Patton Street Corp. v. NAB Asset Venture II, L.P.

Opinion issued November 27, 2002

In The

Court of Appeals

For The

First District of Texas

____________

NO. 01-00-00144-CV

____________

PATTON STREET CORPORATION AND LONE STAR TRUCK STOP, INC.,

Appellants

V.

NAB ASSET VENTURE II, L.P., Appellee

On Appeal from the 152nd District Court

Harris County, Texas

Trial Court Cause No. 96-38921

OPINION ON REHEARING

This is an appeal from a declaratory judgment rendered on motions and cross-motions for summary judgment. This judgment resolved competing liens affecting

a 24.5-acre Houston commercial property (the property) in favor of appellee, NAB

Asset Venture II, L.P. (NAB), plaintiff in the trial court. Patton Street Corporation

(Patton Street), appellant here and one of several defendants in the trial court,

challenges this judgment and the denial of its own motion for summary judgment.

On February 28, 2002, we reversed and remanded. NAB filed a motion for

rehearing. We deny the motion for rehearing, but issue this opinion in place or our

original opinion. Accordingly, we deny, as moot, NAB’s motion for reconsideration

en banc.

We address issues raised by the motions for summary judgment and

pertinent to the relative superiority between a future-advance, or “dragnet,” clause

in an initial lien and a subordination clause in a competing, third lien. We reverse

and remand.

Facts and Procedural History

A. Background

In 1993, Patton Street, on behalf of a joint venture with others, purchased the

property for $1,200,000 from Lone Star Truck Stop, Inc. (Lone Star), which had

acquired the property in 1991.

Lone Star issued a general warranty deed to Patton

Street. Patton Street also paid approximately $250,000 in outstanding property taxes

shortly after the closing. Early in 1996, Patton Street leased a portion of the property

to a tenant. The tenant improved the property and used it as a truck stop.

In 1996, NAB sued Patton Street and others, including Lone Star and Patton

Street’s tenant, to challenge Patton Street’s ownership. NAB, which had purchased

a third lien note against the property from the Resolution Trust Corporation (RTC)

in 1993, asserted first priority lien rights, with a right to foreclose, on the grounds

that its third lien note was in turn secured by a first lien deed of trust, executed in

1986 (the first lien), which contained a future-advance, or “dragnet,” clause.

B. The Liens

1. First Lien Deed of Trust

On March 26, 1986, George W. Gilman, an individual, purchased the property

from Central Freight Lines (Central Freight). First Capital Savings Association

(First Capital) financed the transaction through a commercial real estate note (the

first note), in the principal amount of $2,572,000, secured by a first lien. Central

Freight issued Gilman a general warranty deed that reserved a vendor’s lien in favor

of Central Freight, which Central Freight assigned to First Capital as additional

security for Gilman’s loan. Twelve days later, on April 7, 1986, Gilman deeded the

property, subject to the first lien and the vendor’s lien, to a corporation, Velma, Inc.

(Velma), through a transaction by which Velma assumed the first note. The first lien

was filed of record on April 9, 1986.

The first lien contains the following future-advance clause:

This deed of trust shall secure, in addition to the Note, all funds

hereafter advanced by Beneficiary to or for the benefit of [Gilman],

as contemplated by any covenant or provision herein contracted or

for any purpose, and all other indebtedness, of whatever kind or

character, owing or which may hereafter become owing by [Gilman]

to Beneficiary, whether such indebtedness is direct or indirect,

primary or secondary, fixed or contingent or arises out of or is

evidenced by note, deed of trust, open account, overdraft,

endorsement, surety agreement, guaranty, or otherwise. It being

contemplated that [Gilman] may hereafter become indebted to

Beneficiary in further sum or sums (all of the aforesaid, including all

amounts payable under the Note, being hereinafter sometimes called

“said indebtedness.”) Said indebtedness shall be payable at the above

stated address of Beneficiary or at such other place as Beneficiary may

hereafter direct in writing; and, unless otherwise provided in the

instrument evidencing said indebtedness, shall bear interest at the same

rate per annum as the Note bears, from date of accrual of said

indebtedness until paid. In addition, any and all attorney’s fees and

expenses of collection payable under the terms of the Note shall be and

constitute a part of said indebtedness secured hereby. This Deed of

Trust shall also secure all renewals, rearrangement and extensions

of any said indebtedness .

(Emphasis added.)

2. Second Lien Deed of Trust

Also on April 7, 1986, Velma borrowed $262,529.50 from the original owner

of the property, Central Freight, and executed a commercial real estate note (the

second note) and deed of trust in favor of Central Freight (the second lien) for that

indebtedness. This note served to reimburse Central Freight for funds advanced for

ad valorem taxes.

The second lien was filed of record on April 9, 1986, along with

the first lien.

3. Third Lien Deed of Trust

Just under two years later, on February 29, 1988, Velma borrowed an

additional $1,978,859.41 from First Capital. This loan was secured by an additional

note (the third note) and deed of trust (the third lien) in favor of First Capital. The

third lien was recorded on March 3, 1988. A typewritten provision added to the third

note stated as follows:

The lien securing this Note shall be and remain secondary and inferior

to the lien securing those two certain Promissory Notes more

particularly described in [sic] Deed of Trust of even date herewith.

The third lien was essentially similar to the first lien, except that it contained three

added typewritten clauses. The third typewritten clause stated as follows:

It is stipulated, covenanted and agreed that the lien created by this

instrument shall be and remain secondary and inferior to the lien(s)

securing the payment of that (1) one certain other Promissory Note in

the principal sum of $2,572,000.00 dated March 21, 1986, executed by

GEORGE W. GILMAN and payable to the order of FIRST CAPITAL

SAVINGS ASSOCIATION OF TEXAS,

more fully described in a

Deed of Trust recorded under File No. K485910 of the County Clerk’s

Records of Harris County, Texas; . . . and (2) one certain Promissory

Note in the principal sum of $250,000 dated April 9, 1986, executed by

VELMA, INC., and payable to the order of CENTRAL FREIGHT

LINES, INC.,

more fully described in a Deed of Trust recorded under

File No. K486570 of the County Clerk’s Records of Harris County,

Texas.

C. NAB’s Acquisition

First Capital was declared insolvent in March 1989 and taken over first by the

Federal Savings and Loan Insurance Corporation (FSLIC) and then by the RTC,

which was appointed receiver. On October 13, 1993, and thus before Patton Street’s

November 30, 1993 purchase, NAB purchased the third note for $120,000 at a

national RTC auction. This was a non-recorded quitclaim assignment. On May 13,

1994, the RTC assigned to NAB a judgment entered on October 14, 1992 in Civil

Action No. H-89-1150 by the United States Court for the Southern District of Texas

(the federal court judgment). This judgment adjudicated Velma liable for

$1,978,859.41, the full amount of the third note, plus over $1,000,000 in accrued and

per diem interest. The quitclaim assignment to NAB was not recorded until

September 26, 1994.

D. This Litigation

Based on the future-advance clause, NAB filed this lawsuit, claiming the

following: (1) the first lien had priority; (2) Lone Star’s 1991 acquisition of the

property was therefore void; and (3) Patton Street therefore acquired no rights when

it purchased the property from Lone Star in 1993. Patton Street’s counterclaim

asserted superior rights in the property, including rights as bona fide purchaser.

The parties promptly filed motions for summary judgment seeking declaratory

relief. These were referred to a mediator by an agreed order issued by the trial court.

As contemplated by the agreed order, when no settlement occurred, the mediator,

whose role then switched to that of a master, submitted a 23-page advisory opinion

and report to the trial court. On the issue of the rights NAB derived from the first

lien, the report recommended granting Patton Street’s motion and denying NAB’s.

The report also concluded that fact issues on the status of Patton Street as bona fide

purchaser precluded summary judgment.

NAB and Patton Street submitted additional briefing to the trial court, which

initially rendered an interlocutory summary judgment in favor of Patton Street.

When NAB moved for reconsideration, the trial court again referred the motion to

the mediator/master, who issued a supplemental, revised, advisory report, but still

recommended summary judgment in favor of Patton Street on the issue of the rights

NAB derived from the first lien. NAB and Patton Street filed additional briefing

pertaining to the recommendations contained in the report. NAB also requested

leave to file an affidavit as additional summary judgment evidence. The trial court

granted NAB’s request, but refused to allow Patton Street to file an affidavit in

response.

After resolving several matters to finalize the issues for appeal, the trial court

reversed its prior ruling and ruled in favor of NAB, first by an interlocutory order on

the parties’ cross-motions for summary judgment, and then by a final, declaratory

judgment that extensively detailed how the three liens against the property affected

the parties’ rights. This judgment of the trial court reflects the following conclusions

on NAB’s and Patton Street’s competing claims to the property:

1. NAB was the sole owner of the “Third Debt,” worth approximately

$5,244,369.06, which was secured by both the first lien and the third

lien, and had a right to foreclose on either of these liens.

2. Lone Star’s foreclosure of the second lien and later transfer of the

property to Patton Street were void ab initio, and Lone Star and Patton

Street therefore had no interest, either legal or equitable, in the

property.

3. Patton Street was not a bona fide purchaser.

Patton Street brings a broad challenge to this judgment in its first issue and raises six

additional subsidiary issues. We address each party’s interpretation of the effect of

the future-advance clause as warranting summary judgment. In addition, we address

Patton Street’s contentions that NAB was not entitled to prevail by summary

judgment on the grounds that Patton Street (1) was not a bona fide purchaser, (2) was

barred by res judicata from contesting NAB’s right to foreclose, and (3) had no

standing to contest NAB’s claims.

Standards of Review

Patton Street’s first and second issues trigger the well-settled standards that

govern summary judgments and interpretation of written instruments.

A. Summary Judgment - Rule 166a(a)

NAB and Patton Street filed traditional rule 166a(a) motions for summary

judgment. We follow the usual standard of review: The party with the burden of

proof must prove it is entitled to judgment by establishing each element of its claim

or defense as a matter of law, or by negating an element of claim or defense of the

opposing party as a matter of law. Tex. R. Civ. P. 166a(a)–(b), comment; Randall’s

Food Mkts. Inc. v. Johnson , 891 S.W.2d 640, 644 (Tex. 1995). When a motion for

summary judgment raises multiple grounds, we may affirm if any ground is

meritorious. Cincinnati Life Ins. Co. v. Cates , 927 S.W.2d 623, 625 (Tex. 1996);

Hanson v. Republic Ins. Co. , 5 S.W.3d 324, 327 (Tex. App.—Houston [1st Dist.]

1999, pet. denied). When, as here, both parties move for summary judgment, and the

trial court grants one motion and denies the other, we may determine all questions

presented, including the propriety of overruling the appealing party’s motion,

provided each party has fully met its burden and sought final judgment relief. CU

Lloyd’s v. Feldman , 977 S.W.2d 568, 569 (Tex. 1998); Hanson , 5 S.W.3d at 327 .

We consider all summary judgment grounds the trial court rules on that the appealing

parties preserve for appellate review and are necessary for final disposition of the

appeal. See Cates , 927 S.W.2d at 626 .

B. Interpretation of Written Instruments

Unambiguous written instruments may be interpreted as a matter of law by

summary judgment. See DeWitt County Elec. Coop., Inc. v. Parks , 1 S.W.3d 96, 100

(Tex. 1999); Coker v. Coker , 650 S.W.2d 391, 393 (Tex. 1983); GTE Mobilnet, Ltd.

Partnership v. Telecell Cellular, Inc. , 955 S.W.2d 286, 289 (Tex. App.—Houston

[1st Dist.] 1997, writ denied). Mortgages are written instruments governed by the

same rules of interpretation that govern contracts. Sonny Arnold, Inc. v. Sentry Sav.

Ass’n , 633 S.W.2d 811, 815 (Tex. 1982); Starcrest Trust v. Berry , 926 S.W.2d 343,

351 (Tex. App.—Austin 1996, no writ).

A contract is not ambiguous if its wording permits a definite or certain legal

meaning. DeWitt County Elec. Coop ., 1 S.W.3d at 100 ; National Union Fire Ins. Co.

v. CBI Indus. , 907 S.W.2d 517, 520 (Tex. 1995). A contract is ambiguous if, after

applying established rules of construction, its meaning is uncertain and doubtful, or

the writing is reasonably susceptible to more than one meaning. DeWitt County

Elec. Coop. , 1 S.W.3d at 100 ; Coker , 650 S.W.2d at 393 . In determining whether

a contract is ambiguous, courts construe and harmonize all provisions of the contract

to discern the parties’ intent. Coker , 650 S.W.2d at 393-94 ; Weaver v. Highlands

Ins. Co. , 4 S.W.3d 826, 830 (Tex. App.—Houston [1st Dist.] 1999, no pet.). This

inquiry also considers the context of the agreement of the parties and the

circumstances present when the agreement arose. Friendswood Dev. Co. v. McDade

+ Co ., 926 S.W.2d 280, 282 (Tex. 1996). To discern the contracting parties’ intent,

courts may properly consider all writings pertaining to the same transaction, even if

the writings were executed at a different time and do not expressly refer to one

another. DeWitt County Elec. Coop. , 1 S.W.3d at 102 . Summary judgment is

improper when ambiguity exists because facts must be resolved to discern the

parties’ intent. Harris v. Rowe , 593 S.W.2d 303, 306 (Tex. 1979); Simpson v. Geico

Gen. Ins. Co. , 907 S.W.2d 942, 945 (Tex. App.—Houston [1st Dist.] 1995, no writ).

But a writing is not ambiguous merely because it lacks clarity or because a

disagreement in interpretation arises. DeWitt County Elec. Coop. , 1 S.W.3d at 100 ;

Weaver , 4 S.W.3d at 830 . Moreover, parol evidence of the contracting parties’ intent

is not admissible to support a claim that terms of a contract are ambiguous.

Friendswood Dev. Co. , 926 S.W.2d at 283. Likewise, parol evidence of the parties’

intent is not admissible to vary the terms of an otherwise unambiguous instrument.

Estes v. Republic Nat’l Bank , 462 S.W.2d 273, 275 (Tex. 1970). For parol evidence

of the parties’ intent to be admissible, the contract must first be ambiguous as a

matter of law. Id. Ambiguity may be patent or latent. Friendswood Dev. Co. , 926

S.W.2d at 282-83. Patent ambiguity is evident on the face of the contract. Id. at 282.

When a contract is otherwise unambiguous on its face and fails because of collateral

matters, the ambiguity is latent. Id. at 282-83.

Reasonably Contemplated Scope of the Future-Advance Clause

Patton Street’s first and second issues challenge whether NAB conclusively

established its right to foreclose on the property by virtue of the future-advance

clause in the first lien securing the $2,600,000 first note between First Capital and

Velma. Patton Street contends the first lien did not secure the third debt as a matter

of law because the typewritten additions to the third lien conclusively negate the

effect of the future-advance clause. In the alternative, Patton Street contends the

written instruments are ambiguous and that parol evidence is necessary to discern the

intent of the parties in executing the instruments. Patton Street further contends: (1)

NAB conceded the instruments were ambiguous by submitting the affidavit of

Robert J. Adam, First Capital’s President/CEO and general counsel, in which he

explained that First Capital did not intend to negate the future-advance clause in the

first lien; and (2) the trial court compounded its error in interpreting the instruments

“as a matter of law” by admitting the parol evidence in Adam’s affidavit and refusing

to admit Patton Street’s proffered affidavit of Wendell H. Sandlin, the president of

Velma, in which he explained his understanding of the purpose of the subordination

language in the third lien.

Courts presume that debt instruments containing future-advance clauses

embody the contracting parties’ intent and will enforce agreements that “clearly and

unambiguously” state that intent. See Estes , 462 S.W.2d at 276 (rejecting challenge

to enforcement of clause allegedly included by mutual mistake because parol

evidence offered to negate clause failed “clear, exact, and satisfactory” standard).

Mortgage clauses that secure future indebtedness apply, however, only to debts that

are reasonably within the contemplation of the parties. See Wood v. Parker Square

State Bank , 400 S.W.2d 898, 901 (Tex. 1966); Vaughn v. Crown Plumbing & Sewer

Serv., Inc. , 523 S.W.2d 72, 76 (Tex. Civ. App.—Houston [1st Dist.] 1975, writ ref’d

n.r.e.). In enforcing future-advance clauses, therefore, courts necessarily construe

not only the instrument that contains the future-advance clause, but also the

instrument that creates the future indebtedness to be enforced under the clause. See

Vaughn , 523 S.W.2d at 76-77 ; Bishop v. Nat’l Loan Investors, L.P. , 915 S.W.2d 241,

244-45 (Tex. App.—Fort Worth 1995, writ denied); Airline Commerce Bank v.

Commercial Credit Corp. , 531 S.W.2d 171, 175 (Tex. Civ. App.—Houston [14th

Dist.] 1975, writ ref’d n.r.e.) (all construing documents containing future-advance

clauses and documents creating indebtedness sought to be enforced); see also DeWitt

County Elec. Coop. , 1 S.W.3d at 102 (holding that courts properly consider all

writings pertinent to same transaction, even those executed at different time and

without reference to transaction).

In challenging NAB’s contention that the future-advance clause in the first

lien deed of trust clearly and unambiguously encompasses the third note between

First Capital and Velma, Patton Street relied, in part, on the additional, typewritten

clauses, excerpted above, that were incorporated into the third note and third lien

negotiated between Velma and First Capital. Patton Street contends the typewritten

provisions indicate the parties’ express intent to subordinate the lien securing the

third debt to the liens securing the first and second debts. See Western Auto Supply

Co. v. Brazosport Bank , 840 S.W.2d 157, 159 (Tex. App.—Houston [1st Dist.] 1992,

no writ) (defining “subordination agreement” as “a contractual modification of lien

priorities” that must be construed both as to parties’ expressed intent and its own

terms). Therefore, Patton Street contends, the additional, typewritten provisions

indicate Velma’s and First Capital’s express intent to exempt the third debt from the

application of the preprinted future-advance clause in the first lien and thus prevent

the third debt from falling within the scope of the future-advance clause.

NAB challenges Patton Street’s reliance on the additional typewritten clauses

on several grounds. NAB first contends the terms of the third deed of trust cannot

be considered for any purpose in construing the meaning of the future-advance

clause in the first lien because Velma and First Capital executed these documents

two years after the first note and as part of a different transaction.

But, the only case

NAB relies on does not support this argument. Jim Walter Homes, Inc. v.

Schuenemann merely acknowledges, as a settled rule of contract interpretation and

in the context of a claim that an acceleration-of-maturity clause was usurious, that

courts must construe, together, separate documents that are executed at the same

time, for the same purpose, and in course of the same transaction. 668 S.W.2d 324,

327 (Tex. 1984).

Moreover, NAB’s argument ignores that courts must necessarily examine the

documents creating the future indebtedness in determining whether the parties

reasonably contemplated that a future-advance clause encompass that indebtedness.

See Vaughn , 523 S.W.2d 76 ; Bishop , 915 S.W.2d at 244-45 ; Airline Commerce

Bank , 531 S.W.2d at 175 . NAB’s arguments also ignore that we must consider and

attempt to reconcile all relevant provisions when interpreting written instruments.

See Coker , 650 S.W.2d at 393 . Finally, in defending its interpretation that the

future-advance clause encompasses the third debt, NAB belies that it rejects the third

lien and note by asking us to consider other documents executed at that point in time.

NAB alternatively dismisses the added typewritten provisions as mere “boilerplate”

exceptions to warranties of title that appear elsewhere in the third lien. In

subordinating the third lien to the first and second liens, however, the provisions

exceed that minimal function.

Although we reject NAB’s dismissal of the added typewritten subordination

provisions in the third note and lien, we do not agree that the provisions conclusively

bar the indebtedness secured by the third lien from falling within the future-advance

clause. In contending they do, Patton Street asks rhetorically: If the parties intended

the future-advance clause to encompass the third debt, why would they (1) create a

separate lien to secure the third debt, (2) expressly subordinate that lien to the first

and second liens, but (3) never mention the future-advance clause in the third-debt

documents, or (4) otherwise indicate that the first lien also secured the third debt?

As these questions and NAB’s and Patton Street’s arguments demonstrate, and

as we have determined after applying settled rules of construction, the instruments

at issue here do not permit the definite or certain legal meaning accorded by the trial

court in rendering summary judgment in favor of NAB as sole owner of the third

debt, which debt was secured by both the first and third liens. Accordingly, the trial

court erred by rendering summary judgment in favor of NAB on that ground.

Likewise, the instruments at issue here do not permit the definite and certain legal

meaning that the third debt was not reasonably within the contemplation of the

parties to the first lien, as Patton Street contends. Accordingly, the trial court did not

err by not rendering summary judgment in favor of Patton Street on that ground.

Because it is not possible to discern, with certainty, the effect of the

typewritten subordination clause added to the third lien on the future-advance clause,

and vice versa, we cannot say, with certainty, that Gilman and First Capital

reasonably contemplated, in executing the first lien containing the future-advance

clause, that the clause would encompass the third indebtedness negotiated between

Velma and First Capital. The typewritten subordination clause added to the third

lien thus gives rise to a latent ambiguity in interpreting the future-advance clause in

the first lien. Because of this latent ambiguity, parol evidence is admissible to

ascertain Gilman’s and First Capital’s intent in including the future-advance clause

in the first lien, and to ascertain, given the future-advance clause, Velma’s and First

Capital’s intent in adding the subordination clauses in the third note and lien.

Accordingly, although inconsistent with its rendering summary judgment in favor

of NAB, the trial court did not err by admitting into evidence the affidavit of Robert

J. Adam, First Capital’s President/CEO and general counsel, in which he explained

that First Capital did not intend to negate the future-advance clause in the first lien

by adding the typewritten subordination clause. Because parol evidence of the

parties’ intent is admissible, the trial court did err, however, by refusing to admit

Patton Street’s proffered affidavit of Velma’s president, Wendell H. Sandlin, in

which he explained his understanding of the purpose of the subordination language

in the third lien.

We sustain Patton Street’s first and second issues, except as to its challenge

to the trial court’s admitting the Adam affidavit.

Patton Street’s Bona Fide Purchaser Defense

In its sixth issue, Patton Street contends the trial court erred by rendering

summary judgment in favor of NAB on the ground that Patton Street was not a bona

fide purchaser when it acquired the property from Lone Star in 1993.

Bona fide

purchaser status is an affirmative defense. See Madison v. Gordon , 39 S.W.3d 604,

605 (Tex. 2001). A bona fide purchaser acquires its interest in a property in good

faith, for value, and without notice of the claim or interest of a third party, here NAB.

See Madison , 39 S.W.3d at 606 ; see also Tex. Prop. Code Ann. § 13.001(a)

(Vernon Supp. 2002) (rendering unrecorded conveyances of real property or interests

in real property void as to bona fide purchasers); Prowse v. Walters , 941 S.W.2d

223, 228 (Tex. App.—Corpus Christi 1996, writ denied) (stating that purpose of

recording statute is to protect those who take without notice of prior transfer from

injury or prejudice arising from lack of knowledge of prior claim).

Notice may be actual or constructive. Gordon , 39 S.W.3d at 606 . Actual

notice derives from personal information or knowledge; constructive notice is

imputed in law to a person with no personal information or knowledge. Id. As a

general rule, notice is a fact issue and thus inappropriate for resolution by summary

judgment. Hardy Road 13.4 Joint Venture v. Med. Ctr. Bank , 867 S.W.2d 889, 893

(Tex. App.—Houston [1st Dist.] 1993, writ denied) (notice or knowledge); Apex Fin.

Corp. v. Brown , 7 S.W.3d 820, 831 (Tex. App.—Texarkana 1999, no pet.) (actual

notice).

NAB’s motion for summary judgment sought to defeat the notice element of

Patton Street’s bona fide purchaser defense. To prevail by summary judgment, NAB

had the burden to establish that Patton Street had actual or constructive notice of

NAB’s claims as a matter of law. Tex. R. Civ. P. 166a(a)-(b), comment. NAB

argued Patton Street had constructive notice of its claims by virtue of the future-advance clause in the recorded first lien, which triggered a duty in Patton Street to

investigate whether any indebtedness existed that might be encompassed by the

clause. The notice provided by a future-advance clause, however, extends only “so

far as a purchaser or junior creditor may, by an inspection of the record, by ordinary

diligence and common prudence, ascertain the extent of the incumbrance.” Willis

v. Sanger , 40 S.W. 229, 232 (Tex. Civ. App.—Dallas 1897, writ ref’d).

It is undisputed that the Harris County real property records revealed the

following information concerning the property when Patton Street purchased it in

1993 from the record owner, Lone Star, which released all liens in favor of Patton

Street: (1) Lone Star had acquired the first note, first lien, and vendor’s lien from the

RTC; (2) Central Freight had foreclosed the second lien securing the second note in

1991; (3) the foreclosure of the second lien extinguished the third lien;

(4) the third

note and third lien expressly subordinated any liens securing the third debt to the

first and second liens; (5) the federal court judgment the RTC obtained in Civil

Action No. H-89-1150 did not refer to the property or the liens; and (6) Velma no

longer owned the property when the abstract of the federal judgment was filed with

the Harris County District Clerk. It is likewise undisputed that, when Patton Street

purchased the property, the real property records did not reveal any assignment of

the third note, the third lien, the federal judgment, or the first lien to NAB.

Although the future-advance clause in the first lien may have triggered a duty

of inquiry in Patton Street, an ordinarily diligent and prudent inspection of the real

property records would not have revealed NAB’s claims to a degree necessary to

establish constructive knowledge as a matter of law. NAB also mistakenly relies on

Patton Street’s failure to obtain an estoppel certificate from the RTC, the holder of

the first lien, to ensure the future-advance clause would not be enforced against any

indebtedness not disclosed by the real property records. See Southwest Title Ins. v.

Northland Bldg. Corp ., 542 S.W.2d 436 , 441 n.1 (Tex. App.—Fort Worth 1976),

aff’d in part and rev’d in part , 552 S.W.2d 425 (Tex. 1977). Although a properly

drawn estoppel certificate may afford that protection, id. , failure to execute one does

not preclude bona fide purchaser status. NAB also relies on a lis pendens filed in the

federal action, Civil Action No. H-89-1150, as establishing that Patton Street had

constructive knowledge of NAB’s claims as a matter of law. But the abstract of that

judgment in the Harris County real property records indicated only an award to the

RTC of recited principal and interest; the abstract did not address the property, the

first and third liens, or the debts they secured.

NAB attributed actual knowledge to Patton Street and its codefendants by

relying on “numerous letters and correspondence,” directed either to them or their

attorneys, which referred to either the first lien, the lis pendens and judgment in the

federal court action, or the subject debt. NAB did not conclusively demonstrate,

however, that the correspondence afforded actual notice of NAB’s claims.

Moreover, in responding to NAB’s motion for summary judgment, Patton Street

denied it had any knowledge, when it purchased the property, that NAB had any

interest in it.

Whether considered singly or together, these factors do not establish, as a

matter of law, that Patton Street had actual or constructive notice of NAB’s claims

and is thus barred from asserting its bona fide purchaser defense.

We sustain Patton Street’s sixth issue.

Patton Street’s Standing to Challenge NAB’s Right to Foreclose

In its fifth issue, Patton Street challenges whether NAB established that Patton

Street lacks standing to dispute NAB’s right to foreclose on the property.

In

moving for summary judgment on this ground, NAB argued that only mortgagors or

those in privity with them may contest a mortgagor’s sale under a deed of trust and

that Patton Street is a stranger to title. See Mercer v. Bludworth , 715 S.W.2d 693,

698 (Tex. App.—Houston [1st Dist.] 1986, writ ref’d n.r.e.), disapproved on other

grounds by Shumway v. Horizon Credit Corp ., 801 S.W.2d 890, 894 (Tex. 1991).

As NAB acknowledges, a well-settled exception vests standing in third-party holders

of legal or equitable interests. See Goswami v. Metropolitan Sav. & Loan Ass’n , 751

S.W.2d 487, 489 (Tex. 1988); see also Henry v. Mr. M Convenience Stores, Inc. , 543

S.W.2d 393, 396 (Tex. Civ. App.—Houston [1st Dist.] 1976, writ ref’d n.r.e.)

(recognizing standing of third party holding equitable interest to sue to remove cloud

on title). In contending Patton Street has neither legal nor equitable interest in the

property, NAB disregards, in particular, Patton Street’s having purchased the

property for $1,200,000 and paid off the first lien and tax liens. This alone creates

an equitable interest in the property in Patton Street, which thus has standing to

challenge NAB’s right to foreclose on the property.

We sustain Patton Street’s fifth issue.

Res Judicata Effect of Federal Court Judgment

Patton Street’s third issue challenges whether NAB established, as a matter of

law, that a 1992 federal judgment bars Patton Street from challenging the rights

NAB derived through the future-advance clause in the first lien.

NAB’s first

asserted basis in moving for summary judgment was that a 1992 federal court

judgment precluded Patton Street from contesting these rights. This argument refers

to the federal court judgment in Civil Action No. H-89-1150 in favor of the RTC, as

receiver for First Capital. This judgment, which adjudicated Velma liable for the full

amount of the third note, now worth approximately $5,000,000, is the judgment that

the RTC sold to NAB for $120,000 on October 13, 1993.

The premise underlying NAB’s plea in bar was that Central Freight, the holder

of the second note and lien, sued Velma in the federal court action, and also cross-claimed against First Capital for a declaration that the first lien secured only the first

debt and not the third debt, despite the future-advance clause in the first lien. On

settling its dispute with Velma, however, Central Freight abandoned its cross-claim

against First Capital, and the federal court judgment does not address it. In moving

for summary judgment in this case, NAB claimed Patton Street was barred, as a

matter of law, from contesting the lien rights NAB claimed under the future-advance

clause in the first lien because the final judgment in the federal court action disposed

of all matters before that court as a matter of law, including Central Freight’s cross-claim for declaratory relief. Patton Street contends the federal court judgment had

no preclusive effect because the judgment did not resolve Central Freight’s request

for declaratory relief. We agree.

Federal law determines the preclusive effect of a federal court judgment in

Texas state court. Eagle Properties, Ltd. v. Scharbauer , 807 S.W.2d 714, 718 (Tex.

1990). Barring an exception, res judicata applies under federal law when: (1) a final

judgment is rendered on the merits; (2) by a court of competent jurisdiction; (3) the

prior action and the subject action involve the same cause of action; and (4) the prior

action and the subject action involve the same parties. Id. ; Home Indem. Co. v. Pate ,

814 S.W.2d 497, 500 (Tex. App.—Houston [1st Dist.] 1991, writ denied).

Unresolved requests for declaratory relief constitute a well-settled exception to the

claim-preclusion doctrine. Kaspar Wire Works, Inc. v. Leco Eng’g & Mach., Inc. ,

575 F.2d 530, 535 (5th Cir. 1979); see 28 U.S.C. § 2201 (a) (1994) (federal

Declaratory Judgment Act) (providing that any declaration of “rights and other legal

relations of any interested party seeking such declaration” shall “have the force and

effect of a final judgment or decree” and be reviewable as final judgment or decree).

Because the federal court judgment declared no rights on Central Freight’s

abandoned counterclaim, that judgment does not preclude Patton Street from

contesting the lien rights NAB claimed under the future-advance clause in the first

lien. Accordingly, NAB was not entitled to prevail by summary judgment on its

asserted affirmative defense of res judicata.

We sustain Patton Street’s third issue.

We need not address Patton Street’s remaining issues, numbers four and

seven, which challenge, respectively, the trial court’s declarations that Lone Star’s

1991 foreclosure sale was void ab initio and that Patton Street had no rights of

equitable subrogation. The invalidity of the Lone Star foreclosure is not a

dispositive issue for purposes of summary judgment for either party based on the

parties’ interpretations of the effect of the future-advance clause and may never be

reached, depending on the trial court’s resolution of the issues remanded. Likewise,

Patton Street’s equitable defenses arise only if NAB’s interpretation of the future-advance clause is correct.

Conclusion

We incorporate our interlocutory order of April 20, 2000, granting the

unopposed motion to dismiss of appellant, Lone Star Truck Stop, Inc., and dismiss

its appeal. In all other respects, we reverse the judgment of the trial court and

remand the cause for further proceedings.

Tim Taft

Justice

Panel consists of Justices Taft, Brister,

and Price.

Do not publish. Tex. R. App. P. 47.4.