Equitable Title Trumps Judgment Lien

Lorrie Smith filed suit for judicial foreclosure of a judgment lien against three lots in a Frisco subdivision. Smith had obtained her judgment against Shaddock Builders & Developers, and she recorded an abstract of the judgment on July 15, 2010. Two years earlier, Shaddock had acquired the three lots and immediately conveyed them to another company, Basin, Ltd. The conveyance from Shaddock to Basin was recorded, but the original sale to Shaddock went unrecorded until the seller corrected its “oversight” exactly one day before Smith recorded her judgment lien. Shortly thereafter, Basin conveyed the lots to Sumeer Homes, which built houses and sold the lots to the current homeowners. Each of those subsequent transactions was recorded. Seeking to foreclose on the lots in order to collect on her judgment against Shaddock, Smith sued the homebuilder, the homeowners, their mortgage lenders, and the title company. The defendants moved for and obtained summary judgment against Smith.

On appeal, Smith argued that the conveyance to Shaddock had been fraudulently backdated, and that it had really been filed the day after she recorded her judgment lien. According to Smith, that meant that legal title to the property had not been transferred to Shaddock until after she filed her lien, therfore making the three lots subject to her claim. The court of appeals rejected that argument. Although “legal title” to property serves as evidence of ownership, it does not constitute full and complete title to the property. What really matters when it comes to a judgment creditor’s lien is equitable title to the property, which passes to the purchaser when it pays the purchase price and fulfills the obligations of the contract of sale. In this case, Shaddock had acquired equitable title to the lots three years before Smith recorded her lien, and Shaddock had immediately transferred that title to Basin. Equitable title is a complete defense against the lien of a judgment creditor. Because Basin had acquired equitable title long before Smith acquired her judgment against Shaddock, that title subsequently passed to Sumeer Homes and the subsequent homebuyers free and clear of Smith’s judgment judgment against Shaddock. Nor did Shaddock hold “legal title” to the three lots on the day Smith recorded her lien. The summary judgment evidence showed that the original seller had recorded the sale the day before, and because Shaddock had conveyed the property to Basin by warranty title two years earlier, legal title to the property passed instantly to Basin when the sale to Shaddock was finally recorded. The court of appeals therefore affirmed the trial court’s grant of summary judgment.

Smith v. Sumeer Homes, Inc., No. 05-11-01632-CV

Reversionary Remanded

In 2011, the Dallas Court of Appeals affirmed the trial court’s dismissal of an inverse condemnation suit, holding that the former owners of the property did not have a compensable interest merely because they had the right to repurchase it if the City of McKinney ceased using it as a park. That right was invoked when the city decided to build a library on a portion of the property, but the city defended the subsequent takings suit by arguing that the substance of the claim was really a breach of contract for which no sovereign immunity had been waived. On petition for review, the Texas Supreme Court has rejected that argument, holding that the former owners’ deed conveyed a “defeasible estate” to the City, and that the former owners retained a “conditional future interest” in the property. According to the Supreme Court, that was not simply a contractual right, but a property interest that was indeed compensable as a taking. The Supreme Court therefore reversed the judgment of the court of appeals and remanded the case to the trial court to determine whether and to what extent building the library had actually constituted a taking of the property.

El Dorado Land Co., L.P. v. City of McKinney, No. 11-0834

Your Agent, Your Responsibility

The court affirmed the trial court’s judgment in this commercial real estate lawsuit. Jarvis provided a loan through its loan servicer, NAC, to CAS for the purchase of an apartment complex. The loan documentation identified NAC as the “servicer” and the lender as Jarvis “c/o” NAC. CAS made monthly loan payments directly to NAC, who then disbursed them to Jarvis. CAS later sold the property to K&E through Stewart Title. Stewart Title paid the loan payoff amount directly to NAC for payment to Jarvis, as NAC had done for two other loan payoff transactions to Jarvis in the past. But in this case, NAC did not provide the funds to Jarvis and instead purported to continue making CAS’s monthly payments without notifying Jarvis of the sale. When NAC stopped making those payments, evidently due to insolvency, Jarvis learned of the property sale and sought to foreclose on the property.

K&E filed a declaratory action asserting that the loan was paid off and seeking to prevent foreclosure. Jarvis filed a third-party petition against CAS, Stewart Title asserting negligence and breach of contract claims against Stewart Title for making the loan payment to NAC instead of directly to Jarvis. Jarvis also sought a declaration that the loan was not discharged and sought to quiet title. At trial, Jarvis moved to exclude evidence of the other loans serviced by NAC in which NAC received the payoff amount and disbursed it to Jarvis, which was denied. Based on this evidence, the trial court found that Jarvis and NAC established a procedure where NAC received payoff funds and disbursed them to Jarvis and that NAC had actual and apparent authority to accept the payoff amount here. It entered judgment for K&E, declaring that the loan was fully paid, enjoining Jarvis from attempting to foreclose on the party, and awarding K&E attorney’s fees. The court also granted K&E and Stewart Title summary judgment on Jarvis’s negligence and breach of contract claims and severed out Jarvis’s claims against CAS.

On appeal, Jarvis argued that the trial court erred by denying its motion to exclude because the loan documents dictated the relationship between the parties, and thus the parol evidence rule precluded the evidence of Jarvis and NAC’s other course of dealings. The court held that the loan documents indicated that NAC had authority to act for Jarvis, but the scope of that authority was unclear. Thus, parol evidence showing the scope of NAC’s authority to accept loan payoff amounts and not contradicting the terms of the documents was not barred. Additionally, the evidence was sufficient to show that NAC had implied actual authority to accept the loan payoff. This holding also disposed of Jarvis’s claims against Stewart Title, whose transfer of funds to NAC constituted payment to Jarvis rather than a breach of any duty to Jarvis, and Jarvis’s declaratory action because its lien and deed of trust on the property was discharged. Finally, K&E’s attorney’s fees recovery was warranted because the UDJA permits a declaratory action brought to invalidate a real estate note, as well as any lien securing the note.

Jarvis v. K&E RE One, LLC, et al., 05-11-00341-CV

Fences, Not Driveways, Make Good Neighbors

A developer in Wylie purchased two adjoining tracts of land.  In 2004, he decided to sell  one of the properties to Capital One.  However, the city decided that both properties would have to be developed as one site, with a single access site on the Capitol One property.  The parties therefore entered into a cross-easement agreement, requiring Capital One to pave the internal drives that would link the access site to both of the properties.  However, Capital One finished its construction and obtained a certificate of occupancy without ever constructing the new approach.  The developer ended up building the driveway himself, and sued Capital One to pay for its cost.  After a bench trial, the trial court awarded the developer awarding approximately $22,000 in damages and another $100,000 for attorney fees.

The court of appeals reversed.   According to the appellate court, the cross-easement agreement required the parties to “keep and maintain” the driveway, but not to actually construct it.  The court also rejected the developer’s argument that Capital One had breached the agreement by failing to comply with a government regulation by not constructing the driveway, because there was no evidence the city had ever ordered Capital One to construct it.  The court also rejected the developer’s quantum meruit argument for failing to attack all grounds asserted in the bank’s summary judgment motion, and remanded to the district court for a determination of the bank’s attorney fees as the prevailing party under their contract.

Capital One, N.A. v. Haddock, No. 05-10-01028-CV

No Recourse, Some Waste

The loan agreement for the Regal Parc apartments in Irving was generally non-recourse to the borrower, but it also included a carve-out that made the loan fully recourse if the borrower breached its obligation to remain a single-purpose entity.  After the lender foreclosed on the property, it sued the borrowers for an $11.6 million deficiency, alleging they had violated the agreement by commingling funds with their related entities and committing waste by failing to maintain the property.  The trial court accepted the borrowers’ explanations of why they had not commingled Regal Parc funds with those of other entities, meaning that the loan remained non-recourse.  But the trial court also entered judgment against the owners for approximately $1 million due to waste and improper retention of post-default rents.  The court of appeals affirmed, holding that the trial court’s finding was adequately supported by the testimony of the borrowers’ witnesses.  The court of appeals also rejected the lender’s claim that the borrowers should have been responsible for an additional million dollars worth of waste that occurred before they assumed the loan, because the loan agreement only made the borrowers responsible for waste that occurred “henceforth” — i.e., from the date they assumed the loan.  Finally, the court found sufficient evidence to support the award of damages for waste and retained rents.

Wells Fargo Bank, N.A. v. HB Regal Parc, LLC, No. 05-10-01428-CV

Evidence Still Useful in Defeating No-Evidence Motion for Summary Judgment

The owners of a tract of land in Collin County formed a limited partnership with an investor and his company to develop the property, then sold the land to the LP.  As part of the sale, the LP issued a $9 million promissory note to the seller, plus another $1.5 million promissory note to a mortgage company, secured by a deed of trust on the property.  Subsequent loans by the mortgage company to the LP upped the debt by another $6.5 million, also secured by deeds of trust and with priority over the note issued to the sellers.  Since it all ended up in litigation, you will not be surprised to learn that the development collapsed.  The sellers sued the limited partnership, their fellow investor, and the mortgage company for fraud, breach of fiduciary duty, and related claims.  The mortgage company initiated foreclosure proceedings, which were stayed by the grant of a temporary injunction.  Before long, everybody filed motions for summary judgment, and the trial court granted them all.

The court of appeals affirmed.  With respect to the seller’s fraud claims, there was no evidence of misrepresentation in the original loan documents because those documents were not in the record on appeal.  Nor was there any evidence the seller relied on any misrepresentations in the subsequent loan agreements because, citing health concerns, she had not presented herself for deposition and she had not included any affidavit in response to the mortgage company’s no-evidence motion.  The court rejected the seller’s argument that the mere fact of having signed the agreement established that the seller had relied on the alleged misrepresentations.

Hall v. Douglas, No. 05-10-01102-CV

HardiPlank and Hypocrisy

One day, Appellee Dale Allen came home to see construction workers installing “HardiPlank” siding on his neighbor’s house.  This neighbor, Appellant Michael Jamison, had chosen to use HardiPlank on the exterior of his house because it is virtually indistinguishable from wood, and yet remains  fire resistant, rot resistant, and insect resistant.  HardiPlank does not shrink, it does not swell, and it does not absorb moisture.  It turns out, however, that the one thing HardiPlank is not resistant to is the subdivision’s restrictive covenant, which required that the “exterior walls” of the homes be covered in approved materials only.  And HardiPlank was not an approved material.

Allen, thus, brought suit to ensure that Jamison complied with the neighborhood’s exterior standards.  The only problem:  Allen himself had wrapped HIS house’s gables in HardiPlank.  Jaimson pointed out Allen’s hypocrisy, arguing, under the doctrine of quasi estoppel, that Allen cannot enforce a covenant with which he failed to comply.  The trial court rejected Jamison’s argument, finding that a “gable” is not the same and an “exterior wall,” and ruled in Allen’s favor.  The court of appeals, however, plunged the depths of Webster’s Third New International Dictionary and determined that a “gable” does, in fact, qualify as an exterior wall.  Having so determined, the Court then held that Allen was estopped from suing to require that Jamison comply with the very covenant he refused to abide by.

Jamison v. Allen, No. 05-11-00603-CV