Lexington Ins. Co. v. Gray

• Decision Date: 28 June 1989
• Docket Number: No. 3-88-141-CV,3-88-141-CV
• Citation: 775 S.W.2d 679
• Parties: 10 UCC Rep.Serv.2d 139 LEXINGTON INSURANCE COMPANY, Appellant, v. Ted GRAY, Jr., et al., Appellees.
• Court: Texas Court of Appeals

Page 679

775 S.W.2d 679

10 UCC Rep.Serv.2d 139

LEXINGTON INSURANCE COMPANY, Appellant, v. Ted GRAY, Jr., et al., Appellees.

No. 3-88-141-CV.

Court of Appeals of Texas,

Austin.

June 28, 1989.

Rehearing Denied Sept. 13, 1989.

Michael Klein, Fulbright & Jaworski, Austin, for appellant.

Walter Mizell, John E. Gangstad, Brown Maroney & Oaks Hartline, Austin, for appellees.

Before POWERS, EARL W. SMITH ^* and JONES, JJ.

JONES, Justice.

This appeal arose out of a declaratory judgment action filed by Ted Gray, Jr., appellee, against Lexington Insurance Company, appellant, to determine Gray's liability as guarantor of a promissory note. Additional guarantors, Katherine Berkeley Reynolds, Valerie Jane Hickie, and Division One, a Texas General Partnership, intervened in the trial court on the side of Gray and are now appellees. All appellees will be referred to collectively as "guarantors." The trial court granted the guarantors' motions for partial summary judgment, declaring that they had no liability to Lexington. The parties stipulated as to attorney's fees and severed other claims in the lawsuit, whereupon the trial court entered the final judgment from which Lexington appeals. We will reverse the judgment of the trial court and remand the cause.

The material facts are not in dispute. In December 1983, InterFirst Bank of Austin, N.A. ("Bank") loaned Mississippi Lofts, Inc. $450,000 to purchase a building in St. Louis, Missouri. Mississippi Lofts executed a promissory note payable to the Bank, as well as a deed of trust on the property to secure payment of the note. In addition, the guarantors executed agreements which guaranteed prompt and full payment of the promissory note. As required by the deed of trust, Mississippi Lofts obtained, from Lexington, an insurance policy covering various types of damage to the premises, including fire. The policy contained a "standard mortgage clause," under which any reimbursement by Lexington for loss or damage would be payable to the "mortgagee (or trustee) as [its] interest may appear, and this insurance, as to the interest of the mortgagee (or trustee) only therein, shall not be invalidated by any act or neglect of the mortgagor or owner of the within described property." The standard mortgage clause also provided that

[w]henever this Company shall pay the mortgagee (or trustee) any sum for loss or damage under the policy and shall claim that as to the mortgagor or owner, no liability therefore existed, this Company shall to be extent of such payment, be thereupon legally subrogated to all the rights of the party to whom such payment shall be made, under all securities held as collateral to the mortgage debt, or may at its option, pay to the mortgagee (or trustee) the whole principal due or to grow due on the mortgage with interest accrued thereon to the date of such payment, and shall thereupon receive a full assignment and transfer of the mortgage and on all such other securities.

On or about October 13, 1984, while the insurance policy was still in full force and effect, the subject property was destroyed by fire. Mississippi Lofts made a claim for loss under the policy, which Lexington denied on the ground of arson.

Mississippi Lofts sued Lexington in the United States District Court for the Eastern District of Missouri, claiming a right to the insurance proceeds under the policy. After a jury trial, the federal district court entered judgment that the fire had indeed been intentionally set by agents of Mississippi Lofts, and accordingly decreed that Mississippi Lofts take nothing by its suit. See Mississippi Lofts, Inc. v. Lexington Insurance Co., 653 F.Supp. 345 (E.D.Mo.1986). That judgment was upheld by the United States Court of Appeals for the Eighth Circuit. See Mississippi Lofts, Inc. v. Lexington Insurance Co., 841 F.2d 251 (8th Cir.1988).

Simultaneously, the Bank filed this suit against Lexington and Gray, claiming that (1) the Bank was entitled to the insurance proceeds under the Lexington policy, and (2) Gray was liable to the Bank under his guaranty agreement. On February 15, 1985, eight days after suit was filed, Lexington paid the Bank $530,103.75, representing the whole principal due on the note That upon payment of the total amount as referred to above [$530,103.75] on or about February 15, 1985, the undersigned InterFirst Bank Austin, N.A. does hereby transfer, assign, and set over unto the insuror [sic], Lexington Insurance Company, all right, title, interest, causes of action or any other rights InterFirst Bank Austin, N.A. may have in said mortgage and all other such securities as provided in the standard mortgage clause referred to above and agrees to assign the mortgage and all other such securities which are held as collateral to the mortgage debt to the insuror [sic], Lexington Insurance Company.

with interest. Following payment, the Bank dismissed its claims and executed an "Assignment" and an "Assignment of Deed of Trust," the former of which provides as follows in pertinent part:

Meanwhile, Lexington and Gray cross-claimed against each other, Lexington for a recovery under the assignment and Gray for a declaratory judgment that he was not liable under his guaranty agreement. Reynolds, Hickie, and Division One intervened seeking similar declaratory relief, whereupon Lexington counterclaimed against them to recover under the assignment.

The guarantors filed motions for summary judgment. The parties stipulated--for purposes of the summary judgment proceeding only--that Lexington was the "holder" of the Mississippi Lofts note. The trial court declared that the guarantors were not liable to Lexington on their guaranties, and ruled that Lexington take nothing by its claims against them. Although the trial court's judgment does not specify its grounds for the summary judgment, the parties presented three issues in their motions, responses, and briefs to the court below: (1) whether the doctrines of subrogation and/or assignment impose liability on the guarantors under these circumstances, (2) whether the order dismissing the Bank's claims had the effect of discharging and extinguishing the debt guaranteed by the guarantors, and (3) whether Lexington is collaterally estopped by virtue of the judgment of the United States District Court for the Eastern District of Missouri from asserting the guarantors' liability. In its single point of error before this Court, Lexington addresses all three of these issues.

We note at the outset the well-established standards for granting a summary judgment:

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 also that since the Mississippi Lofts note provides for a variable interest rate tied to a fluctuating "base rate" established by the Bank, the note apparently is not a "negotiable instrument" as that term is defined in the Uniform Commercial Code. See Tex.Bus. & Com.Code Ann. § 3.104(a) (Vernon 1968). Nor are the guaranties themselves negotiable instruments. Accordingly, general principles of contract law will govern this case. Even a "non-negotiable" contract, however, is assignable if it does not involve personal trust or confidence and if it does not contain language limiting its assignability. First National Bank v. Lone Star Life Insurance Co., 524 S.W.2d 525 (Tex.Civ.App.), writ ref'd n.r.e., 529 S.W.2d 67 (Tex.1975). Those limiting factors are not present in the Mississippi Lofts note, and the guaranty agreements expressly permit their assignment.

SUBROGATION/ASSIGNMENT

The guarantors' position on the subrogation/assignment issue, before both the trial court and this Court, is summed up in their brief as follows (i) [T]he assignment of the note from the bank to Lexington gives it no greater rights than it would have under principles of equitable subrogation, (ii) under principles of equitable subrogation, the subrogee insurance carrier cannot recover against a third party unless the subrogee's equities are superior to the equities of the third party, and (iii) that, as a matter of law, the equities of appellees (who, as the uncontroverted summary judgment proof indicates, were in fact "innocent" of any participation in the alleged arson which gave rise to the loss) are superior to the equities of Lexington....

Lexington's primary challenge, with which we agree, is to the first premise stated above.

Although often confused, the doctrines of subrogation and assignment are not the same:

Subrogation is the act of the law, depending not upon contract, but upon the principles of equity, while assignment is the act of the parties, and depends generally on intention. Subrogation presupposes an actual payment and satisfaction of the debt or claim to which the party is subrogated, although the remedy is kept alive in equity for the benefit of the one who made the payment under circumstances entitling him to contribution or indemnity, while assignment necessarily contemplates the continued existence of the debt or claim assigned. Subrogation operates only to secure contribution and indemnity, whereas an assignment transfers the whole claim.

6A C.J.S. Assignments § 5, at 597 (1975).

It is settled law in Texas that a standard mortgage clause such as the one in Lexington's policy is valid and enforceable in accordance with its express terms. British American Assur. Co. v. Mid-Continent Life Ins. Co., 37 S.W.2d 742 (Tex.Comm'n App.1931, judgm't adopted); Boatner v. Home Ins. Co., 239 S.W. 928 (Tex.Comm'n App.1922, judgm't adopted). Its effect...