Citation Codes

Equivalent Citations

citation codes

Docket Number

No. C-6820.

Attorney(S)

Mark Z. Levbarg, Austin, for petitioners. Patrick A. Pirtle, Kenneth W. Gentry, Austin, for respondents. OPINION

Judges

Oscar H. Mauzy

See more information ...

Smart Summary

Nelson N. Lee, et ux. v. Key West Towers, Inc., et al. — Supreme Court of Texas (June 21, 1989)

Factual and Procedural Background

In October 1980 Nelson and Alice Lee sold a hotel to Richard O. Eid and Key West Towers for $1,125,000. Key West executed a note to the Lees for $1,125,000 (the "Lee note"), secured by a deed of trust. The Lee note "wrapped" an earlier unpaid obligation (the "O'Leary note"); the Lees were obligated to make corresponding payments on the O'Leary note from payments received from Key West. Key West defaulted, producing a chain of defaults to the first lienholder, Ray Berney Enterprises, Inc. and C. R. Peters, who foreclosed and purchased the property at the trustee's sale for a high bid of $700,000.

After foreclosure, the O'Learys sued the Lees, Key West and Eid on the O'Leary note. The Lees brought a cross-action against Key West and Eid on the Lee note. Key West and Eid filed an original answer to the Lees' cross-claim three days before trial that included a general denial and a verified denial asserting Eid's lack of individual liability. The trial court entered judgments: against the Lees on the O'Leary note in favor of the O'Learys and against Key West and Eid on the guaranty for $157,489.85 (plus interest, costs, and fees); and on the Lees' cross-claim a judgment against Key West and Eid for $73,702.70 (plus interest, costs, and fees). In computing the Lee note obligation, the trial court credited the unpaid balance of the O'Leary note. The court of appeals applied a "true debt" approach (crediting the bid only against the excess of the Lee note over the O'Leary note) and also held Eid failed to timely raise his verified denial; the Supreme Court of Texas granted review.

Legal Issues Presented

How should a deficiency or surplus be calculated after foreclosure of a mortgage securing a wraparound note — specifically, whether the foreclosure bid should be credited against the entire outstanding balance of the wraparound (Lee) note or only against the excess of the wraparound note over the prior (O'Leary) debt?
Whether a verified denial filed within seven days of trial in response to a cross-claim is properly before the trial court and appellate courts when the record is silent as to whether leave to file was requested or granted (i.e., application of Tex.R.Civ.P. 63 and the treatment of late responsive pleadings to cross-claims).

Arguments of the Parties

Lees (Petitioners)

Contended the trial court erred by failing to credit the foreclosure sale bid price against the entire obligation of Key West and Eid on the Lee note rather than only against the amount by which the Lee note exceeded the O'Leary note.
Argued that Eid's verified pleading, filed within seven days of trial, should be treated as an amended pleading subject to Tex.R.Civ.P. 63 and therefore required leave of court; since Rule 92 creates a general denial, Eid's later responsive pleading amended that general denial and thus needed leave.

Eid and Key West (Respondents)

Eid argued he was liable only in his representative capacity as president of Key West, not personally; he raised this defense three days before trial by verified denial and did not seek leave to file.
Eid contended that no leave was required because the verified pleading should be treated as an original or supplemental answer rather than an amendment to a Rule 92 general denial.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Summers v. Consolidated Capital Special Trust, 783 S.W.2d 580 (Tex. 1989)	Adoption of the "outstanding balance" approach for calculating deficiencies in cases involving wraparound notes (credit foreclosure bid against outstanding balance of the wraparound note).	The court applied Summers and held Key West and Eid are liable for the entire amount of the Lee note less the amount bid at foreclosure; the court of appeals erred in employing the "true debt" approach.
Goswami v. Metropolitan Savings Loan Ass'n, 751 S.W.2d 487 (Tex. 1988)	Liberal construction of Tex.R.Civ.P. 63: where the record is silent as to whether leave to file an amended petition was requested or granted and there is no showing of surprise or prejudice, leave is presumed.	The court applied Goswami to conclude that, because the record did not show denial of leave or surprise/prejudice, Eid's late verified denial was presumed to have been considered and thus the question of his personal liability was properly before the appellate court.
Lee v. Key West (court of appeals), 742 S.W.2d 28 (1987)	Applied the "true debt" approach and held that Eid's verified pleading filed within seven days of trial was not properly filed for purposes of raising lack-of-capacity defense on appeal.	The Supreme Court reversed the court of appeals' application of the true debt approach and its conclusion regarding the verified denial, holding the court of appeals erred.

Court's Reasoning and Analysis

The Court addressed two discrete issues.

First, regarding application of foreclosure proceeds in a wraparound note context, the Court relied on its decision in Summers, which adopted the "outstanding balance" approach. Under that approach, the proper credit is the amount bid at foreclosure applied against the outstanding balance of the wraparound (Lee) note. The Court concluded the court of appeals erred in applying the "true debt" approach, which had subtracted the prior debt balance (the O'Leary note) from the Lee note before applying the foreclosure bid.

Second, on the verified denial filed three days before trial, the Court analyzed the interaction of Tex.R.Civ.P. 92 and 63. The Court agreed that, as a procedural matter, responses to counterclaims or cross-claims filed within seven days of trial are to be treated as amendments to the Rule 92 general denial and thus ordinarily subject to Rule 63's requirement of leave when filed within seven days of trial. However, the Court emphasized Goswami's liberal construction of Rule 63: when the record is silent as to whether leave was sought or granted and there is no showing of surprise or prejudice, the trial court is presumed to have granted leave (or to have considered the pleading). Here, because the record contains no indication leave was denied, nor any showing of surprise or prejudice by the Lees, the Court presumed leave and held Eid's verified denial was properly before the trial court and thus properly reviewable on appeal.

Holding and Implications

REVERSED and REMANDED.

Holding: The Supreme Court of Texas reversed the judgment of the court of appeals. It held that (1) under the outstanding balance approach (as adopted in Summers) the foreclosure bid must be credited against the entire outstanding balance of the Lee wraparound note (not merely against the excess over the prior O'Leary debt), and (2) under Goswami and Tex.R.Civ.P. 63, Eid's verified denial filed within seven days of trial is presumed to have been considered where the record is silent and no surprise or prejudice is shown, so the issue of Eid's personal liability was properly before the appellate court.

Implications: The direct consequences are that the court of appeals' judgment is reversed and the cause is remanded to the court of appeals to consider (a) Eid's personal liability on the Lee note and (b) calculation of damages to be awarded to the Lees applying the outstanding balance approach. The opinion follows Summers and Goswami; no broader new precedent beyond application of those decisions is announced here in this opinion. A dissent by Justice Mauzy, joined by Justices Spears and Ray, objects to the outstanding balance approach and would have affirmed the court of appeals.

Show full summary ...

Nelson N. LEE, et ux., Petitioners, v. KEY WEST TOWERS, INC., et al., Respondents.

PHILLIPS, Chief Justice.

This case involves two issues: the calculation of a deficiency or surplus after foreclosure of a mortgage securing a "wraparound note," and the effect of a verified denial filed within seven days of trial. For the reasons set forth in our decision today in Summers v. Consolidated Capital Special Trust, 783 S.W.2d 580 (Tex. 1989), we hold that the amount bid at the foreclosure sale should be credited against the outstanding balance of the note. We also hold that under our previous decision in Goswami v. Metropolitan Savings Loan Ass'n, 751 S.W.2d 487 (Tex. 1988), the court of appeals erred in failing to treat the verified denial as properly filed. We therefore reverse the judgment of the court of appeals, 742 S.W.2d 28 (1987), and remand to that court for further consideration.

In October 1980, Nelson and Alice Lee sold a hotel to Richard O. Eid and Key West Towers for $1,125,000. Key West executed a note to the Lees for $1,125,000 (the Lee note) which was secured by a deed of trust on the property. The Lee note "wrapped" or included the unpaid balance of an earlier note, the O'Leary note, which the Lees executed when they purchased the hotel from the O'Learys. The Lee note and deed of trust obligated the Lees to make corresponding payments on the O'Leary note out of the payments received from Key West. Additionally, Key West and Eid executed an agreement guaranteeing the payment of the O'Leary note. Key West defaulted on its note, causing a chain of defaults back to the first lienholder, Ray Berney Enterprises, Inc. and C. R. Peters, who initiated foreclosure proceedings and bought the property at the trustee's sale for a high bid of $700,000.

Following the foreclosure, the O'Learys brought suit against the Lees, Key West and Eid on the O'Leary note. The Lees brought a cross action against Key West and Eid on the Lee note. Key West and Eid filed an original answer to the Lees' cross claim three days prior to trial. The answer contained a general denial and verified denial in which Eid denied liability in his individual capacity.

The trial court found that the O'Learys were entitled to judgment against the Lees on the O'Leary note and against Key West and Eid, jointly and severally, on the guaranty agreement in the amount of $157,489.85 plus interest, costs, and attorney's fees. On the Lees' cross claim, the trial court rendered judgment against Key West and Eid, jointly and severally, on the Lee note for $73,702.70 plus interest, costs, and attorney's fees. In computing the amount owed by Key West and Eid on the Lee

note, the trial court credited the unpaid balance owed by the Lees on the O'Leary note.

On appeal, the Lees contended that the trial court erred in failing to credit the bid price from the foreclosure sale against the entire amount of Key West and Eid's obligation on the Lee note rather than crediting it against the amount by which the Lee note exceeded the O'Leary note. The court of appeals disagreed, applying the so-called "true debt" approach and holding that the balance due on the prior debts must be subtracted from the balance due on the Lee note. 742 S.W.2d 28, 32 n. 3. The court of appeals also held that since Eid failed to file his verified pleading within seven days of trial, Eid had not properly raised his defense of lack of capacity below and could not urge it on appeal.

Application of Proceeds

In Summers v. Consolidated Capital Special Trust, 783 S.W.2d 580 (Tex. 1989), the court adopted the "outstanding balance" approach for calculating deficiency judgments in cases involving wraparound notes. Under this approach, Key West and Eid are liable to the Lees for the entire amount of the Lee note less the amount bid at foreclosure. In holding otherwise, the court of appeals erred.

Verified Denial

Eid brings a separate application for writ of error, urging that the court of appeals erred in affirming the judgment of the trial court that he was personally liable on the Lee note. Eid contends that he is liable on the note only in his representative capacity as president of Key West, not individually. He first raised this defense to the Lee's cross-claim only three days before trial by verified denial. Eid made no request for leave of court to file the pleading, nor did the Lees file any exception to it. Eid argues that leave of court was not required because the pleading constituted an original answer, or in the alternatively, a supplemental answer, but not an amended answer. The Lees argue that leave of court was required because, under Tex.R.Civ.P. 92, Eid was deemed to have pleaded a general denial in response to the cross-claim. Eid's responsive pleading was therefore an amended pleading, for which leave of court had to be obtained since it was offered for filing within seven days of trial. Tex.R.Civ.P. 63.

We agree with the Lees that Rule 63 applies. If a response to a counterclaim or cross-claim filed within seven days were treated as an original answer, requiring no leave of court, parties would be encouraged to wait as close to trial as possible to file an operative answer. This would not serve the ends of justice. Accordingly, responsive pleadings to counterclaims and cross-claims filed within seven days of trial will be treated as answers which amend a Rule 92 general denial.

The court of appeals was incorrect in its application of Rule 63, however. As we held in Goswami v. Metropolitan Savings Loan Assoc., 751 S.W.2d 487 (Tex. 1988), Rule 63 is to be liberally construed. Thus, where "the record is silent of any basis to conclude that the amended petition was not considered by the trial court, and inasmuch as [there was no showing of] surprise or prejudice, leave of court is presumed." Id. at 490. As in Goswami, the record here does not reflect whether leave of court was requested or granted, nor is there any indication that the trial court refused leave to file the amended petition. Since there is no basis in the record to conclude that Eid's amended petition was not considered by the trial court, and inasmuch as the Lees did not show any surprise or prejudice, leave of court is presumed. We therefore conclude that the question of Eid's personal liability was properly before the appellate court for review.

Accordingly, we reverse the judgment of the court of appeals and remand for that court to consider the issue of Eid's personal liability and to calculate the amount of damages to be awarded to the Lees.

MAUZY, J., files a dissenting opinion in which SPEARS and RAY, JJ., join.

MAUZY, J., dissenting.

The court has this day in Summers v. Consolidated Capital Special Trust, 783 S.W.2d 580 (Tex. 1989), construed the provisions of a wrap-around note and deed of trust. For the reasons set out in my dissent in Summers, I dissent to the court's holding under the so-called "outstanding balance approach" that Key West and Eid are liable to the Lees for the entire amount of the Lee note less the amount bid at foreclosure. I would affirm the court of appeals.

SPEARS and RAY, JJ., join in this dissent.

LEE v. KEY WEST TOWERS INC