Fleetwood v. Med Center Bank

• Decision Date: 28 March 1990
• Docket Number: No. 3-89-054-CV,3-89-054-CV
• Citation: 786 S.W.2d 550
• Parties: M.D. FLEETWOOD, Appellant, v. MED CENTER BANK, Appellee.
• Court: Texas Court of Appeals

Page 550

786 S.W.2d 550

M.D. FLEETWOOD, Appellant, v. MED CENTER BANK, Appellee.

No. 3-89-054-CV.

Court of Appeals of Texas,

Austin.

March 28, 1990.

Rehearing Overruled April 24, 1990.

John T. Anderson, Robert M. Roller, Graves, Dougherty, Hearon & Moody, Austin, for appellant.

H. Miles Cohn, Honigman, Miller, Schwartz & Cohn, Houston, for appellee.

Before SHANNON, C.J., and GAMMAGE and JONES, JJ.

JONES, Justice.

This is a subrogation case. M.D. Fleetwood, appellant, sued Med Center Bank (Med Center), appellee, seeking a judgment declaring that Fleetwood's leasehold interest in certain commercial property was superior to Med Center's interest in the same property, which it acquired at a non-judicial foreclosure sale. Med Center counterclaimed, also seeking declaratory relief. The trial court granted summary judgment for Med Center, declaring that Med Center had become subrogated to rights under a prior deed of trust (also held by Fleetwood) that was superior to Fleetwood's leasehold interest. The court also declared that the foreclosure sale at which Med Center purchased its interest had extinguished Fleetwood's rights under the lease. Fleetwood perfected this appeal, arguing primarily that subrogation of Med Center to his superior lien position is inequitable because it would prejudice him in his capacity as owner of an interest in the leasehold. We will reverse the judgment of the trial court and remand the cause.

The summary judgment record reveals the following facts. Prior to February 3, 1986, Fleetwood was a joint venturer with two other individuals, Messrs. Looney and Bradshaw, in the Center Hill Joint Venture (Center Hill). On February 3, 1986, Fleetwood sold his interest in Center Hill to the joint venture for the following consideration: (1) a promissory note in the original principal amount of $1,391,000 from Center Hill to Fleetwood (the Fleetwood Note); (2) a 55% undivided interest in a lease covering a 12.289-acre tract (the leased premises) in which Center Hill was lessor; and (3) a cash payment. The Fleetwood Note was secured by a deed of trust (the February 3 deed of trust) covering a 24.8376-acre tract owned by Center Hill, and which included the leased premises. Also executed on February 3, 1986, was a lease agreement, under which Center Hill leased the leased premises to Fleetwood, Bradshaw, and Looney, as co-tenants, for a term of ninety-nine years, with Fleetwood holding a 55% undivided interest and Bradshaw and Looney each holding a 22.5% undivided interest. The lease expressly provided that it was made "subject to" the February 3 deed of trust. The parties subsequently filed in the Travis County Real Property Records a fully executed "Memorandum of Lease Agreement," setting forth a property description of the leased premises, the names and respective ownership interests of the parties to the lease, and the beginning and ending dates of the lease term.

On May 15, 1986, Center Hill obtained a loan from Med Center and executed a promissory note in the original principal amount of $1,691,000 (the Med Center Note). The Med Center Note was secured by a deed of trust (the May 15 deed of trust) covering 16.2037 acres, including the leased premises, out of the 24.8376 acres covered in the February 3 deed of trust. The May 15 deed of trust recited that the money being advanced by Med Center was to be used to pay off the Fleetwood Note and that the lien created by the February 3 deed of trust "is hereby expressly acknowledged by Borrower [Center Hill] to be a valid and subsisting lien against the property herein described and is hereby renewed, extended and continued in full force and effect to secure the payment of said note hereby secured." The May 15 deed of trust also contained a general provision that

[a]ny of the proceeds of the Note utilized to take up outstanding liens against all or any part of the Property have been advanced by Lender at Borrower's request and upon Borrower's representation that such amounts are due and are secured by valid liens against the Property. Lender shall be subrogated to any and all rights, superior titles, liens and equities owned or claimed by any owner or holder of any outstanding liens and debts, however remote, regardless of whether said liens or debts are acquired by Lender by assignment or are released by the holder thereof upon payment.

The proceeds of the Med Center Note were used to pay off the Fleetwood Note, whereupon Fleetwood signed a "Full Release of Deed of Trust," prepared by Med Center, acknowledging payment of the note and releasing to its makers the property "free from all liens retained [or] granted ... in said deed of trust to secure the payment of said note." Fleetwood was not a party to and did not sign the May 15 deed of trust.

Center Hill subsequently defaulted on the Med Center Note, and on January 5, 1988, Med Center foreclosed on 3.6476 acres of the property covered by the May 15 deed of trust, bidding $1,000,000. The property purchased by Med Center at the foreclosure sale was entirely within the 12.289-acre leased premises. Looney and Bradshaw subsequently signed documents acknowledging extinguishment of the lease.

Med Center's position on appeal is simple: by advancing funds to pay the Fleetwood Note, Med Center became, as a matter of law, entitled to the benefit of (i.e., subrogated to) all liens securing that note, including the February 3 deed of trust. Because the lease was expressly subordinated to the February 3 deed of trust, the lien created by that deed of trust was superior to the lease. Therefore, Med Center's foreclosure extinguished all rights under the lease.

Fleetwood, on the other hand, argues the existence of an exception to the Texas subrogation rule: subrogation is not allowed where it would result in prejudice to the rights of others, most often holders of "intervening equities." Fleetwood asserts that, under the circumstances of the present case, subrogation of Med Center to his prior lien rights would prejudice his rights as the owner of an interest in the lease.

The standards for granting a summary judgment are well established:

(1) The movant for summary judgment has the burden of showing that there is no genuine issue of material fact 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;

(3) Every reasonable inference must be indulged in favor of the non-movant and any doubts resolved in its favor.

Nixon v. Mr. Property Management Co., 690 S.W.2d 546, 548-49 (Tex.1985).

We note initially the rule that "a lease executed before the deed of trust lien is superior to and not extinguished by foreclosure, and the purchaser at the trustee's sale becomes the new landlord." United General Ins. Agency v. American Nat'l Ins. Co., 740 S.W.2d 885, 886 (Tex.App.1987, no writ). Thus, if Med Center was not subrogated to the rights under the February 3 deed of trust, its foreclosure must have proceeded only under its May 15 deed of trust, which was later in time and, therefore, junior to the lease. If, however, Med Center was subrogated to the rights under the February 3 deed of trust, its lien rights were superior to the lease, and its foreclosure extinguished the lease.

Subrogation is a doctrine of equity, and is the substitution of another person in the place of a creditor, so that the person in whose favor it is applied succeeds to the rights of the creditor in relation to the debt. Platte v. Securities Inv. Co., 55 S.W.2d 551, 553 (Tex.Comm.App.1932, jdgmt adopted); Means v. United Fidelity Life Ins. Co., 550 S.W.2d 302, 308 (Tex.Civ.App.1977, writ ref'd n.r.e.). It has been called a legal fiction by which an obligation, extinguished by a payment made by a third person, is treated as still subsisting for the benefit of this third person. First Nat. Bank v. Ackerman, 70 Tex. 315, 8 S.W. 45, 47 (1888). See generally Annot. 99 Am.St.Rep. 474 (1904).

There are two kinds of subrogation: "legal," which arises by operation of law, and "conventional," which arises by agreement of the parties. See Ramey v. Cage, 90 S.W.2d 626 (Civ.App.1935, no writ). Legal subrogation is always controlled by principles of equity. Galbraith-Foxworth Lumber Co. v. Long, 5 S.W.2d 162 (Tex.Civ.App.1928, writ ref'd). Circumstances involving conventional subrogation, on the other hand, are not always governed exclusively by equitable principles. ¹ See Lexington Ins. Co. v. Gray, 775 S.W.2d 679, 683-84 (Tex.App.1989, writ denied).

Both parties to this appeal agree that principles of equity control here. In addition, the holder of the senior lien (Fleetwood) was not a party to the subrogation agreement. For these reasons and others we will discuss later, we conclude that principles of equity do govern the present case, notwithstanding the existence of a subrogation agreement between Med Center and Center Hill.

Subrogation has been recognized as an important doctrine and has traditionally received favorable treatment in Texas. See Diversified Mortgage Investors v. Lloyd D. Blaylock General Contractor, Inc., 576 S.W.2d 794, 807 (Tex.1978). One of the three commonly recognized situations in which subrogation arises in mortgage law is when a lender or other third party advances money to pay off a prior lien on property. See G. Nelson & D. Whitman, Real Estate Finance Law §§ 10.1, 10.5 (2d ed. 1985). Texas courts have long held that

[o]ne who advances money to pay off an incumbrance on realty at the instance of either the owner of the property or the holder of the incumbrance, either on the express understanding, or under circumstances from which an understanding will be implied, that the advance made is to be secured by a first lien on the property, is not a mere volunteer, and, in the event the new security is for any reason not a first lien on the property, the holder of...