K.D.F. v. Rex

• Decision Date: 22 June 1994
• Docket Number: No. D-4340,D-4340
• Citation: 878 S.W.2d 589
• Parties: K.D.F., a Kansas General Partnership, Kansas Public Employees Retirement System, and Pacholder Associates, Inc., Relators, v. The Honorable James L. REX, Judge, Respondent.
• Court: Texas Supreme Court

Page 589

878 S.W.2d 589

K.D.F., a Kansas General Partnership, Kansas Public Employees Retirement System, and Pacholder Associates, Inc., Relators, v. The Honorable James L. REX, Judge, Respondent.

No. D-4340.

Supreme Court of Texas.

Argued Dec. 16, 1993.

Decided June 22, 1994.

Randall L. Rouse and Joel B. Locke, Odessa, Kevin B. Jackson, Andrews, for relators.

Homer Gilbe Hollingsworth, Midland, Daniel D. Sullivan, Andrews, Greg Jordan, Robert L. Brown, III and Donald R. Taylor, Austin, for respondent.

CORNYN, Justice, delivered the opinion of the Court, in which PHILLIPS, Chief Justice, GONZALEZ, HIGHTOWER, HECHT, GAMMAGE, ENOCH and SPECTOR, Justices, join.

In this mandamus action, the Kansas Public Employees' Retirement System ("KPERS"), a Kansas governmental entity, and two affiliated entities, K.D.F. and Pacholder Associates, contend that the trial court abused its discretion by overruling their TEX.R.CIV.P. 120a special appearances. All three assert that under principles of interstate comity, Texas is obliged to recognize the sovereign immunity of the State of Kansas and therefore to decline to exercise jurisdiction over them. See generally United Mexican States v. Ashley, 556 S.W.2d 784 (Tex.1977) (recognizing foreign sovereign under international principles of comity). We determine that two of the three relators are conditionally entitled to issuance of the writ.

I

KPERS is a Kansas governmental entity. KAN.STAT.ANN. § 74-4903 (1992). Kansas Debt Fund ("K.D.F.") is a Kansas General Partnership, created by Commerce Bank of Topeka, Kansas, which holds securities on behalf of KPERS. Pacholder Associates, Inc., KPERS's independent investment advisor, is an Ohio corporation with its principal place of business in Ohio. The Real Parties in Interest are plaintiff Texas Hydrogen Energy Corporation, a Texas corporation wholly owned as a subsidiary, and its parent, plaintiff Hydrogen Energy Corporation, a Utah corporation based in Kansas. (collectively, "Hydrogen").

This controversy arises out of a loan KPERS made to Hydrogen in November 1989, in return for which Hydrogen executed a promissory note ("Note K") payable to K.D.F. as KPERS's agent. The purpose of the loan was to facilitate Hydrogen's purchase of an oil and gas property in Andrews County, Texas, from a debtor in bankruptcy; Hydrogen used the loan proceeds to purchase another promissory note ("Note H") from a creditor in the bankruptcy proceedings. A mortgage on the Andrews County oil and gas property secures Note H, and KPERS has secured Note K by taking a security interest in Note H and the mortgage securing it. See TEX.BUS. & COM.CODE ANN. §§ 1.201(37), 9.103 & cmt. 4, 9.201 (Vernon 1991 & Supp.1994). From an earlier transaction between the parties, K.D.F. holds a $2,500,000 convertible debenture dated April 2, 1985.

In 1991, Hydrogen sought to sell the Andrews County property to UMC Petroleum Corporation. The sale fell through, Hydrogen claims, after KPERS and K.D.F. reneged on their agreement to release K.D.F.'s security interest in Note H. Hydrogen also alleges that KPERS and K.D.F. impermissibly conditioned the release upon Hydrogen's payment of past due interest on the debenture.

Hydrogen filed suit against KPERS, K.D.F., and Pacholder in Andrews County on December 1991, alleging in its jurisdictional statement that the case involved the rights of creditors to mineral interests in Andrews County. Hydrogen sought damages and injunctive relief, alleging ordinary and gross negligence, tortious interference with business relations, fraud, defamation, breach of the duty of good faith and fair dealing, and breach of fiduciary duties. Hydrogen later amended its petition to add a claim for usury.

In response, each defendant filed a special appearance. After a hearing, the trial court overruled all objections to jurisdiction. The defendants, as relators, now seek mandamus relief from the trial court's order overruling their contest to jurisdiction.

II

Initially, we address the parties' conflicting characterizations of the nature of Hydrogen's suit and the basis upon which the trial court has assumed jurisdiction over relators. Hydrogen argues that the trial court has exercised its in rem jurisdiction and that the issue presented is the right of Texans to sue in Texas courts to establish title to their land. Relators argue that Hydrogen's suit is one for damages brought "under the guise of a suit to determine the collateral interest of K.D.F. and to restrain a foreclosure." Hydrogen has sued for fraud, defamation and other torts, for injunctive relief, and for a declaratory judgment determining the effect of contracts between it and the Kansas entities, including the debenture, Note K, and the Note K security agreement. Hydrogen has not brought an action in trespass to try title, see TEX.PROP.CODE ANN. §§ 22.001-22.045 (Vernon 1984), or an action to quiet title. See TEX.CIV.PRAC. & REM.CODE ANN. § 15.011 (Vernon 1986); Humble Oil & Refining Co. v. Sun Oil Co., 191 F.2d 705, 710-11, 171-20 (5th Cir.1951), cert. denied, 342 U.S. 920, 72 S.Ct. 367, 96 L.Ed. 687 (1952). Hydrogen cannot obtain the relief it seeks unless our courts exercise in personam jurisdiction over KPERS and the entities associated with it. Thus, we conclude, this action cannot proceed in rem. See McElreath v. McElreath, 162 Tex. 190, 345 S.W.2d 722, 725-27 (Tex.1961) (distinguishing between in rem and in personam actions for purposes of interstate comity).

Furthermore, Hydrogen is the only party holding any interest in the realty located in Andrews County. The only interest that KPERS and K.D.F. hold is a security interest in "[Hydrogen's] notes, instruments, general intangibles, deeds of trust, guaranties, financing statements, mortgages, security agreements ... and all extensions thereof." The Note K collateral includes Note H and any mortgage securing it, but the Andrews County property is not itself collateral for Note K.

Hydrogen's lien is not governed by Article Nine of the Uniform Commercial Code because the collateral securing Note H is real property. TEX.BUS & COM.CODE ANN. § 9.104(10). KPERS's Note K lien, however, is an Article Nine security interest because, under TEX.BUS. & COM.CODE ANN. § 9.102(c), "the application of this chapter to a security interest in a secured obligation is not affected by the fact that the obligation is itself secured by a transaction or interest to which this chapter does not apply." The relevant KPERS security interest for present purposes is a security interest in an instrument, see TEX.BUS. & COM.CODE ANN. §§ 3.104, 9.105(a)(9), 9.106, not real property. See TEX.BUS. & COM.CODE ANN. § 9.102(c) & cmt. 4. The Note K security interest and the remedies it affords ¹ enable KPERS and K.D.F, in the event of foreclosure, to acquire Note H and the associated mortgage interest in Andrews County realty. ² But Hydrogen is the only party that currently holds a real property interest.

III

KPERS is a Kansas statutory entity, a "body corporate and instrumentality" of the Kansas government, KAN.STAT.ANN. § 74-4903 (1992), created to manage and invest the retirement savings of Kansas state employees. Analogous Texas entities are the Employees Retirement System of Texas, see TEX.GOV'T CODE ANN. §§ 811.001-815.501 (Vernon 1994), and the Teacher Retirement System of Texas. See TEX.GOV'T CODE ANN. §§ 821.001-825.511 (Vernon 1994). When Kansas created its public employee retirement system, it conditionally waived its sovereign immunity to lawsuits, but required all actions "directly or indirectly" against the system to be filed in Shawnee County, Kansas. KAN.STAT.ANN. § 74-4904 (1992 & Supp.1993).

A

Mandamus issues to correct a clear abuse of discretion when there is no adequate remedy by appeal. Walker v. Packer, 827 S.W.2d 833, 839-42 (Tex.1992). Recently, in Canadian Helicopters v. Wittig, 876 S.W.2d 304 (Tex.1994), we held that a defendant whose special appearance is overruled ordinarily has an adequate remedy by appeal, and is therefore not entitled to mandamus relief. Mandamus, we reiterated, is "an extraordinary remedy, available only in limited circumstances." Id. at 305 (citing Walker, 827 S.W.2d at 840). However, in Canadian Helicopters, we noted an exception to the rule when issues of sovereign immunity and comity are at stake CHL points out our decision in United Mexican States v. Ashley, 556 S.W.2d 784 (Tex.1977), as support for its claim that mandamus review of a special appearance is appropriate. However, Ashley involved the issue of sovereign immunity, implicating comity and foreign affairs concerns not present in the usual special appearance.

Canadian Helicopters, 876 S.W.2d at 306.

This comity exception, enunciated in Ashley and confirmed in Canadian Helicopters, is explained by the risk of harm to interstate and international relations likely to occur if a Texas trial court erroneously exercises jurisdiction over another sovereign. Such potential harm plainly goes beyond the additional time and expense ordinarily required to pursue an appeal, and beyond the immediate interests of the parties to the suit. Therefore, we reaffirm that an appeal does not provide an adequate remedy in this context.

The "clear abuse of discretion" standard is a function of the distribution of decision-making authority among the trial and appellate courts. As we said in Walker, "with respect to resolution of factual issues or matters committed to the trial court's discretion, for example, the reviewing court may not substitute its judgment for that of the trial court ... [o]n the other hand, review of the trial court's determination of the legal principles controlling its ruling is much less deferential." Walker, 827 S.W.2d at 839-40 (emphasis added). The decision whether to subject another sovereign to the jurisdiction of the Texas courts is not analogous to a discovery dispute or the resolution of an issue of fact. Because of the larger...