When a Commercial Loan Default Notice or Acceleration May Be Defective Under Texas Law
A commercial lender sends a letter with a sentence every borrower dreads: “The entire unpaid principal balance, accrued interest, and all other amounts owing under the Loan Documents are hereby immediately due and payable.”
A $150,000 dispute has suddenly become a $12 million problem. Or has it?
Commercial loan documents frequently give lenders powerful acceleration rights after an Event of Default. But saying a loan is accelerated and effectively accelerating it under the contract and applicable law are not necessarily the same thing.
A borrower may actually have breached a covenant while the lender nevertheless accelerated prematurely. A cure period may still be running. A required notice may never have been given. Or the lender may be relying on a demand the loan documents did not authorize.
The right question is therefore not simply, “Was there a default?” It is also: “Did this default give the lender the right to accelerate this loan, in this manner, on this date?”
Default and Acceleration Are Not the Same Event
A commercial borrower can default without missing a payment. Failing to pay taxes, maintain insurance, complete repairs, remove liens, provide financial reports, replenish reserves, or comply with other covenants may constitute an Event of Default.
But an Event of Default does not necessarily mean the entire debt instantaneously becomes due. Many commercial notes give the lender an option to accelerate after default. If acceleration is optional, there is a distinction between the event giving the lender the right to accelerate and the lender’s later exercise of that right.
The analysis should proceed in sequence: What happened? Did it constitute an Event of Default? Was notice required? Was there a cure right, and did it expire? Was acceleration optional? What did the lender have to do to exercise that option?
Texas Generally Recognizes Two Acceleration Notices
Texas law traditionally distinguishes between two separate notices when optional acceleration is involved: notice of intent to accelerate and notice that acceleration has actually occurred.
In Ogden v. Gibraltar Savings Association, 640 S.W.2d 232 (Tex. 1982), the Texas Supreme Court explained that, absent waiver, notice of intent must afford an opportunity to cure and make clear that failure to cure will result in acceleration and foreclosure. The Court separately recognized notice that the debt has actually been accelerated.
In Shumway v. Horizon Credit Corp., 801 S.W.2d 890 (Tex. 1991), the Court confirmed that notice of intent to accelerate and notice of acceleration are separate rights.
The first tells the borrower: Cure the default or we will accelerate. The second tells the borrower: You did not cure. We have accelerated. The entire debt is due.
The distinction matters. A letter stating that the lender may, intends to, or will accelerate if a default remains uncured should not automatically be treated as though acceleration has already occurred.
But Commercial Loan Waivers Matter Too
Sophisticated commercial loan documents frequently contain extensive waivers. A borrower may waive presentment, demand, protest, notice of dishonor, notice of default, notice of acceleration, or other procedural rights.
Shumway held that waiver of presentment, notice of intent to accelerate, and notice of acceleration must be clear and unequivocal, and that the distinct rights surrendered must be stated specifically. A general waiver of “notice” or even “all notice,” without sufficient specificity, does not necessarily waive the separate right to notice of intent to accelerate.
Read the waiver. Then identify exactly which right was surrendered.
Cure Periods Can Decide the Case
Suppose a loan agreement requires specified property repairs within 60 days after notice. The lender sends notice on June 1. On June 20, it declares default and accelerates because the repairs have not been completed. The borrower still had 40 days to perform.
But commercial loan agreements are rarely that simple. The lender may argue that the default was not failure to complete the repairs. Instead, a separate provision required an immediate deposit of the estimated repair cost.
Now the dispute changes. Did the lender have a contractual right to demand the deposit? Was the amount calculated correctly? Should existing reserves have been credited? When did the deposit become due?
That is why a default notice should be compared to the actual covenant invoked. Which default? Under which section? Triggered by what event? Due when? Subject to what cure?
One Letter Cannot Necessarily Collapse Time
Lenders sometimes send one letter purporting to declare default, demand cure, announce an intent to accelerate, accelerate immediately, and threaten foreclosure.
Sometimes the documents permit compressed remedies, particularly for immediately actionable defaults where applicable notice rights have been waived. But putting every remedy into one letter does not make the sequence valid.
If the borrower has a contractual cure period, the lender generally cannot preserve that right in one paragraph and eliminate it in the next. A demand letter cannot rewrite the loan documents.
Foreclosure Adds Another Notice Layer
When Texas real property is involved, acceleration is not the only timing issue. Texas Property Code § 51.002(b) separately governs notice of a nonjudicial foreclosure sale and generally requires at least 21 days’ notice before the sale.
Commercial borrowers should be careful not to import the 20-day cure provision in § 51.002(d) into every commercial foreclosure. Subsection (d), by its text, applies to real property used as the debtor’s residence. For commercial property, cure rights ordinarily must be identified in the loan documents and applicable acceleration law rather than assumed from that residential provision.
The better approach is not to count letters. Build a timeline showing which contractual or legal requirement each communication was intended to satisfy.
“We Feel Insecure” Is Different From “You Breached Section 8.4”
Texas Business and Commerce Code § 1.309 imposes a special rule on terms permitting acceleration “at will,” when a party “deems itself insecure,” or in words of similar import. Such language permits acceleration only when the party in good faith believes that the prospect of payment or performance is impaired.
But § 1.309 should not be converted into a general fairness test for every acceleration. There is a difference between “We may accelerate whenever we deem ourselves insecure” and “Failure to maintain required insurance constitutes an Event of Default, after which Lender may accelerate.”
Classification comes first. A borrower challenging acceleration should identify the precise source of the lender’s claimed authority rather than merely arguing that acceleration was “in bad faith.”
Attack the First Domino
Article 2 in this series addressed a recurring problem: a lender declares default over repairs or reserve funding while already controlling substantial reserves, escrows, or insurance proceeds.
Suppose the lender demands an additional $600,000 deposit. The borrower refuses. The lender declares default and accelerates.
If failure to make the deposit is the triggering Event of Default, acceleration may stand or fall with the validity of the demand. Was the lender entitled to demand the gross repair cost or only a shortfall? Did it include casualty work funded from insurance proceeds? Did it ignore money already held in an applicable reserve? Were the contractual conditions permitting the demand satisfied?
Do not begin by attacking acceleration in the abstract. Attack the first domino.
Acceleration Starts a Clock for the Lender Too
Effective acceleration has consequences for the lender. Texas Civil Practice and Remedies Code § 16.035 imposes a four-year limitations period applicable to foreclosure of a real-property lien.
In Holy Cross Church of God in Christ v. Wolf, 44 S.W.3d 562 (Tex. 2001), the Texas Supreme Court held that when a note contains an optional acceleration clause, default alone does not start limitations. The action accrues when the holder actually exercises its option to accelerate. The Court explained that effective acceleration requires clear and unequivocal notice of intent to accelerate followed by clear and unequivocal notice of acceleration, absent a contrary agreement or abandonment.
Texas law also recognizes abandonment or rescission of acceleration under appropriate circumstances. Subsequent notices, payment demands, rescission notices, and other lender conduct can therefore become important. An old acceleration letter should never be analyzed in isolation.
When the Acceleration Letter Arrives
Do not begin with an angry response. Build the chronology.
- What exact provision was breached?
- Had performance actually become due?
- What notice was contractually required?
- Was there a cure period, and had it expired?
- Was the underlying demand contractually authorized?
- What acceleration notices were required?
- What notices were validly waived?
- Was acceleration optional?
- Did the lender clearly exercise the option?
- Were Texas foreclosure-sale notice requirements separately satisfied?
- Had the lender previously accelerated or abandoned acceleration?
What looks like one event is often a chain of separate contractual and legal events.
The Takeaway
Acceleration converts a dispute over a payment, repair, reserve, lien, covenant, or reporting obligation into a demand for the entire debt. But acceleration is not magic.
A lender does not necessarily make acceleration effective merely by writing the word in bold type. The borrower may genuinely be in default and still have a legitimate challenge to acceleration. Conversely, a defect in acceleration does not necessarily erase the underlying default or prevent the lender from correcting the problem and proceeding again.
The analysis is sequential: Was there a valid default? Had the cure period expired? Was the underlying demand authorized? What notices were required and what notices were waived? Did the lender clearly exercise its option? Did the foreclosure process independently comply with Texas law?
When millions of dollars become “immediately due and payable,” those are not technical questions. They may determine whether the lender presently has the remedy it says it has.
And that is why, when the acceleration letter arrives, the first response should not be panic. It should be: Show me the loan documents.
Previous in the Distressed Commercial Loan series: The Receiver Just Took Over Your Property. Now What? · Your Lender Has $500,000 of Your Money. Can It Still Declare You in Default?
Next in the series: The Forbearance Agreement May Be More Dangerous Than the Default.
Matthew M. Clarke is a shareholder at Kelley Clarke, PC and Chair of Litigation. He represents borrowers, guarantors, sponsors, investors, and businesses in commercial real estate and lender-liability disputes. He is also preparing the forthcoming Texas Lender Liability: A Practitioner’s Guide. This article is for informational purposes only and does not constitute legal advice. Reading it does not create an attorney-client relationship.