in Re Howard Chong

Petition for Writ of Mandamus Granted and Memorandum Opinion filed June
25, 2019.
In The
Fourteenth Court of Appeals
NO. 14-19-00368-CV
IN RE HOWARD CHONG, Relator
ORIGINAL PROCEEDING
WRIT OF MANDAMUS
133rd District Court
Harris County, Texas
Trial Court Cause No. 2016-46251
MEMORANDUM OPINION
On May 3, 2019, Howard Chong (“Intervenor”) filed a petition for writ of
mandamus in this court. See Tex. Gov’t Code Ann. § 22.221 (Supp.); see also Tex.
R. App. P. 52. The real parties-in-interest include SMDCHOI, LLC (“Plaintiff”), and
Euro General Construction, Inc., Hyung Kyu Yu, and Do Yeon Yu (“Defendants”).
In the petition, Intervenor asks this court to compel the Honorable Jaclanel
McFarland, presiding judge of the 133rd District Court of Harris County, to vacate
her order denying Intervenor’s amended motion to expunge lis pendens and to grant
such motion.
We conditionally grant relief.
FACTUAL AND PROCEDURAL BACKGROUND
Plaintiff and Defendants entered into a Construction Agreement on or about
November 2013 to improve twenty-five (25) apartment units of Plaintiff. Plaintiff
agreed to pay Defendants $1.5 million and Defendants agreed to furnish all labor
and materials to improve the apartments by December 30, 2014.
Plaintiff paid the $1.5 million over the course of construction. Defendant Euro
General Construction, Inc. (“Euro”), acting as the general contractor, hired
subcontractors to complete the project. Plaintiff alleges that Euro had a contractual
and fiduciary obligation to use the payments it received from Plaintiff to pay the
subcontractors.
When the project was near completion, Plaintiff learned that there were
several subcontractors who had not been paid and had asserted liens against the
property totaling approximately $330,000. These liens prevented Plaintiff from
obtaining a certificate of occupancy from the county. To extinguish the
subcontractor liens, Plaintiff loaned Defendants $330,000 to pay the unpaid
subcontractors. Defendants signed an agreement acknowledging that they were
responsible to pay the subcontractors and agreed to repay the $330,000 loan.
Defendants gave Plaintiff a post-dated check in the amount of $330,000 and an
agreed judgment that Plaintiff could file if the check did not clear.
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The subcontractors were paid, and they released their liens. However,
payment of the $330,000 check was refused due to insufficient funds.
Plaintiff filed suit on July 12, 2016, alleging Defendants failed to complete
the apartments by the due date and breached their agreement to repay the $330,000
loan. Plaintiff also filed a notice of lis pendens on August 3, 2016 on the properties
that Defendants had purchased with funds which Plaintiff contends should have
instead been used to pay subcontractors.
On or about September 27, 2017, Intervenor filed a petition to intervene in the
underlying suit to assert rights as to six real properties identified in the notice of the
lis pendens. Intervenor alleges he loaned Defendants funds memorialized by
promissory notes and secured by first-priority deeds of trust on all six properties and
has obtained title to two of these properties through foreclosure.
Intervenor filed an amended motion to expunge the lis pendens. On September
10, 2018, after hearing, the trial court signed an order denying the motion.
MANDAMUS STANDARD
To obtain mandamus relief, a relator generally must show both that the trial
court clearly abused its discretion and that relator has no adequate remedy by appeal.
In re Prudential Ins. Co. of Am., 148 S.W.3d 124, 135–36 (Tex. 2004) (orig.
proceeding). A trial court clearly abuses its discretion if it reaches a decision so
arbitrary and unreasonable as to amount to a clear and prejudicial error of law or if
it clearly fails to analyze the law correctly or apply the law correctly to the facts. In
re Cerberus Capital Mgmt. L.P., 164 S.W.3d 379, 382 (Tex. 2005) (orig.
proceeding) (per curiam). “Under an abuse of discretion standard, we defer to the
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trial court’s factual determinations if they are supported by evidence, but we review
the trial court’s legal determinations de novo.” In re Labatt Food Serv., L.P., 279
S.W.3d 640, 643 (Tex. 2009) (orig. proceeding). The relator must establish that the
trial court could reasonably have reached only one decision, but did not reach that
decision. Walker v. Packer, 827 S.W.2d 833, 840 (Tex. 1992) (orig. proceeding).
ANALYSIS
A. Controlling Statute
Section 12.0071(c) of the Property Code provides:
(c) The court shall order the notice of lis pendens expunged if the court
determines that:
(1) the pleading on which the notice is based does not contain
a real property claim;
(2) the claimant fails to establish by a preponderance of the
evidence the probable validity of the real property claim; or
(3) the person who filed the notice for record did not serve a copy
of the notice on each party entitled to a copy under Section
12.007(d).
Tex. Prop. Code Ann. § 12.0071(c) (Supp.) (emphasis added).
In his petition for writ of mandamus, Intervenor relies only on subsection 1,
arguing that he is entitled to expungement of the lis pendens because the pleading
on which the notice of lis pendens is based does not contain a real property claim.
A real property claim is “an action involving title to real property, the
establishment of an interest in real property, or the enforcement of an encumbrance
against real property.” In re Moreno, No. 14-14-00929-CV, 2015 WL 225049, at *2
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(Tex. App.—Houston [14th Dist.] Jan. 15, 2015, orig. proceeding) (per curiam)
(mem. op.) (citing Tex. Prop. Code Ann. § 12.007(a)).
B. Plaintiff’s Petition
We examine the plaintiff’s petition to determine whether the action is one
coming within the provisions of the lis pendens statute. Hughes v. Houston
Northwest Medical Ctr., 647 S.W.2d 5, 6 (Tex. App.—Houston [1st Dist.] 1982, writ
dism’d w.o.j.) (construing article 6640a, now section 12.0071 of the Property Code).
After the filing of the notice of lis pendens, but before the trial court ruled on the
amended motion to expunge the lis pendens, Plaintiff filed a Third Amended Petition.1
Relevant here are the petition’s allegations that Defendants had a fiduciary duty to use
funds paid by Plaintiff for the construction project to pay subcontractors, and that
Defendants breached this fiduciary duty by using these funds, not to pay subcontractors,
but to purchase certain real properties for themselves. Plaintiff also alleges that
Defendants breached their agreement to repay the $330,000 loan Defendants used to pay
subcontractors. Plaintiff seeks an assignment and an award of Defendants’ interest in
these real properties on the basis of unjust enrichment.
C. Plaintiff Has Not Alleged a Real Property Claim
Plaintiff’s notice of lis pendens is invalid for two reasons. First, Plaintiff
ultimately seeks judgment against Defendants for breach of their agreement to repay the
$300,000 loan. This is only a breach of contract claim, not a breach of fiduciary duty
1
We need not decide whether the validity of the lis pendens should be decided based on
the pleading on file when the lis pendens was filed (Plaintiff’s Original Petition) or the pleading
on file when the trial court ruled on the motion to expunge (Plaintiff’s Third Amended Petition)
because we find that even the more detailed Third Amended fails to allege a real property claim.
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claim. “Generally, the relationship between a borrower and a lender does not create a
fiduciary duty.” Wakefield v. Bank of Am., N.A., No. 14-16-00580-CV, 2018 WL
456721, at *5 (Tex. App.—Houston [14th Dist.] Jan. 18, 2018, no pet.) (citing Baskin v.
Mortgage & Trust, Inc., 837 S.W.2d 743, 747 (Tex. App.—Houston [14th Dist.] 1992,
writ denied)). Plaintiff’s lis pendens is invalid because the facts alleged in its petition do
not state a breach of fiduciary claim that would support the award of real property based
on unjust enrichment.
Second, the controlling case law indicates that Plaintiff has not alleged a “real
property claim” under section 12.0071(c). In Flores v. Haberman, 915 S.W.2d 477 (Tex.
1995) (per curiam) (orig. proceeding), the plaintiffs brought a suit for conversion against
Flores, alleging that he converted property of the plaintiffs and used the proceeds to buy
certain real properties. In their petition, plaintiffs sought the imposition of a constructive
trust on the properties and filed notices of lis pendens on the properties. Id. at 478.
Because the plaintiffs seek a constructive trust in the purchased properties only to satisfy
the judgment they seek against Flores, the Texas Supreme Court held the plaintiffs’
interest is no more than a collateral interest in the properties and the notices of lis pendens
are therefore improper. Id. (citing Moss v. Tennant, 722 S.W.2d 762, 763 (Tex. App.—
Houston [14th Dist.] 1986, orig. proceeding)).2
In Moss, the plaintiff alleged fraud, traced the proceeds obtained through that
fraud to a specific property, filed a notice of lis pendens, and sought to impose a
constructive trust on the property “to the extent it was purchased with the proceeds.” 722
2
Plaintiff argues that Flores is distinguishable because the parties filing the lis pendens
sought a constructive trust on the proceeds, not on the real properties. To the contrary, Flores is
clear that the parties filing the lis pendens sought a constructive trust on the real properties. 915
S.W.2d 477.
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S.W.2d at 763. Our court noted that the plaintiff’s suit did “not seek recovery to the title
to relator’s property nor to establish an interest in the [property] except as security for
the recovery of . . . damages . . . on his fraud allegation and only to the extent he [could]
trace the proceeds” used to purchase of the property. Id. Therefore, our court held that
the plaintiff’s claim was “essentially a prayer for a judgment lien, affects the property
only collaterally, and does not come within the provisions of § 12.007.” Id.3
These principles also apply to conversion claims. “Typically, in a conversion suit,
the claimant alleges that the proceeds of the converted property were used to purchase
real estate and then seeks a constructive trust on that real property. In these cases, the
courts have found that imposing a constructive trust on the real estate to satisfy the
judgment against the adversary is asserting only a collateral interest in the real property
and that a lis pendens is improper.” Countrywide Home Loans, Inc., 240 S.W.3d at 6
(citing In re Wolf, 65 S.W.3d at 806). “In contrast, where the constructive trust is sought
to restore to the aggrieved party the actual property that was misappropriated, the action
is seeking to establish an interest in the property itself, so that a lis pendens is
appropriate.” Id. (citing First Nat’l Petroleum Corp. v. Lloyd, 908 S.W.2d 23, 25 (Tex.
App.—Houston [1st Dist.] 1995, no writ)).
Flores, Moss, and this case all involve the use of funds obtained from the plaintiff
to purchase real property. We do not see a material difference between the plaintiff
3
Similarly, the Beaumont Court of Appeals and the Austin Court of Appeals have held that
an action seeking title to property that was purchased with funds converted from the plaintiff is a
not a “real property claim” because there is not a sufficient nexus between the subject matter of
the claim and the real property. See In re Wolf, 65 S.W.3d 804 (Tex. App.—Beaumont 2002, orig.
proceeding) and Countrywide Home Loans, Inc. v. Howard, 240 S.W.3d 1, 6 (Tex. App.—Austin
2007, pet. denied).
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seeking to establish equitable ownership in real property through a constructive trust, as
in Moss and Flores, and Plaintiff seeking legal ownership through unjust enrichment, as
in this case. Plaintiff is not seeking to restore real property that was misappropriated
from it, but is seeking an interest in real property to satisfy a potential judgment against
Defendants. Accordingly, Flores and Moss indicate that Plaintiff has not alleged a “real
property claim” under section 12.0071(c) and Intervenor is entitled to have the lis
pendens expunged.
We recognize that two other courts of appeal have held that a lis pendens is proper
when the plaintiff seeks an award of an interest in real property purchased with funds
wrongfully obtained from the plaintiff based on unjust enrichment or fraud. See Teve
Holdings, Ltd. v. Jackson, 763 S.W.2d 905, 908 (Tex. App.—Houston [1st Dist.] 1988,
no writ) (which was decided before Flores); In re Cohen, 340 S.W.3d 889, 898–99 (Tex.
App.—Houston [1st Dist.] 2011, orig. proceeding) (which relies on Jackson); and Long
Beach Mortgage Co. v. Evans, 284 S.W.3d 406, 414 (Tex. App.—Dallas 2009, pet. denied)
(which relies on Jackson). However, we do not follow these decisions because they
are inconsistent with Flores and Moss. Again, we do not see a material difference
between seeking equitable ownership and seeking legal ownership of real property;
they both are means by which the plaintiff seeks to recover judgment against the
defendant for fraud or conversion.
C. Not Necessary to Show Inadequate Remedy by Appeal
In Moss, 722 S.W.2d at 763, our court explained that because an improper lis
pendens is a void action, the availability of other remedies will not prevent issuance
of mandamus. See also Helmsley-Spear of Texas, Inc. v. Blanton, 699 S.W.2d 643,
645 (Tex. App.—Houston [14th Dist.] 1985, orig. proceeding) (lis pendens that does
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not come within the provisions of § 12.007 is void); Prappas v. Meyerland Com.
Imp. Ass’n., 795 S.W.2d 794, 796 (Tex. App.—Houston [14th Dist.] 1990, writ
denied) (When there is no basis to support a lis pendens, the affected party may seek
mandamus relief).
CONCLUSION
For these reasons, we conditionally grant the petition for writ of mandamus,
and direct the trial court to expunge Plaintiff’s notice of lis pendens as provided for
by section 12.0071(c). We are confident the trial court will act in accordance with
this opinion. The writ of mandamus shall issue only if the trial court fails to do so.
/s/ Tracy Christopher
Justice
Panel consists of Justices Christopher, Bourliot, and Zimmerer.
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