Thomas N. Kearns and Vineyard Bay Development Company, Inc. v. Bruce Liesman, Trustee; Alamo Title Insurance of Texas; and The Vineyard on Lake Travis--Appeal from 53rd District Court of Travis County

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TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-95-00687-CV
Thomas N. Kearns and Vineyard Bay Development Company, Inc., Appellants
v.

Bruce Liesman, Trustee; Alamo Title Insurance of Texas; and

The Vineyard on Lake Travis, Appellees

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 53RD JUDICIAL DISTRICT
NO. 92-15811, HONORABLE SUZANNE COVINGTON, JUDGE PRESIDING
Appellees Bruce Liesman, Trustee, and Alamo Title Insurance of Texas sued Vineyard Bay Development Company for payment on a note, seeking to foreclose liens on real estate owned by Vineyard Bay. Liesman and Alamo also sued appellant Thomas Kearns as a defendant and asked the court to declare that their liens on the land were superior to that of Kearns. Following a trial without a jury, the trial court rendered judgment awarding foreclosure of the liens and declaring that the liens enjoyed priority over Kearns' lien. We will affirm the trial court's judgment.

BACKGROUND

The parties do not dispute the facts forming the background of this case. In 1984, The Vineyard on Lake Travis borrowed money from the United Bank of Texas. United Bank secured payment of its note by a deed of trust on land The Vineyard planned to develop. In 1986, The Vineyard sold fifty-three lots in the planned subdivision to Vineyard Bay Development Company in exchange for Vineyard Bay's assumption of the United Bank note. The Vineyard reserved a vendor's lien on the fifty-three lots and obtained a separate deed of trust to secure the assumption. Kearns subsequently loaned money to Vineyard Bay and took yet another lien on three of the fifty-three lots. (1)

Pursuing its real estate development, Vineyard Bay sold lots in the subdivision to individual homeowners. The lots conveyed were released from United Bank's lien, but remained subject to the liens obligating Vineyard Bay on the note it had assumed. As the homeowners purchased them, Alamo insured title to the lots. United Bank was declared insolvent, and the Federal Deposit Insurance Corporation became the holder of the note. On Vineyard Bay's default in paying the note and the FDIC's suit against it, Vineyard Bay negotiated a settlement by which it paid part of the balance due. The FDIC then sued The Vineyard for the deficiency.

In the case now on appeal, The Vineyard sued Vineyard Bay, seeking indemnity for the amount it was obligated to pay the FDIC and foreclosure of its vendor's lien. Alamo learned of this suit and, after investigating, determined that it would be responsible for defending title to the lots its insureds had bought from Vineyard Bay. Alamo therefore purchased the note from the FDIC and released The Vineyard from liability in exchange for The Vineyard's transfer of its liens on the fifty-three lots to Alamo's named trustee, Bruce Liesman. Liesman then released the liens on all but the four lots still owned by Vineyard Bay. Liesman and Alamo intervened in this suit against Vineyard Bay. (2) Liesman sought to foreclose the liens on the four lots that Vineyard Bay still owned. Three of these lots remained subject to Kearns' junior lien. Kearns asserted that, as a junior lienholder, he was entitled to benefit from the equitable doctrine of marshaling assets. By its judgment, the trial court denied Kearns any equitable relief and granted Liesman a judicial foreclosure on the four lots. We will refer to Liesman and Alamo together as Alamo and to the liens securing the note Vineyard Bay assumed as Alamo's liens or the assumption liens.

DISCUSSION

In his sole point of error, Kearns asserts that the trial court erred in concluding that the doctrine of marshaling applies only to subsequent transferees and, therefore, in failing to apply the doctrine to him. (3) Kearns obtained his lien after the assumption liens were in place, putting Kearns in the position of a junior lienholder on the three lots. In conclusion of law number twenty, the trial court stated: "The doctrine of marshalling is applicable only as to subsequent transferees. Since neither Defendant is a subsequent transferee, the doctrine is inapplicable." Kearns challenges this conclusion as being incorrect as a matter of law.

The equitable doctrine of marshaling assets encompasses two separate doctrines, the two-funds doctrine and the rule of inverse order of alienation. See John F. Green, Jr., Marshaling Assets in Texas, 34 Tex. L. Rev. 1054, 1054 (1956). The two-funds doctrine applies when a creditor holds a lien on two funds to secure the payment of a debt, one of which funds is subject to an inferior lien. If the debtor defaults, the junior lienholder may require the senior lienholder to satisfy its lien first out of that fund not subject to the inferior lien; if such fund is sufficient to satisfy the debt, the senior lien on the fund subject to the inferior lien is discharged. Burg v. Hitzfeld, 89 S.W.2d 272, 275-76 (Tex. Civ. App.--San Antonio 1935, writ dism'd); see Green, supra, at 1055. Applying the two-funds doctrine protects the junior lienholder from having his security destroyed when the senior lienholder could have satisfied its lien on property not doubly secured. Wileman v. Federal Farm Mortgage Corp., 169 S.W.2d 1013, 1015 (Tex. Civ. App.--Texarkana 1943, no writ); Ohio Cultivator Co. v. People's Nat'l Bank, 55 S.W. 765, 771 (Tex. Civ. App.--Dallas 1900, no writ). Had Vineyard Bay done nothing more than grant a second lien on part of its land to Kearns, Kearns might have invoked the doctrine to compel Alamo to satisfy its senior liens from that part of the land not subject to Kearns' junior lien.

After granting a second lien to Kearns, however, Vineyard Bay sold forty-nine of its lots to individual homeowners, subject to Alamo's liens. Alamo's liens, after these sales, covered properties in the hands of more than one "debtor." The two-funds doctrine, which requires that two creditors seek to charge the same debtor, does not apply to such a case. Rogers v. Blum, 56 Tex. 1, 8 (1881); see Keasler v. Wray, 171 S.W. 534, 536 (Tex. Civ. App.--Texarkana 1914, no writ); Ohio Cultivator Co., 55 S.W. at 771. Kearns must therefore invoke the rule of inverse order of alienation. This doctrine applies when a debtor conveys various parcels of mortgaged property for value to successive grantees. On the debtor's default and the lienholder's threatened foreclosure, the grantees may be entitled to compel the lienholder to resort first to any property remaining in the debtor's hands and then to proceed against the parcels in the reverse order in which the debtor transferred them. Vansickle v. Watson, 123 S.W. 112, 114 (Tex. 1909). The inverse-order rule protects trusting or ill-advised buyers of mortgaged property by allowing the mortgaged debt to be first satisfied from unsold or more recently sold property. Maurer v. Arab Petroleum Corp., 135 S.W.2d 87, 88 (Tex. 1940); see Green, supra, at 1058. The doctrine, being purely one of equity, does not apply automatically, and courts asked to apply it must scrutinize the circumstances of each case. E.g.,Vansickle, 123 S.W. at 115.

An extension of the inverse-order rule may apply if the lienholder, with knowledge of the grantee's right to marshaling, releases from its lien a tract primarily liable, that being an unsold or most recently sold tract. Those tracts liable after the first are then held to be discharged from the senior lien to the extent of the value of the land released. Watson v. Vansickle, 114 S.W. 1160, 1164 (Tex. Civ. App.--Dallas), rev'd on other grounds, 123 S.W. 112 (Tex. 1909). Kearns contends that, by releasing the homeowners' lots from the assumption liens, Alamo effectively discharged the senior liens on the three lots subject to his junior lien.

The inverse-order rule clearly applies to benefit subsequent purchasers. But Kearns is not a subsequent purchaser. To receive its protection, Kearns must first establish that the rule considers junior lienholders to be equivalent to subsequent purchasers. Kearns must further argue that the extension of the rule applies in view of Alamo's release of the homeowners' lots from the assumption liens. The trial court denied Kearns relief on the ground that the doctrine cannot be claimed by a junior lienholder. Although several older cases have applied the rule to protect junior lienholders, we need not resolve this issue to determine Kearns' point of error. See First State Bank v. Cox, 139 S.W. 1, 3 (Tex. Civ. App.--Dallas 1911, no writ); John M. Bonner Memorial Home v. Collin County Nat'l Bank, 122 S.W. 430, 433 (Tex. Civ. App.--Dallas 1909, no writ); see also Maurer, 135 S.W.2d at 88 (stating that inverse-order rule protects subsequent vendees or junior lienholders).

Assuming that the trial court reached an incorrect legal conclusion, the judgment will not be reversed if the controlling findings of fact will support a correct legal theory. Westech Eng'g, Inc. v. Clearwater Constructors, Inc., 835 S.W.2d 190, 196 (Tex. App.--Austin 1992, no writ). The trial court made a fact finding on one element of the marshaling doctrine, namely, that Kearns is not a subsequent transferee. (4) When the trial court gives express findings on some elements of a defense but omits other elements, we assume that the court made findings on the omitted elements in a manner consistent with the judgment. Tex. R. Civ. P. 299; Bednarz v. State, 176 S.W.2d 562, 563 (Tex. 1943); Leonard v. Eskew, 731 S.W.2d 124, 132 (Tex. Civ. App.--Austin 1987, writ ref'd n.r.e.). Kearns must show on appeal that the trial court erred in determining each element against him. See Johnson v. Garza, 884 S.W.2d 831, 835 (Tex. App.--Austin 1994, writ denied).

To benefit from the doctrine of marshaling, Kearns was required to prove in view of all the circumstances that the equity of his position surpassed that of the party or parties to be affected by marshaling. Moody Day Co. v. Westview Nat'l Bank, 452 S.W.2d 572, 574 (Tex. Civ. App.--Waco 1970, writ ref'd n.r.e.). Thus, Kearns was not entitled to marshaling if it would delay or inconvenience Alamo or prejudice it in any manner. Bewley Mills v. First Nat'l Bank, 110 S.W.2d 201, 209 (Tex. Civ. App.--Fort Worth 1937, writ dism'd); Ohio Cultivator Co., 55 S.W. at 771. Kearns also had to show that the value of the later acquired lots was adequate to satisfy the debt. Morris v. Biggs & Co., 165 S.W.2d 915, 918 (Tex. Civ. App.--Amarillo 1942, writ dism'd); Bewley Mills, 110 S.W.2d at 209-210. Further, Kearns was required to prove that, when Alamo released the assumption liens on the homeowners' lots, it had actual knowledge of his right to marshaling. Biswell v. Gladney, 213 S.W. 256, 258 (Tex. Comm'n App. 1919, judgm't adopted); Watson, 123 S.W. at 114-15; Wolfe v. Houston Land & Irrigation Co., 98 S.W. 1069, 1070 (Tex. Civ. App.--Houston 1906, no writ); Ohio Cultivator Co., 55 S.W. at 771; see also Abbott v. First Nat'l Bank, 155 S.W. 321, 324 (Tex. Civ. App.--Amarillo 1913, no writ).

On appeal, Kearns attacks Alamo's equities and asserts that the value of the homeowners' lots exceeds the amount secured by the assumption liens. He fails, however, to argue that Alamo knew of his junior lien when it released the homeowners' lots from the assumption liens. Furthermore, Kearns does not specifically argue that the assumption liens should first be satisfied from the one unsold lot before resorting to the homeowners' lots or to the three lots subject to his lien. We determine that, by failing to assert that the one lot should be sold first and the proceeds credited to payment of the note before selling the three lots, Kearns has waived this argument on appeal. Harris v. General Motors Corp., 924 S.W.2d 187, 188 (Tex. App.--San Antonio 1996, writ denied). We therefore cannot agree that Kearns has established his entitlement to marshaling. Even had Kearns argued that he established every element of marshaling, he has not provided this Court with any of the numerous exhibits admitted in evidence at trial. We would be unable to assess the evidentiary support for the elements of marshaling in the absence of a complete reporter's record. Schafer v. Conner, 813 S.W.2d 154, 155 (Tex. 1991).

Because Kearns has failed to show his entitlement to marshaling by attacking every element found against him and by providing a complete record on appeal, we overrule point one.

We affirm the judgment of the trial court.

Bea Ann Smith, Justice

Before Chief Justice Carroll, Justices Aboussie and B. A. Smith

Affirmed

Filed: January 15, 1998

Do Not Publish

1. Although Kearns' lien initially covered four lots, he later released his lien as to one of them.

2. The Vineyard remained in the suit only to seek attorney's fees from Vineyard Bay for its efforts to collect on the note.

3. Vineyard Bay perfected an appeal but, despite representing to this Court that it would move to dismiss its appeal, tendered neither such a motion nor a brief on the merits.

4. Although this finding is ultimately immaterial to the doctrine of marshaling, the trial court intended the finding to relate to Kearns' claim that the doctrine applied to him.

ontrolling findings of fact will support a correct legal theory. Westech Eng'g, Inc. v. Clearwater Constructors, Inc., 835 S.W.2d 190, 196 (Tex. App.--Austin 1992, no writ). The trial court made a fact finding on one element of the marshaling doctrine, namely, that Kearns is not a subsequent transferee. (4) When the trial court gives express findings on some elements of a defense but omits other elements, we assume that the court made findings on the omitted elements in a manner consistent with the judgment. Tex. R. Civ. P. 299; Bednarz v. State, 176 S.W.2d 562, 563 (Tex. 1943); Leonard v. Eskew, 731 S.W.2d 124, 132 (Tex. Civ. App.--Austin 1987, writ ref'd n.r.e.). Kearns must show on appeal that the trial court erred in determining each element against him. See Johnson v. Garza, 884 S.W.2d 831, 835 (Tex. App.--Austin 1994, writ denied).