Drago Daic Trustee v. Nauru Phosphate Royal

• Decision Date: 12 October 2000
• Citation: 27 S.W.3d 695
• Parties: (Tex.App.-Beaumont 2000) DRAGO DAIC, TRUSTEE and MONTGOMERY 666, LTD., Appellants v. NAURU PHOSPHATE ROYALTIES (TEXAS), INC. and BENTWOOD COUNTRY CLUB, INC., Appellees NO. 09-99-085 CV
• Court: Texas Court of Appeals

Page 695

27 S.W.3d 695 (Tex.App.-Beaumont 2000)

DRAGO DAIC, TRUSTEE and MONTGOMERY 666, LTD., Appellants v. NAURU PHOSPHATE ROYALTIES (TEXAS), INC. and BENTWOOD COUNTRY CLUB, INC., Appellees

NO. 09-99-085 CV

In The Court of Appeals Ninth District of Texas at Beaumont

Submitted February 24, 2000

Decided September 21, 2000

Rehearing Overruled October 12, 2000.

On Appeal from the 410th District Court Montgomery County, Texas Trial Cause No. 95-03-00842-CV

[Copyrighted Material Omitted]

Before Walker, C.J., Burgess and Stover, JJ.

OPINION

DON BURGESS, Justice

Drago Daic, Trustee ("Daic Trustee") and Montgomery 666, Ltd. ("M-666") appeal a summary judgment granted to Nauru Phosphate Royalties (Texas), Inc. ("Nauru") and Bentwood Country Club, Inc. (collectively the "Nauru Parties"). Appellants sued the Nauru Parties to collect sums alleged to be due under a promissory note executed by Nauru and secured by a deed of trust lien on Bentwood, a real property development owned by Nauru. Appellants alleged Bentwood Country Club, Inc. was believed to own a portion of the real property covered by the deed of trust. The Nauru Parties counterclaimed, seeking a declaratory judgment that the promissory note, deed of trust, and vendor's lien were no longer enforceable. In both its order and final judgment, the trial court stated the Nauru Parties were entitled to summary judgment under the theories of collateral estoppel and res judicata.

In January 1990, Nauru entered into a sale and development agreement with three parties, Daic Trustee, M-666, and Drago Daic Interests, Inc. (DDI).¹ Nauru purchased 668 acres of undeveloped land in Montgomery County, Texas from Daic Trustee and M-666 to develop the property into a residential housing subdivision, including a country club, golf course and other amenities. DDI, the other party to the agreement, was the project's developer. At closing, Nauru paid $5 million in cash to Daic Trustee and M-666 for the 668 acres. Nauru also executed an $8 million promissory note to Daic Trustee and M-666, which would be payable only if the project was successful, as defined by a formula contained in the development agreement, i.e., generally, if revenues exceeded expenditures in any given year.

A dispute developed between Nauru and DDI. Nauru gave notice of its intent to terminate DDI as developer. Nauru filed a demand for arbitration and then an arbitration complaint against DDI. Shortly afterwards, Daic Trustee and M-666 filed this suit. However, the Nauru-DDI arbitration hearing proceeded, with the arbitration panel determining Nauru's breaches of the development agreement were not material and resulted in no damage to DDI. Conversely, the arbitrators found DDI's breaches of the agreement were material and resulted in damages to Nauru. The arbitrators further found: (1) Nauru properly terminated the development agreement; (2) Nauru had no further duties to DDI under the agreement; and (3) Nauru had no liability for payment of the eight million dollar promissory note executed by Nauru and payable to Daic Trustee and M-666.

Ultimately, Nauru filed suit in federal district court seeking confirmation of the arbitration award. Opposing confirmation, DDI argued the district court lacked diversity jurisdiction and the arbitration panel exceeded its authority in concluding Nauru was not liable for payment of the eight million dollar promissory note to Daic Trustee and M-666. A federal magistrate judge recommended confirmation of the award, and found the similarity of interests between DDI, Daic Trustee, and M-666 on the arbitration issues allowed for the enforcement of the award against Daic Trustee and M-666, even though they did not participate in the arbitration. The federal district court, after conducting a de novo review, confirmed the award and its enforcement against appellants. The Fifth Circuit then affirmed the district court's confirmation. Nauru Phosphate Royalties, Inc. (Texas) v. Drago Daic Interests, Inc., 138 F.3d 160 (5th Cir. 1998). The Fifth Circuit held that the arbitration panel did not exceed its authority in ruling on Nauru's liability on the promissory note, and "reject[ed] any suggestion that because Daic Trustee and M-666 were not parties to the arbitration or to this case, the breach of the Development Agreement and Nauru's consequent non-liability on the Promissory Note were beyond the reach of the arbitration." Id. at 162.

Subsequent to the Fifth Circuit's ruling, the trial court here found the Nauru Parties were entitled to summary judgment under "collateral estoppel and res judicata." The trial court further found the Nauru Parties had no liability to appellants "under the eight million dollar promissory note." In its final judgment, the trial court rendered a "take-nothing" judgment on appellants' claims on the basis Nauru had no liability on the note, and further decreed (1) Nauru had no continuing obligations under the deed of trust and vendor's lien contained in the warranty deed, and (2) the deed of trust and vendor's lien were "void and unenforceable."

Appellants bring four issues. In the first, they argue the note and lien should not be cancelled. In the second, they assert the dismissal of their claims, without trial or without their agreement or participation violates constitutional and statutory rights, and further assert neither the arbitrators nor the federal courts had either in personam or subject matter jurisdiction. In the third, contending generally that the arbitration award and federal court decisions were wrong on the merits, appellants make four more specific arguments: (a) they may collaterally attack the decisions; (b) default by DDI is not a defense to collection of payments due under the note; (c) immateriality of Nauru's breaches is not a defense to collection of payments under the note; and (d) the contracts are not third party beneficiary contracts. Fourth, and finally, they maintain res judicata and collateral estoppel are not applicable.

The standards for review of summary judgments are well established: (1) the movant for summary judgment has the burden of showing that no genuine issue of material fact exists and that it is entitled to judgment as a matter of law; (2) in deciding whether there is a disputed material fact issue precluding summary judgment, evidence favorable to the non-movant will be taken as true; and (3) every reasonable inference must be drawn in favor of the non-movant and any doubts resolved in his favor. See Nixon v. Mr. Property Mgmt. Co., 690 S.W.2d 546, 548-49 (Tex. 1985). To obtain summary judgment based on an affirmative defense, the movant must conclusively establish all elements of the affirmative defense. Cathey v. Booth, 900 S.W.2d 339, 341 (Tex. 1995). The reviewing court may affirm the granting of the motion for summary judgment on any ground presented by the movant and preserved for appeal. See Cincinnati Life Ins. Co. v. Cates, 927 S.W.2d 623, 625 (Tex. 1996). Here, the trial court's order specified the Nauru Parties were entitled to summary judgment "under collateral estoppel and res judicata." The Nauru Parties bring no counter issues alleging summary judgment was proper on other grounds. Thus, we limit our review to the grounds specified by the order.

We consider appellants' fourth issue first as it is dispositive of much of this appeal. They attack the trial court's application of res judicata and collateral estoppel with three arguments: (a) the elements of res judicata and collateral estoppel have not been shown; (b) appellants, the note holders, are not in privity with DDI; and (c) any decision relating to the legal liability on the promissory note was not necessary to the arbitration award or the court decisions, is surplusage and dicta, and is a legal conclusion not binding on this court.

Where, as here, the original judgment was entered in a federal proceeding, federal law controls whether the principles of res judicata will bar a later state court proceeding. See Next Level Communications, L.P. v. DSC Communications Corp, 179 F.3d 244, 250 (5th Cir. 1999); Geary v. Texas Commerce Bank, 967 S.W.2d 836, 837 (Tex. 1998); Allen v. Port Drum Co., 777 S.W.2d 776, 777 (Tex. App.--Beaumont 1989, writ denied). Res judicata bars the litigation of claims that either have been litigated or should have been raised in an earlier suit. In re Southmark Corp., 163 F.3d 925, 934 (5th Cir.), cert. denied, 527 U.S. 1004, 119 S.Ct. 2339, 144 L.Ed.2d 236 (1999). Under federal law, four elements are necessary to establish res judicata, or claims preclusion: (1) the parties are identical or in privity; (2) the judgment in the prior action was rendered by a court of competent jurisdiction; (3) the prior action was concluded to a final judgment on the merits; and (4) the same claim or cause of action was involved in both actions. Id.; Latham v. Wells Fargo Bank, N.A., 896 F.2d 979, 983 (5th Cir. 1990).²

As to the first element of res judicata, DDI (the defendant in the arbitration suit) is not identical to either Daic Trustee or M-666. Therefore, we consider whether DDI is in privity with them. The Latham court explained privity:

A non-party is in privity with a party for res judicata purposes in three instances. First, if he has succeeded to the party's interest in property, he is bound by prior judgments against the party. Second, if he controlled the prior litigation, he is bound by its result. Third, he is bound if the party adequately represented his interests in the prior proceeding.

896 F.2d at 983.

The Fifth Circuit determined certain evidence showed the identity of interests among DDI, Daic Trustee, and M-666. Nauru, 138 F.3d at 166 n. 2. The same facts are also before us:³

1. Drago Daic is the sole owner of DDI.

2. Daic, Trustee represents the 3-D Trust, a verbal trust established by Drago Daic for his children and grandchildren.

3. The land that was sold to Nauru for the development was...