I-10 Colony, Inc. v. Lee

• Court: Texas Court of Appeals
• Writing for the Court: MARTHA HILL JAMISON
• Citation: I-10 Colony, Inc. v. Lee, 393 S.W.3d 467 (Tex. App. 2013)
• Decision Date: 28 January 2013
• Docket Number: No. 14–10–01051–CV.,14–10–01051–CV.
• Parties: I–10 COLONY, INC., Appellant v. CHAO KUAN LEE, Li Yang Lee, Li Hsiang Chang, Appellees.

393 S.W.3d 467

I–10 COLONY, INC., Appellant

v.CHAO KUAN LEE, Li Yang Lee, Li Hsiang Chang, Appellees.

No. 14–10–01051–CV.

Court of Appeals of Texas, Houston (14th Dist.).

Dec. 28, 2012.

Rehearing and En Banc Overruled Jan. 28, 2013.

Kiwi Alejandro Danao Camara, Houston, TX, for Appellant.

Adam P. Schiffer, David W. Holman, Norman Roser, Houston, TX, for Appellees.

Panel consists of Chief Justice HEDGES and Justices JAMISON and McCALLY.

SUBSTITUTE OPINION

MARTHA HILL JAMISON, Justice.

We overrule the motion for rehearing, withdraw our opinion dated September 25, 2012, and issue this substitute opinion.

This case involves a dispute over the ownership of and profits derived from a hotel property. In its final judgment, the trial court held that appellee Chao Kuan Lee and Henry Wu, the latter on behalf of appellant I–10 Colony, Inc., each owned an undivided 50 percent interest in the property. The court awarded appellees Chao Kuan and Li Yang Lee damages based on jury findings related to income from the property. The court additionally ordered I–10 to pay Chao Kuan Lee attorney's fees and prejudgment interest.¹

In six issues, I–10 contends that the trial court erred in (1) determining property ownership in a declaratory judgment action; (2) awarding attorney's fees in a case involving title to property; (3) determining that Chao Kuan Lee owned 50% of the hotel property; (4) instructing the jury that it should not subtract the cost of certain improvements when calculating property income; (5) instructing the jury that it should not subtract salaries paid to Henry and Emily Wu when calculating property income; and (6) calculating prejudgment interest from a particular date. We reform the judgment concerning the calculation of prejudgment interest and affirm the judgment as so modified.

I. Background

Chao Kuan Lee and I–10, a company owned by Henry Wu, were equal partners in South Territory Ltd., a partnership formed to own and manage hotel properties. In 1995, the partnership purchased the hotel property that is now the subject of this lawsuit. In 1997, the property was sold to Blue Bonnet Hospitality, Inc. for $2.1 million. To effectuate the sale, South Territory first conveyed a 50 percent interest each to Lee and Wu. Wu then conveyed his interest to I–10, and both Lee and I–10 conveyed their interests to Blue Bonnet. As part of the sale arrangement, Blue Bonnet assumed a loan with Metro Bank. Blue Bonnet also executed separate notes for $150,000 each to Lee and I–10.

Each note states that it “is in equal dignity with the $150,000 note of even date herewith,” and each specifically identifies the other. Each of the notes also was secured by a separate deed of trust: one in favor of Lee and one in favor of I–10, each pledging 100% of the property. The deeds of trust each reference and identify the corresponding note that it is securing. The deeds also describe the duties of the named trustees upon foreclosure, including that the property shall be sold to the highest bidder, “subject to prior liens and to other exceptions to conveyance and warranty.” The only “prior lien” identified in the deeds is the one securing the loan from Metro Bank. Under the heading “[o]ther exception[ ] to Conveyance and Warranty,” each of the deeds has the single phrase “[s]ame as set forth in Deed of even date herewith from Beneficiary to Grantor.” Under the “General Provisions” heading, the deeds indicate that the liens they secure are superior to later-created liens. Under this heading, the deeds also indicate that they are subordinate to the liens favoring Metro Bank. Both deeds contain markings indicating that they were filed with the county clerk's office.

In 1999, Blue Bonnet defaulted on the notes favoring Lee and I–10. I–10 then foreclosed on the property and bought it at the foreclosure sale. Lee, however, did not foreclose at that time. Later in 1999, Lee filed the present lawsuit. In his initial pleadings, Lee raised several issues and claims; he sought a declaratory judgment establishing his interest in the hotel property and alleged that Wu breached his fiduciary duty and fraudulently induced Lee to not foreclose on the property when I–10 did.

On May 28 and 30, 2002, the trial court held a hearing regarding Lee's request for a declaration of rights concerning the validity of his lien. On June 5, the trial court issued an order holding that Lee's and I–10's liens “were of Equal Dignity,” that Lee's lien therefore survived and was not extinguished or otherwise impaired by I–10's foreclosure on its lien, and that Lee was entitled to foreclose on his own lien. In September 2002, Lee foreclosed on his lien against the hotel property then owned by I–10. Thereafter, Lee also amended his pleadings to assert a trespass-to-try-title cause of action, a claim that he would later nonsuit, and to add a request for a declaration of ownership.

Litigation over the remaining issues in the case continued for several years. After a 2008 jury trial primarily on fraud, the court entered judgment reconfirming its earlier order that the liens were of equal value and I–10's earlier foreclosure did not extinguish Lee's rights and holding that after Lee's foreclosure, the parties had equal rights to ownership. The court also awarded attorney's fees to Lee under the Declaratory Judgments Act and, based on the jury's verdict, awarded Lee $2.7 million for fraud. However, at the parties' urging, the court subsequently granted a new trial on the fraud issue. Before a new trial could commence, Lee amended his pleadings with leave of court to include a claim for an accounting, seeking a share of the income I–10 had derived from the property since Lee's foreclosure. At the conclusion of the second trial, the jury found no fraud was proven but assessed Lee's share of income from the property at almost $608,000. The trial court entered final judgment in accordance with its prior orders regarding the liens and ownership of the hotel property, as well as the second jury's findings. The court also awarded attorney's fees and prejudgment interest to Lee.

II. Ownership of the Hotel Property

In its third issue, I–10 asserts that the trial court erred in determining that Lee owned 50 percent of the hotel property. According to I–10, it owns 100 percent of the property as a matter of law because it foreclosed on its lien first, so that when it then bought the property at the foreclosure sale, Lee's lien was extinguished and I–10 took title unencumbered by Lee's lien. Although I–10 correctly phrases the question as whether the title it received from the foreclosure sale was subject to Lee's lien and deed of trust, we do not otherwise agree with I–10's arguments.

As I–10 points out, the deed of trust it received from Blue Bonnet instructed the trustee upon foreclosure to convey the property to the purchaser subject to prior liens and other exceptions. Lee's lien is not identified in I–10's deed of trust as either a prior lien or an exception (Metro Bank's lien is the only other lien expressly identified).² I–10 argues that because the deed of trust specifically defined the encumbrances to which a conveyance after foreclosure would be subject and did not identify Lee's lien, then the property passed without being unencumbered by Lee's lien. I–10 further contends that the description in the two notes of the liens being of “equal dignity” has no impact on whether Lee's lien was extinguished by the foreclosure sale or whether I–10 took the hotel property at foreclosure subject to Lee's lien. I–10 has not cited any authority that supports these positions.

It is well settled in Texas that a valid foreclosure on a senior lien (sometimes referred to as a “superior” lien) extinguishes a junior lien (sometimes referred to as “inferior” or “subordinate”) if there are not sufficient excess proceeds from the foreclosure sale to satisfy the junior lien. See, e.g., Diversified Mortg. Investors v. Lloyd D. Blaylock Gen. Contractor, Inc., 576 S.W.2d 794, 808 (Tex.1978); Kothari v. Oyervidez, 373 S.W.3d 801, 807 (Tex.App.-Houston [1st Dist.] 2012, pet. denied);Elbar Invs., Inc. v. Wilkinson, No. 14–99–00297–CV, 2003 WL 22176624, at *2 (Tex.App.-Houston [14th Dist.] Sept. 23, 2003, pet. denied) (mem. op.). In other words, the purchaser at the foreclosure sale takes title free from the junior lien. Nat'l W. Life Ins. Co. v. Acreman, 425 S.W.2d 815, 817–18 (Tex.1968); Poston v. Wachovia Mortg. Corp., No. 14–11–00485–CV, 2012 WL 1606340, at *2 (Tex.App.-Houston [14th Dist.] May 8, 2012, pet. denied) (mem. op.). Conversely, it is also clear that under most circumstances, foreclosure on a junior lien will not extinguish a senior lien and the purchaser at the foreclosure sale will take subject to the senior lien. See, e.g., KCB Equities, Inc. v. HSBC Bank USA, N.A., No. 05–10–01648–CV, 2012 WL 1985899, at *2 (Tex.App.-Dallas June 4, 2012, no pet.) (mem. op.); Northside Marketplace W.D. '97, Ltd. v. David Christopher, Inc., No. 02–03–00276–CV, 2005 WL 3118794, at *4 (Tex.App.-Fort Worth Nov. 23, 2005, no pet.) (mem. op.); see alsoRestatement (Third) of Property: Mortgages § 7.1 (1997).³

Only a few Texas cases discuss “equal dignity” liens created as part of the same transaction or otherwise. However, the existing cases conclude that foreclosure of one of the co-equal liens does not by itself extinguish the other co-equal lien, just as foreclosure on a junior lien does not generally affect the rights of a senior lienholder. See, e.g., Douglass v. Blount, 95 Tex. 369, 67 S.W. 484, 490 (1902) (explaining that foreclosure and sale on one equal dignity lien did not impair rights of other equal dignity lienholder, who retained same right to foreclosure; furthermore, purchaser held title subject to remaining lien); Matthews v. First State Bank, 312 S.W.2d 571, 581 (Tex.Civ.App.-Beaumont 1958, writ ref'd n.r.e.) (holding that where there are more than one “liens of equal rank,” the...