Boston Investors Group, Inc. v. Three Arch Capital

Opinion issued May 19, 2011.

In The

Court of Appeals

For The

First District of Texas

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NO. 01-08-00852-CV

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Boston INVESTORS Group, Inc., Appellant

V.

Three Arch Capital, Appellee

On Appeal from the 55th District Court

Harris County, Texas

Trial Court Case No. 2006-48728

MEMORANDUM OPINION

Seeking recovery of surplus proceeds from a foreclosure sale to satisfy a second lien on real property, Three Arch Capital (“Three Arch”) sued Boston Investors Group, Inc. (“Boston”).  Boston denied that Three Arch held a valid second lien and further asserted that the sale—in which Boston was listed as both the seller and the purchaser of the property—was a mistake.  After a bench trial resulted in a judgment in Three Arch’s favor, Boston brought this appeal, in which it raises twelve points of error. 

We affirm.

BACKGROUND

When Arturo and Yolanda Rodriguez bought their home in Pasadena, Texas, they executed a first note payable to New Century Mortgage Corporation (“New Century”), for the principal amount of $400,000 and, that same day, signed a second note for $100,000, also payable to New Century.  Both notes were secured by deeds of trust that gave New Century liens on the property.

New Century subsequently transferred the first note to Boston, which, after the Rodriguezes defaulted, appointed James D. Kuehn as a substitute trustee on October 13, 2005, to begin foreclosure proceedings.  That same day, Kuehn sent a letter to the Rodriguezes warning them of Boston’s intent to foreclose.

On November 1, 2005, in exchange for the payment of a certain sum, Boston agreed to assign the first note to Global Equity Holdings, LLC (“Global Equity”), a company with which it shared offices.[1]  Boston was also to receive forty-two percent of the foreclosure sale proceeds.  The record does not reflect, however, that Boston actually assigned its interest in the first note to Global Equity prior to the date of the foreclosure sale.

 Kuehn sent another letter to the Rodriguezes on November 13, 2005, this time informing them that Global Equity intended to foreclose.  On December 6, 2005, Kuehn held a non-judicial foreclosure sale, listing Boston as the foreclosing note-holder.  Following information given to him by Boston about the bid amount, Kuehn purchased the property in Boston’s name for $553,024.39, an amount exceeding the balance owed on the first note.

Three Arch, learning of the sale and the surplus amount, sought an accounting from Boston and payment of the second note of $100,000, which, Three Arch asserted, had been assigned to it by New Century in 2005.  After its attempts were unsuccessful, Three Arch sued Boston, asserting a perfected security interest in the property, breach of fiduciary duties to Three Arch as a junior lienholder by refusing to provide an accounting, misrepresentation that the foreclosure sale yielded no surplus proceeds, and withholding of those sums to which Three Arch was entitled.  Three Arch requested an accounting, actual damages, and attorney’s fees. 

Boston filed a verified denial, affirmatively pleading that Three Arch was not the owner and holder of the second note and deed of trust, the alleged assignment was not genuine, and the affirmative defense of mistake.  Boston also filed a counterclaim and, pursuant to the Texas Declaratory Judgment Act[2] (“TDJA”), requested a “declaration that the Substitute Trustee’s Deed was the result of a mistake and should be rescinded and cancelled” along with all subsequent conveyances of the property to various parties.

Three Arch thereafter amended its petition seeking a declaration as to “its right to excess proceeds” and that “all exceed proceeds from the foreclosure sale of the Property be awarded to Plaintiff.”

At trial, Three Arch introduced, among other items:

(1) the original second note with a blank endorsement on the back (plaintiff’s exhibit four);

(2) an allonge to the original second note payable to Three Arch dated August 15, 2005 (plaintiff’s exhibit five);

(3) an assignment of the deed of trust on the second note from New Century to Three Arch, dated September 30, 2004 (plaintiff’s exhibit six);

(4) an assignment of the deed of trust on the second note from New Century to Northwest Funding Group LLC and Pacific Island Investment Partners, LLC, two of Three Arch’s subsidiary companies, also dated September 30, 2004 (plaintiff’s exhibit seven);

(5) an assignment of the deed of trust from Northwest Funding and Pacific Island to Three Arch, dated February 23, 2007 (plaintiff’s exhibit eight);

(6) the appointment of a substitute trustee, dated October 13, 2005, appointing Kuehn as substitute trustee to sell the property, signed by Suresh C. Mody as President of Boston, filed with the Harris County Clerk on the date of the foreclosure sale, December 6, 2005 (plaintiff’s exhibit eleven);

(7) the substitute trustee’s deed, signed by Kuehn, listing Boston as both the holder of the note and the buyer of the property for the amount of $553,024.39 (plaintiff’s exhibit twelve); and

(8) a special warranty deed conveying the property from Boston to Global Equity executed January 18, 2006 (plaintiff’s exhibit thirteen).               

Three Arch’s corporate representative, Brandon Brown, a portfolio manager for Three Arch, testified that Three Arch owned the second lien on the Rodriguez property.  According to Brown, New Century assigned the second note to Three Arch in 2005 after Three Arch had purchased a portfolio from New Century that included the Rodriguez loan.  Three Arch’s attorney, Sam Houston, testified regarding attorney’s fees.

Boston introduced:

(1) a memorandum of understanding between Boston and Global Equity, dated November 1, 2005 (defendant’s exhibit one);

(2)  a special warranty deed, executed January 18, 2006 (defendant’s exhibit two) (same as plaintiff’s exhibit thirteen);

(3) a notice of intent to foreclose sent by Kuehn to the I.R.S. dated November 11, 2005 (defendant’s exhibit three);

(4) an assignment of deed of trust from New Century to Northwest Funding, dated September 30, 2004 (defendant’s exhibit four (same as plaintiff’s exhibit 7); and

(5) a letter from Kuehn to the Rodriguezes, dated November 13, 2005 (defendant’s exhibit five).

Boston’s president, Suresh Mody, testified that after Kuehn’s appointment as trustee, Boston learned that the Rodriguez property had sustained considerable damage.  It then assigned its interest in the property to Global Equity on November 1, 2005, and informed Kuehn of the assignment. According to Mody, the written materials he sent to Kuehn providing the bid price for the foreclosure sale were sent as a courtesy to Global Equity, not as an instruction to Kuehn to bid because Boston did not intend to foreclose on the property, and it did not authorize Kuehn to foreclose on or purchase the property in Boston’s name.  Boston further challenged any award of attorney’s fees to Three Arch, arguing that such an award was improper in a suit for damages.

The trial court found Three Arch to be the holder of the note, recessed without making any additional findings, and invited the parties to submit subsequent briefing.[3]  The court ultimately issued a judgment in Three Arch’s favor, awarding $107,771.00 in actual damages plus attorney’s fees.

THREE ARCH’S RIGHT

TO ENFORCE THE SECOND NOTE

In its first five points of error, Boston complains of the trial court’s findings and conclusions regarding Three Arch’s rights to enforce the second note.[4]  Boston contends that Three Arch’s exhibits five, six, and seven were improperly admitted (points of error one, two, and three), which caused the rendition of an improper judgment because without those exhibits, “there was no competent evidence” to support the trial court’s “finding and conclusions” that Three Arch was the owner and holder of the second note and deed of trust (points of error four and five). 

I. Point of Error Four: Legal Sufficiency of the Evidence

In its fourth point of error, Boston asserts that there is no evidence, or alternatively, insufficient evidence, to support the trial court’s finding that Three Arch was the owner and holder of the second note (finding of fact number two).  We interpret Boston’s sufficiency challenge as a challenge to the legal sufficiency of the evidence to support this finding.  See BMC Software Belgium, N.V. v. Marchand, 83 S.W.3d 789, 795 (Tex. 2002) (describing legal sufficiency as “no-evidence” challenge).  We will consider Boston’s complaints regarding the admission of Three Arch’s exhibits five, six, and seven as part of our discussion of the sufficiency of the evidence supporting this factual finding. 

a. Standard of Review

Findings of fact in a case tried to the court have the same force and effect as a jury’s verdict and are reviewed under the same sufficiency standards applicable to jury verdicts.  Anderson v. City of Seven Points, 806 S.W.2d 791, 794 (Tex. 1991).  Unchallenged fact findings are binding on the appellate court unless the contrary is established as a matter of law or if there is no evidence to support the finding.  Davey v. Shaw, 225 S.W.3d 843, 853 (Tex. App.—Dallas 2007, no pet.).  “[A]n appellate court will overrule a challenge to fact findings that underpin a legal conclusion or disposition when other fact findings that also support the legal conclusion or disposition go unchallenged.”  Howeth Invs., Inc. v. City of Hedwig Village, 259 S.W.3d 877, 889 (Tex. App.—Houston [1st Dist.] 2008, pet. denied) (internal citations and quotations omitted).

In reviewing the legal sufficiency of the evidence, we must consider the evidence in the light most favorable to fact-finder’s decision and indulge every reasonable inference that would support it.  City of Keller v. Wilson, 168 S.W.3d 802, 822 (Tex. 2005).  “The final test for legal sufficiency must always be whether the evidence at trial would enable reasonable and fair-minded people to reach the verdict under review. . . . [L]egal-sufficiency review in the proper light must credit favorable evidence if reasonable jurors could, and disregard contrary evidence unless reasonable jurors could not.”  Id. at 827.  The trial court evaluates the credibility of the witnesses, determines the weight to be given their testimony, and resolves conflicts and inconsistencies in the testimony. Sw. Bell Media, Inc. v. Lyles, 825 S.W.2d 488, 493 (Tex. App.—Houston [1st Dist.] 1992, writ denied).  An appellate court may not impose its own opinion on these matters contrary to that of the fact-finder.  See City of Keller, 168 S.W.3d at 819. 

          When a party attacks the legal sufficiency of an adverse finding on which it did not have the burden of proof, it must demonstrate that there is no evidence to support the adverse finding.  Croucher v. Croucher, 660 S.W.2d 55, 58 (Tex. 1983).  Such a no-evidence challenge will be sustained when “‘(a) there is a complete absence of evidence of a vital fact, (b) the court is barred by rules of law or of evidence from giving weight to the only evidence offered to prove a vital fact, (c) the evidence offered to prove a vital fact is no more than a mere scintilla, or (d) the evidence conclusively establishes the opposite of the vital fact.’”  King Ranch, Inc. v. Chapman, 118 S.W.3d 742, 751 (Tex. 2003) (quoting Merrell Dow Pharms., Inc. v. Havner, 953 S.W.2d 706, 711 (Tex. 1997)).  More than a scintilla of evidence exists when the evidence “rises to a level that would enable reasonable and fair-minded people to differ in their conclusions.”  Ford Motor Co. v. Ridgway, 135 S.W.3d 598, 601 (Tex. 2004) (quoting Havner, 953 S.W.2d at 711).  However, evidence does not exceed a scintilla if it is so weak as to do no more than to create a mere surmise or suspicion that the fact exists.  Id. (quoting Kindred v. Con/Chem, Inc., 650 S.W.2d 61, 63 (Tex. 1983)).

b. Some Evidence that Three Arch Was the Owner and Holder of the Second Note 

          We first observe that Boston does not challenge finding of fact number nine, in which the trial court found that Three Arch has a secured interest in the excess proceeds of the foreclosure sale in the amount of $107,771.  This finding of fact is sufficient to support the trial court’s conclusions of law numbers twenty and twenty-two, which required Boston to pay Three Arch the sum of its secured interest from the excess proceeds.  It also provides the basis to overrule Boston’s legal sufficiency challenge to finding of fact number two.  See Howeth Invs, 259 S.W.3d at 889.

          Thus, the trial court had evidence before it to find that Three Arch was the holder of the second note.  Putting aside plaintiff’s challenged exhibits five, six, and seven, the record indicates that plaintiff’s exhibit four, the original second note,[5] contained a blank endorsement.  This fact was not challenged below or on appeal.

          When an instrument contains a blank endorsement, it becomes payable to the bearer and may be negotiated by transfer of possession alone.  Tex. Bus. & Com. Code Ann. § 3.205 (b) (West 2002).  Although Boston challenged Brown’s testimony as to how Three Arch came to possess the original note, the resolution of fact issues is the trial court’s province.  Sw. Bell Media, 825 S.W.2d at 493.  Transfer of an instrument vests in the transferee the right to enforce the instrument, including any right as a holder in due course.  Tex. Bus. & Com. Code Ann. § 3.203 (West 2002).  Accordingly, Three Arch’s possession of the original note with a blank endorsement is some evidence that it was the owner and holder of the second note.  Because there is some evidence to support the trial court’s finding of fact number two, Boston’s legal sufficiency challenge fails.  See Croucher, 660 S.W.2d at 58.

          Accordingly, we need not discuss Boston’s first three points of error, in which it challenges the admission of exhibits five, six, and seven, because even if these exhibits were erroneously admitted, an issue we do not decide, it would have been harmless error as their admission would not have caused the rendition of an improper verdict in light of the existence of plaintiff’s exhibit four.  See Tex. R. App. P. 44.1(a)(1).

          We overrule points of error one, two, three and four.

II. Point of Error Five: Conclusion of Law Numbers Twenty and Twenty-Two

In its fifth point of error, Boston challenges the trial court’s conclusion of law number twenty, in which it ruled that Three Arch had a secured interest in the note, and conclusion of law number twenty-two, in which it ruled that Boston owed Three Arch the sum of $107,771.00.  Boston argues that there is “no competent evidence” to support these conclusions of law.[6]  Having determined that the evidence is legally sufficient to support the trial court’s finding that Three Arch was the sole holder and owner of the second note on the property, secured by a second deed of trust (point of error four), we overrule point of error five.

BOSTON’S AFFIRMATIVE DEFENSE OF MISTAKE

          In points of error six through eleven, Boston complains of the trial court’s findings of fact and conclusions of law regarding its affirmative defense of mistake.  Again, Boston groups its argument with no subheadings, segregation, or discrete discussion of issues, and it cites three authorities for six points of error.  It argues that the trial court erred in not believing Boston’s evidence and in not finding that it was entitled to equitable relief on the basis of mistake.  There is no discussion of the appropriate standard of review, nor application to the facts.  See Tex. R. App. P. 38.1(i).  To the extent that we can discern these arguments, we address them.

I. Points of Error Six, Seven and Eight: Factual Sufficiency of the Evidence

In its points of error six, seven, and eight, Boston attacks the trial court’s findings of fact as they relate to its affirmative defense of mistake and its claim for equitable relief.  Although it is not clear from the briefing, it appears as though Boston is challenging the factual sufficiency of the evidence to support these findings of fact.  We will review these challenges accordingly.

When, as here, a party attacks the factual sufficiency of an adverse finding on an issue on which it had the burden of proof, the party must demonstrate that the adverse finding is against the great weight and preponderance of the evidence. Dow Chem. Co. v. Francis, 46 S.W.3d 237, 242 (Tex. 2001); Grider v. Mike O’Brien, P.C., 260 S.W.3d 49, 57 (Tex. App.—Houston [1st Dist.] 2008, pet. denied).  A reviewing court must consider and weigh all of the evidence and can set aside a verdict only if the evidence is so weak or the finding is so against the great weight and preponderance of the evidence as to be clearly wrong and unjust.  Dow Chem. Co., 46 S.W.3d at 242.  In a bench trial, the trial court evaluates the credibility of the witnesses, determines the weight of testimony, and resolves conflicts and inconsistencies in the testimony.  See Sw. Bell Media, 825 S.W.2d at 493. As long as the evidence falls “within [the] zone of reasonable disagreement,” we will not substitute our judgment for that of the fact-finder.  City of Keller, 168 S.W.3d at 822.

Boston complains that the trial court erred as a matter of law, when it found that (1) “there was no mistake in the bid price instructions given to Mr. James Kuehn” (point of error six)[7], (2) Boston “sold the property at a foreclosure sale on December 6, 2005 and [Boston] purchased the property at the foreclosure sale on December 6, 2005” (point of error seven)[8], and (3) Boston “did not assign the note prior to the December 6, 2005 [sale]” (point of error eight).[9]  All of these findings are supported by the documentary evidence, including the deed of sale which lists Boston as both the seller and the buyer of the property at a foreclosure sale on December 6, 2005, and the appointment of Kuehn as Boston’s substitute trustee for purposes of the sale.  The record indicates that Kuehn conducted the foreclosure sale solely under his authority as substitute trustee for Boston.  Mody, Boston’s president, testified that he gave instructions to Kuehn on the bid amount days before the foreclosure sale. 

In support of its position, Boston relies heavily upon the testimony of Mody and the November 1, 2005 “Memorandum of Understanding” in which Boston agreed to assign its interest in the property to Global Equity on the following day.  This memorandum, however, is not an assignment; it merely reflects the parties’ agreement to assign the property on a future date.  Aside from the testimony of Mody, the record contains no evidence that the assignment actually transpired.  Although Mody acknowledged giving the bidding instructions to Kuehn, he also testified that (1) Boston did not own the property as of the December 6, 2005 sale, (2) he only passed along the bidding instructions to Kuehn as a favor to the true owner, Global Equity, (3) he made an error in those bidding instructions, and (4) he did not instruct Kuehn to bid on behalf of Boston.  Here, the trial court apparently did not believe at least some portions of Mody’s testimony, which, as the sole finder of fact, it was within its discretion to do.  See City of Keller, 168 S.W.3d at 819.

We conclude that the adverse findings were not so against the great weight and preponderance of the evidence such that they were clearly wrong or manifestly unjust.  See Dow Chem. Co., 46 S.W.3d at 242. 

We overrule points of error six, seven, and eight.

II. Points of Error Nine, Ten, and Eleven: Challenges to Conclusions of Law

          Boston also challenges the trial court’s conclusion of law numbers nineteen (point of error nine), twenty-two (point of error eleven), and twenty-three and twenty-four (point of error ten).  It argues that the trial court’s conclusions of law are erroneous because they are based on erroneous factual findings.  We review a trial court’s legal conclusions de novo.  See BMC Software, 83 S.W.3d at 794.

a. Point of Error Nine (Conclusion of Law Number Nineteen)

In its ninth point of error, Boston complains that the trial court erred when it concluded that “[t]he December 6, 2005 foreclosure sale of the Property was a valid sale.” Boston appears to complain that this conclusion is not supported by the evidence because Boston proved that it had assigned the note prior to the foreclosure sale.  As we have already held against Boston on this factual question (point of error eight), we likewise overrule its challenge to the trial court’s legal conclusion regarding the validity of the sale.

We overrule point of error nine.

b. Point of Error Ten (Conclusion of Law Numbers Twenty-Three and Twenty-Four)

In its tenth point of error, Boston complains that the trial court erred when it concluded that “no relief existed that would entitle [Boston] to any equitable relief or any relief on its affirmative defenses.”  Although Boston sets out the legal basis under which a trial court may grant equitable relief against a unilateral mistake in the context of a contract, it fails to discuss or provide relevant record and legal citations demonstrating how it proved any necessary legal burdens and why it was error for the trial court to conclude that it had not met its burden to be entitled to either equitable relief or relief on its affirmative defense, apart from an argument that the trial court erred in making the underlying factual finding. See Tex. R. App. P. 38.1(i).  We have already held against Boston on its complaint regarding the trial court’s factual finding on the question of mistake.  Accordingly, we overrule Boston’s challenge to the legal conclusions arising from such a finding.  

We overrule point of error ten.

c. Point of Error Eleven (Conclusion of Law Number Twenty-Two)

In its eleventh point of error, Boston complains that the trial court erred as a matter of law when it concluded that Boston “owes [Three Arch] $107,771.00 and entering judgment in that amount.”  In its “Arguments and Authorities” section, Boston cites no authorities, tenders no specific discussion, and advances no discrete arguments regarding how the trial court erred as a matter of law in concluding that Boston owed the specified amount and in entering judgment in such an amount.[10]  See Tex. R. App. P. 38.1(i).  We hold that Boston has waived this issue on appeal and we decline to address it.

We overrule point of error eleven.

ATTORNEY’S FEE AWARD

In its twelfth point of error, Boston asserts that the trial court improperly awarded attorney’s fees to Three Arch.  It argues that Three Arch’s claim under the TDJA was made solely as a means to recover (otherwise unrecoverable) attorney fees and, thus, the trial court erred by awarding the fees.  At the outset, we note that that Boston initially invoked the TDJA, pursuant to which the trial court may award reasonable and necessary attorney’s fees that are equitable and just.  Tex. Civ. Prac. & Rem. Code § 37.009 (West 2008).  Further, Boston does not contend that the attorney’s fees awarded were unreasonable or unnecessary.  The TDJA “entrusts attorney fee awards to the trial court’s sound discretion, subject to the requirements that any fees awarded be reasonable and necessary, which are matters of fact, and to the additional requirements that fees be equitable and just, which are matters of law.”  Bocquet v. Herring, 972 S.W.2d 19, 21 (Tex. 1998).  Therefore, we review a trial court’s award of attorney’s fees under the TDJA for an abuse of discretion.  Id. A trial court abuses its discretion by ruling arbitrarily, unreasonably, without regard to guiding legal principles, or without supporting evidence.  Id.

Under the TDJA, the trial court may exercise its discretion to award attorney’s fees to a party seeking or defending against a claim for declaratory relief.  See Petroleum Analyzer Co. LP v. Olstowski, No. 01–09–00076–CV, 2010 WL 2789016, at *21 (Tex. App.—Houston [1st Dist.] Jul. 15, 2010, no pet.) (mem. op.) (holding trial court properly awarded attorney’s fees to party defending against claim for declaratory relief).  Here, the trial court found that the “attorney’s fees and expenses incurred by Three Arch Capital were reasonable and necessary to obtain a declaratory judgment that there were excess proceeds from the foreclosure sale.” 

Three Arch’s counsel testified on cross-examination that he did not segregate the time spent on prosecuting Three Arch’s case from Boston’s counterclaim for declaratory judgment because he “consider[ed] the counterclaim an integral part of prosecuting the case” and “it would all be part of the same thing and necessary in order to present [Three Arch’s] case to include all of it as the same fees.”  Because it was necessary for Three Arch to defend against Boston’s declaratory judgment claim in order for it to succeed on its own claim, we conclude that the trial court did not abuse its discretion when it awarded attorney’s fees to Three Arch.

          We overrule Boston’s twelfth point of error.

CONCLUSION

          We affirm the judgment of the trial court.

                                                                   Jim Sharp

                                                                   Justice

Panel consists of Justices Jennings, Alcala, and Sharp.

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[1]           Boston and Global Equity memorialized their agreement in a Memorandum of Understanding, dated November 1, 2005. Although the parties agreed that payment would be made the following day, November 2, 2005, the record does not reflect that Global Equity paid Boston prior to the date of the foreclosure sale.

[2]           Tex. Civ. Prac. & Rem. Code Ann. § 37.004 (West 2008).

[3]           The appellate record contains no such supplemental briefing.

[4]           In approximately four pages, Boston argues all five points of error under a single heading, with no subheadings separating its arguments and no discrete discussions of each separate point.

[5]           A copy was substituted for the record on appeal. That copy does not include the endorsement, but the record clearly establishes the existence of the blank endorsement on the original.

[6]           Boston, however, does not assert how the trial court’s conclusions were erroneous as a matter of law, apart from its argument that there is no competent evidence that Three Arch was the owner or holder of the note.  See Tex. R. App. P. 38.1(i).

[7]           Point of error six appears to correspond with finding of fact number three, in which the trial court found that Mody, acting on behalf of Boston, gave bidding instructions to Kuehn to bid on the property at the foreclosure sale and Kuehn followed these instructions.

[8]           Point of error seven appears to correspond with findings of fact numbers four and five, in which the trial court found that Boston sold the property to itself at the December 6, 2005 foreclosure sale for $553,024.39 and that “the bid was not a mistake.”  The portion of finding of fact number five that states that “the bid was not a mistake,” appears to be a conclusion of law that corresponds to point of error ten (conclusion of law number twenty-three), discussed below.

[9]           Although it does not mention this finding by number, Boston’s point of error eight appears to be challenging finding of fact number six in which the trial court found that Boston did not assign the note prior to December 6, 2005. 

[10]          We note also that Boston did not file a motion for new trial and did not file any post-judgment motion complaining of this sum of damages.