Noble Mortgage & Investments, LLC v. D & M Investments, LLC

Opinion issued March 17, 2011

In The

Court of

Appeals

For The

First District

of Texas

————————————

NO. 01-09-00987-CV

———————————

Noble Mortgage & Investments, LLC , Appellant

V.

D&M

Vision Investments, LLC, Danny K. Whitfield, SR., and Mary W. Whitfield , Appellees.

* * *

D&M Vision Investments, LLC, Danny K. Whitfield, SR., and Mary

W. Whitfield ,

Appellant

V.

Noble

Mortgage & Investments, LLC , Appellees.

On Appeal from the 11th District Court

Harris County, Texas

Trial Court Case No. 2008-21310

O P I N I O N

This is an

appeal following a bench trial from a judgment adjudicating title and encumbrances

to real property. We reverse the trial

court’s judgment.

BACKGROUND

This dispute involves property

located at 1923 Blodgett in Houston.

(“Blodgett Property”). Danny

Whitfield (“Whitfield”) purchased the Blodgett Property at an execution sale held

to satisfy a county court judgment against the then owner, Kenneth Banks

(“Banks”). Plaintiff D&M Vision

Investment (“D&M”), a company owned by Whitfield and an assignee of title

to the Blodgett Property, filed a trespass to try title action against Noble

Mortgage (‘Noble”), another party claiming later-acquired title to the same

property. Noble counterclaimed against

D&M and filed cross-claims against Whitfield and his wife, seeking title to

the property or, alternatively, a subrogation lien. Because the timing of various transactions

and filings are germane to this appeal, we first set forth several relevant

transactions and their dates.

In March 2005, Houston Kaco, Inc.—a

company owed by Banks — purchased

the Blodgett Property. The purchase was

financed by a mortgage from Statewide Capital Investments (“Statewide”) and

secured by a deed of trust properly recorded in the real property records in

favor of Statewide. This mortgage and

deed of trust were later transferred from Statewide to International Bank of

Commerce (“ICB”), which recorded the assignment in the real property records.

On March 23, 2006, Houston Kaco

transferred title to the Blodgett Property to Banks personally. In October 2007, Banks sought refinancing of

a portion of the Statewide/ICB mortgage debt and applied for a mortgage loan

with Noble. As part of this refinancing

transaction, Banks conveyed the Blodgett Property back to Houston Kaco on

October 9, 2007. On the same date, Nobel

loaned $172,250.00 to Houston Kaco, secured by a deed of trust on the

property. The Noble mortgage deed of

trust was recorded in the real property records of Harris County on November 2,

2007.

Out of the new loan proceeds

supplied by Noble, three pre-existing liens were paid off and released: (1)

$130,000.00 towards balance due to ICB (as assignee of Statewide’s lien

recorded in the real property records on May 3, 2005), (2) $2,545.40 for

balance due on a judgment in favor of Unovate Inc. evidenced by an abstract of

judgment recorded in the real property records on October 5, 2004, and (3)

$9,982.39 to satisfy unpaid property taxes, secured by superior tax liens.

Unbeknownst to Noble, on October 30, 2006,

Financial Holdings, Inc. had obtained a default judgment against Banks in the

County Civil Court at Law No. 2 of Harris County, Texas. Financial Holdings did not file an abstract

of that judgment in the real property records.

It did, however, obtain an execution and order of sale on July 5, 2007,

which resulted in a constable’s sale of the property on September 4, 2007. The high bidder of $18,000.00 was

Whitfield. The sale was documented in

the litigation records of Case No. 866,463 in the County Civil Court at Law No.

2 by the constable’s filing of a “return of execution” on September 11, 2007. On November 14, 2007, the constable prepared

a deed transferring the Blodgett Property to Whitfield, which Whitfield recorded

in the real property records on December 31, 2007. That December 31, 2007 filing was the first

time any reference to the Financial Holdings Judgment, lien, or sale to

Whitfield appeared in the real property records, and it was after Noble’s interest

was recorded in the real property records.

On January 14, 2008, the Whitfields transferred title of the Blodgett

Property to their company D&M.

After filing D&M’s deed in the

real property records, Whitfield posted “No Trespassing” signs at the Blodgett

Property. Around the same time, Noble

foreclosed on Houston Kaco’s note secured by the Blodgett Property. Upon finding Whitfield’s signs on the

property, Nobel’s owner, Darrell Daik, called Whitfield and, for the first time,

the parties discovered that they had competing claims to title of the Blodgett

Property.

THE TRIAL COURT PROCEEDINGS

D&M filed a trespass to try

title suit against Noble, requesting that D&M be declared the fee simple

owner of the property. Noble asserted,

as an affirmative defense, that it was a bona fide mortgagee and/or bona fide

purchaser of the Blodgett Property and, as such, its interest was taken free

and clear of D&M’s unrecorded claims.

Noble also asserted a counterclaim

against D&M and asserted third-party cross-claims against Whitfield and his

wife, requesting the court quiet title to the property by extinguishing the

deeds transferring the Blodgett Property to Whitfield and D&M. Alternatively, if title remained vested in

D&M, Noble requested that the court grant it a $142,527.79 subrogation

lien, to reimburse Noble the liens it satisfied when it refinanced the Blodgett

Property, i.e., $130,000 to IBC, $9,982.39 to taxing authorities, and $2,545.40

to extinguish the Unovate Judgment lien.

In answering these claims, D&M argued that Noble knew, or should

have known, of its and Whitfield’s ownership of the Blodgett Property because the

underlying judgment, though unrecorded in the real property records,

nonetheless was of public record in the Harris County Civil Court civil court

records. D&M further denied that

Noble is subrogated to any prior liens.

The case was tried to the bench

with Whitfield, Daik, and Banks testifying.

A.

Whitfield’s testimony

Whitfield testified that he first

located the Blodgett Property on a constable office’s list of properties to be

auctioned. Before bidding on the

property, Whitfield did not commission a professional title search, but he did

research himself to determine what liens might burden the property by looking

at (1) the real property records, (2) tax records, and (3) the County Court at

Law No. 2 docket of the Financial Holdings lawsuit giving rise to the

constable’s foreclosure sale. The only lien

he located in the real property records was the abstract of the Unovate

Judgment, although he stipulated at trial that Statewide’s mortgage lien was

properly filed and of record at the time he bought the property putting him on

notice of that lien. The tax records,

according to his research, revealed taxes to be “fairly current.” Finally, he testified that, while there was

no abstract or other reference to the Financial Holdings Judgment in the real

property records, he believed that “by giving Financial Holdings the right to

foreclose on Kenneth Banks’ property at 1923 Blodgett,” the county court at law

“had already decided that Banks was the owner of the property.” Whitfield knew at the time of the foreclosure

sale that he would be responsible for satisfying any outstanding liens if he

bought the Blodgett Property, and he testified that he was unsure whether he

would have bid on the property had he known about the approximately $196,000 deed

of trust to Statewide Mortgage.

After submitting the winning bid of

$18,000 for the Blodgett Property at the constable’s sale on September 4, 2007,

Whitfield paid with a cashier’s check and received a receipt. [1] He testified about several follow-up

conversations he had with the constable’s office over the next couple of months

requesting his deed. The first deed

produced by the constable in November 2007 misspelled Whitfield’s name. He later received a corrected “Deed Under

Execution,” dated November 14, 2007, which he filed in the real property

records on December 31, 2007. A couple

of weeks later, he executed and filed in the real property records a deed

transferring the Blodgett Property to D&M, an investment company owned by him

and his wife.

Whitfield testified that, shortly

after purchasing the Blodgett Property, he walked around the property and spoke

with neighbors who indicated that someone lived there. Although he could tell the property was

occupied, he was never able to speak to the occupants because they would not answer

the door. After filing D&M’s deed,

he left “No Trespassing” notices at the property stating that the property was

under D&M’s ownership pursuant to an execution sale. These notices were torn down two or three

times. Finally, in March 2008, Daik

called him claiming that Noble owned the Blodgett Property.

B.

Banks’s testimony

Banks — the prior owner of the Blodgett Property — owns Houston Kaco, a construction renovation company that also purchases

property for resale. He testified that

he did not receive notice of the Financial Holdings default judgment against

him and that he did not learn about it or the resulting judgment execution sale

until he found one of D&M’s “No Trespassing” signs in his yard well after

he had closed his refinancing loan with Noble.

While he agrees that his correct address is listed on the constable

records, he did not receive or cash the $390.35 check that constable’s records

reflect were disbursed to him as surplus from the foreclosure sale. When he signed documents at the closing of

his refinancing with Noble attesting that no pending litigation or undisclosed

liens or encumbrances existed, he believed those statements to be true.

C.

Daik’s testimony

Daik owns Noble Mortgage. Noble is primarily in the business of making

s hort-term loans—for a year or less—to

investors who are renovating and reselling properties. He testified that John Shively — a broker with whom Noble works closely with and

at times shared office space —first

presented him with a proposed refinance deal for Banks on his Blodgett Property

mortgage. The application was initially

in Banks’s name individually (although the loan was later taken in the name of

Houston Kaco) and was only partially completed and unsigned. Daik testified that the application is one of

several different forms the company has used and “not one that [it] require[s]

be filled out completely.”

Daik testified to his understanding at that time that Banks’s current

mortgage holder, Statewide, had gone out of business and sold at least part of

its portfolio to IBC. “IBC was trying to

get out of these loans” that it did not want to keep in its portfolio and was

thus unwilling to renew Banks’s loan on the Blodgett Property that had already

ballooned. Banks needed to move the loan

to a different lender to cover the time for him “to do some cosmetic repairs

and put the house on the market to be sold.”

After evaluating the loan, Noble determined that the payoff of the

Statewide/IBC existing lien, the Unovate Judgment, the back taxes, and the

$23,000 Noble was going to hold back for repairs exceeded the amount Noble was

willing to lend on the Blodgett Property.

Statewide thus agreed to accept a partial payoff of $130,000 and retain

a $25,000 loan to Banks that would be subordinated to Noble’s interest.

As part of its due diligence, Daik testified that Noble ordered an

appraisal, a survey, and a title commitment.

The title commitment disclosed three liens—the Statewide/IBC mortgage, property

tax liens, and the Unovate lien—that Noble required be satisfied at closing. Daik testified that nothing in his

investigation, the title report, or the closing put him on notice that another

lien existed or that there had been a foreclosure sale of the Blodgett

property. He testified that Noble

followed all its standard procedures in making the loan, that he did not know at

the time of closing about the Financial Holdings Judgment, and that Noble acted

in good faith with regard to all parties involved. He relied upon both the title search and

Banks’s sworn statements at closing that no other encumbrances existed on the

property.

While Noble sometimes obtains credit reports on borrowers before lending

money, he could not locate one in the file on this transaction and did not

recall there being one. When asked why

he did not require a credit report that might have placed him on notice of the

Financial Holdings Judgment, he explained that Noble’s making loans without a

credit report or payment history is not unusual because, as an equity-based

lender, Noble’s focus in lending is on the value of the property itself, rather

than the payment history or credit-worthiness of the borrower. Daik agreed that, had Noble done a credit

check on Banks, it “maybe” would have discovered the Financial Holdings

Judgment.

Daik testified that, after making two payments, Banks defaulted on the

loan. Banks executed a “Warranty Deed in

Lieu of Foreclosure” transferring the Blodgett Property from Houston Kaco to

Noble. Shortly thereafter, Noble

foreclosed its lien to extinguish IBC’s subordinated lien and anything that

might have levied on the property between the time of its loan and the

foreclosure.

D.

The trial court’s judgment and findings

On September 4, 2009, the court

entered judgment (1) divesting Noble of title to the Blodgett Property, (2)

finding D&M has “valid, subsisting, good, and indefeasible title to the

property, subject to subrogation rights,” and (3) declaring that Noble “is

subrogated in the total amount of $142,527.79 to liens on the property, which are

senior and superior to any title interest of claim of D&M.” Specifically, the court granted Noble the

following subrogation interests:

A. Lien by subrogation in the

amount of $130,000 for payoff of the debt secured by that Deed of Trust,

Security, Agreement, and Assignment of Rents from Houston Kaco, Inc. to the

Trustee for Statewide Capital Investments, LLC, filed at Clerk’s File No.

Y456278 on May 10, 2005, in the Real Property Records of Harris County, Texas.

B. Lien by subrogation in the

amount of $9,982.39 for payoff of unpaid property taxes for tax years 2005 and

2006, as secured by the senior and superior tax liens of Harris County and

related taxing authorities under Chapter 32, Texas Property Tax Code.

C. Lien by subrogation in the

amount of $2,545.40 for payoff of an Abstract of Judgment lien, as recorded at

Clerk’s File No. X965928 on October 5, 2004, in the Real Property Records of

Harris County, Texas.

The court further recognized that

Noble is entitled to judicial foreclosure of its lien right by subrogation, but

that D&M can acquire a release of the subrogation lien and divest Noble of

its right to foreclosure by paying to Noble $142,527.79 by December 26,

2009.

After the trial court denied Noble’s

motion for new trial, the parties filed cross-notices of appeal. The court then made the following Findings of

Facts and Conclusions of Law:

Findings of Fact

1. The sale of . . . 1923

Blodgett Street, Houston, Texas 77004 (“the Property”) as under Execution to

satisfy the Default Judgment in Cause No. 866463 in the County Court at Law No.

2, Harris County, Texas, in favor of Financial Holdings, Inc, against Kenneth

Banks (“Banks”) as Defendant was published in the newspaper.

2. The Execution and order of

sale and Officer’s Return of Execution on the sale of the Property to satisfy

the Judgment were filed in the records of the County Court at Law No. 2 on

September 11, 2007.

3. Through no fault on his

part, Danny K. Whitfield, Sr. did not receive a Deed Under the Execution until

late November 2007. The Deed Under the

Execution misspelled Danny K. Whitfield, Sr.’s name and had to be corrected.

4. On December 31, 2007, the

corrected Deed Under the Execution from May Walker, Constable of Precinct 7, to

Danny K. Whitfield, Sr. was issued and recorded in the Property Records of

Harris County, Texas.

5. Danny K. Whitfield, Sr. left

signs on the Property giving notice of possession by D&M Vision

Investments, LLC, but the signs were removed.

6. Banks, Houston Kaco, Inc.,

and Noble Mortgage & Investments, LLC (“Noble Mortgage”) had constructive

notice of Danny K. Whitfield, Sr.’s title to the Property before entering into

any transactions involving a property interest in the Property.

7. In August 2007, Noble

Mortgage began having discussions with a loan broker and Banks about

refinancing the loan Statewide Capital Investments, LLC had made to Houston

Kaco, Inc. to finance the purchase of the Property.

8. At that time, International

Bank of Commerce had succeeded to the interests of Statewide Capital

Investments, LLC under the note.

International Bank of Commerce was not willing to renew the note, which

was due.

9. The loan broker shared

office space with Noble Mortgage.

10. Banks submitted a Uniform

Residential Loan Application to Noble Mortgage in connection with proposed

refinancing. Banks did not complete that

part of the application that required that he disclose whether he was a party

to a lawsuit and did not sign the application.

11. The application was for a

loan to Banks individually; subsequently, however, Banks requested, and Noble

Mortgage agreed, that the loan be made to Houston Kaco, Inc. Noble Mortgage did not require that Houston

Kaco, Inc. complete and sign a loan application. No one at Noble Mortgage met with Banks personally

before the closing.

12. Houston Kaco, Inc.,

defaulted on note payments to Noble Mortgage & Investments, LLC.

13. Banks, Houston Kaco, Inc.,

and Noble Mortgage had actual notice of Danny K. Whitfield, Sr.’s title to the

Property before entering into any transactions involving a property interest in

the Property.

14. Reasonable inquiry by Noble

Mortgage would have disclosed Danny K. Whitfield, Sr.’s title in the property.

15. Noble Mortgage did not

acquire an interest in the Property in good faith.

16. Noble Mortgage did not

acquire an interest in the Property without notice of any third-party claim or

interest.

17. Houston Kaco, Inc. was not a

bona fide purchaser as against Danny K. Whitfield, Sr.’s prior claims.

18. Noble Mortgage is not a bona

fide purchaser or mortgagee as against Danny K. Whitfield, Sr.’s prior claims.

Conclusions of Law

1. Title to the Property vested

in Danny K. Whitfield, Sr. on September 4, 2007.

2. The Execution and Order of

Sale and the Officer’s Return of Execution on the sale of the Property to

satisfy the Judgment were filed in the records of the Harris County Clerk in

accordance with the Texas Rules of Civil Procedure.

3. The filing of the Execution

and order of Sale and the Officer’s Return of Execution on the sale of the

Property to satisfy the Judgment in the records of the Harris County clerk was

a record for the purposes of Texas law.

4. The filing of the Execution

and order of Sale and the Officer’s Return of Execution on the sale of the

Property to satisfy the Judgment in the records of the Harris County clerk

satisfied the recording statute of the Texas Property Code.

5. Banks, Houston Kaco, Inc.,

and Noble Mortgage had constructive notice of Danny K. Whitfield, Sr.’s title

to the Property before entering into any transactions involving a property

interest in the Property.

6. Banks, Houston Kaco, Inc.,

and Noble Mortgage had actual notice of Danny K. Whitfield, Sr.’s title to the

Property before entering into any transactions involving a property interest in

the Property.

7. Noble Mortgage did not

acquire an interest in the Property in good faith.

8. Noble Mortgage did not

acquire an interest in the Property without notice of any third-party claim or

interest.

9. Houston Kaco, Inc. was not a

bona fide purchaser as against Danny K. Whitfield, Sr.’s prior claims.

10. Noble Mortgage is not a bona

fide purchaser or mortgagee as against Danny K. Whitfield, Sr.’s prior claims.

11. The title to the Property

that vested in Danny K. Whitfield, Sr. on September 4, 2007, was equitable and

not subject to recording statutes.

12. Danny K. Whitfield, Sr.,

Mary W. Whitfield, and D&M Vision Investments, LLC are not estopped to

assert the superiority of Danny K. Whitfield, Sr.’s equitable title.

13. D&M Vision Investments,

LLC is the successor of Danny K. Whitfield, Sr., and Mary W. Whitfield.

14. D&M Vision Investments,

LLC is entitled to possession of the Property for which execution will issue in

this case.

15. D&M Vision Investments,

LLC is the record title owner of the Property.

16. Noble Mortgage &

Investments, LLC is subrogated in the total amount of $142,527.79 to liens on

the property, which are senior and superior to any title interest or claim of

D&M Vision Investments.

THIS APPEAL

Nobel challenges the court’s

denying it bona fide mortgagee and/or purchaser status. Specifically, it contends that — because neither the Financial Holdings Judgment

nor any document related to Whitfield and/or D&M’s purchase of the Blodgett

Property was ever recorded in the real property records (and because Noble did

not otherwise know they existed) before Noble took its interest — Whitfield’s title is void against Noble’s later

acquired mortgage and title.

D&M argues that the trial court

correctly held that D&M enjoys superior title, but argues that the trial

court “erred in holding that Noble Mortgage is subrogated in the total amount

of $142,527.79 to liens on the Blodgett Property.” Neither contractual nor equitable subrogation

applies here, D&M contends, because Noble came “into court with unclean

hands” and because Noble cannot show the equities are in its favor.

A.

Standard of Review

In an appeal of a judgment rendered

after a bench trial, the trial court’s findings of fact have the same weight as

a jury’s verdict, and we review the legal and factual sufficiency of the

evidence to support them as we would review a jury’s findings. Catalina v. Blasdel , 881 S.W.2d 295, 297

(Tex. 1994); In re K.R.P. , 80 S.W.3d

669, 673 (Tex. App.—Houston [1st Dist.] 2002, pet. denied). To determine whether legally sufficient

evidence supports a challenged finding, we must consider evidence that favors

the finding if a reasonable fact-finder could consider it, and we must

disregard evidence contrary to the challenged finding unless a reasonable

fact-finder could not disregard it. See

City of Keller v. Wilson , 168 S.W.3d 802, 827 (Tex. 2005). This Court may not sustain a legal

insufficiency, or “no evidence” point unless the record demonstrates (1) a

complete absence of evidence of a vital fact; (2) that the court is barred by

rules of law or of evidence from giving weight to the only evidence offered to

prove a vital fact;

(3) that the evidence offered to prove a vital fact is no more than a mere

scintilla; or (4) that the evidence conclusively establishes the opposite of

the vital fact. Id. at 810 . When a party attacks the factual sufficiency

of an adverse finding on an issue on which it has the burden of proof, it must

demonstrate on appeal that the adverse finding is against the great weight and

preponderance of the evidence. Urista v.

Bed, Bath, & Beyond, Inc. , 245 S.W.3d 591, 601 (Tex. App.—Houston [1st Dist.] 2007, no pet.)

We review conclusions of law by the

trial court de novo and will uphold them if the judgment can be sustained on

any legal theory supported by the evidence. In re

Moers , 104 S.W.3d 609, 611 (Tex. App.—Houston [1st Dist.] 2003, no pet.). The trial court’s conclusions of law are not

subject to challenge for lack of factual sufficiency, but we may review the

legal conclusions drawn from the facts to determine their correctness. Brown v.

Brown , 236 S.W.3d 343, 348 (Tex. App.—Houston [1st Dist.] 2007, no

pet.) We will overrule a challenge to

fact findings that form the basis of a conclusion of law or disposition when

the appellant does not challenge other fact findings that support that conclusion

or disposition. See Britton v. Tex. Dep’t

of Crim. Justice , 95 S.W.3d 676, 682 (Tex. App.—Houston [1st Dist.] 2002,

no pet.).

Statutory construction is a

question of law that the Court also reviews de novo. In re

Forlenza , 140 S.W.3d 373, 376 (Tex. 2004). The primary objective in construing any

statute is to determine and give effect to the Legislature’s intent. Warner

v. Glass , 135 S.W.3d 681, 683 (Tex. 2004). We begin with the plain and common meaning of

the statute’s words. Id .; Tex.

Gov’t Code Ann . § 311.011(a) (Vernon 2005). “If the meaning of the

statutory language is unambiguous, we adopt . . . the interpretation supported

by the plain meaning of the provision’s words and terms.” Fitzgerald

v. Advanced Spine Fixation Sys., Inc. , 996 S.W.2d 864, 865 (Tex. 1999); Alex Sheshunoff Mgmt. Servs., L.P. v.

Johnson , 209 S.W.3d 644, 651-52 (Tex. 2006). We must, however, be mindful of our duty to

glean “legislative purpose from a consideration of the statutory scheme as a

whole rather than from a literal application or interpretation of any

particular statutory language.” Rylander

v. Fisher Controls Int’l, Inc. , 45 S.W.3d 291, 299 (Tex. App.—Austin 2001,

no pet.).

B.

Noble’s Appeal

In its first and third points of

error, Noble argues the evidence was legally and factually insufficient “to

support the trial court’s ruling that Noble Mortgage was not a bona fide mortgagee

as against the unrecorded claims” of D&M and the Whitfields. In its second and fourth points, it argues

that the evidence is legally and factually insufficient “to support the trial

court’s ruling that Appellees’ unrecorded claim was not void under the

recording statute, § 13.01, et. seq ., Texas Property Code.” In its fifth point, it argues that the “trial

court erred as a matter of law in ruling that Appellee D&M Vision was

entitled to title and possession of” the Blodgett Property.

Each of Noble’s five points of

error relate to its complaint that the trial court erred by holding that Noble’s

bona fide status was not proven as a matter of law.

1.

Applicable Law

Bona Fide Purchaser/Mortgagee

A bona fide purchaser is one who

acquires property in good faith, for value, and without notice, constructive or

actual, of any third party claim or interest.

Madison v. Gordon , 39 S.W.3d

604, 606 (Tex. 2001); Richards v. Suckle ,

871 S.W.2d 239, 242 (Tex. App.—Houston [14th Dist.] 1994, no writ). In Texas, a bona fide purchaser prevails over

a holder of a prior unrecorded deed or other unrecorded interest in the same

property. See generally Madison , 39 S.W.3d at 606 .

(a)

A conveyance of real property or an interest in real property or a

mortgage or deed of trust is void as to a creditor or to a subsequent purchaser

for a valuable consideration without notice unless the instrument has been

acknowledged, sworn to, or proved and filed for record as required by law.

(b)

The unrecorded instrument is binding on a party to the instrument, on the

party’s heirs, and on a subsequent purchaser who does not pay a valuable

consideration or who has notice of the instrument.

. . . .

Tex. Prop. Code Ann. § 13.001(a)-(b) (Vernon 2004). A bona fide purchaser similarly prevails over

a claim under a prior equitable title. E.g. , Richards , 871 S.W.2d at 242 ;

H.D. Boswell v. Farm & Home

Sav. Assoc ., 894 S.W.2d 761, 766 (Tex. App.—Fort Worth 1994, writ

denied).

Under section 13.001, a lender can

be a bona fide mortgagee, if the lender takes a lien in good faith, for

valuable consideration, and without actual or constructive notice of

outstanding claims. Houston First Am. Sav. v. Musick , 650 S.W.2d 764, 769 (Tex. 1983); Gordy v. Morton , 624 S.W.2d 705, 707

(Tex. App.—Houston [14th Dist.] 1981, no writ).

A bona fide mortgagee is entitled to the same protections as a bona fide

purchaser. Graves v. Guar. Bond State Bank , 161 S.W.2d 118, 120 (Tex. Civ.

App.—Texarkana 1942, no writ).

Status as a bona fide purchaser is

generally an affirmative defense in a title dispute. Madison ,

39 S.W.3d at 606 . “In a contest between

the owner of an equitable right of title and the holder of legal title,”

however, “the burden of proof as to good faith and consideration is upon the

party asserting the equitable right and not upon the subsequent purchaser of

legal title.” Gordy , 624 S.W.2d at 707 .

Notice

Notice sufficient to defeat bona

fide purchaser status may actual or constructive. E.g. ,

Flack v. First Nat’l Bank of Dalhart ,

226 S.W.2d 628, 631 (Tex. 1950). “Actual

notice rests on personal information or knowledge.” Madison , 39 S.W.3d at 606 .

“Constructive notice is notice the law imputes to a person not having

personal information or knowledge.” Id . Constructive notice creates an irrebuttable

presumption of actual notice in some circumstances. See

HECI Exploration Co. v. Neel , 982 S.W.2d 881, 887 (Tex. 1998) (citing Mooney v. Harlin , 622 S.W.2d 83, 85

(Tex. 1981)).

The Texas Property Code provides

that an “instrument that is properly recorded in the proper county is . . .

notice to all persons of the existence of the instrument.” Tex. Prop. Code Ann . § 13.002.

Recorded instruments in a grantee’s chain of title generally establish

an irrebuttable presumption of notice. Ford v. Exxon Mobil Chem. Co. , 235

S.W.3d 615, 617 (Tex. 2007); see also

HECI Exploration Co. , 982 S.W.2d at 887 (“The need for stability and

certainty regarding titles to real property has led courts to hold that real

property records can constitute constructive notice.”); Westland Oil Dev. Corp. v. Gulf Oil Corp ., 637 S.W.2d 903, 908

(Tex. 1982) (“It is well settled that ‘a purchaser is bound by every recital, reference and reservation

contained in or fairly disclosed by any instrument which forms an essential

link in the chain of title under which he claims.’”).

“Although a deed outside the chain

of title does not impute constructive knowledge, a person may be charged with

the duty to make a reasonable diligent inquiry using the facts at hand in the

recorded deed.” Nguyen v. Chapa , 305 S.W.3d 316, 324-25 (Tex. App.—Houston [14th

Dist.] 2009, pet. denied). “Thus, every

purchaser of land is charged with knowledge of all facts appearing in the chain

of title through which he claims that would place a reasonably prudent person

on inquiry as to the rights of other parties in the property conveyed.” Id .

at 325.

Good faith

“Texas law does not provide a

definitive explanation for what constitutes ‘good faith’ sufficient to make one

a bona fide purchaser” in the sale of real property context. Cohen

v. Hawkins , No. 14-07-00043-CV, 2008 WL 1723234 , at *5 (Tex. App.—Houston

[14th Dist.] April 15, 2008, pet. denied) (mem. op.). This Court — addressing the bona fide purchaser defense to a real property fraudulent

transfer claim — has analyzed good faith in

terms of whether a subsequent purchaser is aware of circumstances independent

of the chain of title that would put it on notice of an unrecorded claim. Hahn v.

Love , 321 S.W.3d 517, 527 (Tex. App.—Houston [1st Dist.] 2009, pet. denied)

(“A transferee who takes property with knowledge of such facts as would excite

the suspicions of a person of ordinary prudence and put him on inquiry of the

fraudulent nature of an alleged transfer does not take the property in good

faith and is not a bona fide purchaser.”). Cf.

Downs v. Stevenson , 119 S.W. 315, 317 (Tex. Civ. App. 1909, writ ref’d)

(good faith of party claiming bona fide purchaser status is “measured by his intent

at the time” the subsequent purchaser’s interest was acquired).

2. Is Noble a bona fide mortgagee?

Noble challenges here the court’s

factual finding and legal conclusion that “Noble Mortgage is not a bona fide

purchaser or mortgagee as against Danny K. Whitfield, Sr.’s prior claims.” [2] Noble also challenges, among other conclusions,

the trial court’s determination that the “filing of the Execution and order of

Sale and the Officer’s Return of Execution on the sale of the Property to

satisfy the Judgment in the records of the Harris County Clerk satisfied the

recording statute of the Texas Property Code.”

On October 4, 2007, Noble’s

security interest in the Blodgett Property was first recorded in the real

property records. While the Financial

Holdings Judgment was entered on October 30, 2006, almost a year before, it is

undisputed that no one filed an abstract of that judgment in the real property

records. It is likewise undisputed that — prior to Whitfield’s December 31, 2007 filing

of the “Deed Under Execution” issued by constable transferring Blodgett

Property from Banks to Whitfield in the real property records — there there was no mention of the Financial

Holdings Judgment or the resulting foreclosure sale to Whitfield anywhere in

the real property records.

Does a Texas Rule of Civil Procedure 656 recording provide constructive

notice?

Whether Noble is a bona fide

mortgagee or purchaser turns largely on the issue of whether recording of a

sale on an execution docket in compliance with Rule 656 of the Texas Rules of

Civil Procedure is a “recording” for the purpose of putting subsequent

creditors and purchasers on constructive notice under sections 13.001 and

13.002 of the Texas Property Code. As

the parties and trial court recognized, this presents an issue of first

impression in Texas. The trial court

ultimately concluded that the filing of the Officer’s Return of Execution on

the sale of the Blodgett Property in the records of the Harris County Clerk in

accordance with Rule 656 “satisfied the recording statute of the Texas Property

Code.” We disagree.

Rule 656 instructs the clerk to

keep a docket of executions, and proscribes penalties for failure to do so:

Rule 656. Execution Docket

The

clerk of each court shall keep an execution docket in which he shall enter a

statement of all executions as they are issued by him, specifying the names of

the parties, the amount of the judgment, the amount due thereon, the rate of

interest when it exceeds six per cent, the costs, the date of issuing the

execution, to whom delivered, and the return of the officer thereon, with the

date of such return. Such docket entries

shall be taken and deemed to be a record.

The clerk shall keep an index and cross-index to the execution

docket. When execution is in favor or

against several persons, it shall be indexed in the name of each person. Any clerk who shall fail to keep said

execution docket and index thereto, or shall neglect to make the entries

therein, shall be liable upon his official bond to any person injured for the

amount of damages sustained by such neglect.

Tex. R. Civ. P. 656.

D&M argues that the September

11, 2007 “Entry of the Execution and Order of Sale and the Constable’s Return

in the records of the Harris County Court of Law is deemed to be a record and constituted

constructive notice to Noble Mortgage of Whitfield’s prior title.” To hold otherwise, D&M contends, “would

create a gap in the law” because purchasers “at execution sales . . . have no

control over when a recordable deed is issued.”

Thus, according to D&M, the burden should be placed upon the

subsequent creditor or purchaser to “simply . . . access[] the civil court

records on the Harris County Clerk’s website as Whitfield had done” which, in

this case, would have revealed the Financial Holdings Judgment and Return of

Execution.

Noble disagrees, arguing that the a

record of the Constable’s sale has “to be recorded in the Real Property Records of the County Clerk’s Office in order

to constitute constructive notice to third parties.” It notes the precise rules in the Texas

Property Code and Texas Government Code for recording and indexing of real

property documents identified by statute as the “real property records” and the

stated purpose of indexing as “providing effective notice to all persons of the

existence of the referenced instrument.” Tex.

Prop. Code Ann . § 11.007; id. § 11.004 (clerk must record real property instruments in the order filed

and keep indexes required by law); see

also Tex. Loc. Gov’t Code Ann .

§ 191.001 (Vernon 2008)

(duties of clerk as county recorder); § 191.002 (records to be keep in well-bound book or on microfilm); § 191.006 (public must have access to records); § 192.001 (clerk must “record each deed,

mortgage, or other instrument that is required or permitted by law”); Stemper, Frank, A Handbook for Texas Abstracters and Title Men 15 (3d Ed.

1983) (“The purpose of filing in this office, and of recording and indexing, is

to give notice to the public that such a document exists and that the title to

the land has changed or been affected.

Here, the public may discover these changes.”)

Noble also points us to numerous

cases deeming certain types of documents outside the real property records as

insufficient to import constructive notice of real property interest. E.g. ,

Woodward v. Ortiz , 237 S.W.2d 286,

289 (Tex. 1951) (judgment recorded only in the civil minutes of the district

court was not constructive notice of real property interest conveyed in

judgment); Permian Oil Co. v. Smith , 73 S.W.2d 490, 504

(Tex. 1934) (clerk’s recording of court’s judgment partitioning of real

property in the minutes of a district court is not “substantial compliance”

with recording of judgment in real property records for purposes of

constructive notice to those claiming bona fide purchaser status); Stafford v. Lunsford , 53 S.W.3d 906, 908

(Tex. App.—Houston [1st Dist.] 2001, pet. denied) (divorce decree transferring

real property but not filed according to the recording acts does not provide

notice to third parties); Dutton

v. Kinsley , 124 S.W.2d 446, 449 (Tex. Civ. App.—Fort Worth 1938, no writ)

(unrecorded district court order of partition is not constructive notice to

subsequent purchaser claiming bona fide purchaser status).

Finally, Noble contends that the

trial court’s conclusion that a “document filed in the litigation records of the County Clerk’s Office constitutes

constructive notice to third parties and title searchers . . . contradicts 150

years of Texas statutory law, case law, and title practice.” According to Noble, such an “interpretation of

Rule 656 would vitiate the entire body of law about abstracts of judgment”

located in Chapter 52 of the Texas Property Code. This is because “there would never be any

need for an abstract of judgment to be filed because recording of an instrument

of the litigation records would

suffice.”

We agree with Noble that recording

under Rule 656 is not a recording for purposes of importing constructive

knowledge to defeat a claim of bona fide purchaser. Section 13.001 of the Texas Property Code

provides that a real property mortgage or deed is “void as to a creditor or to

a subsequent purchaser for a valuable consideration without notice unless the

instrument has been . . . filed for record as required by law.” While Rule 656 states that execution recorded

on the execution docket under that rule “shall be taken and deemed to be a

record,” it would be inconsistent with the overall recording scheme long

embodied in the Texas Property Code to hold that because a document is a

“record” under Rule 656, that instrument is “filed for record” under section

13.001.

As the El Paso Court of Appeals

recently explained after noting that the rule voiding unrecorded interests as

against subsequent bona fide creditors and purchasers has been around since

before Texas was a state, the purpose of the Texas Property Code’s recording

provisions is to make information about claimed interest in land readily

available:

Texas law has long favored

the purpose of recording acts, which make land title information available to

interested persons. . . . The intention of the recording acts is to compel

every person receiving conveyances of real property to place such an instrument

of record, not only that he may thereby protect his own rights, but also those

of all others who may afterwards seek to acquire an interest in the same

property. To be effectively recorded, an

instrument relating to real property must be recorded in the public records in

the county in which a part of the property is located. The recording laws in Texas were meant to

protect innocent purchasers and creditors without notice of the prior transfer

from being injured or prejudiced by their lack of knowledge of the competing

claim.

Sanchez v.

Telles , 960 S.W.2d 762, 767 (Tex. App.—El Paso 1997, pet. denied) (citations

omitted).

While some cases, such as Sanchez quoted above, refer only to

“record[ing] in the public records in the county,” we read this to refer to the

county real property records rather than the execution docket of the county

court. See e.g. , Baylor v. Tillebach ,

49 S.W. 720, 722 (Tex. Civ. App. 1899, no writ) (“It is for the purpose of

notice and protection of innocent purchasers for value that decrees of

partition of real property are required to be recorded in the record of deeds in the county where the

land is situated. . . .” (emphasis added)). This interpretation is consistent with Texas

courts’ focus on the chain of title in the real property records when determining

whether a subsequent purchaser has constructive notice of a claim to real

property. See Nguyen , 305 S.W.3d at 324 (“[A] subsequent purchaser is also

charged with [constructive] notice of the terms in the deeds which form an

essential link in his chain of ownership.”).

“‘Chain of title’ has been defined

to be ‘The successive conveyances, commencing with the patent from the

government, each being a perfect conveyance of the title down to and including

the conveyance to the present holder.” Reserve Petroleum Co. v. Hutcheson , 254

S.W.2d 802, 806 (Tex. Civ. App.—Amarillo 1952, writ ref’d n.r.e.) (quoting Havis v. Thorne Inv. Co. , 46 S.W.2d 329,

332 (Tex. Civ. App.—Amarillo 1932, no writ)).

Under Texas law, a subsequent creditor or purchaser is only deemed on

constructive notice of recorded documents within its direct chain of title that

either reveal the interests of another, or that contain recitals that would put

a prudent purchaser on inquiry notice of another’s interest outside the chain

of title. E.g. , Walters v. Pete ,

546 S.W.2d 871, 874 (Tex. Civ. App.—Texarkana 1977, writ ref’d n.r.e.) (“The

deed under which Appellee Pete claims was not in Appellant Walters’ chain of

title and since the Ray-Delamer-Pete deeds contained no ambiguities on their

faces which would put Walters on inquiry about Pete’s claim, the mere

registration of those deeds would not constitute constructive notice that Pete

was claiming the land to which Walters had secured a deed.”). In other words, absent ambiguities on the

face of a deed, a subsequent purchaser is “not required to look any further

than his own chain of title to determine whether or not he was acquiring good

title to his property.” Id . at 875.

The Texas Supreme Court — in a case in which one party claimed a judgment

adjudicating real property interest filed in the minutes of the district court

defeated the later claim of bona fide purchaser — has explained the significance of the distinct role the clerk plays as

the county recorder of real property records.

See Permian Oil Co. , 73 S.W.2d

at 504 . In that case, the size of the

county at issue dictated that a “single clerk was required to serve as both

district and county clerk.” Id .

But the court rejected the argument that a judgment affecting real

property being recorded in the district court minutes constituted constructive

notice of that judgment’s terms to a subsequent purchaser of the property:

Plaintiff in error insists

that where there is but one office and one officer a record of the judgment in

the minutes of the district court would be a substantial compliance with the

terms of the statute. We are unable to

agree with this contention. While there

was but one officer, he was required to discharge the duties incumbent upon

both district and county clerks. . . . The judgment in question was not

recorded in the office of the county clerk as required by the statutes, unless

it was incorporated in some record kept by this officer in the performance of

the duties imposed upon a county clerk.

Id .

Given that a civil County Court of

Law execution docket is not a repository for chain-of-title documents, and

given the “well-established rule that a deed or instrument lying outside of his

chain of title imports no notice,” Nguyen ,

305 S.W.3d at 324 , we hold that recording on the execution docket of the county

civil court of law is not a recording for purposes of importing constructive

notice to subsequent creditors and purchasers.

The only case D&M cites does

not compel a different result. In Goggans v. Green , the court addressed

whether entry on the execution docket of a sheriff’s sale could substitute as

evidence of a writ authorizing the sale.

165 S.W.2d 928, 929 (Tex. Civ. App.—Texarkana 1942, no writ). At issue in Goggans was the requirement that, to “deraign title through a

sheriff’s deed, it is necessary to show both the judgment and the writ issued

thereon by authority of which the sheriff made the sale.” Id .

at 928. The judgment was entered into

evidence, but the writ had been lost and the plaintiff sought to use recording

on an execution docket as substitute proof of the writ. Id . The court held this substitution was

permissible because the “execution docket is an official record . . . and is

held to be evidence of the issuance of such writs.” Id .

at 929. While Groggans does, as D&M claims, “address[] the significance of

the execution docket,” we agree with Noble that it is inapposite as it “says

nothing about the recording statute, the bona fide purchaser doctrine, or

constructive notice to third parties.”

Finally, in response to D&M’s

argument that our holding would “create a gap in the law” leaving purchasers

from execution sales vulnerable during the period between their purchase and when

a recordable deed is issued, we note that Chapter 52 of the Texas Property Code

is expressly devoted to abstracts of money judgments and designed to offer

protection in this very situation.

“Under Texas law, no lien is created by the mere rendition of a

judgment.” Wilson v. Dvorak , 228

S.W.3d 228, 233 (Tex. App.—San Antonio 2007, pet. denied) (citing Citicorp Real Estate, Inc. v. Banque Arabe

Internationale D’Investissement , 747 S.W.2d 926, 929 (Tex. App.—Dallas

1988, writ denied)). “To create an

enforceable lien against real property owned by the judgment debtor, the

judgment creditor must comply with the requirements of Chapter 52 of the Texas

Property Code.” Id . “The judgment creditor’s

first step in creating a judicial lien is to obtain an abstract of the

judgment.” Id . (citing Tex. Prop. Code

Ann . § 52.002 (Vernon 2007)).

“The purpose of an abstract of

judgment is to create a lien against the debtor’s property and to provide notice to subsequent purchasers and

encumbrancers of the existence of the judgment and lien.” Id .

(emphasis added) (citing Olivares v. Nix

Trust , 126 S.W.3d 242, 247 (Tex. App.—San Antonio 2003, pet. denied)). Section 52.004 of the Texas Property Code

mandates that the clerk “immediately record in the county real property records

each properly authenticated abstract that is presented for recording” as well

as simultaneously index the filing with reference to the plaintiff and

defendant. “When properly recorded and

indexed, an abstract of judgment creates a judgment lien that is superior to

the rights of subsequent purchasers and lien holders.” Wilson ,

228 S.W.3d at 233-34 . While there is no

information in the record here about why Financial Holdings did not follow

Chapter 52’s procedures for abstracting its judgment that ultimately led to the

foreclosure sale to Whitfield, had that judgment been properly abstracted and

recorded, subsequent creditors and purchasers — including Noble — would have

been charged with notice of it. Although

Chapter 52 has no application here, its existence answers D&M’s concern

about the vulnerability of purchasers at foreclosure sales while waiting for

recordable deeds.

Is there other evidence to support a finding of notice?

In addition to arguing that

recording on the execution docket operated as constructive notice to Noble,

D&M contends that there is other evidence to support a finding that Noble

was on actual or constructive notice of its interest that defeats bona fide

mortgagee or purchaser status. Because

D&M does not argue that anything in the Blodgett’s Property’s chain of

title would put Noble on inquiry notice of the interest held by Financial

Holdings, Whitfield, or D&M, we interpret this argument as contending that

Noble did not take its interest in good faith because it allegedly had

knowledge of facts outside the chain of title that would put a prudent person

on inquiry notice of unrecorded interests in the property. See Hahn ,

321 S.W.3d at 527 .

D&M points to the following: (1) Noble

“did not require a credit report or payment history for Banks or [Houston] Kaco,”

(2) Noble “knew that in two and a half years, the Blodgett property had gone

from [Houston] Kaco to Banks and would now go back to [Houston] Kaco again as

part of the plethora of transactions surrounding” Noble’s refinancing, and (3)

Banks did not fill out part of the application asking whether he was party to

any judgment. D&M acknowledges the

testimony of Daik, Noble’s principal, that he did not know anything about the

Financial Holdings Judgment, and that he relied upon a third-party title search

and the three documents Banks signed at closing attesting to the fact that

there were no additional liens, judgment, or encumbrances against the Blodgett

Property. D&M insists, however, that

under the circumstances, Noble’s duty extended beyond reliance on a title search,

even if that is the standard in the industry.

In support of its argument, D&M cites only an unpublished

Fifth Circuit case concluding that a purchaser’s open, visible and unequivocal possession of real property deprived a

party with a later-acquired interest of bona fide purchaser status and noting

that the duty of inquiry, in that circumstance, could exceed banking industry

standards, which only required a title search and not inspection of the

property. Bank of Am. v. Schwartz , 194 F. App’x 217 (5th Cir. 2006). Schwartz ’s

holding is consistent with Texas courts’ recognition that open, exclusive, and

unequivocal occupation of property by a third party can operate as constructive

notice of that party’s claims to the property and defeat a subsequent purchaser’s

claim bona fide status. Madison , 39 S.W.3d at 607 . Notice by possession, however, is not at

issue in this case.

We hold that none of the evidence

D&M points to is evidence that would put a mortgagee or purchaser on

inquiry notice that an unrecorded money judgment in the County Court at Law

records existed. Rather, the evidence

conclusively demonstrates that Noble took its interest in good faith, without

notice of the Financial Holdings Judgment or the subsequent sale to Whitfield

or transfer to D&M. D&M’s deed

is thus void as to Noble. Tex. Prop.

Code Ann. § 13.001(a).

We therefore sustain Noble’s first

and second issues on appeal, holding that the evidence is legally insufficient

to support the trial court’s ruling that Noble is not a bona fide purchaser and

that Noble’s bona fide status was proven as a matter of law. We also sustain its fifth issue and hold that

the trial court erred in ruling that D&M was entitled to title and possession

of the Blodgett Property.

C.

D&M’s Appeal

D&M’s complaints on appeal

about the trial court’s granting Noble subrogation liens burdening D&M’s

title are dependent upon our affirming the trial court’s holding that title to

the Blodgett Property is vested in D&M.

Because we have reversed that holding and instead hold that title was

properly vested in Noble, D&M’s points on appeal complaining of liens in

Noble’s favor are moot. The judgment

should remove reference to these liens.

CONCLUSION

We reverse the trial court’s

judgment holding that D&M was entitled to possession and title of the

Blodgett Property and render judgment that Noble is instead entitled to

possession and title of the Blodgett Property.

We remand to the district court for entry of judgment consistent with

this opinion.

Sherry

Radack

Chief

Justice

Panel

consists of Chief Justice Radack and Justices Alcala and Bland.

[1]

The constable’s receipt

reflected the following d isbursements from the $18,000: $17,186.28 to Financial Holdings, $238.37

to the constable, $175.00 to cover publication costs, and $390.35 to Banks.

[2]

D&M asserts that Noble “does

not specifically challenge the [trial court’s] finding . . . [that] ‘Noble

Mortgage did not acquire an interest in the Property in good faith.” A challenge to the trial court’s finding that

Noble did not acquire its interest in the Blodgett Property in good faith,

however, is fairly subsumed within Noble’s arguments that the trial court erred

in finding it was not a bona fide mortgagee or purchaser, as good faith is a

required element of that bona fide status.

Tex. R. App. P. 38.1(f); Jarvis v. Feild , 327 S.W.3d 918, 928

(Tex. App.—Corpus Christi 2010, no pet.) (appellate briefs “are to be construed

reasonably, yet liberally, so that the right of appellate review is not lost by

waiver.”)