Trinity Financial Services, LLC v. Jason Mahanay and Amber Mahanay ( 2022 )

In the
Court of Appeals
Second Appellate District of Texas
at Fort Worth
___________________________
No. 02-21-00027-CV
___________________________
TRINITY FINANCIAL SERVICES, LLC, Appellant
V.
JASON MAHANAY AND AMBER MAHANAY, Appellees
On Appeal from the 96th District Court
Tarrant County, Texas
Trial Court No. 096-313075-19
Before Sudderth, C.J.; Birdwell and Bassel, JJ.
Memorandum Opinion by Justice Birdwell
MEMORANDUM OPINION
The trial court rendered a declaratory judgment that Appellees Jason and Amber
Mahanay were bona fide purchasers for value. The court found, among other things,
that the Mahanays had no notice of the lien that Appellant Trinity Financial Services,
LLC now asserts against their property.
On appeal, Trinity argues, quite correctly, that real property records bestowed
the Mahanays with constructive notice of the lien. This presumption of constructive
notice is irrebuttable, and it defeats the Mahanays’ bona fide purchaser defense as a
matter of law. We therefore reverse and remand.
I. BACKGROUND
In 2006, Teena and Martin Lopez hired a contractor to build a swimming pool
at their property in Tarrant County. To finance the project, the Lopezes took a loan
from Certified Funding, LP. Along with a note, the Lopezes signed a deed of trust (the
lien).
In the next two years, the note and lien were assigned twice. In 2006, Certified
Funding transferred the note and lien to Credit Union of Texas (CUTX), whereupon
they were recorded. In December 2008, CUTX assigned the note and lien to
Companion Property and Casualty Insurance, which recorded them.
Teena and Martin later divorced, and Martin transferred his interest in the
property to Teena in 2009. There was some evidence that Teena submitted payment
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for the note to CUTX in 2009, even though the note and lien had been assigned from
CUTX to Companion in 2008.
In August 2014, the Mahanays bought the property from Teena. The central
question in this appeal is whether, at the time of purchase, the Mahanays had actual or
constructive notice that the property was encumbered by the lien. The record contains
four types of evidence with bearing on that question.
First, during closing in 2014, the Mahanays obtained a title commitment from
their title agent. The title commitment specifically mentioned that the property was
encumbered by a lien held by Companion.
Second, there was a recorded assignment of the note and lien from CUTX to
Companion in late 2008. When the Mahanays bought the property, the Tarrant County
real property records thus reflected that Companion was the holder of an outstanding
note and lien.
Third, there were a set of representations that Teena made to the Mahanays’ title
agent at the time of purchase. Teena told the Mahanays’ title agent that the note and
lien had been paid off in 2009 and there were no outstanding liens against the property.
She provided the Mahanays’ title agent with contact information for CUTX and
encouraged the Mahanays to verify the status of the note and lien.
Fourth, when the Mahanays’ title agent reached out to verify Teena’s statements,
CUTX confirmed that Teena had paid the full amount of the note in 2009 and that
CUTX should have recorded a release of the lien at that time. So, on July 30, 2014,
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CUTX filed a release of lien, even though it had not held any interest in the note or lien
since 2008.
In 2019, Trinity attempted to foreclose on the property, though it was disputed
how Trinity came into possession of the note and lien. The Mahanays responded by
filing this suit for declaratory judgment, quiet title, and temporary and permanent
injunctions. The Mahanays sued various parties, but by the time of trial, Trinity was
the only defendant.
After a bench trial, the trial court granted a declaratory judgment that the
Mahanays were bona fide purchasers and it awarded them $26,000 in attorney’s fees.
The judgment declared that the Mahanays purchased the property in good faith, for
value, without actual or constructive notice of any third-party claim or interest, and they
thus took the property free and clear of Trinity’s claims. Trinity appeals.
II. STANDING
Because it relates to jurisdiction, we begin with the Mahanays’ argument that
Trinity lacked standing. The Mahanays submit that in order to establish standing,
Trinity must be able to trace its ownership of the note and lien back to the original
mortgagee, Certified Funding. According to the Mahanays, Trinity offered no evidence
to prove ownership, and it therefore lacks standing.
We agree that the trail of ownership grew murky after Companion obtained the
note in 2008. There was no clear evidence to explain how, specifically, Trinity came
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into possession of the note and lien, and its ownership was hotly disputed in the trial
court.1
But despite the ownership issues, there are multiple defects in the Mahanays’
argument concerning standing that preclude its success. First, it is not clear whether
the Mahanays are challenging Trinity’s standing in the trial court or its standing to
appeal. Their ambiguous argument includes concepts that would comport with either
a challenge to trial-court standing or to appellate standing.
Second, if the Mahanays’ argument is that Trinity failed to demonstrate trial-
court standing, then the Mahanays—the plaintiffs who initiated this suit against
Trinity—are attempting to shift their burden to demonstrate standing onto a defendant.
Standing is a component of subject matter jurisdiction, Meyers v. JDC/Firethorne, Ltd.,
1
At trial, Trinity maintained that it was the owner and holder of the note by virtue
of two documents, but those documents left questions unanswered. The first was an
undated allonge to the note that Companion executed with a blank space following the
words “Pay to the order of,” making it payable to the bearer. The second was an
instrument that purported to assign the note from Companion to Trinity, which reflects
that it was signed in 2011 but that, for some reason, was first erroneously recorded in
Dallas County in 2015 and then was apparently re-recorded in the correct county,
Tarrant County, in 2016. However, it was undisputed that Trinity could not produce
the original note itself or any payment history on the note, and there was little evidence
to explain how Trinity acquired the note from Companion. Furthermore, other
evidence cast doubt on Trinity’s claim that it acquired the note and lien directly from
Companion. The Mahanays pointed to an affidavit of lost note executed in September
2012 by Dreambuilder Investments, LLC—an apparent stranger to the chain of title—
in which Dreambuilder claimed to be the then-owner of the note and lien, both of
which it declared were lost. If Dreambuilder’s affidavit were true, then Trinity’s claim
that it acquired the note and lien from Companion in 2011 could not also be true.
Trinity was unable to produce any evidence to clarify this morass.
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548 S.W.3d 477, 484 (Tex. 2018), and it is the plaintiffs’ burden to affirmatively
demonstrate the trial court’s jurisdiction, Heckman v. Williamson Cnty., 369 S.W.3d 137,
150 (Tex. 2012). The elements of the standing inquiry relate to whether “the plaintiff
has personally been injured,” whether “the plaintiff’s alleged injury [is] fairly traceable
to the defendant’s conduct,” and whether the plaintiff has shown “a substantial
likelihood that the requested relief will remedy the alleged injury.” Watson v. City of
Southlake, 594 S.W.3d 506, 514 (Tex. App.—Fort Worth 2019, pet. denied) (cleaned up).
Thus, in Lewis v. Aurora Loan Services, the court declined a plaintiff’s invitation to
consider whether the defendants had standing to foreclose in light of gaps in the
defendant’s chain of ownership of the mortgage documents. No. 01-15-00362-CV,
2016 WL 887176, at *3 (Tex. App.—Houston [1st Dist.] Mar. 8, 2016, no pet.) (mem.
op.). “The defendants are not the plaintiffs in this case. Lewis is. Thus, the issue is
not whether defendants have standing to maintain this action.” Id. It was the Mahanays
who alleged that they suffered an injury traceable to Trinity’s conduct. Trinity, as the
party pulled into court, had no burden to demonstrate trial-court standing; the relevant
inquiry is standing to sue, not standing to be sued.
Third, if the Mahanays are instead referring to standing to appeal, their argument
is equally unavailing. A named party to the suit may bring an appeal. Kenneth D. Eichner,
P.C. v. Dominguez, 623 S.W.3d 358, 362 (Tex. 2021). “[A] party whose own interest is
prejudiced by an error has standing to appeal.” Torrington Co. v. Stutzman, 46 S.W.3d
829, 843 (Tex. 2000). Trinity is a party to the final judgment and complains on appeal
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of errors that injuriously affected its claimed interest in the property, and it therefore
has standing to appeal. See Suite 900, LLC v. Vega, No. 02-19-00271-CV, 2020 WL
2608394, at *7 (Tex. App.—Fort Worth May 21, 2020, pet. denied) (mem. op.).
We reject the Mahanays’ argument concerning standing.
III. BONA FIDE PURCHASER
In its first issue, Trinity asserts that the Mahanays were not bona fide purchasers
because the Mahanays had constructive knowledge of the lien. Trinity cites the
recorded assignment from CUTX to Companion from 2008, which, if diligently
inspected in its proper context at the time of the Mahanays’ purchase in 2014, would
have informed them that there was an outstanding lien held by Companion. According
to Trinity, this recorded assignment imparted the Mahanays with constructive
knowledge of the lien, which conclusively defeats their bona fide purchaser defense.
A. Standard of Review
We review declaratory judgments under the same standards as other judgments
and decrees and look to the procedure used to resolve the issue in the trial court to
determine the appropriate standard of review. City of Forest Hill v. Benson, 555 S.W.3d
284, 288 (Tex. App.—Fort Worth 2018, no pet.). The procedure used in this case was
a bench trial. When a declaratory judgment is rendered after a bench trial, we review
the trial court’s conclusions of law de novo. Id. We review a trial court’s findings of
fact under the same legal and factual sufficiency standards that we use for jury questions.
Walterscheid v. Walterscheid, 557 S.W.3d 245, 257 (Tex. App.—Fort Worth 2018, no pet.).
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We may sustain a legal-sufficiency challenge only when (1) the record bears no
evidence of a vital fact, (2) the rules of law or of evidence bar the court from giving
weight to the only evidence offered to prove a vital fact, (3) the evidence offered to
prove a vital fact is no more than a mere scintilla, or (4) the evidence establishes
conclusively the opposite of a vital fact. Shields LP v. Bradberry, 526 S.W.3d 471, 480
(Tex. 2017). In determining whether legally sufficient evidence supports the finding
under review, we must consider evidence favorable to the finding if a reasonable
factfinder could and must disregard contrary evidence unless a reasonable factfinder
could not. Cent. Ready Mix Concrete Co. v. Islas, 228 S.W.3d 649, 651 (Tex. 2007). We
indulge “every reasonable inference deducible from the evidence” in support of the
challenged finding. Gunn v. McCoy, 554 S.W.3d 645, 658 (Tex. 2018).
B. Constructive Notice
Under Texas law, an unrecorded deed of trust is void as to a subsequent
purchaser who purchases the property for valuable consideration without notice. Tex.
Prop. Code Ann. § 13.001(a); Broadway Nat’l Bank, Tr. of Mary Frances Evers Tr. v. Yates
Energy Corp., 631 S.W.3d 16, 26 (Tex. 2021). A person who acquires property in good
faith, for value, and without notice of any third-party claim or interest is a bona fide
purchaser. Broadway Nat’l Bank, 631 S.W.3d at 26. A bona fide purchaser acquires a
property interest without being subject to prior claims. Orca Assets, G.P., L.L.C. v.
Dorfman, 470 S.W.3d 153, 164 (Tex. App.—Fort Worth 2015, pets. denied). The party
claiming bona fide purchaser status has the burden to prove the defense. Bellaire
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Kirkpatrick Joint Venture v. Loots, 826 S.W.2d 205, 209 (Tex. App.—Fort Worth 1992,
writ denied).
There is no dispute concerning the Mahanays’ purchase of the property in good
faith and for value. The question is whether the Mahanays had notice of the lien.
Notice may be constructive or actual. Madison v. Gordon, 39 S.W.3d 604, 606
(Tex. 2001). Actual notice rests on personal information or knowledge. Id.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.” Aston Meadows, Ltd. v. Devon
Energy Prod. Co., L.P., 359 S.W.3d 856, 859 (Tex. App.—Fort Worth 2012, pet. denied)
(citing, inter alia, HECI Expl. Co. v. Neel, 982 S.W.2d 881, 887 (Tex. 1998)). “[W]hereas
actual notice is usually a question of fact for the jury, constructive notice is a legal
presumption not to be controverted.” Bank of Am. v. Babu, 340 S.W.3d 917, 923 (Tex.
App.—Dallas 2011, pet. denied) (quoting Univ. State Bank v. Gifford-Hill Concrete Corp.,
431 S.W.2d 561, 571 (Tex. App.—Fort Worth 1968, writ ref’d n.r.e.)).
An “instrument that is properly recorded in the proper county is . . . notice to all
persons of the existence of the instrument.” Aston Meadows, 359 S.W.3d at 859 (quoting
Tex. Prop. Code Ann. § 13.002). “While not all public records establish an irrebuttable
presumption of notice, the recorded instruments in a grantee’s chain of title generally
do.” Ford v. Exxon Mobil Chem. Co., 235 S.W.3d 615, 617 (Tex. 2007). “Chain of title
refers to the documents which show the successive ownership history of the land, and
9
includes 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.” Hahn v. Love, 394 S.W.3d 14, 28 (Tex. App.—
Houston [1st Dist.] 2012, pet. denied) (cleaned up). “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.” Westland Oil Dev. Corp. v. Gulf Oil Corp., 637 S.W.2d 903, 908 (Tex. 1982)
(cleaned up). Any description, recital of fact, or reference to other documents in an
instrument puts the purchaser on inquiry, and he is bound to follow up this inquiry,
step by step, from one discovery to another and from one instrument to another, until
the whole series of title deeds is exhausted and a complete knowledge of all the matters
referred to and affecting the estate is obtained. Id.; Disanti v. Wachovia Bank, NA, No.
2-08-330-CV, 2009 WL 1372970, at *3 (Tex. App.—Fort Worth May 14, 2009, no pet.)
(mem. op.).
One could fairly argue that the Mahanays should be excused from constructive
knowledge of the lien because they inquired into the lien but were twice misled, by
Teena and CUTX, as to the status of the lien. In 2014, Teena told the Mahanays’ title
agent that she paid CUTX the full amount of the note in 2009, and also in 2014, CUTX
wrongly confirmed that the note had been validly paid off and the lien should have been
released as a result. CUTX then executed an ineffectual written release of lien. One
could argue that there should be some exception to constructive notice when, as here,
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a former property owner and a former lien holder have both misled the purchasers of
the property as to the lien’s status.
Legally, though, we find no room for such an exception in this case. The
Mahanays were indeed misled, which would affect the Mahanays’ actual knowledge.
However, constructive notice is ascribed to a person “irrespective of any actual
knowledge.” City of Richland Hills v. Bertelsen, 724 S.W.2d 428, 430 (Tex. App.—Fort
Worth 1987, no writ). A purchaser is bound to search the official county records since
they constitute the primary source of information as to title, and that person is charged
with knowledge of the existence and contents of recorded instruments that affect the
title to the property. Swanson v. Grassedonio, 647 S.W.2d 716, 718 (Tex. App.—Corpus
Christi–Edinburg 1982, no writ). At the time of the Mahanays’ purchase, the county
records would have reflected (1) that CUTX had sold its interest in the note and lien to
Companion in 2008, (2) that Companion had held an outstanding note and lien since
that time, and (3) that CUTX had nonetheless attempted to execute a release of lien in
2014, after it had already parted ways with the instruments. Nothing in the county
records would have suggested that CUTX had the authority to release the lien in this
fashion. But instead of diligently searching the county records, the Mahanays and those
in their camp instead elected to rely on representations by a former property owner
(Teena) and a former noteholder (CUTX), as well as a release from the latter. The
Mahanays did so at their own hazard, and they may not rely on the faults in their own
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inquiry as a boon for purposes of the bona fide purchaser defense. 2 See Watson v. Druid
Hills Co., 355 S.W.2d 65, 70 (Tex. App.—Dallas 1962, writ ref’d n.r.e.).
Texas Supreme Court precedent shows that despite Teena’s and CUTX’s false
representations that the lien had been properly paid off, the Mahanays nonetheless
should be held to their constructive notice of the lien’s continuing validity and
enforceability. See Ford, 235 S.W.3d at 616. In Ford, a plaintiff sued for real estate fraud
alleging that he signed an amendment to an easement only because the defendant
“falsely represented that the original easement covered . . . three tracts, when in fact it
covered only one.” Id. On appeal, the court rejected the plaintiff’s contention that the
statute of limitations should be tolled because he lacked notice of the problem with the
easement. Id. at 617. The court held that despite the misrepresentations, the plaintiff
was nonetheless charged with irrebuttable constructive notice of the truth contained in
the real property records. Id. This constructive notice of the defect in the amendment
triggered the immediate running of limitations. See id.
2
We allow for the possibility that the situation might be different if the Mahanays
had instead been misled as to the status of the lien by a party who was then currently
the holder of the note and lien. See Tex. Consol. Oils v. Bartels, 270 S.W.2d 708, 712 (Tex.
App.—Eastland 1954, writ ref’d) (suggesting that estoppel might come into play in such
a circumstance); Garrett v. Katz, 23 S.W.2d 436, 438 (Tex. App.—Dallas 1929, writ ref’d),
corrected, 27 S.W.2d 373 (Tex. App.—Dallas 1930, no writ); see also Pustejovsky v. K. J. Z.
T. Lodge, 79 S.W.2d 1084, 1085 (Tex. 1935); cf. Ellis v. Waldrop, 627 S.W.2d 791, 798
(Tex. App.—Fort Worth 1982) (“When investigation produces facts sufficient to satisfy
a prudent inquirer that a recorded claim will not be enforced by its holder, then the
inquiring party may be a bona fide purchaser, even where the document from which
the claim derives remains of record.”), aff’d in part, rev’d in part on other grounds, 656 S.W.2d
902 (Tex. 1983) (op. on reh’g). But that is not the case here.
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Here, despite the misrepresentations by Teena and CUTX, the Mahanays are
charged with constructive notice of the truth that would have been revealed by diligent
inspection of the real property records. Those records would have informed the
Mahanays of an outstanding claim to the property.
Moreover, at the time of closing, the Mahanays signed a title commitment that
specifically mentioned the lien. This title commitment would have put the Mahanays
on inquiry, and it thus only strengthens the case for holding the Mahanays to their
constructive notice of the lien. See Schwendeman v. BT SFRL I, LLC, No. 02-19-00007-
CV, 2020 WL 479592, at *7 (Tex. App.—Fort Worth Jan. 30, 2020, pet. denied) (mem.
op.).
This notice, by itself, defeats their bona fide purchaser defense as a matter of
law. See Cooksey v. Sinder, 682 S.W.2d 252, 253 (Tex. 1984). We therefore sustain
Trinity’s first issue. This renders it unnecessary to consider Trinity’s second issue.
C. Extinguishment of the Lien
The Mahanays contend that notwithstanding any constructive notice, the
judgment in their favor may be upheld on other grounds because the lien was
extinguished through payment of the note. Much of the Mahanays’ briefing concerns
whether, despite the evidence that CUTX had assigned away the note and lien in 2008,
CUTX could nonetheless accept payment on the note in 2009, either as the owner of
the note and lien or as the servicer on behalf of Companion. According to the
Mahanays, there is some evidence that CUTX was either the owner or the servicer and
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thus validly accepted payment. The Mahanays submit that if CUTX validly accepted
payment of the note, the lien would be instantly extinguished—which, they argue, is
another means to justify the trial court’s determination that the Mahanays took title free
from the lien.
But the linchpin of the Mahanays’ argument—that the lien was extinguished
because the note had been paid off—does not have any apparent connection with their
bona fide purchaser defense. There is no authority from this court that would allow
the Mahanays to prevail on a bona fide purchaser defense by proving the separate issue
of whether the lien was extinguished through a payoff. See In re K.G., 350 S.W.3d 338,
345–46 (Tex. App.—Fort Worth 2011, pet. denied) (concluding that a judgment could
not be upheld on an entirely different ground than the one found by the trier of fact).
Rather, as we understand it, the Mahanays’ case for the bona fide purchaser defense
hinged on notice, and the notice element of the defense does not concern whether the
lien is valid or extinguished.3 This element instead concerns whether the purchaser has
notice of any claimed interest in the property, whether or not that claim ultimately proves
valid. See Broadway Nat’l Bank, 631 S.W.3d at 26 (couching the issue as whether the
3
In Gary E. Patterson & Associates, P.C. v. Holub, the court assumed that the success
of a bona fide purchaser defense depended on whether the underlying lien was valid,
but it offered no authority to support this assumption. 264 S.W.3d 180, 187 (Tex.
App.—Houston [1st Dist.] 2008, pet. denied); see also Murray v. Cadle Co., 257 S.W.3d
291, 301 (Tex. App.—Dallas 2008, pet. denied) (op. on reh’g) (implying that the validity
of a lien factors into whether there is constructive notice of the lien); Gen. Elec. Credit
Corp. v. First Nat’l Bank of Dumas, 432 S.W.2d 737, 739–40 (Tex. App.—Amarillo 1968,
no writ) (same). We have never issued a similar holding, and we decline to do so today.
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purchaser has notice of “any third-party claim or interest” (emphasis added)); Madison,
39 S.W.3d at 606 (same); Barron v. Shmaisani, No. 02-19-00064-CV, 2021 WL 2253301,
at *16 n.16 (Tex. App.—Fort Worth June 3, 2021, pets. denied) (mem. op.) (same); Orca
Assets, 470 S.W.3d at 164 (same). Thus, even if the lien were extinguished as the
Mahanays claim, this circumstance would not support the judgment in the Mahanays’
favor on the bona fide purchaser defense.
This view accords with the rationale for the bona fide purchaser rule. In part,4
the rule is founded in comparative equity: the relative fault of the lienholder who,
though he is in the best position to make the world aware of his interest, has failed to
validly record it in the real property records, and the relative blamelessness of the
purchaser who, in justified reliance on the records’ silence, comes to the transaction
innocent and is caught unawares. See Kochan, supra note 4, at 12–13, 15; The Hazard of
Fraud in Deeds of Trust, 48 Yale L.J. 892, 893–94 (1939); see also Fraim v. Frederick, 32 Tex.
294, 308 (1869); Blythe v. Crump, 66 S.W. 885, 886 (Tex. App.—Dallas 1902, no writ).
That innocence and lack of awareness does not hinge on the validity of the claimed
interest, but on knowledge of the claim regardless of its validity.
And if the claimed interest has indeed been extinguished, then the purchasers are
free to prove that vital fact regardless of the bona fide purchaser defense—just as the
4
The rule is also rooted in a desire for certainty and simplicity in property
transactions—a recognition that purchasers should not be required to look behind the
real property records. See Donald J. Kochan, Dealing with Dirty Deeds: Matching Nemo Dat
Preferences with Property Law Pragmatism, 64 U. Kan. L. Rev. 1, 12–13 (2015).
15
Mahanays may do when our disposition revives their quiet title claim. The Mahanays
claim that the lien was invalid because it had been paid off. Though postured on appeal
as a claim for declaratory judgment, the true basis of this claim remains one to quiet
title. Gordon v. W. Hous. Trees, Ltd., 352 S.W.3d 32, 38 n.1 (Tex. App.—Houston [1st
Dist.] 2011, no pet.) (“When an action for declaratory relief and a suit to quiet title are
based on the same facts and request similar relief, they are both treated as one suit to
quiet title.”).
IV. ATTORNEY’S FEES
In its third issue, Trinity prays for this court to reverse the attorney’s fees that
were awarded to the Mahanays under their declaratory judgment action.
When the trial court “awards attorney’s fees to the prevailing party in a
declaratory judgment action, and we reverse the trial court’s declaratory judgment, we
are required to remand the attorney’s fees issue to the trial court for its reconsideration
in light of our reversal.” Rhino Real Est. Invs., Inc. v. City of Runaway Bay, No. 2-08-340-
CV, 2009 WL 2196131, at *4 (Tex. App.—Fort Worth July 23, 2009, no pet.) (mem.
op.); see Ferguson v. Ferguson, 111 S.W.3d 589, 600 (Tex. App.—Fort Worth 2003, pet.
denied).
We sustain Trinity’s third issue.
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V. CONCLUSION
The trial court’s judgment is in all things reversed and remanded for further
proceedings.
/s/ Wade Birdwell
Wade Birdwell
Justice
Delivered: January 27, 2022
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