erroneously refused to

enforce.1

In order to decide the merits of Hardy’s appeal, we must

first decide whether the district court erred in holding that

Ohio choice of law governs this deficiency action. Because this

1
Hardy argues alternatively that even if Ohio choice of
law does govern the deficiency action, the district court erred in
failing to apply the protections of Ohio’s foreclosure law in
determining whether Int’l Interests was entitled to a deficiency
judgment. This argument was not before the district court at the
time summary judgment was entered, and accordingly we cannot
consider it. Williams v. Plumbers & Steamfitters Local 60 Pension
Plan, 48 F.3d 923, 925 (5th Cir. 1995) (citing Topalian v. Ehrman,
954 F.2d 1125, 1131-32 & n.10 (5th Cir.), cert. denied, 506 U.S.
825 (1992)); see also Munoz v. Int’l Alliance of Theatrical Stage
Employees & Moving Picture Mach. Operators, 563 F.2d 205, 209 (5th
Cir. 1977) (“The decision whether to grant a summary judgment is
for the district court alone in our three-tiered federal court
system. We are merely authorized to review the propriety of the
grant on the basis of the matters of record at the time the summary
judgment was entered.”).
Hardy also appeals the district court’s order denying his
Motion for New Trial and his Motion to Modify, Alter or Amend
Judgment. However, because the district court entered its order
after Hardy filed his notice of appeal and because Hardy did not
subsequently amend that notice of appeal or file a new notice of
appeal, he did not effectively appeal the order and we do not have
jurisdiction to consider it. Fiess v. State Farm Lloyds, 392 F.3d
802, 806-07 (5th Cir. 2004).
2
issue involves unresolved questions of Texas state law that are

dispositive, we respectfully certify the questions to the Supreme

Court of Texas.

CERTIFICATION FROM THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT TO THE SUPREME COURT OF TEXAS,
PURSUANT TO ARTICLE 5, SECTION 3-C OF THE TEXAS
CONSTITUTION AND RULE 58 OF THE TEXAS RULES OF
APPELLATE PROCEDURE. TO THE SUPREME COURT OF TEXAS
AND THE HONORABLE JUSTICES THEREOF:

I. STYLE OF THE CASE

The style of the case in which certification is made is

International Interests, L.P. v. Hardy, No. 04-21025, in the

United States Court of Appeals for the Fifth Circuit, on appeal

from the United States District Court for the Southern District

of Texas. Federal jurisdiction is based on diversity of

citizenship. The Fifth Circuit, on its own motion, has decided to

certify these questions to the Justices of the Supreme Court of

Texas.

II. STATEMENT OF THE CASE

Hardy, a resident of Oklahoma, was a co-owner of The

Concierge of Houston, Inc. (“Concierge”), a Texas corporation in

the nursing home business. In late 2002, KeyBank National

Association (“Keybank”), an Ohio-based national banking

association, loaned Concierge $4,820,000 so that Concierge could

purchase a nursing home in Houston, Texas that was in

foreclosure. In exchange, Concierge executed a promissory note
3
for that amount payable to Keybank. The note was secured by a

deed of trust to the property and was personally guaranteed by

Hardy. We note that the promisory note, the deed of trust, and

the guaranty were each executed and delivered in Houston, Texas.

The note was intended to serve as temporary financing until

Concierge could secure permanent financing; however, Concierge

never secured permanent financing and Keybank accordingly posted

the nursing home for non-judicial foreclosure sale, scheduled for

July 2, 2003.

On June 30, 2003, Concierge filed for bankruptcy under

Chapter 11, staying the scheduled foreclosure. Unable to collect

on its debt, Keybank sold the note, along with its associated

guarantees and collateral rights, to Int’l Interests, a Texas

limited partnership. On July 8, 2003, Int’l Interests filed the

present lawsuit against Hardy to enforce Hardy’s guarantee, and

on July 22, Int’l Interests moved in bankruptcy court to lift the

stay of foreclosure so that it could foreclose on the facility

under the deed of trust. The bankruptcy court, after affording

Concierge time to try to obtain permanent financing or to secure

a buyer for the property, granted Int’l Interests’ motion and

allowed the foreclosure to proceed. At the November 4, 2003

foreclosure sale, which was conducted in Harris County, Texas in

accordance with Texas law, The Ireland Limited Family Partnership

4
(“ILFP”), the sole bidder, purchased the nursing home for

$1,000,000. After applying this amount to Concierge’s debt,

approximately $3,090,476 was still owed on the note.2

Int’l Interests brought this lawsuit in the court below to

recover the deficiency from Hardy pursuant to the guaranty

agreement.3 Hardy filed a counterclaim, alleging that the

facility was sold at foreclosure for less than fair market value

and seeking, under section 51.003 of the Texas Property Code, a

determination of the facility’s fair market value and an offset

in that amount from any deficiency judgment.4 Int’l Interests

2
This approximation does not include interest in the
amount of $90,561 that accrued on the note after the foreclosure,
which is reflected in the total judgment of $3,181,037 entered by
the district court in Int’l Interests’ favor.
3
For simplicity’s sake, the facts that follow summarize
the district court proceedings, omitting reference to the various
amendments the parties made to their submissions.
4
Section 51.003 states,
(b) Any person against whom [a deficiency] is sought by
motion may request that the court in which the action is
pending determine the fair market value of the real
property as of the date of the foreclosure sale. . . .
(c) If the court determines that the fair market value
is greater than the sale price of the real property at
the foreclosure sale, the persons against whom recovery
of the deficiency is sought are entitled to an offset
against the deficiency in the amount by which the fair
market value, less the amount of any claim, indebtedness,
or obligation of any kind that is secured by a lien or
encumbrance on the real property that was not
extinguished by the foreclosure, exceeds the sale price.
If no party requests the determination of fair market
value or if such a request is made and no competent
5
moved for summary judgment, asserting that (1) a choice-of-law

provision in the guaranty agreement5 required that Ohio law —

which does not provide a deficiency offset — govern the

deficiency action, preventing application of section 51.003 of

the Texas Property Code, and (2) even if Texas law governed the

deficiency action, Hardy in the guaranty waived any right to

challenge Int’l Interests’ actions taken to enforce the guaranty.

Hardy responded that (1) because the foreclosure was governed by

Texas law under the deed of trust, Texas law also governed the

resulting deficiency action; (2) he did not waive his right to

challenge the actions taken by Int’l Interests to enforce the

guaranty; (3) even if Ohio law governed the deficiency action,

Int’l Interests was judicially or equitably estopped from

pursuing a deficiency under Ohio law because it was seeking

attorney’s fees under Texas law; and (4) if the court found that

Ohio law governed the deficiency action, it should grant him a

continuance to permit him to raise defenses and counterclaims

evidence of fair market value is introduced, the sale
price at the foreclosure sale shall be used to compute
the deficiency.
TEX. PROP. CODE ANN. § 51.003.
5
The guaranty signed by Hardy contains the following
clause: “This Guaranty shall be construed in accordance with the
laws of the State of Ohio and shall inure to the benefit of
[Keybank], its successors and assigns, and to any holder who
derives title to or an interest in this Guaranty or the
Liabilities.”
6
available under Ohio law.

The district court granted Int’l Interests’ motion for

summary judgment and dismissed Hardy’s counterclaim, concluding

that Ohio law governed the deficiency action, that Hardy had no

estoppel defense, and that Hardy was not entitled to a

continuance. Specifically, with respect to the choice of law

issue, the district court made several determinations. First, the

district court determined that the law of the guaranty, not the

law of the deed of trust, governed the action because “[u]nder

Texas law . . . ‘[a]n action against guarantors of a note for a

deficiency following foreclosure on real property is an action

involving enforcement of the underlying debt.’ Thus, even if

Hardy is correct that Texas law governs the deed of trust, it is

the Hardy Guaranty, not the deed of trust that creates [Int’l

Interests’] right to a deficiency judgment in this case [and

accordingly] the law applicable to the Hardy Guaranty that

governs [the] deficiency action.” Int’l Interests, L.P. v. Hardy,

No. H-03-2418, slip op. at 8 (S.D. Tex. Nov. 17, 2004) (order

granting summary judgment) (second alteration in original)

(quoting Resolution Trust Corp. v. Northpark Joint Venture, 958

F.2d 1313, 1318 (5th Cir. 1992) (quoting Res. Sav. Ass’n v.

Neary, 782 S.W.2d 897, 902 (Tex. App.--Dallas 1989, writ denied))

and citing First Commerce Realty Investors v. K-F Land Co., 617

7
S.W.2d 806, 809 (Tex. Civ. App.--Houston [14th Dist.] 1981, writ

ref’d n.r.e.)). The district court then conducted a choice of law

analysis under Texas law and determined that because the parties

could have explicitly “agreed, without violating Ohio law, that

Hardy would be liable for the full amount of any deficiency

judgment with no right of offset,” id. at 8-9 (citing Chase

Manhattan Bank, N.A. v. Greenbriar N. Section II, 835 S.W.2d 720

(Tex. App.--Houston [1st Dist.] 1992, no writ.)), and because

“under Texas law, Hardy could have contractually waived the right

of offset provided by section 51.003 of the Texas Property Code,”

id. at 9 (citing LaSalle Bank Nat’l Ass’n v. Sleutel, 289 F.3d

837 (5th Cir. 2002)), the Ohio choice of law provision in the

guaranty agreement between the parties was enforceable. Hardy

appealed.

III. LEGAL ISSUES

In diversity cases, a federal court must follow the choice

of law rules of the forum state, here Texas. Mayo v. Hartford

Life Ins. Co., 354 F.3d 400, 403 (5th Cir. 2004). The Supreme

Court of Texas has recognized that contractual choice of law

provisions should generally be enforced, but has also stated that

“the parties’ freedom to choose what jurisdiction’s law will

apply . . . [is not] unlimited. They cannot require that their

contract be governed by the law of a jurisdiction which has no

8
relation whatever to them or their agreement. And they cannot by

agreement thwart or offend the public policy of the state the law

of which ought otherwise to apply.” DeSantis v. Wackenhut Corp.,

793 S.W.2d 670, 677 (Tex. 1990). In order to effect this policy,

the court adopted section 187 of the Restatement (Second) of

Conflict of Laws,6 which defines in conflicts cases when the law

of the state chosen by the parties to a contract will be applied.

Id.

The first problem in this case is that the parties arguably

agreed that the law of one state, Texas, would apply to the deed

6
Section 187 states,
(1) The law of the state chosen by the parties to govern
their contractual rights and duties will be applied if
the particular issue is one which the parties could have
resolved by an explicit provision in their agreement
directed to that issue.
(2) The law of the state chosen by the parties to govern
their contractual rights and duties will be applied, even
if the particular issue is one which the parties could
not have resolved by an explicit provision in their
agreement directed to that issue, unless either
(a) the chosen state has no substantial
relationship to the parties or the transaction and there
is no other reasonable basis for the parties’ choice, or
(b) application of the law of the chosen state
would be contrary to a fundamental policy of a state
which has a materially greater interest than the chosen
state in the determination of the particular issue and
which, under the rule of § 188, would be the state of the
applicable law in the absence of an effective choice of
law by the parties.
(3) In the absence of a contrary indication of
intention, the reference is to the local law of the state
of the chosen law.
RESTATEMENT (SECOND) OF CONFLICT OF LAWS § 187 (1971).
9
of trust and that the law of another state, Ohio, would apply to

the guaranty agreement.7 The Fifth Circuit has held, interpreting

Texas law, that because a deficiency action “is an action

involving enforcement of the underlying debt,” the law of the

guaranty applies in an action to recover that debt to the

exclusion of the law of the deed of trust. Resolution Trust

Corp., 958 F.2d at 1318 (citing Res. Sav. Ass’n, 782 S.W.2d at

902). However, this Fifth Circuit case and the Texas court of

appeals case it was interpreting involved foreclosures that

occurred prior to the date of enactment of section 51.003 of the

Texas Property Code; accordingly, neither court considered that

provision when deciding which law to apply. Moreover, the Supreme

Court of Texas has never spoken on whether the law of the

guaranty governs in a Texas deficiency action to the exclusion of

the law of the deed of trust. Accordingly, we respectfully

request that the Supreme Court of Texas address this issue via a

reply to our certified questions.

The second problem in this case is the application of

Restatement (Second) of Conflict of Laws section 187 and the

principles underlying it. Texas applies section 187 to determine

7
We do not make any statement here about whether the
parties agreed that the deed of trust, which incorporates Texas
foreclosure procedures and repeatedly refers to the Texas Property
Code, would be governed by Texas law. We assume, for argument’s
sake, that they did.
10
in a conflicts case whether a choice of law clause is

enforceable. DeSantis, 793 S.W.2d at 677-78. The first step is to

determine whether under section 187(1) of the Restatement the

specific issue was “one which the parties could have resolved by

an explicit provision in their agreement.” Id. at 678 (internal

quotation marks omitted). Although we do not disagree with the

district court that Texas’s right of offset is waivable,8 an

issue the Supreme Court of Texas has never addressed, we are not

convinced that under Texas law a party can waive that right via a

general choice of law provision. A waiver must generally be

knowing and intelligent to be enforceable, see, e.g., Fort Worth

Indep. Sch. Dist. v. City of Fort Worth, 22 S.W.3d 831, 844 (Tex.

2000), and it must be stated in clear and unambiguous language,

see, e.g., Purnell v. Follett, 555 S.W.2d 761, 766 (Tex. Civ.

App.--Houston [14th Dist.] 1977, no writ). Considering these

principles, we are not sure how the Supreme Court of Texas would

analyze section 187(1) of the Restatement in this case.

Furthermore, we are not clear how the Supreme Court of Texas

would analyze section 187(2). Section 187(2) states that the law

of the state chosen by the parties to govern will be applied

8
Int’l Interests, No. H-03-2418, at 9 (citing LaSalle Bank
Nat’l Ass’n, 289 F.3d at 840-42); see also Segal v. Emmes Capital,
L.L.C., 155 S.W.3d 267, 278-81 (Tex. App.--Houston [1st Dist.]
2004, pet. dism’d) (agreeing with LaSalle that the right of offset
can be contractually waived).
11
unless either

(a) the chosen state has no substantial
relationship to the parties or the transaction and
there is no other reasonable basis for the parties’
choice, or
(b) application of the law of the chosen state
would be contrary to a fundamental policy of a state
which has a materially greater interest than the chosen
state in the determination of the particular issue and
which, under the rule of § 188, would be the state of
the applicable law in the absence of an effective
choice of law by the parties.

DeSantis, 793 S.W.2d at 678. Under subsection (a), the chosen

state in this case, Ohio, no longer has a substantial

relationship to the parties and there is no longer a reasonable

basis for applying Ohio law (other than giving effect to the

choice of law provision). Granted, Keybank National Association,

the original lender and guarantee, is an Ohio-based national

banking association, but Keybank sold its interest in the note

and the guaranty to International Interests, L.P., a Texas

limited partnership, before this suit commenced. And Mr. Hardy is

an Oklahoma resident. Moreover, the property that secured the

note is in Texas, the note, deed of trust, and guaranty were all

signed in Texas, and Texas’s foreclosure law, not Ohio’s, was

used to foreclose the underlying property. These facts might push

a Texas court analyzing section 187(2) to apply Texas law,

especially considering the statement in DeSantis that the parties

to a contract “cannot require that their contract be governed by

12
the law of a jurisdiction which has no relation whatever to them

or their agreement,” id. at 677, but we have no guidance from the

Supreme Court of Texas on this issue.9

Moreover, under subsection (b), absent an effective choice

of law, Texas’s law would most likely apply in this case and

Texas arguably has a materially greater interest than Ohio in

deciding the deficiency offset issue (Ohio really has no interest

now that Keybank is not involved). Thus, the enforceability of

the Ohio choice of law provision would come down to a fundamental

policy inquiry under section 187(2)(b). Texas law does not define

whether the right of offset is fundamental, at least not in the

choice of laws context.10 There are some Texas cases indicating

that the right of offset is not fundamental, see supra note 10,

but the Texas Supreme Court has not spoken on the issue and there

9
Section 187(2)(a) is particularly problematic considering
comment d to section 187, which states that subsection (2) “applies
only when two or more states have an interest in the determination
of the particular issue.” RESTATEMENT (SECOND) OF CONFLICT OF LAWS § 187,
cmt. d. As stated above, Ohio no longer has any interest in the
determination of the deficiency offset issue, as no party is from
Ohio, the property in question is in Texas, the note, deed of
trust, and guaranty were all signed in Texas, and Texas’s
foreclosure law, not Ohio’s, was used to foreclose the property.
10
The cases stating that the right of offset can be waived
give as one reason that the right of offset is not fundamental. See
Segal, 155 S.W.3d at 278; see also LaSalle, 289 F.3d at 840 & n.2.
But the importance of the right of offset in the waiver context is
not necessarily the same as in the choice of laws context, where
application of foreign law may abrogate the right of offset without
the guarantor’s knowledge.
13
are some intricacies here that make this issue particularly

problematic, namely, Texas may have a fundamental policy interest

in having its entire foreclosure scheme applied, not just parts

of it, when enforcing a foreign choice of law provision would

destroy some of the protections Texas foreclosure law provides.

Accordingly, we respectfully request that the Supreme Court of

Texas address the application of section 187 of the Restatement

via a reply to our certified questions.

IV. QUESTIONS CERTIFIED

We certify the following two determinative questions of law

to the Supreme Court of Texas:

1. In an action to recover the deficiency owing on a note

guaranteed by the defendant where the guaranty agreement between

the original parties is governed by Ohio law and the deed of

trust to the property that secured the note is governed by Texas

law and the property itself is in Texas, does the law of the

guaranty or the law of the deed of trust govern the calculation

of any deficiency?

2. If the law of the guaranty governs the calculation of the

deficiency, should an Ohio choice of law clause in that guaranty

be given effect under section 187 of the Restatement (Second) of

Conflict of Laws where (1) no party is from Ohio, the property

that secured the note is in Texas, the note, deed of trust, and

14
guaranty were all executed and delivered in Texas, and Texas’s

foreclosure law, not Ohio’s, was used to foreclose the underlying

property and (2) applying Ohio law would prevent application of

section 51.003 of the Texas Property Code, which provides for a

deficiency offset?

We disclaim any intention or desire that the Supreme Court

of Texas confine its reply to the precise form or scope of the

questions certified. The answers provided by the Supreme Court of

Texas will determine the issue on appeal in this case. The record

and copies of the parties’ briefs are transmitted herewith.

QUESTIONS CERTIFIED.

15