Surrey Oaks LLC v. Evanston Insurance Company
Filing
64
Memorandum Opinion and Order granting 56 Motion for Summary Judgment filed by Evanston Insurance Company. All claims and causes of action asserted by plaintiffs against Evanston be, and are hereby, dismissed. (see order for specifics) (Ordered by Judge John McBryde on 7/19/2017) (mpw)
U.S. DISTRICT COURT
NORTIIERN DISTRICT OF TEXAS
.
IN THE UNITED STATES DISTRICT COU
NORTHERN DISTRICT OF TEXAS
FORT WORTH DIVISION
SURREY OAKS LLC, STANLEY
and NANLING CHEN,
xu,
FIL1?D
r·······~
i JUL I 9 2017 :
CLERK,
§
· :_,10 TRlCI COURT
---~.....-:---Deputy
§
§
Plaintiffs,
§
§
vs.
§
NO. 4:16-CV-516-A
§
EVANSTON INSURANCE COMPANY,
§
§
Defendant.
§
MEMORANDUM OPINION
and
ORDER
Came on for consideration the motion of defendant, Evanston
Insurance Company ("Evanston"), for summary judgment. Plaintiffs,
Surrey Oaks LLC, Stanley Xu ("Xu"), and Nanling Chen ("Chen"),
have filed a response, and Evanston has filed a reply. Having
considered the motion, the response, the reply, the entire
summary judgment record, and applicable legal authorities, the
court concludes that Evanston's motion should be granted.
I.
Background
Surrey Oaks LLC initiated this action by filing an original
complaint in the 352nd Judicial District Court of Tarrant County,
Texas. On June 22, 2016, Evanston removed the action to this
court. Doc. 1 1. Plaintiffs' live pleading is their third amended
1
The "Doc. "references are to the number of the item on the docket in this action.
complaint filed January 30, 2017. In such complaint, plaintiffs
assert the following claims against Evanston:
(1) breach of
contract; and (2) violations of Chapter 542 of the Texas
Insurance Code. As damages, plaintiffs seek $211,285.47 in
insurance proceeds plus 18% interest pursuant to the Texas
Insurance Code, additional prejudgment interest under Texas law,
and reasonable attorney's fees.
II.
Undisputed Evidence
The following is an overview of evidence pertinent to the
motion for summary judgment that is undisputed in the summary
judgment record:
Surrey Oaks LLC was a limited liability company formed under
the laws of the State of Washington on March 30, 2004. Doc. 58 at
1. Its managing members were Xu and Chen. See id. at 8-9. On
July 15, 2004, Surrey Oaks LLC purchased property located at 525
King George Drive, Fort Worth, Texas (the "Apartments"). Doc. 38
at 2-3, 32. To finance the purchase, Surrey Oaks LLC executed a
promissory note and deed of trust in favor of Citibank FSB
("Citibank")
(the "first Deed of Trust"). Doc. 58 at 28. Citibank
subsequently assigned all rights under the first Deed of Trust to
Fannie Mae effective June 20, 2008. Id. at 51-55.
2
On August 28, 2009, Surrey Oaks LLC sold the Apartments to
Management of Surrey Oaks LLC ("Management"), id. at 70-71, by a
deed that contained a Vendor's Lien in favor of Surrey Oaks LLC,
id.
Management gave a deed of trust to Surrey Oaks LLC to secure
notes given by Management to Surrey Oaks LLC as part of the
purchase price (the "second Deed of Trust"). Id. at 57. The
second Deed of Trust required Management to maintain insurance on
the Apartments and to name Surrey Oaks LLC as an additional
insured. See id. at 64. Management subsequently purchased an
insurance policy from Evanston, but the policy did not name
Surrey Oaks LLC as an additional insured. Id. at 428. Fannie Mae
was named in the policy as a mortgage holder. Id. at 429.
On September 10, 2009, Chen filed a certificate of
cancellation of Surrey Oaks LLC with the Washington Secretary of
State. Id. at 75-76. The reason for cancellation was that "[t]he
property [the Apartments] was sold recently." Id. at 76. 2
On or about May 25, 2011, the Apartments suffered a loss
that was covered by the Evanston insurance policy. Doc. 58 at
420-22. As a result, Evanston issued a check dated May 23, 2012,
drawn on its account at SunTrust Bank ("SunTrust") for
$211,285.47, naming "[the Apartments]
2
and Fannie Mae,
ISAOA
The court has not concerned itself with the regularity of the cancellation of Surrey Oaks LLC.
Each side assumes that the cancellation was regular and effective. Doc. 3 8 at 32, ~ 4; Doc. 61 at 20-21;
Doc. 57 at 12-14, ~~ 32-38.
3
~-~~-----
------~----------------------
[Management]" as payees. Id. at 423. SunTrust honored the check
without the endorsement of Fannie Mae. Doc. 38 at 274-75, Req.
Admis. 5. After discovering that the check had been issued, Xu
made a claim to Evanston for the insurance proceeds, which
Evanston twice denied. Id. at 34-35,
~~
9-12.
On March 27, 2013, after Surrey Oaks LLC defaulted on the
promissory note secured by the first Deed of Trust, Fannie Mae
filed an emergency application for the appointment of receiver in
the 256th Judicial District Court of Tarrant County, Texas. Doc.
58 at 80. Fannie Mae filed an amended petition on April 3, 2013
after discovering the second Deed of Trust between Surrey Oaks
LLC and Management. Id. at 194. On November 21, 2013, the
appointed receiver filed his report of sale and motion to approve
an agreement to sell the Apartments and to confirm the sale of
the Apartments. Id. at 318. The receiver stated the following as
to the second Deed of Trust:
3.
On or about September 3, 2009, [Surrey Oaks
LLC] executed and delivered a deed purportedly
conveying its fee interest in a portion of [Surrey Oaks
Apartments] to [Management] in exchange for the
execution and delivery by [Management] to [Surrey Oaks
LLC] of a Deed of Trust securing a purported
$2,650,000.00 indebtedness, recorded as Instrument No.
D209237361 in the Deed Records of Tarrant County, Texas
(the "[second Deed of Trust]"), pursuant to which
[Surrey Oaks LLC] ostensibly holds a security interest
in and to [the Apartments] . Both the deed purportedly
conveying [Surrey Oaks LLC's] fee interest in the
Apartments] and the [second Deed of Trust] were
4
executed, delivered and recorded in violation of the
provisions of the [first Deed of Trust] .
Id. at 319. The receiver requested that the state court approve
the agreement and confirm that the receiver was authorized to
sell the Apartments "including without limitation [Surrey Oaks
LLC's] purported security interest under the [second Deed of
Trust]." Id. at 320. On December 5, 2013, the state court granted
the receiver's motion, and authorized him "to proceed with the
sale of [the Apartments] , along with any and all of [Surrey Oaks
LLC's] and [Management's]
interests therein, including without
limitation [Surrey Oaks LLC's] purported security interest under
the
[second Deed of Trust] . " Id. at 415-16.
III.
Grounds of Evanston's Motion
Evanston first argues that it is entitled to judgment as a
matter of law because Surrey Oaks LLC lacks capacity to sue and
Xu and Chen are not real parties in interest. Second, Evanston
contends that plaintiffs' breach of contract claim fails for
three independent reasons:
(1) plaintiffs sold, conveyed, and
assigned away their rights to all policy proceeds under the first
Deed of Trust;
(2) plaintiffs' substantive rights to the policy
proceeds, if any, were sold and conveyed in the 2013 receivership
proceeding in Tarrant County; and (3) Evanston had no notice of
the second Deed of Trust. Finally, Evanston argues that
5
plaintiffs' claims under Chapter 542 of the Texas Insurance Code
are precluded because Evanston is not liable for breach of
contract, and,
in any event, such claims would be barred by
limitations.
IV.
Applicable Summary Judgment Principles
Rule 56(a) of the Federal Rules of Civil Procedure states
that the court shall grant summary judgment on a claim or defense
if there is no genuine dispute of material fact and the movant is
entitled to judgment as a matter of law. The summary judgment
movant bears the initial burden of showing that there is no
genuine dispute of material fact. Celotex Corp. v. Catrett, 477
U.S. 317, 323, 325
(1986). The movant can carry this burden by
pointing out the absence of evidence supporting one or more
essential elements of the nonmovant's claim,
"since a complete
failure of proof concerning an essential element of the nonmoving
party's case necessarily renders all other facts immaterial." Id.
at 323.
Once the movant has carried its burden under Rule 56(a), the
nonmovant must identify specific evidence in the record and
articulate the precise manner that creates a genuine dispute of
rna t e ria 1 fact . I d . at 3 2 4 ; see a 1 so Fed . R . Ci v . P . 5 6 ( c )
party asserting that a fact
.
( "A
. is genuinely disputed must
6
support the assertion by .
citing to particular parts of
materials in the record .
•
11
).
A fact is material if it might
affect the outcome of the case under the governing law. Anderson
v. Liberty Lobby Inc., 477 U.S. 242, 248
(1986). A dispute about
a material fact is genuine if the evidence is such that a
rational fact finder could resolve the dispute in favor of either
party. Id.
The standard for granting a motion for summary judgment is
the same as the standard for rendering judgment as a matter of
law. Celotex Corp., 477 U.S. at 323. If the record taken as a
whole could not lead a rational trier of fact to find for the
nonmovant, there is no genuine dispute for trial and summary
judgment is appropriate. Matsushita Elec. Indus. Co. V. Zenith
Radio Corp., 475 U.S. 574, 597; see also Boeing Co. v. Shipman,
411 F.2d 365, 374-75 (5th Cir. 1969)
(en bane)
(explaining the
standard to be applied in determining whether the court should
enter judgment on motions for directed verdict or for judgment
notwithstanding the verdict) .
v.
Analysis
A.
Evanston Did Not Have a Payment Obligation to Plaintiffs
When a mortgagor breaches an agreement to name mortgagee as
an additional insured under an insurance policy, the mortgagee
7
may seek to enforce the terms of the agreement by suit directly
against the insurer. See Wade v. Seeburg, 688 S.W.2d 638, 639
(Tex. App-Texarkana 1985, no writ). However,
"if the insurer is
not informed of the agreement, it is not bound thereby, but after
the information is given to it, the duty rests upon the insurer
to treat the proceeds of the policy as though such a provision
was written into the policy." Farmers Ins. Exch. v. Nelson, 479
S.W.2d 717, 720
(Tex. Civ. App.-Waco 1972, writ ref'd n.r.e.)
(quoting Fid. & Guar. Ins. Corp. v. Super-Cold Sw. Co., 225
S.W.2d 924, 927
(Tex. Civ. App.-Amarillo 1949, writ ref'd
n.r.e.)). The mortgagee is entitled "to recover his pro rata
share of any funds payable under the policy at the time the
insurer learned of his interest." Westchester Fire Ins. Co. v.
English, 543 S.W.2d 407, 414-15 (Tex. Civ. App.-Waco 1976, no
writ).
Here, plaintiffs contend that Evanston had either
constructive or actual knowledge of the second Deed of Trust and
therefore is liable to plaintiffs for the proceeds under the
insurance policy. Plaintiffs claim that Evanston can be charged
with constructive notice because the second Deed of Trust was
duly recorded on September 3, 2009, prior to when the insurance
policy became effective. And, plaintiffs assert that Evanston had
actual notice of the second Deed of Trust by August 21, 2012,
8
when an alleged agent of Evanston sent an email concerning
Evanston's issuance of the check, and by September 4, 2012, when
Xu first submitted a claim to Evanston for the insurance
proceeds.
Constructive notice of a duly recorded instrument extends
"only to those who are bound to search for it, such as subsequent
purchasers under the grantor in such an instrument." Cox v. Clay,
237 S.W.2d 798, 804
(Tex. Civ. App.-Amarillo 1950, writ ref'd
n.r.e.). Plaintiffs have not cited any legal authority for the
proposition that insurers are also under such an obligation, and
the court finds none. Thus, plaintiffs' constructive notice
theory is without merit.
Even if Evanston had actual notice of the second Deed of
Trust by August 21, 2012 or September 4, 2012 as alleged by
plaintiffs, Evanston had already issued its claims check months
beforehand. Evanston issued its claims check on May 23, 2012 and
it was honored by SunTrust on May 29, 2012. See Doc. 58 at 423.
The law clearly states that an insurer is not bound by such an
agreement until it has knowledge of the agreement, see Farmers
Ins. Exch., 479 S.W.2d at 720; Westchester Fire Ins. Co., 543
S.W.2d at 414-15, and plaintiffs have provided no evidence that
Evanston had knowledge of the second Deed of Trust before it
issued the check.
9
Plaintiffs also argue that after SunTrust honored Evanston's
check without the endorsement of Fannie Mae, Evanston could have
sought to recover the check funds from SunTrust on the theory of
wrongful conversion, and then could have reissued the check
naming Surrey Oaks LLC as co-payee. Even if Evanston was entitled
to take such action, plaintiffs have identified no legal
authority that would compel Evanston to do so, especially absent
any apparent attempt by Fannie Mae to recover the check funds.
Accordingly, at the time it issued its claims check,
Evanston was not required to include Surrey Oaks LLC as a payee,
and plaintiffs' breach of contract claim fails as a matter of
law.
B.
The Other Grounds of Evanston's Motion
Considering some of the other grounds of Evanston's motion
as additional reasons why it should be granted, the court
concludes that the summary judgment record establishes as a
matter of law that Surrey Oaks LLC lacked capacity to prosecute
this action and Xu and Chen are not real parties in interest. 3
3
The court finds that it need not consider the other alternative grounds of Evanston's motion as
described in part III of this memorandum opinion and order, supra.
10
1.
Surrey Oaks LLC Lacked Capacity to Prosecute this
Action
The parties agree that the law of the State of Washington
governs whether Surrey Oaks LLC has capacity to bring this
lawsuit. Under Washington State law as it existed in 2009, the
year Chen filed the certificate of cancellation of Surrey Oaks
LLC with the Washington Secretary of State, Doc. 58 at 75-76, a
limited liability company's ability to sue ended upon
cancellation. Chadwick Farms Owners Ass'n v. FHC LLC, 207 P.3d
1251, 1261-62
(Wash. 2009)
(en bane); HB Dev., LLC v. W. Pac.
Mut. Ins., 86 F. Supp. 3d 1164, 1174-75 (E.D. Wash. 2015). Thus,
after Surrey Oaks LLC was cancelled in September 2009, it no
longer retained the capacity to bring a lawsuit.
Plaintiffs argue that the 2016 enactment of RCW 25.15.297, a
Washington statute, applies retroactively and allows a dissolved
limited liability company such as Surrey Oaks LLC to prosecute
actions as part of winding up its activities. Alternatively,
plaintiffs contend that "the issue of retroactivity is
irrelevant," because the "precipitating event" for plaintiffs'
application of RCW 25.15.297 occurred after the effective date of
the statute.
Under Washington State law, statutory amendments are
presumed to be prospective unless there is a legislative intent
to apply the statute retroactively or the amendment is clearly
11
curative or remedial. Houk v. Best Dev. & Constr. Co., Inc., 322
P.3d 29, 31 (Wash. Ct. App. 2014)
Inc., 663 P.2d 482
(citing Johnson v. Cont'l W.,
(Wash. 1983)). "A statute which provides a
claimant with the right to proceed against persons previously
outside the scope of the statute deals with a substantive right,
and therefore applies prospectively only." Id. at 32
Dep't of Ret. Sys. v. Kralman, 867 P.2d 643
(quoting
(Wash. Ct. App.
1994)).
Contrary to plaintiffs' assertions, RCW 25.15.297 is not
retroactive. Surrey Oaks LLC has not identified, and the court is
not aware of, any authority that would support its contention
that RCW 25.15.297 applies retroactively. And, if RCW 25.15.297
were construed to permit a previously cancelled limited liability
company to initiate a lawsuit as part of winding up its
activities, it would confer a right previously outside the scope
of the statute, and thus would be a substantive right that
applies prospectively only. Cf. Pointe at Westport Harbor
Homeowners' Ass'n v. Eng'rs Nw., Inc., P.S., 376 P.3d 1158 (Wash.
App. Ct. 2016)
(unpublished text)
(holding that 2010 amendments
to RCW 25.15 did not apply retroactively). Thus, Surrey Oaks
LLC's capacity to bring suit is not revived by RCW 25.15.297.
Plaintiffs'
"precipitating event" argument is also without
merit. Plaintiffs argue that the "issue of retroactivity is
12
irrelevantu because the "precipitating eventu for the application
of RCW 25.15.297 is the initiation of this action. Doc. 61 at 18.
As a result, plaintiffs contend that this action involves a
prospective application of RCW 25.15.297 and "retroactive
application is not at issue.u Id.
If anything, the precipitating event relevant to this action
would be the filing of Surrey Oaks LLC's certificate of
cancellation in 2009. See Chadwick Farms Owners Ass'n, 207 P.3d
at 1257 (describing the cancellation of the certificate of
formation as the "critical eventu). The cases plaintiffs offer in
support of their precipitating event argument are wholly
inapplicable to the instant action. Moreover, plaintiffs'
interpretation of what constitutes a "precipitating eventu would
render the dichotomy between the prospective/retroactive
application of a statute meaningless. Accordingly, Surrey Oaks
LLC does not have capacity to prosecute this action.
2.
Xu and Chen are not Real Parties in Interest
Rule 17(a) of the Federal Rules of Civil Procedure states
that an action must be prosecuted in the name of the real party
in interest.
"The real party in interest is the person holding
the substantive right sought to be enforced, and not necessarily
the person who will ultimately benefit from the recovery.u
Wieburg v. GTE Sw. Inc., 272 F.3d 302, 306
13
(5th Cir. 2001)
(quoting Farrell Constr. Co. v. Jefferson Par., La., 896 F.2d
136, 140
(5th Cir. 1990)).
Plaintiffs argue that Surrey Oaks LLC's purported right to
insurance proceeds under the Evanston insurance policy passed to
Xu and Chen upon the cancellation of Surrey Oaks LLC in 2009.
However, for the reasons described in subsection A, supra, Surrey
Oaks LLC did not hold any substantive right to insurance proceeds
under the policy. Consequentially, there were no rights under the
policy for Xu and Chen to inherit after Surrey Oaks LLC's
cancellation. Thus, Xu and Chen are not real parties in interest
to this action.
3.
The Chapter 542 Claims Lack Merit
Inasmuch as none of the plaintiffs have a right of recovery
from Evanston under the insurance policy in question, none of
them has any viable claim under chapter 542 of the Texas
Insurance Code.
4.
The Claim for Declaratory Judgment
Through its counterclaim for declaratory judgment, Evanston
seeks to determine its potential liability as to the very claims
plaintiffs assert in their third amended complaint. Because the
court has resolved all claims asserted by plaintiffs, the court
considers Evanston's counterclaim to be likewise resolved.
14
VI.
Order
Therefore,
The court ORDERS that Evanston's motion for summary judgment
be, and is hereby, granted, and that all claims and causes of
action asserted by plaintiffs against Evanston be, and are
hereby, dismissed.
SIGNED July 19, 2017.
District
15
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