KINGMAN HOLDINGS LLC v. MORTGAGE ELECTRONIC REGISTRATION SYSTEMS INC AND MERSCORP HOLDINGS INC

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Court of Appeals of Texas, Dallas.

KINGMAN HOLDINGS, LLC, Appellant v. MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC. AND MERSCORP HOLDINGS, INC., Appellees 1

No. 05-15-01353-CV

Decided: October 27, 2016

Before Justices Fillmore, Brown, and O'Neill 2

MEMORANDUM OPINION

Opinion by Justice Fillmore

Mortgage Electronic Registration Systems, Inc. (MERS) and MERSCORP Holdings, Inc. filed a bill of review, seeking to set aside a May 11, 2011 agreed final judgment (the Final Judgment) in Kingman Holdings, LLC v. DHI Mortgage Company, Ltd., Cause No. 219-01573-2011, in the 219th Judicial District Court of Collin County, Texas (the First Lawsuit), that declared a lien on certain real property was “of no force and effect” and Kingman Holdings, LLC's title to the real property was “not subject to any lien or encumbrance, save for taxes and assessments.” Appellees filed a motion for summary judgment requesting the trial court grant the bill of review, set aside and vacate the Final Judgment, and declare there was a valid and enforceable lien on the real property. Kingman filed a plea to the jurisdiction, asserting the trial court did not have jurisdiction because the controversy was moot and appellees lacked standing to challenge the Final Judgment. The trial court denied Kingman's plea to the jurisdiction, granted appellees' motion for summary judgment, and awarded appellees $49,975.74 for attorneys' fees and costs as well as contingent fees on appeal.

In three issues, Kingman contends the trial court erred by denying Kingman's plea to the jurisdiction, granting appellees' motion for summary judgment, and awarding attorneys' fees to appellees. We conclude appellees do not have standing because they assigned their rights to prosecute this bill of review to Wells Fargo Bank, N.A. Accordingly, we vacate the trial court's order denying the plea to the jurisdiction and render judgment dismissing the case for lack of jurisdiction.

Background 3

This case involves the real property and improvements located at 13751 Lincolnshire Lane in Frisco, Texas (the Property). The Property is subject to a Declaration of Covenants, Conditions and Restrictions for Villages at Willow Bay (the Declarations), which were recorded in the real property records of Collin County, Texas, on June 14, 2005. The Declarations provide for the creation of a lien in favor of the Villages at Willow Bay Homeowners Association, Inc. (the HOA) for assessments which are not timely paid by the individual homeowners.

Troy Westmoreland purchased the Property on August 29, 2007. The purchase was financed through a loan by DHI Mortgage Company to Westmoreland in the amount of $172,788. The loan was evidenced by a promissory note, pursuant to which Westmoreland agreed to pay DHI the principal amount of the loan as well as interest. The note was secured by a deed of trust signed by Westmoreland, and joined pro forma by his wife, Chiharu Murakami, that created a lien on the Property in favor of DHI. The deed of trust was recorded in the public records of Collin County, Texas, on September 4, 2007.

The deed of trust defines the “lender” as DHI and the “beneficiary” as MERS, acting as nominee for the lender and its successors and assigns. The deed of trust states that Westmoreland and Murakami understood and agreed that:

MERS [held] only legal title to the interests granted by [Westmoreland and Murakami] in this Security Instrument; but, if necessary to comply with law or custom, MERS, (as nominee for Lender and Lender's successors and assigns), [had] the right to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender including, but not limited to, releasing or canceling this Security Instrument.

MERS is a wholly owned subsidiary of MERSCORP.4 A lender that is a member of the MERS® System may appoint MERS to act as deed of trust beneficiary or mortgagee and may register the associated mortgage loan on the MERS® System, a private electronic database which is owned and operated by MERSCORP. Throughout the life of the loan, MERS will typically remain the lienholder of record when transfers of the note and/or servicing rights occur between MERS® System members. These transfers are tracked electronically through the MERS® System.

At all times relevant to this appeal, both DHI and Wells Fargo were members of the MERS® System. On September 11, 2007, DHI “negotiated, transferred, sold and/or assigned” the Westmoreland note to Wells Fargo. Following the transfer, MERS continued to hold the deed of trust as beneficiary in a nominee capacity for Wells Fargo. The transfer of the note from DHI to Wells Fargo was not recorded in the public records of Collin County.

On August 18, 2009, the HOA filed in the public records of Collin County a lien on the Property for unpaid assessments in the amount of $360 plus fees, including attorneys' fees, incurred by the HOA. The HOA's lien was specifically subordinate and inferior to the lien created by the deed of trust. On September 7, 2010, the HOA foreclosed on the Property and sold it to Kingman at a non-judicial foreclosure sale for $2,900.5 Kingman recorded its deed in the public records of Collin County on September 21, 2010. The deed from the HOA to Kingman specifically stated the conveyance was made subject to “all valid and subsisting superior liens, mortgages, [and] encumbrances” relating to the Property that were shown by instruments filed in the public records of Collin County.

Kingman sued DHI on April 12, 2011, asserting that the deed of trust was a cloud on the title to the Property that should be extinguished and removed because, on information and belief, DHI no longer owned or held the note secured by the deed of trust and no other party of record had asserted a claim to the Property. Kingman pleaded that the existence of the lien interfered with its use and enjoyment of the property. Kingman did not name either MERS or Wells Fargo as a defendant in the lawsuit and did not provide them with notice of the lawsuit.

In connection with filing suit, Kingman's counsel sent a letter to DHI's counsel stating that the property records reflected DHI was still the beneficiary of the deed of trust and holder of the note relating to the Property, but “[b]ased on our prior dealings I assume that this is no longer the case.” Kingman's counsel enclosed a proposed agreed judgment to resolve the litigation. Because DHI no longer owned the note secured by the deed of trust, it agreed to entry of the proposed judgment.6 The Final Judgment, however, not only resolved Kingman's claims against DHI, but ordered that the lien created by the deed of trust was “of no force and effect,” and Kingman's title to the Property was “not subject to any lien or encumbrance, save for taxes and assessments.” The Final Judgment also quieted title to the Property in Kingman. The judge of the 219th Judicial District Court signed the Final Judgment on May 11, 2011.

On August 30, 2011, MERS assigned the deed of trust, “the full benefit of all the powers and of all the covenants and provisos therein contained,” and MERS's beneficial interest under the deed of trust to Wells Fargo. The assignment was filed in the public records of Collin County on September 1, 2011.

In 2012, Wells Fargo filed a bill of review attacking the Final Judgment. On July 9, 2014, appellees filed this bill of review, seeking to set aside the Final Judgment and requesting a declaration that the deed of trust created a valid, subsisting, and enforceable lien on the Property that survived Kingman's purchase of the Property. Wells Fargo dismissed its bill of review on August 1, 2014.

Appellees filed a motion for summary judgment on their requests for a bill of review, for declaratory relief, and for an award of attorneys' fees. Both Kingman and DHI responded to the motion for summary judgment. Kingman also filed a plea to the jurisdiction, contending there was no justiciable controversy and appellees lacked standing because MERS had assigned its interest in the Property to Wells Fargo.

The trial court held a non-evidentiary hearing on Kingman's plea to the jurisdiction and appellees' request for summary judgment. The trial court denied the plea to the jurisdiction; granted appellees' motion for summary judgment; ordered that the Final Judgment was rendered void, vacated, and expunged; declared the deed of trust was in full force and effect and created a valid, subsisting, and enforceable lien on the Property; declared the deed of trust was senior to any interest in the Property held by Kingman and its successors and assigns; ordered that Kingman have judgment against DHI declaring and confirming that DHI no longer owns or holds the note that is secured by the deed of trust and could not enforce the terms of the deed of trust; declared that Kingman, as the owner of the equity of redemption, has the right to maintain its ownership in the Property subject to any valid, senior lien or encumbrance; and awarded appellees $49,975.74 for attorneys' fees and court costs as well as contingent attorneys' fees on appeal.

Plea to the Jurisdiction

In its first issue, Kingman asserts the trial court erred by (1) failing to conduct an evidentiary hearing on the plea to the jurisdiction, (2) refusing to file findings of fact and conclusions of law, and (3) denying the plea to the jurisdiction. As to the third argument, Kingman specifically contends appellees have no current interest in the Property, depriving them of standing to bring the bill of review and causing the dispute to be moot. Because this argument challenges our jurisdiction over this appeal, we address it first.

Standard of Review

A plea to the jurisdiction is a dilatory plea that seeks dismissal of a case for lack of subject matter jurisdiction. Harris Cty. v. Sykes, 136 S.W.3d 635, 638 (Tex. 2004); Univ. of Tex. Sw. Med. Ctr. v. Saunders, No. 05-15-01543-CV, 2016 WL 3854231, at *2 (Tex. App.—Dallas July 13, 2016, pet. denied) (mem. op.). Because subject matter jurisdiction presents a question of law, we review a trial court's ruling on a plea to the jurisdiction de novo. Westbrook v. Penley, 231 S.W.3d 389, 394 (Tex. 2007); Tex. Dep't of Parks & Wildlife v. Miranda, 133 S.W.3d 217, 226 (Tex. 2004).

It is the plaintiff's burden to plead facts that affirmatively establish the trial court's subject matter jurisdiction. Tex. Ass'n of Bus. v. Tex. Air Control Bd., 852 S.W.2d 440, 446 (Tex. 1993); Saunders, 2016 WL 3854231, at *2. When a plea to the jurisdiction challenges the pleadings, we determine if the pleader has alleged facts that affirmatively demonstrate the court's jurisdiction to hear the case. Miranda, 133 S.W.3d at 226 (whether pleader has alleged facts affirmatively demonstrating trial court's subject matter jurisdiction is question of law reviewed de novo). In determining whether the plaintiff has met this burden, we review the allegations in the plaintiff's pleadings, construe them liberally in favor of the plaintiff, and look to the pleader's intent. Id. While we must construe the allegations in favor of the plaintiff, we are not bound by legal conclusions. Saunders, 2016 WL 3854231, at *2.

If a plea to the jurisdiction challenges the existence of jurisdictional facts, we consider the relevant evidence submitted by the parties when necessary to resolve the jurisdictional issues that are raised. Miranda, 133 S.W.3d at 227. The standard of review of a plea to the jurisdiction based on evidence “generally mirrors that of a summary judgment under Texas Rule of Civil Procedure 166a(c).” Id. at 228. Under this standard, we take as true all evidence favoring the nonmovant and draw all reasonable inferences and resolve any doubts in the nonmovant's favor. Id.

Attack on Existing Judgment

When and how an existing judgment may be attacked depends on whether the judgment is void or voidable. PNS Stores, Inc. v. Rivera, 379 S.W.3d 267, 271–72 (Tex. 2012). A voidable judgment must be attacked directly, while a void judgment may be attacked either directly or collaterally. Id. at 271. A direct attack, such as an appeal, a motion for new trial, or a bill of review, “attempts to correct, amend, modify, or vacate a judgment and must be brought within a definite time period after the judgment's rendition.” Id. However, a “collateral attack seeks to avoid the binding effect of a judgment in order to obtain specific relief that the judgment currently impedes,” and may be brought at any time. Id. at 272.

Appellees, through a bill of review,7 brought a direct attack on the Final Judgment on the grounds MERS had an interest in the Property at the time of the First Lawsuit, was a necessary party to the First Lawsuit, and did not receive notice of the First Lawsuit. “ ‘[A] judgment entered without notice or service is constitutionally infirm,’ and some form of attack must be available when defects in personal jurisdiction violate due process.” Id. at 272–73 (quoting Peralta v. Heights Med. Ctr., Inc., 485 U.S. 80, 84 (1988)). “An elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under the circumstances, to apprise interested parties of the pendency of the action and afford them the opportunity to present their objections.” Peralta, 485 U.S. at 84 (quoting Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950)). “Failure to give notice violates ‘the most rudimentary demands of due process of law.’ ” Id. (quoting Armstrong v. Manzo, 380 U.S. 545, 550 (1965)). A complete failure or lack of service violates due process and causes a judgment to be void. PNS Stores, Inc., 379 S.W.3d at 274.8

A nonparty can collaterally attack an existing judgment if the judgment directly and necessarily affects the nonparty's rights. TFHSP Series LLC v. MidFirst Bank, No. 05-14-00730-CV, 2015 WL 4653166, at *3 (Tex. App.—Dallas Aug. 6, 2015, no pet.) (mem. op.). “For example, if a judgment deprives a creditor of its lien but the creditor was not joined in the suit, the creditor can collaterally attack the judgment to protect its interest in the property.” Id.; see also Sec. State Bank & Trust v. Bexar Cty., 397 S.W.3d 715, 721–24 (Tex. App.—San Antonio 2012, pet. denied) (nonparty lienholder could collaterally attack tax delinquency judgment and foreclosure sale because lienholder was given no notice of tax delinquency lawsuit). After the expiration of the time to bring a direct attack, a litigant may only attack a judgment collaterally. PNS Stores, Inc., 379 S.W.3d at 272.

Standing

The legal doctrine of standing addresses whether a party is the proper person to bring a lawsuit. Webb v. Vega, 316 S.W.3d 809, 812 (Tex. App.—Dallas 2010, no pet.). The general test for standing is whether there is a real controversy between the parties that will actually be determined by the judgment sought. Tex. Ass'n of Bus., 852 S.W.2d at 446; Gertner v. HQZ Partners, LP, No. 05-15-00422-CV, 2016 WL 4436444, at *3 (Tex. App.—Dallas Aug. 22, 2016, no pet. h.) (mem. op.). To have standing, a party must have a personal stake in the controversy. Nootsie, Ltd. v. Williamson Cty. Appraisal Dist., 925 S.W.2d 659, 661 (Tex. 1996); Ascendant Anesthesia PLLC v. Abazi, 348 S.W.3d 454, 461 (Tex. App.—Dallas 2011, no pet.). The issue of standing focuses on whether a party has a sufficient relationship with the lawsuit so as to have a justiciable interest in the outcome. Austin Nursing Ctr., Inc. v. Lovato, 171 S.W.3d 845, 848 (Tex. 2005); ECF N. Ridge Assocs., L.P. v. ORIX Capital Mkts., L.L.C., 336 S.W.3d 400, 405 (Tex. App.—Dallas 2011, pet. denied). Generally, to have standing to bring a bill of review, a litigant must have been a party to the prior judgment or have had a then-existing interest or right that was prejudiced by the prior judgment. Frost Nat'l Bank v. Fernandez, 315 S.W.3d 494, 502 (Tex. 2010).

Appellees argue they have standing to bring this bill of review because MERS had an existing interest or right in the property at the time of First Lawsuit, was not given notice of that litigation, and its interest or right in the property was prejudiced by the Final Judgment.9 Kingman contends appellees do not have standing to bring this bill of review because MERS assigned the deed of trust to Wells Fargo after the entry of the Final Judgment. Based on this Court's opinion in HSBC Bank USA, N.A. v. Watson, 377 S.W.3d 766 (Tex. App.—Dallas 2012, pets. dism'd), which constitutes authority binding upon this panel, we are compelled to conclude that, because MERS assigned its right to bring this bill of review to Wells Fargo, appellees do not have standing to prosecute this suit.

HSBC involved a bill of review brought by the assignee of a note and a deed of trust relating to real property. Jeanie and Tony Watson purchased the real property from First Source Real Estate Services and Property Management, Inc. in July 2004. Id. at 770. The Watsons borrowed money from Fieldstone Mortgage to finance the purchase, and Fieldstone was named as the grantee in two deeds of trust on the property. Id. In 2005, the Watsons sued First Source and another defendant for statutory fraud, violation of the Texas Deceptive Trade Practices Act, and declaratory relief. Id. Fieldstone was not a defendant in the suit and was not notified of the litigation. Id.

The trial court signed a default judgment on July 1, 2005, that both awarded damages to the Watsons and voided the purchase of the property. Id. Specifically, the judgment voided all real estate closing documents relating to the Watsons' acquisition of the property, including First Source's warranty deed with vendor's lien and Fieldstone's two deeds of trust. Id. The Watsons believed the default judgment had the effect of re-vesting the property in First Source, free and clear of the liens addressed by the default judgment. Id.

The Watsons subsequently executed on the default judgment against First Source, resulting in a constable's sale of the property in August 2006. Id. Burleson Old Town, L.L.C. purportedly acquired an interest in the property at the constable's sale. Id. Through a series of conveyances, Matthew G. Aiken acquired Burleson's interest in the property. Id.

In 2007, HSBC acquired the note executed by the Watsons when they borrowed the purchase money from Fieldstone and a deed of trust relating to the property by assignment from MERS, as nominee for the lender and its successors and assigns. Id. Burleson sued HSBC after it took steps toward conducting a nonjudicial foreclosure sale of the property. Id. Aiken was later substituted as the plaintiff in that litigation. Id.

HSBC filed a bill of review against the Watsons in April 2009, seeking to set aside the default judgment. Id. Aiken intervened in the bill of review. Both Aiken and the Watsons filed pleas to the jurisdiction asserting HSBC lacked standing to bring the bill of review. Id. at 770–71. The trial court denied HSBC's bill of review. Id. at 772.

On appeal, HSBC contended it was the assignee of Fieldstone's rights, and an assignee has standing to assert a cause of action previously belonging to its assignor. Id. at 774. HSBC specifically argued Fieldstone had a then-existing right that was affected by the default judgment, had not been served by the Watsons, had standing to bring the bill of review, and properly conferred that standing on HSBC by assignment. Id. The Watsons and Aiken responded that: (1) as a matter of law, only a person whose due-process rights have been violated has standing to assert those rights in a bill of review, and (2) alternatively, HSBC had failed to show Fieldstone actually assigned its due-process rights to HSBC. Id.

As a matter of first impression, we considered whether a bill-of-review claim was assignable. Id. We first noted the case did not present a situation in which a bill-of-review plaintiff was a judgment debtor trying to set aside a money judgment. Id. Rather, Fieldstone was allegedly the owner of an interest in real property and the creditor on a debt obligation, and both of these interests were allegedly voided by the default judgment. Id. HSBC, as Fieldstone's assignee, was attempting in the bill of review proceeding to validate property and contract rights that it allegedly obtained from Fieldstone and that were ostensibly invalidated by the default judgment. Id. We noted that the public policy of Texas is to permit the assignment of a cause of action in the absence of policy reasons to forbid the particular kind of assignment. Id. at 774, 775. We concluded that, under the unique circumstances of the case, public policy did not prohibit the assignment of Fieldstone's bill-of-review rights to HSBC. Id. at 775; see also Am. Homeowner Preservation Fund, LP v. Pirkle, 475 S.W.3d 507, 513–14, 516–26 (Tex. App.—Fort Worth, 2015, pet. denied) (agreeing with analysis of HSBC regarding ability to assign rights to due-process claim, but concluding tax code provides statutory framework for challenging tax sale, assignee purchased property with irrebuttable presumption of notice of the tax sale, assignee chose to ignore its statutory remedies, and “it would be violative of both public policy, as expressed by both the property code and the tax code, and principles of equity to allow [assignee] nevertheless to bypass the statutory scheme available to challenge the tax sale”). We also concluded the default judgment voiding Fieldstone's note and deed of trust did not preclude Fieldstone from assigning the affected instruments and did not affect HSBC's standing to bring the bill of review. HSBC Bank, USA, N.A., 377 S.W.3d at 777.

In HSBC, we concluded an assignee of a note and deed of trust had standing, by virtue of the assignment, to assert a violation of the prior lienholder's due-process rights through an attack on an existing judgment by bill of review. In this case, when MERS assigned the deed of trust to Wells Fargo, which already owned the note, that assignment included MERS's bill-of review claim. Id. at 775, 777. Wells Fargo now stands in MERS's shoes for purposes of collaterally attacking the final judgment as void on the basis that MERS's due-process rights were violated when Kingman failed to give MERS notice of the First Lawsuit, and appellees do not have standing to bring this bill of review proceeding.10

We resolve Kingman's first issue in its favor, vacate the trial court's order denying the plea to the jurisdiction, and render judgment dismissing the case for lack of jurisdiction.11

JUDGMENT

In accordance with this Court's opinion of this date, we vacate the trial court's order denying Kingman Holdings, LLC's plea to jurisdiction and DISMISS this case for want of jurisdiction.

It is ORDERED that appellant Kingman Holdings, LLC recover its costs of this appeal from appellee Mortgage Electronic Registration Systems, Inc. and MERSCORP Holdings, Inc.

FOOTNOTES

3.   The facts contained in the body of this opinion are taken from the parties' and DHI's summary judgment evidence.

4.   MERS is a recognized “book entry system.” See TEX. PROP. CODE ANN. § 51.0001(1) (West 2014) (“book entry system” means a national book entry system for “registering a beneficial interest in a security instrument that acts as a nominee for the grantee, beneficiary, owner, or holder of the security instrument and its successors and assigns”); Morlock, L.L.C. v. Nationstar Mortg., L.L.C., 447 S.W.3d 42, 46 (Tex. App.—Houston [14th Dist.] 2014, pet. denied). The MERS® System is designed to track transfers and avoid recording and other transfer fees that are otherwise associated with the sale of real property. Morlock, L.L.C., 447 S.W.3d at 46; Campbell v. Mortg. Elec. Registration Sys., Inc., No. 03-11-00429-CV, 2012 WL 1839357, at *4 (Tex. App.—Austin May, 18, 2012, pet. denied) (mem. op.). When a mortgage is executed through a MERS® System member and registered in the MERS® System, it is recorded in the real property records with MERS named on the instrument as nominee or mortgagee of record. Robeson v. Mortg. Elec. Registration Sys, Inc., No. 02-10-00227-CV, 2012 WL 42965, at *5 (Tex. App.—Fort Worth Jan. 5, 2012, pet. denied) (mem. op.). While the mortgage is in effect, the original lender may transfer the beneficial ownership or servicing rights on the mortgage to another MERS® System member, with MERS tracking these electronic transfers. Id. These assignments are not recorded in the real property records. Id; Campbell, 2012 WL 1839357 at *4.

5.   The business model of a Kingman principal has been described as “revolv[ing] around purchasing properties at assessment lien foreclosures and then filing suit in an attempt to have the superior mortgage lien declared invalid.” JPMorgan Chase Bank NA v. Ngo, Case No. 4:13CV273, 2014 WL 229482, at *2 (E.D. Tex. Jan. 21, 2014).

6.   In its response to appellees' motion for summary judgment, DHI asserted that it held no interest or title in the Property at the time of the First Lawsuit and never intended, or had any authority, to release any interest in the Property held by another entity by agreeing to the Final Judgment.

7.   A bill of review is a suit to set aside a prior judgment that is no longer subject to challenge by motion for new trial or appeal. Caldwell v. Barnes 154 S.W.3d 93, 96 (Tex. 2004) (per curiam).

8.   A judgment is also void when the trial court had no jurisdiction of the subject matter, no jurisdiction to enter the particular judgment, or no capacity to act. PNS Stores, Inc., 379 S.W.3d at 272.

9.   Appellees also assert they have standing because the failure to give MERS notice of the First Lawsuit negatively impacts their business model through a potential loss of business. This argument is also premised on the failure to give MERS notice of the First Lawsuit, and we will not address the argument separately.

10.   Our opinion in this case in no way condones Kingman's actions in obtaining a final judgment adversely affecting the interests of parties not named in the litigation or provided notice of the litigation.

11.   Based on our disposition of Kingman's first issue, we need not address its other complaints. See TEX. R. APP. P. 47.1.

ROBERT M. FILLMORE JUSTICE