Schmidt v. Richardson
Dallas Court of Appeals, No. 05-13-00206-CV (January 13, 2014)
Justices Bridges, Fillmore, and Lewis (Opinion)
The trial court entered a temporary injunction prohibiting a company’s officers from foreclosing on assets the company had posted as collateral for loans that the officers had made to the company. There was no evidence, however, that the officers intended to pursue their foreclosure rights. The plaintiff contended the governing documents permitted the officers to foreclose at any time without notice, and thus the prospect of imminent harm was real. The Court of Appeals disagreed, interpreting the loan documents to allow foreclosure only upon 10 days’ notice. Because the officers had not given the required notice, foreclosure was not imminent, and the Court therefore reversed the temporary injunction.

Sun River Energy, an oil and gas company, suffered financial setbacks as a result of the decline in natural gas prices in 2012, and became unable to pay its officers’ salaries. In an effort to retain its management team, Sun River executed promissory notes in favor of several of its officers for the compensation owed to them. The notes required Sun River to repay the loans within six months, and performance was secured by Sun River’s primary asset—a significant mineral interest in New Mexico. At the end of the six-month period, Sun River was unable to repay the loans.

To keep the officers from foreclosing on Sun River’s primary asset, a shareholder filed a derivative suit and sought a temporary injunction against the foreclosure. The plaintiff contended the loans were designed to fraudulently transfer the company’s main asset to the officers. The trial court granted the injunction.

The Court of Appeals observed there was no evidence that the officers actually intended to foreclose on the property at issue. To show imminent, irreparable harm, the plaintiff relied on a provision in the loan documents that permitted each officer to foreclose “if at any time [he] deems itself or himself insecure and in good faith believes that the prospect of payment of the amounts due . . . is impaired.” Because this provision permitted the officers to foreclose at any time without notice, the plaintiff contended, harm was imminent.

The Court rejected this argument, concluding the provision on which plaintiff relied was inapplicable. An “insecurity clause” like this one is relevant only during the payment period for the loan, a reality that was confirmed by the provision’s reference to “the prospect of payment.” The Court reasoned that, once the payment period ended, the “insecurity clause” was no longer applicable. Instead, the officers’ rights were governed by a more general default provision that required a 10-day notice-and-cure period as a condition of foreclosure. Because the officers had not provided the necessary notice, foreclosure was not imminent, and the temporary injunction therefore could not stand.