Reynolds v. Allstate Ins. Co.

• Decision Date: 06 November 1980
• Docket Number: No. 79-1408,79-1408
• Citation: 629 F.2d 1111
• Parties: F. M. REYNOLDS, et ux. (Reynolds, Earlene), Plaintiffs-Appellees, v. ALLSTATE INSURANCE COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1111

629 F.2d 1111

F. M. REYNOLDS, et ux. (Reynolds, Earlene), Plaintiffs-Appellees, v. ALLSTATE INSURANCE COMPANY, Defendant-Appellant.

No. 79-1408.

United States Court of Appeals, Fifth Circuit.

Nov. 6, 1980.

Opinion on Rehearing Jan. 12, 1981.

See 633 F.Supp. 1208.

Gordon R. Pate, Beaumont, Tex., for defendant-appellant.

Jas. W. Mehaffy, Jr., Beaumont, Tex., for plaintiffs-appellees.

Appeal from the United States District Court for the Eastern District of Texas.

Before GOLDBERG, GARZA and REAVLEY, Circuit Judges.

GOLDBERG, Circuit Judge:

As the ashes smoldered, silently evidencing the prior existence of a home in Vidor, Texas, a jury in nearby Beaumont found that plaintiffs F. M. and Earlene Reynolds were entitled to recover the proceeds of a fire insurance policy issued by defendant, Allstate Insurance Company, on the recently-cindered residence. Dissatisfied with the dousing it received at the trial level, Allstate now heatedly contests the finding that the Reynolds had an insurable interest in the former structure, by crying that something was ablaze within the records of the title office. We, the appellate firemen, must respond to all calls and have approached the question of title with caution, combing both the record of the proceedings below and the mortgage laws of Texas for a hidden spark. Finding appellant Allstate's pleas for help to be nothing more than a false alarm, we affirm the judgment below awarding recovery under the policy. We do, however, consider the award of $3500 attorney's fees to have been an unsupported burnt offering; therefore, we vacate that award and remand the case solely for a determination of reasonable attorney's fees.

I. From Bark to Ash

In 1964, plaintiffs-appellees F. M. and Earlene Reynolds purchased an undeveloped lot in Vidor, Texas. Six months later, they contracted with W. L. Looney to build a house on the lot, and executed a Mechanics and Materialman's Lien and Note in Looney's favor to secure payment for the construction. As further security for their indebtedness to Looney, the Reynolds simultaneously executed a Deed of Trust, conveying the property to Shon P. Hudson as trustee. No payments were made on the house between 1965-1969. On November 21, 1969, Looney, the mortgagee-debt holder, appointed D. Woodrow Wilson as substitute trustee, and shortly thereafter, forced the resignation of the original trustee, Hudson. Looney instructed Wilson to institute foreclosure proceedings, and in January, 1970, Wilson conveyed the property to Looney pursuant to a trustee's sale.

Following the foreclosure, ¹ the Reynolds began to make payments to Looney and continued to live in the house. ² In February, 1975, the couple took out a fire insurance policy on the house with defendant Allstate Insurance Company. Four months later, that which had been dust returned to dust. ³ Upon Allstate's refusal to pay the Reynolds' claim under the policy, ⁴ the couple instituted this action.

II. What's In A Title?

The only substantive issue raised on appeal is whether the Reynolds had an insurable interest in the destroyed property. Both parties agree that absent an "insurable interest," the Reynolds were not entitled to recover under the policy. Similarly, there is no dispute that the only "insurable interest" which could be found to exist on the facts of this case was the Reynolds' claim as mortgagors, the very interest on which Looney attempted to foreclose in 1970. Therefore, in order to prove the existence of an "insurable interest" entitling them to recover on the fire policy, the Reynolds had to attack, and prove the invalidity of, the foreclosure proceedings. The district court permitted plaintiffs to introduce evidence indicating that Looney's attempted foreclosure was invalid and, based on special interrogatories answered by the jury, the court found the foreclosure to be void. Appellant now contests the finding that the foreclosure proceeding was invalid. Moreover, Allstate argues that the plaintiffs should not have been permitted to introduce evidence attacking Looney's record title. Finding no error on either of these points in the proceeding below, we affirm the finding that, at the time of the pyrogenic destruction, the Reynolds had an insurable interest in the property covered by the policy, entitling them to recovery thereunder.

A. A Trustee By Any Other Name ...

In the present case, the deed of trust conveying this soon-to-be broiled plat contained a boilerplate clause providing for the naming of a substitute trustee "in case of absence, death, inability, refusal or failure of the Trustee" to act. It is well-settled in Texas law that Wilson could not have been validly appointed as a substitute trustee absent the occurrence of one of these contingencies specified in the deed. Bracken v. Bounds, 96 Tex. 200, 71 S.W. 547, 549 (1903); Clark v. Richardson, 247 S.W. 347, 348 (Tex.Civ.App.1922). Furthermore, it is equally clear under Texas law that, in the event Wilson was not validly appointed as substitute trustee, his actions in foreclosing on the Reynolds' mortgage and selling the property to Looney were void. Johnson v. Koenig, 353 S.W.2d 478, 484 (Tex.Civ.App.1962); Home Fire & Marine Ins. Co. v. Swanner, 57 S.W.2d 1130, 1131 (Tex.Civ.App.1933); Austin v. Carter, 296 S.W. 649, 651 (Tex.Civ.App.1927); Clark v. Richardson, supra, 247 S.W. at 348; Wilson v. Armstrong, 236 S.W. 755, 757 (Tex.Civ.App.1922); Rawlings v. Lewis, 191 S.W. 784, 786 (Tex.Civ.App.1917); Estelle v. Hart, 55 S.W.2d 510, 513 (Tex.Com.App.1932). Therefore, the validity of Looney's foreclosure turns on whether he strictly complied with the terms of the deed of trust in naming Wilson as substitute trustee.

There was some ambiguity in Looney's testimony at trial as to the circumstances under which he substituted Wilson for the original trustee Hudson. Fortunately for us, the issue whether Looney strictly complied with the terms of the deed of trust in making this substitution was addressed, at trial, by the legal world's supreme source of wisdom on issues whose resolution turns on the meaning of ambiguous testimony-the consensus of peers. For whilst ambiguity may defy truth, ⁵ it can not-in halls of justice-defeat agreement. On special interrogatory, the jury found that Looney failed to request the original trustee to act, and, in fact, prompted his resignation. Additionally, the sagacious collectivity concluded that the trustee substitution was undertaken for "the convenience and benefit" of Looney. We cannot say that there was insufficient evidence to support the jury's finding that the substitute trustee's appointment was unauthorized by the deed of trust. Therefore, we find that if the district court was correct in allowing the Reynolds to attack the validity of the foreclosure, the court was also correct in concluding that the attempted foreclosure was void, and that it failed to extinguish the Reynolds' insurable interest in the residence.

B. A Collateral Attack By Any Other Name ...

Appellant Allstate also argues that the district court should not have allowed the Reynolds' to challenge the validity of the foreclosure, or of Looney's record title. Allstate contends that such "collateral attacks" on title are not permitted in suits-such as the present action for recovery under an insurance policy-where the record titleholder is not named as a party. Collateral attacks, it maintains, can only be attempted in "trespass to try title" actions. We think appellant misconstrues both the form of the Reynolds' argument and the substance of Texas law.

In their complaint, the Reynolds noted that the property insured by appellant had been totally destroyed, that all premiums due under the policy had been paid, and that Allstate had refused to make payments as required by the insurance contract. There were no allegations regarding title, nor were any required in order for the plaintiffs to state a claim for breach of contract. In its answer, Allstate raised the affirmative defense that the plaintiffs had no insurable interest in the destroyed property and were therefore not entitled to recover under the policy. At trial, Allstate was faced with proving, and, in turn, the Reynolds were required to rebut, the "absence of an insurable interest" defense. Allstate introduced evidence of Looney's foreclosure, while the Reynolds strove to prove its invalidity. In so doing, both sides were litigating an operative fact in the insurance suit-the existence of an insurable interest. The issue of title to the property was never contested: record title is not affected by this litigation. ⁶ Admittedly, on the facts of this case, the dispositive issue in the determination of both the existence of an "insurable interest" (in a contract action) and the situs of title (in a property suit) would be the validity of the foreclosure. However, the existence of a common dispositive issue cannot convert "proof of an insurable interest" into a "collateral attack on title." Moreover, it would be grossly inequitable to allow Allstate to introduce Looney's record title to prove that the Reynolds lacked an insurable interest, while simultaneously estopping plaintiffs from introducing evidence tending to prove the existence of such an interest. Therefore, we find that the district court was correct in allowing the Reynolds to attack the validity of Looney's foreclosure.

Lest we be accused of acrobatic semanticizing, or worse, of collapsing into semantic aphasia, we note additionally that contrary to appellant's contention, Texas law does permit collateral attacks on title in actions other than "trespass to try title" suits. See, e. g., Home Fire & Marine Ins. Co. v. Swanner, 57 S.W.2d 1130 (Tex.Civ.App.1933) (by implication) (insurance company can attack title, in contesting mortgagee's "sole ownership" of property, by proving attempted foreclosure by mortgagee to have been void due to unauthorized appointment of...