Patton Street Corp. v. NAB Asset Venture II, L.P.--Appeal from 152nd District Court of Harris County

Opinion issued November 27, 2002

In The

Court of Appeals

For The

First District of Texas

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NO. 01-00-00144-CV

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PATTON STREET CORPORATION AND LONE STAR TRUCK STOP, INC., Appellants

V.

NAB ASSET VENTURE II, L.P., Appellee

On Appeal from the 152nd District Court

Harris County, Texas

Trial Court Cause No. 96-38921

OPINION ON REHEARING

This is an appeal from a declaratory judgment rendered on motions and cross-motions for summary judgment. This judgment resolved competing liens affecting a 24.5-acre Houston commercial property (the property) in favor of appellee, NAB Asset Venture II, L.P. (NAB), plaintiff in the trial court. Patton Street Corporation (Patton Street), appellant here and one of several defendants in the trial court, challenges this judgment and the denial of its own motion for summary judgment. On February 28, 2002, we reversed and remanded. NAB filed a motion for rehearing. We deny the motion for rehearing, but issue this opinion in place or our original opinion. Accordingly, we deny, as moot, NAB s motion for reconsideration en banc. // We address issues raised by the motions for summary judgment and pertinent to the relative superiority between a future-advance, or dragnet, clause in an initial lien and a subordination clause in a competing, third lien. We reverse and remand.

Facts and Procedural History

A. Background

In 1993, Patton Street, on behalf of a joint venture with others, purchased the property for $1,200,000 from Lone Star Truck Stop, Inc. (Lone Star), which had acquired the property in 1991. // Lone Star issued a general warranty deed to Patton Street. Patton Street also paid approximately $250,000 in outstanding property taxes shortly after the closing. Early in 1996, Patton Street leased a portion of the property to a tenant. The tenant improved the property and used it as a truck stop.

In 1996, NAB sued Patton Street and others, including Lone Star and Patton Street s tenant, to challenge Patton Street s ownership. NAB, which had purchased a third lien note against the property from the Resolution Trust Corporation (RTC) in 1993, asserted first priority lien rights, with a right to foreclose, on the grounds that its third lien note was in turn secured by a first lien deed of trust, executed in 1986 (the first lien), which contained a future-advance, or dragnet, clause. //

B. The Liens

1. First Lien Deed of Trust

On March 26, 1986, George W. Gilman, an individual, purchased the property from Central Freight Lines (Central Freight). First Capital Savings Association (First Capital) financed the transaction through a commercial real estate note (the first note), in the principal amount of $2,572,000, secured by a first lien. Central Freight issued Gilman a general warranty deed that reserved a vendor s lien in favor of Central Freight, which Central Freight assigned to First Capital as additional security for Gilman s loan. Twelve days later, on April 7, 1986, Gilman deeded the property, subject to the first lien and the vendor s lien, to a corporation, Velma, Inc. (Velma), through a transaction by which Velma assumed the first note. The first lien was filed of record on April 9, 1986.

The first lien contains the following future-advance clause:

This deed of trust shall secure, in addition to the Note, all funds hereafter advanced by Beneficiary to or for the benefit of [Gilman], as contemplated by any covenant or provision herein contracted or for any purpose, and all other indebtedness, of whatever kind or character, owing or which may hereafter become owing by [Gilman] to Beneficiary, whether such indebtedness is direct or indirect, primary or secondary, fixed or contingent or arises out of or is evidenced by note, deed of trust, open account, overdraft, endorsement, surety agreement, guaranty, or otherwise. It being contemplated that [Gilman] may hereafter become indebted to Beneficiary in further sum or sums (all of the aforesaid, including all amounts payable under the Note, being hereinafter sometimes called said indebtedness. ) Said indebtedness shall be payable at the above stated address of Beneficiary or at such other place as Beneficiary may hereafter direct in writing; and, unless otherwise provided in the instrument evidencing said indebtedness, shall bear interest at the same rate per annum as the Note bears, from date of accrual of said indebtedness until paid. In addition, any and all attorney s fees and expenses of collection payable under the terms of the Note shall be and constitute a part of said indebtedness secured hereby. This Deed of Trust shall also secure all renewals, rearrangement and extensions of any said indebtedness.

(Emphasis added.)

2. Second Lien Deed of Trust

Also on April 7, 1986, Velma borrowed $262,529.50 from the original owner of the property, Central Freight, and executed a commercial real estate note (the second note) and deed of trust in favor of Central Freight (the second lien) for that indebtedness. This note served to reimburse Central Freight for funds advanced for ad valorem taxes. // The second lien was filed of record on April 9, 1986, along with the first lien.

3. Third Lien Deed of Trust

Just under two years later, on February 29, 1988, Velma borrowed an additional $1,978,859.41 from First Capital. This loan was secured by an additional note (the third note) and deed of trust (the third lien) in favor of First Capital. The third lien was recorded on March 3, 1988. A typewritten provision added to the third note stated as follows:

The lien securing this Note shall be and remain secondary and inferior to the lien securing those two certain Promissory Notes more particularly described in [sic] Deed of Trust of even date herewith.

The third lien was essentially similar to the first lien, except that it contained three added typewritten clauses. The third typewritten clause stated as follows:

It is stipulated, covenanted and agreed that the lien created by this instrument shall be and remain secondary and inferior to the lien(s) securing the payment of that (1) one certain other Promissory Note in the principal sum of $2,572,000.00 dated March 21, 1986, executed by GEORGE W. GILMAN and payable to the order of FIRST CAPITAL SAVINGS ASSOCIATION OF TEXAS, // more fully described in a Deed of Trust recorded under File No. K485910 of the County Clerk s Records of Harris County, Texas; . . . and (2) one certain Promissory Note in the principal sum of $250,000 dated April 9, 1986, executed by VELMA, INC., and payable to the order of CENTRAL FREIGHT LINES, INC., // more fully described in a Deed of Trust recorded under File No. K486570 of the County Clerk s Records of Harris County, Texas.

C. NAB s Acquisition

First Capital was declared insolvent in March 1989 and taken over first by the Federal Savings and Loan Insurance Corporation (FSLIC) and then by the RTC, which was appointed receiver. On October 13, 1993, and thus before Patton Street s November 30, 1993 purchase, NAB purchased the third note for $120,000 at a national RTC auction. This was a non-recorded quitclaim assignment. On May 13, 1994, the RTC assigned to NAB a judgment entered on October 14, 1992 in Civil Action No. H-89-1150 by the United States Court for the Southern District of Texas (the federal court judgment). This judgment adjudicated Velma liable for $1,978,859.41, the full amount of the third note, plus over $1,000,000 in accrued and per diem interest. The quitclaim assignment to NAB was not recorded until September 26, 1994.

D. This Litigation

Based on the future-advance clause, NAB filed this lawsuit, claiming the following: (1) the first lien had priority; (2) Lone Star s 1991 acquisition of the property was therefore void; and (3) Patton Street therefore acquired no rights when it purchased the property from Lone Star in 1993. Patton Street s counterclaim asserted superior rights in the property, including rights as bona fide purchaser.

The parties promptly filed motions for summary judgment seeking declaratory relief. These were referred to a mediator by an agreed order issued by the trial court. As contemplated by the agreed order, when no settlement occurred, the mediator, whose role then switched to that of a master, submitted a 23-page advisory opinion and report to the trial court. On the issue of the rights NAB derived from the first lien, the report recommended granting Patton Street s motion and denying NAB s. The report also concluded that fact issues on the status of Patton Street as bona fide purchaser precluded summary judgment.

NAB and Patton Street submitted additional briefing to the trial court, which initially rendered an interlocutory summary judgment in favor of Patton Street. When NAB moved for reconsideration, the trial court again referred the motion to the mediator/master, who issued a supplemental, revised, advisory report, but still recommended summary judgment in favor of Patton Street on the issue of the rights NAB derived from the first lien. NAB and Patton Street filed additional briefing pertaining to the recommendations contained in the report. NAB also requested leave to file an affidavit as additional summary judgment evidence. The trial court granted NAB s request, but refused to allow Patton Street to file an affidavit in response.

After resolving several matters to finalize the issues for appeal, the trial court reversed its prior ruling and ruled in favor of NAB, first by an interlocutory order on the parties cross-motions for summary judgment, and then by a final, declaratory judgment that extensively detailed how the three liens against the property affected the parties rights. This judgment of the trial court reflects the following conclusions on NAB s and Patton Street s competing claims to the property:

1. NAB was the sole owner of the Third Debt, worth approximately $5,244,369.06, which was secured by both the first lien and the third lien, and had a right to foreclose on either of these liens.

2. Lone Star s foreclosure of the second lien and later transfer of the property to Patton Street were void ab initio, and Lone Star and Patton Street therefore had no interest, either legal or equitable, in the property.

3. Patton Street was not a bona fide purchaser.

Patton Street brings a broad challenge to this judgment in its first issue and raises six additional subsidiary issues. We address each party s interpretation of the effect of the future-advance clause as warranting summary judgment. In addition, we address Patton Street s contentions that NAB was not entitled to prevail by summary judgment on the grounds that Patton Street (1) was not a bona fide purchaser, (2) was barred by res judicata from contesting NAB s right to foreclose, and (3) had no standing to contest NAB s claims.

Standards of Review

Patton Street s first and second issues trigger the well-settled standards that govern summary judgments and interpretation of written instruments.

A. Summary Judgment - Rule 166a(a)

NAB and Patton Street filed traditional rule 166a(a) motions for summary judgment. We follow the usual standard of review: The party with the burden of proof must prove it is entitled to judgment by establishing each element of its claim or defense as a matter of law, or by negating an element of claim or defense of the opposing party as a matter of law. Tex. R. Civ. P. 166a(a) (b), comment; Randall s Food Mkts. Inc. v. Johnson, 891 S.W.2d 640, 644 (Tex. 1995). When a motion for summary judgment raises multiple grounds, we may affirm if any ground is meritorious. Cincinnati Life Ins. Co. v. Cates, 927 S.W.2d 623, 625 (Tex. 1996); Hanson v. Republic Ins. Co., 5 S.W.3d 324, 327 (Tex. App. Houston [1st Dist.] 1999, pet. denied). When, as here, both parties move for summary judgment, and the trial court grants one motion and denies the other, we may determine all questions presented, including the propriety of overruling the appealing party s motion, provided each party has fully met its burden and sought final judgment relief. CU Lloyd s v. Feldman, 977 S.W.2d 568, 569 (Tex. 1998); Hanson, 5 S.W.3d at 327. We consider all summary judgment grounds the trial court rules on that the appealing parties preserve for appellate review and are necessary for final disposition of the appeal. See Cates, 927 S.W.2d at 626.

B. Interpretation of Written Instruments

Unambiguous written instruments may be interpreted as a matter of law by summary judgment. See DeWitt County Elec. Coop., Inc. v. Parks, 1 S.W.3d 96, 100 (Tex. 1999); Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983); GTE Mobilnet, Ltd. Partnership v. Telecell Cellular, Inc., 955 S.W.2d 286, 289 (Tex. App. Houston [1st Dist.] 1997, writ denied). Mortgages are written instruments governed by the same rules of interpretation that govern contracts. Sonny Arnold, Inc. v. Sentry Sav. Ass n, 633 S.W.2d 811, 815 (Tex. 1982); Starcrest Trust v. Berry, 926 S.W.2d 343, 351 (Tex. App. Austin 1996, no writ).

A contract is not ambiguous if its wording permits a definite or certain legal meaning. DeWitt County Elec. Coop., 1 S.W.3d at 100; National Union Fire Ins. Co. v. CBI Indus., 907 S.W.2d 517, 520 (Tex. 1995). A contract is ambiguous if, after applying established rules of construction, its meaning is uncertain and doubtful, or the writing is reasonably susceptible to more than one meaning. DeWitt County Elec. Coop., 1 S.W.3d at 100; Coker, 650 S.W.2d at 393. In determining whether a contract is ambiguous, courts construe and harmonize all provisions of the contract to discern the parties intent. Coker, 650 S.W.2d at 393-94; Weaver v. Highlands Ins. Co., 4 S.W.3d 826, 830 (Tex. App. Houston [1st Dist.] 1999, no pet.). This inquiry also considers the context of the agreement of the parties and the circumstances present when the agreement arose. Friendswood Dev. Co. v. McDade + Co., 926 S.W.2d 280, 282 (Tex. 1996). To discern the contracting parties intent, courts may properly consider all writings pertaining to the same transaction, even if the writings were executed at a different time and do not expressly refer to one another. DeWitt County Elec. Coop., 1 S.W.3d at 102. Summary judgment is improper when ambiguity exists because facts must be resolved to discern the parties intent. Harris v. Rowe, 593 S.W.2d 303, 306 (Tex. 1979); Simpson v. Geico Gen. Ins. Co., 907 S.W.2d 942, 945 (Tex. App. Houston [1st Dist.] 1995, no writ). But a writing is not ambiguous merely because it lacks clarity or because a disagreement in interpretation arises. DeWitt County Elec. Coop., 1 S.W.3d at 100; Weaver, 4 S.W.3d at 830. Moreover, parol evidence of the contracting parties intent is not admissible to support a claim that terms of a contract are ambiguous. Friendswood Dev. Co., 926 S.W.2d at 283. Likewise, parol evidence of the parties intent is not admissible to vary the terms of an otherwise unambiguous instrument. Estes v. Republic Nat l Bank, 462 S.W.2d 273, 275 (Tex. 1970). For parol evidence of the parties intent to be admissible, the contract must first be ambiguous as a matter of law. Id. Ambiguity may be patent or latent. Friendswood Dev. Co., 926 S.W.2d at 282-83. Patent ambiguity is evident on the face of the contract. Id. at 282. When a contract is otherwise unambiguous on its face and fails because of collateral matters, the ambiguity is latent. Id. at 282-83.

Reasonably Contemplated Scope of the Future-Advance Clause

Patton Street s first and second issues challenge whether NAB conclusively established its right to foreclose on the property by virtue of the future-advance clause in the first lien securing the $2,600,000 first note between First Capital and Velma. Patton Street contends the first lien did not secure the third debt as a matter of law because the typewritten additions to the third lien conclusively negate the effect of the future-advance clause. In the alternative, Patton Street contends the written instruments are ambiguous and that parol evidence is necessary to discern the intent of the parties in executing the instruments. Patton Street further contends: (1) NAB conceded the instruments were ambiguous by submitting the affidavit of Robert J. Adam, First Capital s President/CEO and general counsel, in which he explained that First Capital did not intend to negate the future-advance clause in the first lien; and (2) the trial court compounded its error in interpreting the instruments as a matter of law by admitting the parol evidence in Adam s affidavit and refusing to admit Patton Street s proffered affidavit of Wendell H. Sandlin, the president of Velma, in which he explained his understanding of the purpose of the subordination language in the third lien.

Courts presume that debt instruments containing future-advance clauses embody the contracting parties intent and will enforce agreements that clearly and unambiguously state that intent. See Estes, 462 S.W.2d at 276 (rejecting challenge to enforcement of clause allegedly included by mutual mistake because parol evidence offered to negate clause failed clear, exact, and satisfactory standard). Mortgage clauses that secure future indebtedness apply, however, only to debts that are reasonably within the contemplation of the parties. See Wood v. Parker Square State Bank, 400 S.W.2d 898, 901 (Tex. 1966); Vaughn v. Crown Plumbing & Sewer Serv., Inc., 523 S.W.2d 72, 76 (Tex. Civ. App. Houston [1st Dist.] 1975, writ ref d n.r.e.). In enforcing future-advance clauses, therefore, courts necessarily construe not only the instrument that contains the future-advance clause, but also the instrument that creates the future indebtedness to be enforced under the clause. See Vaughn, 523 S.W.2d at 76-77; Bishop v. Nat l Loan Investors, L.P., 915 S.W.2d 241, 244-45 (Tex. App. Fort Worth 1995, writ denied); Airline Commerce Bank v. Commercial Credit Corp., 531 S.W.2d 171, 175 (Tex. Civ. App. Houston [14th Dist.] 1975, writ ref d n.r.e.) (all construing documents containing future-advance clauses and documents creating indebtedness sought to be enforced); see also DeWitt County Elec. Coop., 1 S.W.3d at 102 (holding that courts properly consider all writings pertinent to same transaction, even those executed at different time and without reference to transaction). //

In challenging NAB s contention that the future-advance clause in the first lien deed of trust clearly and unambiguously encompasses the third note between First Capital and Velma, Patton Street relied, in part, on the additional, typewritten clauses, excerpted above, that were incorporated into the third note and third lien negotiated between Velma and First Capital. Patton Street contends the typewritten provisions indicate the parties express intent to subordinate the lien securing the third debt to the liens securing the first and second debts. See Western Auto Supply Co. v. Brazosport Bank, 840 S.W.2d 157, 159 (Tex. App. Houston [1st Dist.] 1992, no writ) (defining subordination agreement as a contractual modification of lien priorities that must be construed both as to parties expressed intent and its own terms). Therefore, Patton Street contends, the additional, typewritten provisions indicate Velma s and First Capital s express intent to exempt the third debt from the application of the preprinted future-advance clause in the first lien and thus prevent the third debt from falling within the scope of the future-advance clause.

NAB challenges Patton Street s reliance on the additional typewritten clauses on several grounds. NAB first contends the terms of the third deed of trust cannot be considered for any purpose in construing the meaning of the future-advance clause in the first lien because Velma and First Capital executed these documents two years after the first note and as part of a different transaction. // But, the only case NAB relies on does not support this argument. Jim Walter Homes, Inc. v. Schuenemann merely acknowledges, as a settled rule of contract interpretation and in the context of a claim that an acceleration-of-maturity clause was usurious, that courts must construe, together, separate documents that are executed at the same time, for the same purpose, and in course of the same transaction. 668 S.W.2d 324, 327 (Tex. 1984).

Moreover, NAB s argument ignores that courts must necessarily examine the documents creating the future indebtedness in determining whether the parties reasonably contemplated that a future-advance clause encompass that indebtedness. See Vaughn, 523 S.W.2d 76; Bishop, 915 S.W.2d at 244-45; Airline Commerce Bank, 531 S.W.2d at 175. NAB s arguments also ignore that we must consider and attempt to reconcile all relevant provisions when interpreting written instruments. See Coker, 650 S.W.2d at 393. Finally, in defending its interpretation that the future-advance clause encompasses the third debt, NAB belies that it rejects the third lien and note by asking us to consider other documents executed at that point in time. NAB alternatively dismisses the added typewritten provisions as mere boilerplate exceptions to warranties of title that appear elsewhere in the third lien. In subordinating the third lien to the first and second liens, however, the provisions exceed that minimal function.

Although we reject NAB s dismissal of the added typewritten subordination provisions in the third note and lien, we do not agree that the provisions conclusively bar the indebtedness secured by the third lien from falling within the future-advance clause. In contending they do, Patton Street asks rhetorically: If the parties intended the future-advance clause to encompass the third debt, why would they (1) create a separate lien to secure the third debt, (2) expressly subordinate that lien to the first and second liens, but (3) never mention the future-advance clause in the third-debt documents, or (4) otherwise indicate that the first lien also secured the third debt? As these questions and NAB s and Patton Street s arguments demonstrate, and as we have determined after applying settled rules of construction, the instruments at issue here do not permit the definite or certain legal meaning accorded by the trial court in rendering summary judgment in favor of NAB as sole owner of the third debt, which debt was secured by both the first and third liens. Accordingly, the trial court erred by rendering summary judgment in favor of NAB on that ground. Likewise, the instruments at issue here do not permit the definite and certain legal meaning that the third debt was not reasonably within the contemplation of the parties to the first lien, as Patton Street contends. Accordingly, the trial court did not err by not rendering summary judgment in favor of Patton Street on that ground.

Because it is not possible to discern, with certainty, the effect of the typewritten subordination clause added to the third lien on the future-advance clause, and vice versa, we cannot say, with certainty, that Gilman and First Capital reasonably contemplated, in executing the first lien containing the future-advance clause, that the clause would encompass the third indebtedness negotiated between Velma and First Capital. The typewritten subordination clause added to the third lien thus gives rise to a latent ambiguity in interpreting the future-advance clause in the first lien. Because of this latent ambiguity, parol evidence is admissible to ascertain Gilman s and First Capital s intent in including the future-advance clause in the first lien, and to ascertain, given the future-advance clause, Velma s and First Capital s intent in adding the subordination clauses in the third note and lien. Accordingly, although inconsistent with its rendering summary judgment in favor of NAB, the trial court did not err by admitting into evidence the affidavit of Robert J. Adam, First Capital s President/CEO and general counsel, in which he explained that First Capital did not intend to negate the future-advance clause in the first lien by adding the typewritten subordination clause. Because parol evidence of the parties intent is admissible, the trial court did err, however, by refusing to admit Patton Street s proffered affidavit of Velma s president, Wendell H. Sandlin, in which he explained his understanding of the purpose of the subordination language in the third lien.

We sustain Patton Street s first and second issues, except as to its challenge to the trial court s admitting the Adam affidavit.

Patton Street s Bona Fide Purchaser Defense

In its sixth issue, Patton Street contends the trial court erred by rendering summary judgment in favor of NAB on the ground that Patton Street was not a bona fide purchaser when it acquired the property from Lone Star in 1993. // Bona fide purchaser status is an affirmative defense. See Madison v. Gordon, 39 S.W.3d 604, 605 (Tex. 2001). A bona fide purchaser acquires its interest in a property in good faith, for value, and without notice of the claim or interest of a third party, here NAB. See Madison, 39 S.W.3d at 606; see also Tex. Prop. Code Ann. 13.001(a) (Vernon Supp. 2002) (rendering unrecorded conveyances of real property or interests in real property void as to bona fide purchasers); Prowse v. Walters, 941 S.W.2d 223, 228 (Tex. App. Corpus Christi 1996, writ denied) (stating that purpose of recording statute is to protect those who take without notice of prior transfer from injury or prejudice arising from lack of knowledge of prior claim).

Notice may be actual or constructive. Gordon, 39 S.W.3d at 606. Actual notice derives from personal information or knowledge; constructive notice is imputed in law to a person with no personal information or knowledge. Id. As a general rule, notice is a fact issue and thus inappropriate for resolution by summary judgment. Hardy Road 13.4 Joint Venture v. Med. Ctr. Bank, 867 S.W.2d 889, 893 (Tex. App. Houston [1st Dist.] 1993, writ denied) (notice or knowledge); Apex Fin. Corp. v. Brown, 7 S.W.3d 820, 831 (Tex. App. Texarkana 1999, no pet.) (actual notice).

NAB s motion for summary judgment sought to defeat the notice element of Patton Street s bona fide purchaser defense. To prevail by summary judgment, NAB had the burden to establish that Patton Street had actual or constructive notice of NAB s claims as a matter of law. Tex. R. Civ. P. 166a(a)-(b), comment. NAB argued Patton Street had constructive notice of its claims by virtue of the future-advance clause in the recorded first lien, which triggered a duty in Patton Street to investigate whether any indebtedness existed that might be encompassed by the clause. The notice provided by a future-advance clause, however, extends only so far as a purchaser or junior creditor may, by an inspection of the record, by ordinary diligence and common prudence, ascertain the extent of the incumbrance. Willis v. Sanger, 40 S.W. 229, 232 (Tex. Civ. App. Dallas 1897, writ ref d).

It is undisputed that the Harris County real property records revealed the following information concerning the property when Patton Street purchased it in 1993 from the record owner, Lone Star, which released all liens in favor of Patton Street: (1) Lone Star had acquired the first note, first lien, and vendor s lien from the RTC; (2) Central Freight had foreclosed the second lien securing the second note in 1991; (3) the foreclosure of the second lien extinguished the third lien; // (4) the third note and third lien expressly subordinated any liens securing the third debt to the first and second liens; (5) the federal court judgment the RTC obtained in Civil Action No. H-89-1150 did not refer to the property or the liens; and (6) Velma no longer owned the property when the abstract of the federal judgment was filed with the Harris County District Clerk. It is likewise undisputed that, when Patton Street purchased the property, the real property records did not reveal any assignment of the third note, the third lien, the federal judgment, or the first lien to NAB.

Although the future-advance clause in the first lien may have triggered a duty of inquiry in Patton Street, an ordinarily diligent and prudent inspection of the real property records would not have revealed NAB s claims to a degree necessary to establish constructive knowledge as a matter of law. NAB also mistakenly relies on Patton Street s failure to obtain an estoppel certificate from the RTC, the holder of the first lien, to ensure the future-advance clause would not be enforced against any indebtedness not disclosed by the real property records. See Southwest Title Ins. v. Northland Bldg. Corp., 542 S.W.2d 436, 441 n.1 (Tex. App. Fort Worth 1976), aff d in part and rev d in part, 552 S.W.2d 425 (Tex. 1977). Although a properly drawn estoppel certificate may afford that protection, id., failure to execute one does not preclude bona fide purchaser status. NAB also relies on a lis pendens filed in the federal action, Civil Action No. H-89-1150, as establishing that Patton Street had constructive knowledge of NAB s claims as a matter of law. But the abstract of that judgment in the Harris County real property records indicated only an award to the RTC of recited principal and interest; the abstract did not address the property, the first and third liens, or the debts they secured.

NAB attributed actual knowledge to Patton Street and its codefendants by relying on numerous letters and correspondence, directed either to them or their attorneys, which referred to either the first lien, the lis pendens and judgment in the federal court action, or the subject debt. NAB did not conclusively demonstrate, however, that the correspondence afforded actual notice of NAB s claims. Moreover, in responding to NAB s motion for summary judgment, Patton Street denied it had any knowledge, when it purchased the property, that NAB had any interest in it.

Whether considered singly or together, these factors do not establish, as a matter of law, that Patton Street had actual or constructive notice of NAB s claims and is thus barred from asserting its bona fide purchaser defense.

We sustain Patton Street s sixth issue.

Patton Street s Standing to Challenge NAB s Right to Foreclose

In its fifth issue, Patton Street challenges whether NAB established that Patton Street lacks standing to dispute NAB s right to foreclose on the property. // In moving for summary judgment on this ground, NAB argued that only mortgagors or those in privity with them may contest a mortgagor s sale under a deed of trust and that Patton Street is a stranger to title. See Mercer v. Bludworth, 715 S.W.2d 693, 698 (Tex. App. Houston [1st Dist.] 1986, writ ref d n.r.e.), disapproved on other grounds by Shumway v. Horizon Credit Corp., 801 S.W.2d 890, 894 (Tex. 1991). As NAB acknowledges, a well-settled exception vests standing in third-party holders of legal or equitable interests. See Goswami v. Metropolitan Sav. & Loan Ass n, 751 S.W.2d 487, 489 (Tex. 1988); see also Henry v. Mr. M Convenience Stores, Inc., 543 S.W.2d 393, 396 (Tex. Civ. App. Houston [1st Dist.] 1976, writ ref d n.r.e.) (recognizing standing of third party holding equitable interest to sue to remove cloud on title). In contending Patton Street has neither legal nor equitable interest in the property, NAB disregards, in particular, Patton Street s having purchased the property for $1,200,000 and paid off the first lien and tax liens. This alone creates an equitable interest in the property in Patton Street, which thus has standing to challenge NAB s right to foreclose on the property.

We sustain Patton Street s fifth issue.

Res Judicata Effect of Federal Court Judgment

Patton Street s third issue challenges whether NAB established, as a matter of law, that a 1992 federal judgment bars Patton Street from challenging the rights NAB derived through the future-advance clause in the first lien. // NAB s first asserted basis in moving for summary judgment was that a 1992 federal court judgment precluded Patton Street from contesting these rights. This argument refers to the federal court judgment in Civil Action No. H-89-1150 in favor of the RTC, as receiver for First Capital. This judgment, which adjudicated Velma liable for the full amount of the third note, now worth approximately $5,000,000, is the judgment that the RTC sold to NAB for $120,000 on October 13, 1993.

The premise underlying NAB s plea in bar was that Central Freight, the holder of the second note and lien, sued Velma in the federal court action, and also cross-claimed against First Capital for a declaration that the first lien secured only the first debt and not the third debt, despite the future-advance clause in the first lien. On settling its dispute with Velma, however, Central Freight abandoned its cross-claim against First Capital, and the federal court judgment does not address it. In moving for summary judgment in this case, NAB claimed Patton Street was barred, as a matter of law, from contesting the lien rights NAB claimed under the future-advance clause in the first lien because the final judgment in the federal court action disposed of all matters before that court as a matter of law, including Central Freight s cross-claim for declaratory relief. Patton Street contends the federal court judgment had no preclusive effect because the judgment did not resolve Central Freight s request for declaratory relief. We agree.

Federal law determines the preclusive effect of a federal court judgment in Texas state court. Eagle Properties, Ltd. v. Scharbauer, 807 S.W.2d 714, 718 (Tex. 1990). Barring an exception, res judicata applies under federal law when: (1) a final judgment is rendered on the merits; (2) by a court of competent jurisdiction; (3) the prior action and the subject action involve the same cause of action; and (4) the prior action and the subject action involve the same parties. Id.; Home Indem. Co. v. Pate, 814 S.W.2d 497, 500 (Tex. App. Houston [1st Dist.] 1991, writ denied). Unresolved requests for declaratory relief constitute a well-settled exception to the claim-preclusion doctrine. Kaspar Wire Works, Inc. v. Leco Eng g & Mach., Inc., 575 F.2d 530, 535 (5th Cir. 1979); see 28 U.S.C. 2201(a) (1994) (federal Declaratory Judgment Act) (providing that any declaration of rights and other legal relations of any interested party seeking such declaration shall have the force and effect of a final judgment or decree and be reviewable as final judgment or decree). Because the federal court judgment declared no rights on Central Freight s abandoned counterclaim, that judgment does not preclude Patton Street from contesting the lien rights NAB claimed under the future-advance clause in the first lien. Accordingly, NAB was not entitled to prevail by summary judgment on its asserted affirmative defense of res judicata.

We sustain Patton Street s third issue.

We need not address Patton Street s remaining issues, numbers four and seven, which challenge, respectively, the trial court s declarations that Lone Star s 1991 foreclosure sale was void ab initio and that Patton Street had no rights of equitable subrogation. The invalidity of the Lone Star foreclosure is not a dispositive issue for purposes of summary judgment for either party based on the parties interpretations of the effect of the future-advance clause and may never be reached, depending on the trial court s resolution of the issues remanded. Likewise, Patton Street s equitable defenses arise only if NAB s interpretation of the future-advance clause is correct.

Conclusion

We incorporate our interlocutory order of April 20, 2000, granting the unopposed motion to dismiss of appellant, Lone Star Truck Stop, Inc., and dismiss its appeal. In all other respects, we reverse the judgment of the trial court and remand the cause for further proceedings.

Tim Taft

Justice

Panel consists of Justices Taft, Brister, // and Price. //

Do not publish. Tex. R. App. P. 47.4.