Written Words Versus Arithmetic Numbers in Promissory Notes

The issue of what happens when a promissory note has identified the amount of the loan in two different ways was decided by the Houston Court of Appeals recently in Charles R. Tips Family Trust v. PB Commercial LLC, __S.W.3d ___, 2015 Tex. App. LEXIS 1657 (Tex. App.- Houston [1st Dist.] 2015, n.w.h.). In PB Commercial, the residential loan and guaranty stated that the loan was for “ONE MILLION SEVEN THOUSAND AND NO/100 ($1,700,000.00).” This language appeared five times in three documents in exactly the same form each time and no other language in the documents described the amount of the loan. The borrower paid $595,586 towards the loan and defaulted and after the note was sold, PB Commercial sold the property securing the loan at auction for $874,125. PB Commercial then sued for the deficiency of $815,214.50. The borrowers and guarantor filed a counterclaim alleging that the loan had been paid in full and that PB Commercial was wrongly holding excess funds from the sale in the amount of $189,111.

Both parties filed competing motions for summary judgment and the trial court rendered summary judgment in favor of the bank on the higher amount.The borrowers and guarantor appealed, arguing that the written words control the meaning of the the document and that the note had been satisfied in full and that in fact, a surplus of $189,111 had been collected. The borrowers also argued that the note and guaranty were negotiable instruments and governed by Section 3.114 of the Texas Business and Commerce Code, which provides: “If an instrument contains contradictory terms, typewritten terms prevail over printed terms, handwritten terms prevail over both, and words prevail over numbers. Id. 

Relying on the Supreme Court of Texas opinion in Guthrie v. National Homes Corp., 394 S.W.2d 494 (Tex. 1965), the court of appeals reversed the trial court’s grant of summary judgment and held that the words control over the numbers under Section 3.114 of the Texas UCC. It did not matter that the discrepancy between the numbers and words was a large one because neither Texas case law or Section 3.114 make a distinction on the basis of the size of the obligation or the significance of the conflict in terms. Charles R. Tips Family Trust v. PB Commercial LLC, __S.W.3d ___, 2015 Tex. App. LEXIS 1657 (Tex. App.- Houston [1st Dist.] 2015, n.w.h.), citing, In re Regency Chevrolet, Inc., 122 B.R. 60 (Bankr. S.D. Tex. 1990)(mem.op.). Because the language was not ambiguous, the court of appeals rejected PB Commercial’s argument that this case had special circumstances because of the omission of one word. The court also rejected as being irrelevant the introduction of extrinsic evidence that the amount actually received was $1,700,000 as opposed to $1,007,000 because the contract was not ambiguous. Charles R. Tips Family Trust v. PB Commercial LLC, __S.W.3d ___, 2015 Tex. App. LEXIS 1657 (Tex. App.- Houston [1st Dist.] 2015, n.w.h.), citing, Pitts & Collard, LLP v. Schechter, 369 S.W. 301, 313 (Tex. App.-Houston [1st Dist.] 2011, no pet.).

The importance of document review of loan, lease or guaranty documents cannot be stated more forcefully than this opinion. The opinion in this blog is solely the author’s and any suggestions, comments or replies should be sent to me at john@jrjoneslaw.com.

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