John R. Holley and Ailza M. Holley v. Holley and Taylor, Inc. Pamela K. Holley, Individually and as Independent of the Estate of Mary Marshall Holley, And Melinda McDaniel

Opinion filed February 10, 2017
In The
Eleventh Court of Appeals
__________
No. 11-15-00046-CV
__________
JOHN R. HOLLEY AND AILZA M. HOLLEY, Appellants
V.
HOLLEY AND TAYLOR, INC.; PAMELA K. HOLLEY,
INDIVIDUALLY AND AS INDEPENDENT EXECUTOR OF
THE ESTATE OF MARY MARSHALL HOLLEY, DECEASED;
AND MELINDA MCDANIEL, Appellees
On Appeal from the 35th District Court
Brown County, Texas
Trial Court Cause No. CV1407271
MEMORANDUM OPINION
This is an appeal from a bench trial of a family dispute involving a claim of
equitable subrogation. Appellant John R. Holley and Appellee Pamela K. Holley
are siblings. Appellee Holley and Taylor, Inc. (HTI) is a corporation controlled by
different family members at various times that owned the parcel of real estate where
a family automobile dealership was located. At a time when John was the president
of HTI, HTI executed a deed of trust pledging as collateral the real estate owned by
HTI to secure a note made by John and his wife, Ailza, (collectively referred to as
Appellants) payable to Texas Bank in the amount of $1,215,352.
Pamela subsequently filed a derivative action on behalf of HTI against
Appellants and Citizens National Bank, the successor holder of the note. She alleged
that Appellants wrongfully caused HTI to pledge its real property as security for
Appellants’ personal note. On behalf of HTI, Pamela sought a declaratory judgment
that the deed of trust executed by HTI was “null, void, and without effect.” The
derivative action was concluded by a mediated settlement agreement entered on
December 15, 2008.
In 2014, HTI paid Appellants’ past-due debt under the note when the real
property was sold to a third party. Appellants filed the underlying suit against
Appellees seeking a declaratory judgment that the 2008 settlement agreement
precluded HTI from seeking payment from Appellants for the debt HTI paid on
behalf of Appellants. HTI filed a counterclaim seeking to establish a claim for
equitable subrogation against Appellants for the sums it paid to retire Appellants’
indebtedness under the note and seeking to foreclose on property owned by
Appellants.
The trial court awarded HTI a judgment in the amount of $970,648.73 in
actual damages, plus prejudgment and postjudgment interest and attorneys’ fees.
The trial court further entered a declaration that HTI is equitably subrogated to the
liens of Citizens National Bank on all properties owned by Appellants.
In three issues on appeal, Appellants contend that (1) the trial court erred in
finding that the 2008 Settlement Agreement did not release HTI’s claim of equitable
subrogation, (2) the trial court erred in finding that HTI had a lien by equitable
subrogation because there was insufficient evidence to support a finding that it paid
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the debt involuntarily, and (3) the trial court erred in finding that HTI proved all of
the elements of equitable subrogation. We affirm.
Background Facts
In 2003, John was the president of HTI. At that time, Appellants signed a
promissory note for the $1.2 million loan from Texas Bank in their individual
capacities. The loan was secured by a deed of trust pledging real property owned by
HTI as collateral. John executed the deed of trust in his capacity as president of HTI.
John testified that Appellants then loaned the $1.2 million to Holley Chevrolet
Company (HCC), the family automobile dealership. At that time, John owned 100%
of the stock of HCC. John testified that HCC made all the payments on the note, but
Appellants remained primarily liable for the debt. John testified that Appellants had
been borrowing money in this manner since 1991 on the advice of their accountants.
In 2008, Pamela, individually and derivatively on behalf of HTI, sued
Appellants. The 2008 lawsuit alleged that Appellants “obtained a personal loan by
wrongfully and without proper authorization using the [HTI] property… as
collateral.” In connection with this loan, the lawsuit alleged causes of action for
breach of fiduciary duty to HTI, fraud, negligence, and conspiracy. The lawsuit
further sought a constructive trust on all of Appellants’ real property. As noted
previously, the previous lawsuit was resolved by a mediated settlement agreement
executed on December 15, 2008.
On February 3, 2014, a representative of Citizens National Bank sent a letter
to HTI’s attorney. The letter indicated that payments on the note had become past
due. However, the bank had agreed to allow the payments to remain in past-due
status, pending the contemplated sale of the HTI property. The bank further
indicated that, if the sale of the property fell through, the bank would foreclose on
the HTI property in order to satisfy the debt.
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In April 2014, Pamela, as president of HTI, sold the HTI property. In order
to convey clear title to the buyers, HTI was required to pay the remaining
$970,648.73 owed on the $1.2 million promissory note, which released the bank’s
lien on the HTI property. HTI sought a judgment against Appellants for $970,648.73
for the debt that it paid on Appellants’ behalf. HTI also sought to be equitably
subrogated to the bank’s lien on other properties owned by Appellants because it
paid Appellants’ debt. The trial court granted HTI’s requested relief. Additionally,
the trial court ordered that HTI’s equitable lien was to be foreclosed by an order of
sale.
Analysis
We begin by addressing a matter raised by Appellants after the filing of the
briefs in this appeal. Appellants have filed a motion to disqualify the trial judge, the
Hon. Stephen Ellis. They assert that Judge Ellis was disqualified because he was a
partner with the attorney who originally worked on the loan and encumbrance of
property at issue in this case.
Rule 18b(a)(1) of the Texas Rules of Civil Procedure provides that a judge is
disqualified if he “has served as a lawyer in the matter in controversy, or a lawyer
with whom the judge previously practiced law served during such association as a
lawyer concerning the matter.” TEX. R. CIV. P. 18b(a)(1). Further, the Texas
constitution provides that “[n]o judge shall sit in any case . . . when the judge shall
have been counsel in the case.” TEX. CONST. art. V, § 11. A judge is vicariously
disqualified under the Texas constitution if his former associate served as counsel to
a party concerning the matter in the case. In re O’Connor, 92 S.W.3d 446, 449 (Tex.
2002) (orig. proceeding) (per curium). The issue of constitutional disqualification
may be raised for the first time on appeal. In re Gonzalez, 115 S.W.3d 36, 39 (Tex.
App.—San Antonio 2003, no pet.). When the issue is raised for the first time on
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appeal, we review the question de novo. McElwee v. McElwee, 911 S.W.2d 182,
185 (Tex. App.—Houston [1st Dist.] 1995, writ denied).
Appellants contend that Judge Ellis was disqualified because Judge Ellis’s
former law partner, William Bell, represented HCC and HTI in obtaining the loan at
issue in this case. According to Appellants, Judge Ellis and Bell were law partners
until 1989. In 1985, Bell represented both HCC and HTI. As part of this
representation, Bell assisted John and his father, Wilton Holley, in obtaining “the
loan central to this case.” This loan continued to be modified and renewed, until it
was eventually renewed in Appellants’ names in 2003. According to Appellants,
this constitutes the “same matter” as the case before us because “[s]ome of the key
issues in the trial of this case were the history of the business relationship between
Holley Chevrolet and Holley & Taylor, the origin of the loan encumbering Holley
& Taylor property, and the life of the loan.”
Appellees contend that Judge Ellis is not disqualified because there was no
evidence produced at trial that indicates that John and Wilton Holley relied on Bell
for advice about the loan structure and because the loan originated in 1991, two years
after Judge Ellis left the partnership. Appellees further contend that the transactions
with which Bell allegedly assisted are not the “same matter” that was before
Judge Ellis in this case.
Both parties rely on Fuqua v. Oncor Electric Delivery Co., 315 S.W.3d 552
(Tex. App.—Eastland 2010, pet. denied). In that case, we also reviewed the
professional relationship between Judge Ellis and his former partner, Bell. Id. at
560. That case involved the issues of whether or not Fuqua’s land was burdened by
an easement to Oncor and, if so, whether or not Fuqua violated that easement. Id. at
554–55. During trial, Judge Ellis discovered that Bell had written the title opinion
that was issued to the Fuquas when they purchased the property in 1985. Id. at 560.
We concluded that Judge Ellis was not disqualified because “Bell did not serve as
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counsel to a party” in that suit and that “the matter in controversy . . . [was not] the
same as that at issue in 1985.” Id. Appellants attempt to distinguish Fuqua on the
grounds that, in this case, Bell represented one of the parties in the lawsuit, HTI, in
1985 and that this representation constitutes the same matter as the present suit: the
loan’s structure and purpose. We disagree.
Even assuming that John and Wilton Holley relied on advice from Bell in
structuring the loan in 1985, we conclude that this representation did not constitute
the same matter as that at issue here. Equitable subrogation “allows a party who
would otherwise lack standing to step into the shoes of and pursue the claims
belonging to a party with standing.” Frymire Eng’g Co. ex rel. Liberty Mut. Ins.
Co. v. Jomar Int’l, Ltd., 259 S.W.3d 140, 142 (Tex. 2008). Thus, the primary issue
in this case was whether or not HTI was equitably subrogated to the lien previously
held by Citizens National Bank.
As will be discussed in greater detail below, in order to prove equitable
subrogation, HTI was required to prove that it involuntarily paid a debt for which
another was primarily liable and that the balance of equities favor subrogation.
Murray v. Cadle Co., 257 S.W.3d 291, 299 (Tex. App.—Dallas 2008, pet. denied).
While there was evidence presented at trial regarding the business relationship
between HCC and HTI and the origin, structure, and purpose of the loan, this
evidence was neither required to prove the elements of equitable subrogation nor did
it relate to issues central to this case. The debt at issue in this case was a note
executed by Appellants in 2003 that was secured by a deed of trust executed at the
same time. Additionally, the parties executed a settlement agreement concerning
the deed of trust in 2008, and the claim for equitable subrogation is based upon a
payment that HTI made in 2014. Thus, the matters relevant to HTI’s claim for
equitable subrogation arose many years after Judge Ellis left his association with
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Bell. Therefore, we conclude that the original loan structure is not the same matter
that is at issue in this case. We deny Appellant’s motion to disqualify.
In their first issue, Appellants contend that the trial court erred in finding that
the settlement agreement did not release Appellees’ claim of equitable subrogation.
A release is a contract, and the construction of it is governed by the general rules
relating to contracts. Baty v. ProTech Ins. Agency, 63 S.W.3d 841, 848 (Tex. App.—
Houston [14th Dist.] 2001, pet. denied). Appellants couch their complaint as an
evidentiary challenge to the trial court’s construction of the settlement agreement.
However, the construction of an unambiguous contract is a question of law that we
review de novo. See MCI Telecomms. Corp. v. Tex. Utils. Elec. Co., 995 S.W.2d
647, 650 (Tex. 1999).
When we construe releases, we ascertain and give effect to the intention of
the parties. Baty, 63 S.W.3d at 848. A release must be considered as a whole in
order to give effect to the general purpose and true intention of the parties. Id. To
be effective, a releasing instrument must “mention” the claim to be released.
Victoria Bank & Trust Co. v. Brady, 811 S.W.2d 931, 938 (Tex. 1991). Any claim
not “clearly within the subject matter of the release” is not discharged. Id. However,
the parties are not required to anticipate and identify every potential cause of action
relating to the subject matter of the release. Keck, Mahin & Cate v. Nat’l Union Fire
Ins. Co. of Pittsburg, PA, 20 S.W.3d 692, 698 (Tex. 2000). “[A] valid release may
encompass unknown claims and damages that develop in the future.” Id.
The first paragraph of the typewritten portion of the written settlement
agreement provided that the parties desired “to comprise and settle all claims and
causes of action of any kind whatsoever which the parties have or may have arising
out of the transaction or occurrence which is the subject of this litigation.”
Appellants rely in large part upon this provision to assert that HTI’s act of pledging
its real property for the $1.2 million promissory note made by Appellants was the
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transaction that was the subject of the previous lawsuit and the subsequent settlement
agreement. Appellants contend that the settlement agreement precludes HTI’s claim
for equitable subrogation because it is a claim arising from the loan transaction. We
disagree with this construction of the settlement agreement.
Under the terms of the settlement agreement, the deed of trust pledging HTI’s
property for the $1.2 million note remained in effect. In this regard, Citizens
National Bank was a party to the 2008 lawsuit and the settlement agreement that
concluded it. The settlement agreement did not have any provisions affecting
Appellants’ indebtedness under the note to the bank or the fact that HTI’s property
remained pledged to secure it. Another portion of the settlement agreement provided
as follows:
5. Except for the agreements set forth herein and contingent
upon the performance of the obligations set forth herein the parties
hereby agree to release, discharge, and forever hold the other harmless
from any and all claims, demand, or suits, known or unknown, fixed or
contingent, liquidated or unliquidated, whether or not asserted in the
above case, as of this date, arising from or related to the events and
transactions which are the subject matter of this cause.
(Emphasis added). The italicized portion of this provision was handwritten into a
typewritten provision of the settlement agreement. It indicates that the releases set
out in the agreement were contingent upon the performance of the obligations set
out in the agreement. Thus, the settlement agreement specifically recognized
ongoing obligations among the parties after its execution.
Appellants’ continuing indebtedness to the bank is central to our analysis
because equitable subrogation is a legal fiction whereby one party stands in the shoes
of a creditor to pursue a claim belonging to that creditor. Frymire, 259 S.W.3d at
142; Murray, 257 S.W.3d at 299; Chase Manhattan Mortg. Corp. v. Cook, 141
S.W.3d 709, 714 (Tex. App.—Eastland 2004, no pet.) (“Subrogation substitutes
another person in the place of a creditor so that the person in whose favor it is applied
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succeeds to the right of the creditor in relation to the debt.”). Furthermore, the
settlement agreement does not contain any provisions that preclude HTI from
acquiring the bank’s right to collect from Appellants, which in this case occurred six
years after the execution of the settlement agreement. We agree with HTI’s
contention that its right to seek equitable subrogation does not arise from the
pledging of its property for Appellants’ debt, a matter that was addressed by the
settlement agreement. Instead, HTI’s claim of equitable subrogation arises from the
subsequent payment of Appellants’ debt to the bank. Accordingly, we conclude that
the settlement agreement does not preclude HTI from seeking a money judgment for
the indebtedness it paid to the bank to extinguish Appellants’ indebtedness.
There is an additional matter that we must consider pertaining to the trial
court’s judgment awarding HTI a lien on other properties owned by Appellants,
specifically a tract referred to as the “Toyota property.” Appellants assert that, since
HTI asserted claims in the previous lawsuit against the Toyota property, the
settlement agreement’s broad release language released HTI’s subrogation claims
against Appellants regarding that property. We disagree.
The provisions of the settlement agreement pertaining to the claims asserted
by HTI against the Toyota property in the prior lawsuit are not relevant to our
analysis. Once again, we focus on the liens possessed by Citizens National Bank
after the execution of the settlement agreement because HTI is stepping into the
bank’s shoes by claiming equitable subrogation. See Gant v. Stewart, 347 S.W.2d
1, 4 (Tex. Civ. App.—Waco 1961, writ ref’d n.r.e.) (A subrogation claimant is
entitled to enforce “all rights, liens and equities of a prior lien holder.”). While the
settlement agreement contained a handwritten provision to the effect that “Bob
Boatright, President of Citizens National Bank at Brownwood, shall request to the
Board of Directors of said Bank that the property owned by Holley & Taylor, Inc.
in Brown County, Texas shall secure only the [$]1,200,000 note,” there is no
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evidence that the bank’s board approved this request. The settlement agreement
does not indicate that the bank affirmatively agreed to release the Toyota property
as collateral for the $1.2 million note, but rather that the bank would consider the
request to release the Toyota property by presenting the request to the board of
directors for consideration. At trial, Boatright testified that the bank maintained that
the $1.2 million note was also still secured by the Toyota property because it was
“cross-collateralized” with another $800,000 note made by Appellants to the bank
for which the Toyota property had been pledged. Accordingly, the settlement
agreement did not release the bank’s lien on the Toyota property for the $1.2 million
note, nor did it preclude HTI from subsequently obtaining the bank’s lien. We
overrule Appellants’ first issue.
In their second and third issues, Appellants contend that the trial court erred
in finding that HTI had a lien by virtue of equitable subrogation because there was
no evidence or insufficient evidence that HTI paid the debt involuntarily and because
Appellees failed to prove all of the elements of equitable subrogation. Appellants’
second and third issues are evidentiary challenges that they have briefed together.
In support of these issues, Appellants assert that the trial court’s letter ruling
constituted findings of fact and conclusions of law. We disagree with this
contention.
The trial court issued a letter dated December 8, 2014, to the attorneys of
record announcing the court’s rulings in the case and directing HTI’s attorney to
prepare a judgment for the trial court to sign. However, the letter did not have any
findings other than a statement that the trial court “finds” that HTI “has a lien by
virtue of the doctrine of equitable subrogation after balancing the equities and
finding that all of the elements for this type of claim have been proven by a
preponderance of the evidence.” Generally, a trial court’s prejudgment letter may
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not serve as findings of fact and conclusions of law. See Cherokee Water Co. v.
Gregg Cty. Appraisal Dist., 801 S.W.2d 872, 877–78 (Tex. 1990).
When no findings of fact or conclusions of law were requested or filed in the
trial court, it is implied that the trial court made all the findings necessary to support
its judgment. Worford v. Stamper, 801 S.W.2d 108, 109 (Tex. 1990). Implied
findings of fact, like the trial court’s findings, may be challenged for legal and factual
sufficiency. Curtis v. Comm’n for Lawyer Discipline, 20 S.W.3d 227, 231 (Tex.
App.—Houston [14th Dist.] 2000, no pet.). In determining whether some evidence
supports the judgment and the implied findings of fact, “it is proper to consider only
that evidence most favorable to the issue and to disregard entirely that which is
opposed to it or contradictory in its nature.” Worford, 801 S.W.2d at 109 (quoting
Renfro Drug Co. v. Lewis, 235 S.W.2d 609, 613 (Tex. 1950)). The trial court’s
judgment must be affirmed if it can be upheld on any legal basis that has support in
the record. Id.; Curtis, 20 S.W.3d at 231.
The trial court judges the credibility of the witnesses, determines the weight
of testimony, and resolves conflicts and inconsistencies in the testimony. See Sw.
Bell Media, Inc. v. Lyles, 825 S.W.2d 488, 493 (Tex. App.—Houston [1st Dist.]
1992, writ denied). If the evidence falls “within [the] zone of reasonable
disagreement,” we will not substitute our judgment for that of the fact finder. City
of Keller v. Wilson, 168 S.W.3d 802, 822 (Tex. 2005). In determining whether
legally sufficient evidence supports the finding under review, we consider evidence
favorable to the finding, if a reasonable fact finder could consider it, and disregard
evidence contrary to the finding, unless a reasonable fact finder could not disregard
it. Id. at 827. In a factual sufficiency review, we view all of the evidence in a neutral
light and set aside the finding only if the finding is so contrary to the overwhelming
weight of the evidence such that it is clearly wrong and unjust. Plas-Tex, Inc. v. U.S.
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Steel Corp., 772 S.W.2d 442, 445 (Tex. 1989); Cain v. Bain, 709 S.W.2d 175, 176
(Tex. 1986).
Equitable subrogation applies “in every instance in which one person, not
acting voluntarily, has paid a debt for which another was primarily liable and which
in equity should have been paid by the latter.” Mid-Continent Ins. Co. v. Liberty
Mut. Ins. Co., 236 S.W.3d 765, 774 (Tex. 2007). Thus, the doctrine consists of two
elements: (1) the person whose debt was paid was primarily liable on the debt and
(2) the debt was paid involuntarily. Murray, 257 S.W.3d at 299. Additionally,
viewing the totality of the circumstances, the balance of equities must favor
subrogation. Frymire, 259 S.W.3d at 142; Murray, 257 S.W.3d at 300.
Appellants first argue that HTI acted voluntarily in paying the debt to Citizens
National Bank because it was under no compulsion to sell the property. “Texas
courts are ‘liberal in their determinations that payments were made involuntarily.’”
Frymire, 259 S.W.3d at 145 (quoting Keck, 20 S.W.3d at 702). It is well settled that
a mortgage may be given to secure the debt of a third person. Wilbanks v. Wilbanks,
330 S.W.2d 607, 608 (Tex. 1960). “[T]he person who gives a mortgage to secure
the note of a third person becomes a surety for the third person, even though the
mortgagor may not be a party to the note.” 30 TEX. JUR. 3d Deeds of Trust and
Mortgages § 44 (2016) (citing Planters’ & Mechanics’ Nat. Bank v. Robertson, 86
S.W. 643, 645 (Tex. Civ. App. 1905, no writ)). Thus, HTI became a surety for
Appellants on their indebtedness for the $1.2 million note to the bank. “A person
with an interest in the property, a surety, or a person who pays the debt at the request
of the debtor, is not a mere volunteer and is entitled to subrogation.” 1 W. Mike
Baggett & Brian Thompson Morris, Texas Practice Guide: Real Estate Litigation
§ 4:210 (2016) (citing Farm Credit Bank of Texas v. Ogden, 886 S.W.2d 305, 312
(Tex. App.—Houston [1st Dist.] 1994, no writ)).
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Appellants contend that there is no evidence that the bank made a demand
that, HTI sell the property or pay the debt. However, a letter from Boatright to HTI’s
attorney indicated that Appellants’ $1.2 million note was in default and that if the
closing did not occur on HTI’s property as planned in 2014, the bank could post the
property for foreclosure “if need be.” Boatwright testified at trial that he told HTI
that the bank would foreclose if the conveyance did not occur. Appellee Pamela
Holley also testified that HTI would not have paid the remaining indebtedness on
the $1.2 million note had the bank not required it. A party is not a volunteer if it
paid the debt in good faith and under a reasonable belief that the payment is
necessary for its protection. See Keck, 20 S.W.3d at 702. Accordingly, the trial
court’s implied finding that HTI did not voluntarily pay Appellants’ indebtedness is
supported by legally and factually sufficient evidence.
Appellant next contends that the balance of equities clearly disfavors a finding
that HTI was equitably subrogated to the bank’s lien. “We will not disturb a trial
court’s ruling balancing the equities unless it is shown that it would be inequitable
not to do so.” Murray, 257 S.W.3d at 300. While not an element of the doctrine, a
general purpose of equitable subrogation is to prevent unjust enrichment. See
Frymire, 259 S.W.3d at 146 (using the doctrine of unjust enrichment in the court’s
balance of the equities); see also Smart v. Tower Land & Inv. Co., 597 S.W.2d 333,
337 (Tex. 1980) (“Subrogation to the creditor’s rights is available . . . only when the
debtor was enriched unjustly.”).
Appellants contend that the loan proceeds were used to benefit HTI and that
it, therefore, should not be able to benefit from the loan a second time by being
subrogated to the bank’s lien. In some respects, Appellants are challenging the
element of equitable subrogation requiring that they be primarily liable for the debt.
However, under the express terms of the $1.2 million note, Appellants were
primarily liable for the debt. Appellants base their contention pertaining to equities
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on John’s trial testimony. He testified that the proceeds of the $1.2 million loan were
loaned to HCC and that HCC made all of the payments on the note. However, there
is no evidence that HTI benefited from the loan. Furthermore, the trial court was not
required to accept John’s testimony that varied from the express terms of the
$1.2 million note regarding the parties liable for its payment. Accordingly, we will
not disturb the trial court’s ruling that balanced the equities in this case. Appellants’
second and third issues are overruled.
This Court’s Ruling
We deny Appellants’ motion to disqualify Judge Ellis, and we affirm the
judgment of the trial court.
JOHN M. BAILEY
JUSTICE
February 10, 2017
Panel consists of: Wright, C.J.,
Willson, J., and Bailey, J.
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