Wells Fargo Bank, N.A. v. Patrick O'brien Murphy A/K/A O'brien Murphy and Beverly Murphy

IN THE SUPREME COURT OF TEXAS
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NO . 13-0236
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WELLS FARGO BANK, N.A., PETITIONER,
v.
PATRICK O’BRIEN MURPHY A/K/A O’BRIEN MURPHY AND
BEVERLY MURPHY, RESPONDENTS
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ON PETITION FOR REVIEW FROM THE
COURT OF APPEALS FOR THE FOURTEENTH DISTRICT OF TEXAS
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Argued October 15, 2014
JUSTICE GREEN delivered the opinion of the Court.
JUSTICE JOHNSON did not participate in the decision.
In this dispute between two home-equity borrowers and their lender, we must determine
whether the parties’ loan agreement or the Texas Constitution prohibits an award of attorney’s fees
in the borrowers’ separate and original declaratory judgment action that invoked the automatic stay
and dismissal provisions of Texas Rule of Civil Procedure 736.11. The court of appeals held that
neither party had pleaded a cognizable claim for declaratory relief and the nonrecourse status of the
home-equity loan prohibited a personal judgment for attorney’s fees against the borrowers. ___
S.W.3d ___, ___ (Tex. App.—Houston [14th Dist.] 2013). We hold that the home-equity borrowers,
who filed a separate and original declaratory judgment action, may not avoid personal liability for
any resulting fee award. Accordingly, we reverse the court of appeals’ judgment in part and reinstate
the trial court’s judgment in favor of the lender.
I. Factual and Procedural Background
Patrick O’Brien Murphy and Beverly Murphy (collectively “the Murphys”) refinanced their
existing home loan by obtaining a $252,000 home-equity loan from Wells Fargo Bank, N.A. in
January 2006. The parties executed a note and an accompanying security instrument that created a
home-equity lien on the Murphys’ homestead. Both loan documents memorialize or secure an
“extension of credit as defined by Section 50(a)(6), Article XVI of the Texas Constitution” and recite
that the “Note is given without personal liability against each owner.”
The Murphys quickly fell behind on their loan obligations. They failed to pay their property
taxes in 2007, 2008, and 2009, and their monthly loan payments were late beginning in November
2006. They stopped making loan payments altogether in February 2008. Shortly after the Murphys
stopped making payments, Wells Fargo sent them notice of default, acceleration, and intent to
foreclose. When the Murphys did not cure their default, Wells Fargo filed an application in the
295th District Court for an expedited court order authorizing foreclosure pursuant to the Texas Rules
of Civil Procedure. See TEX . R. CIV . P. 736.1.
The Murphys then filed a separate and original proceeding in the 55th District Court.
Pursuant to Rule 736.11(a), the filing of the Murphys’ lawsuit automatically stayed Wells Fargo’s
application for an expedited foreclosure.1 Upon the Murphys’ motion and pursuant to Rule
1
The relevant portion of Rule 736.11(a) states: “A proceeding or order under this rule is automatically stayed
if a respondent files a separate, original proceeding in a court of competent jurisdiction that puts in issue any matter
related to the origination, servicing, or enforcement of the loan agreement, contract, or lien.” T EX . R. C IV . P. 736.11(a).
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736.11(c), the 295th District Court dismissed Wells Fargo’s application.2 In their separate and
original proceeding, the Murphys pleaded for specific performance of an oral contract to refinance
the loan, declaratory judgment, and common law fraud. The Murphys’ petition also requested
attorney’s fees. The Murphys later amended their petition to assert a claim under the Texas
Deceptive Trade Practices—Consumer Protection Act (DTPA). See generally TEX . BUS. & COM .
CODE § 17.50. Wells Fargo answered with a general denial and later amended its answer to assert
several affirmative defenses and a counterclaim for declaratory judgment. In its amended answer,
Wells Fargo requested attorney’s fees pursuant to the Uniform Declaratory Judgments Act (UDJA).
See TEX . CIV . PRAC. & REM . CODE § 37.009.
The parties filed competing motions for summary judgment. Wells Fargo moved for
summary judgment on all of the Murphys’ claims and its own claim for declaratory relief, requesting
attorney’s fees for both prosecuting and defending a declaratory judgment action. The Murphys
opposed Wells Fargo’s motion, arguing, among other things, that Wells Fargo’s claims should not
be characterized as requesting declaratory relief. However, the Murphys never challenged the
characterization of their own claims requesting declaratory relief. Following a hearing, the trial court
denied the Murphys’ motion, granted Wells Fargo’s motion, found the Murphys had defaulted on
their home-equity loan, and ordered the Murphys to pay Wells Fargo $116,505.75 in attorney’s fees.
2
The relevant portion of Rule 736.11(c) states:
W ithin ten days of filing suit, the respondent must file a motion and proposed order to dismiss or
vacate with the clerk of the court in which the application was filed giving notice that respondent has
filed an original proceeding contesting the right to foreclose in a court of competent jurisdiction. If
no order has been signed, the court must dismiss a pending proceeding.
T EX . R. C IV . P. 736.11(c).
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The Murphys appealed the trial court’s summary judgment rulings and the attorney’s fee
award in favor of Wells Fargo. The court of appeals affirmed the trial court’s summary judgment
that the Murphys had defaulted. ___ S.W.3d at ___. However, the court of appeals reversed the
attorney’s fee award. Id. In doing so, the court of appeals held that neither party had pleaded for
declaratory relief and that the nonrecourse status of the home-equity loan prohibited a personal
judgment against the Murphys. Id. at ___.
Wells Fargo petitioned this Court for review of the attorney’s fee award issue. We granted
the petition. 57 TEX . SUP . CT . J. 753 (June 20, 2014).
II. Wells Fargo’s Attorney’s Fee Award
In challenging the court of appeals’ ruling on attorney’s fees, Wells Fargo contends that
(1) both parties pleaded for declaratory relief, and (2) the parties’ home-equity loan agreement and
the Texas Constitution do not prohibit a personal judgment for attorney’s fees against the Murphys.
We address Wells Fargo’s contentions in turn.
A. Grounds for the Attorney’s Fee Award
Wells Fargo’s first contention—that both parties’ pleadings support the fee award—requires
us to analyze the pleadings and determine whether the parties pleaded cognizable claims for
declaratory relief. Generally, a party may not recover attorney’s fees unless authorized by statute or
contract. Akin, Gump, Strauss, Hauer & Feld, L.L.P. v. Nat’l Dev. & Research Corp., 299 S.W.3d
106, 119 (Tex. 2009). The UDJA authorizes a trial court to award “reasonable and necessary
attorney’s fees as are equitable and just.” TEX . CIV . PRAC . & REM . CODE § 37.009. Absent
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exceptions not applicable here, the party requesting attorney’s fees must affirmatively plead for them
to be eligible for a judgment containing a fee award. See TEX . R. CIV . P. 301.
In the body of its first amended answer and counterclaim, Wells Fargo pleaded that it “is
entitled to recover its attorney’s fees. . . pursuant to Section 37.009 of the Texas Civil Practice &
Remedies Code.” Well Fargo’s prayer for relief generally requested that its attorney’s fees be
assessed against the Murphys. Accordingly, Wells Fargo satisfied Rule 301’s requirement that it
affirmatively plead for an attorney’s fee award.
On appeal to this Court, the Murphys contend that, despite the pleadings, Wells Fargo may
not recover its attorney’s fees because neither party pleaded a cognizable claim for declaratory relief.
For the first time, the Murphys argue that their own pleadings did not state a cognizable claim for
declaratory relief. The Murphys also argue, as they did in the trial court, that Wells Fargo’s claim
should be re-characterized as being for something other than declaratory relief.
“Parties are restricted on appeal to the theory on which the case was tried.” Davis v.
Campbell, 572 S.W.2d 660, 662 (Tex. 1978). Appellate courts are similarly restricted and may not
overlook the parties’ trial theories. See id. Likewise, in the summary judgment context, “[i]ssues
not expressly presented to the trial court by written motion, answer or other response shall not be
considered on appeal as grounds for reversal.” TEX . R. CIV . P. 166a(c). A court of appeals commits
reversible error when it sua sponte raises grounds to reverse a summary judgment that were not
briefed or argued in the appeal. San Jacinto River Auth. v. Duke, 783 S.W.2d 209, 209–10 (Tex.
1990) (per curiam). While it is true that courts may raise jurisdictional issues for the first time on
appeal and may do so sua sponte, see Tex. Ass’n of Bus. v. Tex. Air Control Bd., 852 S.W.2d 440,
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445–46 (Tex. 1993), the UDJA does not confer jurisdiction, but “is merely a procedural device for
deciding cases already within a court’s jurisdiction.” State v. Morales, 869 S.W.2d 941, 947 (Tex.
1994) (citation omitted). Therefore, an appellate court may not re-characterize the parties’ claims
as being for something other than declaratory relief unless the parties preserved the issue for appeal.
Here, both parties pleaded for “declaratory judgment.” The pleadings sufficiently
characterize the parties’ claims as being within the purview of the UDJA. See, e.g., First Am. Title
Ins. Co. of Tex. v. Willard, 949 S.W.2d 342, 352 (Tex. App.—Tyler 1997, writ denied) (“There is
no particular type of pleading required by the [UDJA].”); Canales v. Zapatero, 773 S.W.2d 659, 661
(Tex. App.—San Antonio 1989, writ denied). Despite the Murphys’ trial strategy and argument on
appeal, neither of which challenged the characterization of their own claim, the court of appeals held
that neither party had pleaded a claim for declaratory relief. ___ S.W.3d at ___. This sua sponte re-
characterization of the Murphys’ claim was not based upon jurisdictional grounds; rather, it was
based upon the “basic character of the litigation.” Id. Because the Murphys did not preserve their
re-characterization argument regarding their own claim in the trial court or even raise it in the court
of appeals, it was error for the court of appeals to address it sua sponte. Accordingly, we must accept
the Murphys’ claim as what it purports to be—a claim for declaratory relief.3 Because the Murphys
pleaded for declaratory relief and Wells Fargo pleaded for the recovery of its attorney’s fees for
either prosecuting or defending a claim for declaratory relief, the trial court was authorized to enter
3
The Murphys’ counsel at oral argument agreed, stating: “I cannot get around the fact that what [the Murphys]
filed was a declaratory judgment action. . . . [T]hat’s what the pleading says.”
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a judgment awarding Wells Fargo its attorney’s fees under the UDJA.4 See TEX . CIV . PRAC. & REM .
CODE § 37.009.
B. The Nonrecourse Status of the Home-Equity Loan
Wells Fargo’s second contention is that neither the parties’ home-equity loan agreement nor
the Texas Constitution prohibits a personal judgment for attorney’s fees against the Murphys. To
properly analyze Wells Fargo’s contention, we must determine whether an award of attorney’s fees
in a separate and original declaratory judgment action that invokes the automatic stay and dismissal
provisions in Texas Rule of Civil Procedure 736.11 is included within the “extension of credit.”
Liens against homestead property are not valid unless they are authorized by our Constitution.
See Doody v. Ameriquest Mortg. Co., 49 S.W.3d 342, 344–45 (Tex. 2001). In 1997, Texas voters
approved an amendment to our Constitution to allow home-equity lenders to secure home-equity
loans with homestead property. Id. at 343. The parties’ loan agreement unambiguously states that
it is made pursuant to this constitutional authority. The Murphys’ note states that it is an “extension
of credit as defined by Section 50(a)(6), Article XVI of the Texas Constitution.” The security
instrument defines “extension of credit” to mean “the debt evidenced by the Note, as defined by
Section 50(a)(6), Article XVI of the Texas Constitution.” Finally, the note and security instrument
both mirror the constitutional provision’s language by stating the “Note is given without personal
liability against each owner.”
4
Because one of W ells Fargo’s pleaded grounds for attorney’s fees is valid, we do not reach the question of
whether W ells Fargo pleaded a cognizable claim for declaratory relief.
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No one disputes that “without personal liability against each owner” limits the sources of
funds from which Wells Fargo may seek payment of the loan. Courts have traditionally described
nonrecourse loans with such language. See, e.g., Fein v. R.P.H., Inc., 68 S.W.3d 260, 266 (Tex.
App.—Houston [14th Dist.] 2002, pet. denied) (“A nonrecourse note has the effect of making a note
payable out of a particular fund or source, namely, the proceeds of the sale of the collateral securing
the note.”); Hinckley v. Eggers, 587 S.W.2d 448, 450 (Tex. Civ. App.—Dallas 1979, writ ref’d
n.r.e.) (“[Nonrecourse] provisions have the effect of making the note payable out of a particular fund
or source, namely, the proceeds of a sale of the property covered by the deed of trust.”). Moreover,
the parties agreed that “the Note Holder can enforce its rights under this Note solely against the
property and not personally against any owner of such property.” Given this historical context and
the parties’ own definition, in the event of default, Wells Fargo could seek payment of the home-
equity loan only from the collateral, and could not seek a deficiency judgment against the Murphys
personally.
The parties propose differing interpretations of the meaning of “extension of credit.” Wells
Fargo argues that a lender can recover fees or costs for defending against a borrower’s separate and
original proceeding challenging the foreclosure because those fees were not incurred pursuing a
judgment against the borrower based upon the “extension of credit.”5 Ultimately, according to Wells
Fargo, the Constitution does not prohibit the recovery of attorney’s fees in such a separate and
original proceeding if that recovery is otherwise authorized by law. The Murphys contend that their
5
W e do not address W ells Fargo’s broader argument that when a lender seeks to foreclose on collateral it is
also not pursuing a deficiency judgment and is therefore not prohibited from collecting its attorney’s fees.
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separate and original lawsuit merely contested their alleged default, and they implicitly argue for a
more expansive definition of “extension of credit.”
As a rule, this Court first seeks to resolve disputes upon nonconstitutional grounds. See, e.g,
In re B.L.D., 113 S.W.3d 340, 349 (Tex. 2003). Conversely, we decide constitutional questions only
when we cannot resolve a dispute upon nonconstitutional grounds. Id. In accordance with this rule,
we first look to the parties’ home-equity loan agreement. The parties’ agreement defines “extension
of credit” in a manner that incorporates the definition of that phrase as used in section 50(a)(6) of
the Constitution. Therefore, despite our general rule, we must look to the constitutional definition
to interpret the parties’ home-equity loan agreement.
We recently defined “extension of credit,” for purposes of section 50(a)(6), to consist of “all
the terms of the loan transaction.” Sims v. Carrington Mortg. Servs., L.L.C., 440 S.W.3d 10, 16
(Tex. 2014). The terms of the loan transaction may include the payment of principal, interest, taxes,
insurance premiums, and other related expenses. Id. Therefore, despite the parties’ loan agreement
deferring to constitutional definitions, we look to that very agreement to determine the extension of
credit’s scope. See id.
The parties’ loan agreement contains several terms regarding Wells Fargo’s recovery of its
attorney’s fees and other costs. If the attorney’s fee award falls within one of these terms, it
necessarily falls within the extension of credit’s scope and must be without recourse for personal
liability. See id.; see also TEX . CONST . art. XVI § 50(a)(6)(C). The note states that “the Note Holder
will have the right to be paid back by [the Borrowers] for all of its costs and expenses in enforcing
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this Note to the extent not prohibited by applicable law.” Section 9 of the security instrument
provides a much more detailed framework:
If (a) Borrower fails to perform the covenants and agreements contained in this
Security Instrument, (b) there is a legal proceeding that might significantly affect
Lender’s interest in the Property and/or rights under this Security Instrument (such
as a proceeding in bankruptcy, probate, for condemnation or forfeiture, for
enforcement of a lien which may attain priority over this Security Instrument or to
enforce laws or regulations), or (c) Borrower has abandoned the Property, then
Lender may do and pay for whatever is reasonable or appropriate to protect Lender’s
interest in the Property and rights under this Security Instrument, including protecting
and/or assessing the value of the Property, and securing and/or repairing the Property.
Lender’s actions can include, but are not limited to: (a) paying any sums secured by
a lien which has priority over this Security Instrument; (b) appearing in court; and
(c) paying reasonable attorneys’ fees to protect its interest in the Property and/or
rights under this Security Instrument . . . .
Any amounts disbursed by Lender under this Section 9 shall become
additional debt of Borrower secured by this Security Instrument. These amounts
shall bear interest at the Note rate from the date of disbursement and shall be payable,
with such interest, upon notice from Lender to Borrower requesting payment.
Wells Fargo was awarded its attorney’s fees for defending against the Murphys’ separate and
original declaratory judgment action that invoked the automatic stay and dismissal provision of
Texas Rule of Civil Procedure 736.11. This factual and procedural scenario presents three ways that
the fee award may fall within one of the loan agreement’s terms. First, Wells Fargo might have
incurred “costs and expenses in enforcing th[e] Note.” However, Wells Fargo is not enforcing the
note but is rather defending against the Murphys’ separate and original declaratory judgment action.
Second, Wells Fargo might have incurred its attorney’s fees because the Murphys failed “to perform
the covenants and agreements contained in th[e] Security Instrument.” Once again, however, Wells
Fargo is defending against the Murphys’ separate and original declaratory judgment action, rather
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than protecting itself against the Murphys’ breach of covenants or agreements contained in the
security instrument. Finally, Wells Fargo might have incurred its attorney’s fees because “there is
a legal proceeding that might significantly affect [its] interest in the Property.” While there was a
legal proceeding, it was not a legal proceeding of the kind contemplated by the security instrument,
which addresses those proceedings in “bankruptcy, probate, for condemnation or forfeiture, for
enforcement of a lien which may attain priority over this Security Instrument or to enforce laws or
regulations.” These enumerated legal proceedings have two primary similarities: none of the covered
proceedings are brought by the borrower directly against the lender, and none of the covered
proceedings contest the merits of the underlying loan. The Murphys’ separate and original
declaratory judgment action does both, and therefore falls outside of this term’s scope.
Here, Wells Fargo applied for an expedited order allowing for the foreclosure of its lien
against the Murphys’ home. The Murphys did not file a response in that proceeding, but rather
invoked the automatic stay and dismissal provisions of Rule 736.11 by filing a separate and original
proceeding in the district court. In that proceeding, the Murphys pleaded for specific performance
of an oral contract to refinance the loan, declaratory judgment that Wells Fargo was not entitled to
foreclose, common law fraud, DTPA violations, and their own attorney’s fees. Having initiated a
separate and original proceeding, and having provided a mechanism for Wells Fargo to both incur
and recover its attorney’s fees, there is no basis for the Murphys to hide behind the nonrecourse
status of their home-equity loan.
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III. Reinstatement of the Trial Court’s Judgment
An award of attorney’s fees under the UDJA is subject to modification based upon certain
limiting principles. Under section 37.009, a trial court may award reasonable and necessary
attorney’s fees only when it would be equitable and just to do so. TEX . CIV . PRAC. & REM . CODE
§ 37.009; see Bocquet v. Herring, 972 S.W.2d 19, 21 (Tex. 1998). These statutory limitations are
complemented by other limiting principles, such as segregation of fees. See, e.g., Tony Gullo Motors
I, L.P. v. Chapa, 212 S.W.3d 299, 313–14 (Tex. 2006) (requiring litigants to segregate attorney’s
fees between claims that allow for the recovery of attorney’s fees and claims that do not).
The Murphys did not assert any limiting principles before the trial court or the court of
appeals. Therefore, we do not address whether the amount of the trial court’s $116,505.75 attorney’s
fee award was an abuse of discretion, based upon insufficient evidence, or failed to segregate
recoverable and unrecoverable fees. See id.; Bocquet, 972 S.W.2d at 21. We reinstate the trial
court’s judgment in favor of Wells Fargo for the full amount.
IV. Conclusion
Wells Fargo pleaded to recover its attorney’s fees for either defending or prosecuting a claim
for declaratory relief. Because the Murphys failed to preserve any challenge to the characterization
of their own claim for declaratory relief, the trial court was authorized to enter a judgment awarding
Wells Fargo its attorney’s fees under the UDJA. Neither the parties’ loan agreement nor the Texas
Constitution prohibits a personal judgment against the Murphys for attorney’s fees. Therefore, we
reverse the court of appeals’ judgment in part and reinstate the trial court’s judgment in favor of
Wells Fargo.
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__________________________________
Paul W. Green
Justice
OPINION DELIVERED: February 6, 2015
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