Fuller v. Preston State Bank

• Decision Date: 28 December 1983
• Docket Number: No. 05-82-00760-CV,05-82-00760-CV
• Citation: 667 S.W.2d 214
• Parties: Ethel D. FULLER, Individually and as Unqualified Community Administrator of the Estate of J.B. Fuller, Deceased, Appellants, v. PRESTON STATE BANK, James S. Chaffin, and Donald C. McLeaish, Individually and d/b/a Commonwealth Land Title Company of Dallas and Commercial Title and Abstract Company, Appellees.
• Court: Texas Court of Appeals

Page 214

667 S.W.2d 214

Ethel D. FULLER, Individually and as Unqualified Community Administrator of the Estate of J.B. Fuller Deceased, Appellants, v. PRESTON STATE BANK, James S. Chaffin, and Donald C McLeaish, Individually and d/b/a Commonwealth Land Title Company of Dallas and Commercial Title and Abstract Company, Appellees.

No. 05-82-00760-CV.

Court of Appeals of Texas,

Dallas.

Dec. 28, 1983.

Rehearing Denied Feb. 16, 1984.

Joe D. Gregory, Gregory & Gregory, Dallas, for appellants.

Larry F. Amerine, Dallas, Randall A. Antonson, Duncanville, Tom Wilson, Rick W. Hightower, Dallas, for appellees.

Before GUITTARD, C.J., and STEPHENS and ALLEN, JJ.

GUITTARD, Chief Justice.

This suit concerns the validity of a vendor's deed of trust lien arising from the sale of a homestead. Ethel D. Fuller, individually and as community administratrix of the estate of J.B. Fuller, sued Preston State Bank to cancel the lien. She alleged that the conveyance by her and her late husband to their son and his wife was a simulated transaction made for the purpose of obtaining a loan from the bank and fixing a lien on the homestead, contrary to the prohibition in article XVI, section 50 of the Texas Constitution. She also sought damages from the bank, its loan officer, and a title company attorney under the Deceptive Trade Practices Act, TEX.BUS. & COM.CODE §§ 17.41-17.45 (Vernon Supp.1982-1983). The trial court instructed a verdict for all defendants, and plaintiff appeals. We hold that the evidence raises fact issues as to whether the bank had knowledge or notice that the sale was simulated. We also hold that plaintiff was not a "consumer" with respect to the bank within the Deceptive Trade Practices Act and that she was not adversely affected by any alleged deceptive trade practice within the Act. Consequently, we reverse the judgment insofar as it denies the claim for cancellation of the lien and remand that claim for trial, but otherwise we affirm. In view of another trial, we also rule on points complaining of the exclusion of certain evidence.

1. Validity of Lien

We first consider whether there was sufficient evidence to go to the jury on the validity of the lien. In 1977 J.B. and Ethel Fuller owed more than $22,000 to Preston State Bank and were threatened with bankruptcy. They occupied as their homestead a house in Duncanville. In October of that year they conveyed the property to their son John and his wife Brenda. John and Brenda paid nothing in cash, although the closing papers recite a cash payment of $15,000. They signed a promissory note for $50,000 payable to Preston State Bank and a deed of trust to secure it. The bank credited $22,495.22 of the proceeds to the debt owed by J.B. Fuller, applied $9,482.80 to pay off an existing lien on the property, and paid $12,870 to J.B. Fuller. The record is not clear as to whether the balance of the $50,000 was actually advanced by the bank.

The closing papers were prepared by the title company attorney, Donald McLeaish. Among the papers signed by John and Brenda Fuller was an affidavit stating that they intended to occupy the property as their principal residence. The evidence shows, however, that they never did so. J.B. and Ethel Fuller continued to occupy it as their home. J.B. Fuller died in November 1977. Ethel continued to occupy the property without any payment of rent, paid all the property taxes, made the monthly payments on the note to the bank, and took the interest paid as deductions on her federal income tax. In December 1978 John and Brenda quitclaimed the property to Ethel.

Ethel Fuller testified that at the closing she made an inquiry of McLeaish as follows:

I asked him how this, if it was possible in doing this if he [sic] was going to move out of the house and he said, "Don't worry about this. This is the paper only."

Mrs. Fuller interprets this testimony as evidence that she was told that she and her husband would not have to move out of the house because the transaction was "paper only," thus indicating that McLeaish knew the sale to be a pretense.

The trial judge excluded testimony of John and Brenda Fuller that they did not intend to purchase the homestead of J.B. and Ethel Fuller, and also excluded the testimony of Ethel Fuller that she did not intend to sell it to John and Brenda. The admissibility of this testimony will be considered later in this opinion. Ethel Fuller contends, however, that even without this testimony the evidence is sufficient to raise a fact issue as to whether the purported sale in October 1977 was a subterfuge for the purpose of obtaining a lien on the property. If so, unless the bank advanced the money without knowledge or notice of the subterfuge, the lien is void. See Carter v. Converse, 550 S.W.2d 322, 329 (Tex.Civ.App.--Tyler 1977, writ ref'd n.r.e.). On the other hand, if the bank advanced the money in reliance on the apparent genuineness of the sale, without knowledge of the subterfuge, and without knowledge of facts that would put a reasonable lender on notice of the circumstance, the lien may be enforced. Id. at 329.

We conclude that the evidence, though circumstantial, is sufficient to show that the bank's loan officer knew of the subterfuge or had knowledge of facts that would have put a reasonable lender on notice of the subterfuge. Unquestionably the officer, James Chaffin, knew that J.B. Fuller owed the bank more than $22,000. The bank had sued to collect the debt and had sought a receivership, but had been unsuccessful. After threatening to file a bankruptcy proceeding, Chaffin inspected the Fuller residence for the purpose of a loan in the event of a possible sale. Later a loan application was taken from John and Brenda Fuller, although there was never any contact between them and the bank. The first loan application was turned down. Chaffin then made a telephone call to Ethel Fuller advising that her husband needed to come back to the bank for another loan application, and "this time to come to Mr. Chaffin's office." All negotiations were carried on between the bank and J.B. Fuller.

This second loan application was approved even though it revealed that John and Brenda had only $200 at the time. The bank's normal procedure was to verify all information on the application before approving the loan, but in this instance no verifications were received until several days after the loan was approved. Similarly, the contract of sale is dated at least six days after the loan was approved, although normally a loan is not approved until after a contract is received.

Although the loan application shows that John and Brenda Fuller were supposed to make a $15,000 down payment, they testified that they never knew what they were supposed to be paying, and, in fact, paid nothing. Their statement on the application that they had only $200 in cash was verified by the bank before it paid out any money. The settlement statement at the closing shows a $15,000 "deposit on earnest money," but also, under "Reduction in Amount Due to Seller," shows a $15,000 "Excess deposit (see instructions)." No explanation of this item is offered.

The escrow instructions do not refer to this $15,000 "reduction," but they do show that John and Brenda were to pay certain expenses normally paid by the purchaser in such a transaction, and affidavits of both sellers and purchasers state that the purchasers have paid these fees. The settlement statement, however, shows that all these fees were paid by J.B. Fuller. Before disbursing its funds, the bank had these papers before it, with all of their inconsistencies.

At the closing a question arose concerning waiver of prepayment penalties after the first year of the loan. McLeaish made a telephone call to Chaffin, then changed the provisions of the note and had the change initialed by J.B. Fuller rather than by John and Brenda Fuller, who signed the note. After the closing, the bank continued to send correspondence to J.B. and Ethel Fuller at the same address.

The bank argues that none of this evidence shows that the bank was involved in the transaction other than as a lender. It insists that there is no evidence that the bank had knowledge of any "pretended sale" between the Fullers and that the bank's lien cannot be destroyed by the secret intentions of the Fullers. The bank points out that there is no evidence of any agreement or conversation between Ethel Fuller and the bank concerning the genuineness of the sale.

Although the evidence may be consistent with the theory that J.B. Fuller initiated the scheme and carried it through without the knowledge of the bank, that is not the only reasonable inference. Evidence supporting a contrary inference is necessarily circumstantial because J.B. Fuller's testimony is not available, and neither Ethel nor the younger Fullers participated in the negotiations. Nevertheless, sale of a homestead by a hard-pressed debtor to a relative who signs a note and lien is itself a circumstance that ought to excite the suspicion of a prudent lender. When this circumstance is considered along with the bank's unsuccessful efforts to collect the debt and the irregularities in the loan as compared with the bank's normal procedures, a reasonable inference may be drawn that the bank's officer knew that the sale was simulated, or, at least, that he had knowledge of facts that would have caused a prudent lender to make further inquiry. Consequently, we hold that an issue of fact was raised that should have gone to the jury.

The bank contends that Ethel Fuller is estopped to assert invalidity of the lien in view of her execution of the deed and the other closing documents, including an affidavit stating, "Purchaser is now actually occupying the property ... or in good faith intends to occupy such property as the principal residence." We cannot agree. If the purchaser of a homestead knows or has reason to believe that a purported sale has been simulated for the...