Opinion filed February 10 , 2017



### In The 

# Eleventh Court of Appeals

__________ 

### No. 11

- 1 5

- 00 046

- C V

__________ 

### JOHN R. HOLLEY AND AILZA M. HOLLEY , Appellant s
V. HOLLEY AND TAYLOR, I NC.; PAMELA K. HOLLEY, INDIVIDUALLY AND AS INDEPENDENT EXECUTOR OF THE ESTATE OF MARY MARSHALL HOLLEY, DECEASED;

AND MELINDA MC DANIEL , Appellee s

On Appeal from the 35 th District Court Brown County, Texas Trial Court Cause No. CV1407271

M E M O R A N D U M O P I N I O N This is an appeal from a bench trial of a family d ispute involving a claim of equitable subrogation. Appellant John R. Holley and Appellee Pamela K. Holley are siblings. Appellee Holley and Taylor, Inc. ( HTI) is a corporation controlled by
different family members at various times that owned the parcel of real estate where2

a family auto mobile dealership was located. At a time when John was the president of HTI, HTI executed a deed of trust pledging as collateral the real estate owned by
HTI to secure a note made by John and his wife
, A i lza
, (collectively referred to as Appellants) payable to Texas Ban k in the amount of $1,215,352. Pamela subsequently filed a derivative action on behalf of HTI against Appellants and Citizens National Bank, the successo r holder of the note

. She alleged that Appellants wrongfully caused HTI to pledge its real property as security for Appellants’ personal note. On behalf of HTI, Pamela sought a declaratory judgment
that the deed of trust executed by HTI was “nu ll, void, and without effect.” The derivative action was concluded by a mediated settlement agreement entered on December 15, 2008

. In 2014, HTI paid Appellants’ past

- due debt under the note when the real

prope rty was sold to a third party. Appellants fi led the underlying suit against Appellees seeking a d eclaratory j udgment that the 2008 s ettlement a greement precluded HTI from seeking payment from Appellants for the debt HTI paid on
behalf of Appellants

. HTI filed a counterclaim seeking to establish a c laim for equitable subrogation against Appellants for the sums it paid to retire Appellants’
indebtedness under the note and seeking to foreclose on property owned by Appellants.
The trial court awarded HTI a judgment in the amount of $970,648.73 in actual damages, plus prejudgment and postjudgment interest and attorneys’ fees.
The trial court further entered a declaration that HTI is equitably subrogated to the
liens of Citizens National Bank on all propert ies owned by Appellants

. In three issues on appeal, Appellants contend that ( 1) the trial court erred in finding that the 2008 Settlement Agreement did not release HTI’s claim of equitable subrogation, ( 2) the trial court erred in findin g that HTI had a lien by equitable subrogation because there was insufficient evidence to support a finding that it paid3

the debt involuntarily, and ( 3) the trial court er red in finding that HTI proved all of
the elem ents of equitable subrogation. We affirm. Backgro und Facts
In 2003 , John was the president of HTI. At that time , Appellants signed a promissory note for the $1.2 million loan from Texas Bank i n their individual capacities. The loan was secured by a deed of t rust pledging real proper ty owned by
HTI as collateral. John executed the deed of trust in his capacity as president of HTI.
John testified that Appellants then loaned the $1.2 million to H olley Chevrolet Company (HCC ) , the family automobile dealership

. At th at time, John owned 100%
of the stock of HCC. John testified that HCC made all the payments on the note, but Appellants remained primarily liable for the debt. John testified that Appellants had been borrowing money in this manner since 1991 on the advice of the ir accountants. In 2008, Pamela, individually and derivatively on behalf of HTI, sued Appellants. The 2008 lawsuit alleged that Appellants “obtained a personal loan by wrongfully and without proper authorization using the [HTI] property... as collateral.” In connection with this l oan, the lawsuit alleged causes of action for breach of fiduciary duty to HTI , fraud, negligence , and conspiracy

. The lawsuit further sought a constructive trust on all of Appellants’ real property

. As noted previously, the previous lawsuit was resolved by a mediated settlement agreement executed on December 15, 2008. On February 3, 2014, a representative of C itizens National Bank sent a letter

to HTI’s attorney. The letter indicated that payments on the note had become past
due. However, the bank had agreed to allow the payments to remain in past

- due

status , pending the contemplated sale of the HTI property. The bank further
indicated that
, if the sale of the property fell through, the bank would foreclose on
the HTI property in order to satisfy the debt.4

In April 2014, Pamela, as president of HTI, sold the HTI property. In order to convey clear title to the buyers, HTI was required to pay the remaining $970,648.73 owed on the $1.2 million promissory note, which release d the bank’s
lien on the HTI property

. HTI sought a judgment against Appellants for $970,648.73
for the debt that it paid on Appellants’ behalf. HTI also sought to be equitably subrogated to the bank’s lien on other properti es owned by Appellants bec ause it paid Appellants’ debt. The trial court g ranted HTI’s requested relief. Additionally, the trial court ordered that HTI’s equitable lien was to be foreclosed by an order of
sale

. Analysis We begin by addressing a matter raised by Appellants after the fil ing of the briefs in this appeal . Appellants have filed a motion to disqualify the trial judge, the Hon. Stephen Ellis. They assert that Judge Ellis was disqualified because he was a partner with the attorney who originally worked on the loan and encumbrance of

p roperty at issue in this case. Rule 18b(a) (1) of the Texas Rules of Civil Procedure provides that a judge is disqualified if he “has served as a lawyer in the matter in controversy, or a l awyer with whom the judge previously practiced law served during such association as a lawyer concerning the matter.” T EX

. R. C IV

. P. 18b(a)(1). Further, the Texas

c onstitution provides that “[ n]o judge shall sit in any case . . . when the judge shall have been counsel in the case.” T EX

. C ONST . art. V, § 11. A judge is vicariousl y disqualified under the Texas c onstitution if his former associate served as counsel to a party concerning the matter in the case. In re O’Connor , 92 S .W.3d 446, 449 (Tex. 2002) (orig. proceeding) (per curium). The issue of constitutional disqualification may be raised for the first time on appeal. In re Gonzalez , 115 S.W.3d 36, 39 (Tex. App.

— San Antonio 2003, no pet.). When the issue is raised for th e first time on5

appeal, we review the question de novo

. McElwee v. McElwee , 911 S.W.2d 182, 185 (Tex. App.

— Houston [1 st Dist.] 1995, writ denied ). Appellants contend that Judge El lis was disqualified because Judge Ellis’s former law partner, William Bell , represented HC C and HTI in obtaining t he loan at
issue in this case. According to Appellants, Judge Ellis and Bell were law partners
until 1989. In 1985, Bell represented both HCC and HTI. As part of this representation, Bell assisted John and his father, Wilton Holley, in obtain ing “t he loan central to this case.” This loan continued to be modified and renewed, until it was eventually renewed in Appellants’ names in 2003. According to Appellants,
this constitutes the “same matter” a s the case before us because “ [ s ] ome of the key issues in the trial of this case were the history of the business relationship between Holley Chevrolet and Holley & Taylor, the origin of the loan encumbering Holley & Taylor pro perty, and the life of the lo an

. ” Appellees contend that Judge Ellis is not disqualified because there was no evidence produced at trial that indicates that John and Wilton Holley relied on Bell
for advice about the loan structure and because the loan originated in 1991, two years
af ter Judge Ellis lef

t the partnership. Appellees further contend that the transactions
with which Bell allegedly assisted are not the “ same matter ” that was be fore Judge Ellis in this case. Both parties rely on Fuqua v. Oncor Electric Delivery Co. , 315 S.W.3d 552 (Tex. App.

— Eastland 2010, pet. denied). In that case, we also reviewed the professional relationship between Judge Ellis and his former partner, Bell. Id. at 560. That case involved the issues of whether or not Fuqua’s land was burdened by an easement to Oncor and, if so, w hether or not Fuqua violated that easement. Id. at 554

– 55. During trial, Judge Ellis discovered that Bell had written the title opinion
that was issued t o the Fuquas when they purchased the property in 1985. Id. at 560. We concluded that Judge Ellis was not disqualified because “Bell did not serve as6

c ounsel to a party” in that suit and that “the matter in controversy . . . [was not] the
same as that at issue in 1985.” Id. Appellants attempt to distinguish Fuqua on the grounds that, in this case, Bell represented one of the parti es in the lawsuit
, HTI , i n 1985 and that this representation constitutes the same matter as the present suit: the loan’s struc ture and purpose. We disagree. Even assuming that John and Wilton Holley relied on advice from Bell in structuring the loan in 1985, we conclude that this representation did not constitute
the same matter as that at issue here. Equitable subrogation “al lows a party who would otherwise lack standing to step into the shoes of and pursue the claims belonging to a pa rty with standing.” Frymire Eng’g Co. ex rel. Liberty Mut. Ins.
Co. v. Jomar Int’l, Ltd. , 259 S.W.3d 140, 142 (Tex. 2008). Thus, t he primary issue in this case was whether or not HTI was equitably subrogated to the lien previously held by Citizens National Bank. As will be discussed in greater detail below, in order to prove equitable subrogation, HTI was required to prove that it in voluntarily paid a debt for which another was primarily liable and that the balance of equities favor subrogation. Murray v. Cadle Co.
, 257 S.W.3d 291, 299 (Tex. App.

— Dallas 2008 , pet. denied ). While there was evidence presented at trial regarding the bu siness relationship between HCC and HTI and the origi n, structure , and purpose of the loan , this
evidence was neither required to prove the el ements of equitable subrogation nor did
it relate to issues central to this case. The debt at issue in this case was a note executed by Appellants in 2003 that was secured by a deed of trust executed at the
same time. Additionally, the parties executed a settlement agreement concerning
the deed of trust in 2008
, and the claim for equitable subrogation is based upon a payment that HTI made in 2014. Thus, the matters relevant to HTI’s claim for equitable subrogation arose many years after Judge Ellis left his association with7

Bell

. Therefore, we conclude that the original loan structure is not the same matter
that is at issue in this case. We deny Appellant’s motion to d isqualify. In their first issue, Appellants contend that the trial court erred in finding that
the s ettleme nt a greement did not release Appellees’ claim of equitable subrogation. A release is a contract, and the construction of it is governed by the general rules relating to contracts. Baty v. ProTech Ins. Agency , 63 S.W.3d 841, 848 (Tex. App.

— Houston [14 th Dist.] 2001, pet. denied). Appellants couch their complaint as an
evident iary challenge to the trial court’s construction of the settlement agreement. However, t he construction of an unambiguous contract is a question of law that we
review de novo

. See MCI Telecomm s. Corp. v. Tex. Utils. Elec. Co. , 995 S.W.2d 647, 650 (Tex. 1 999).
When we construe releases, we ascertain and give effect to the intention of the parties. Baty , 63 S.W.3d at 848. A release must be considered as a whole in order to give effect to the general purpose and true intention of the parties. Id. To
be effective, a releasing instrument must “mention” the clai m to be released

. Victoria Bank & Trust Co. v. Brady , 811 S.W.2d 931, 938 (Tex. 1991). Any claim not “clearly within the subject matter of the release” is not discharged. Id. However, the partie s are not required to anticipate and identify every potential cause of action relating to the subject matter of the release. Keck, Mahin & Cate v. Nat’l Union Fire
Ins. Co. of Pittsburg, PA , 20 S.W.3d 692, 698 (Tex. 2000). “[A] valid release may

encompas s unknown claims and damages that develop in the future.” Id. The first paragraph of the typewritten portion of the written settlement agreement provided that the parties desired “to comprise and settle all claims and causes of action of any kind whatsoe ver which the parties have or may have arising
out of the transaction or occurrence which is th e subject of this litigation.” Appellants rely in large part upon this provision to assert that HTI’s act of pledging its real property for the $1.2 million promissory note made by Appellants was the8

transaction that was the subject of the previous lawsuit and the su bsequent settlement agreement. Appellants contend that the settlement agreement precludes HTI’s claim for equitable subrogation because it is a claim arising from the loan transaction. We disagree with this construction of the settlement agreement.
Under the terms of the se ttlement agreement, the deed of trust pledging H TI’s property for the $1. 2 million note remained in effect

. In this regard, Citizens National Bank was a party to the 2008 lawsuit and the settlemen t agreement that
concluded it. The settlement agreement di d not have any provisions affecting Appellants’ indebtedness under the note to the bank or the fact that HTI’s property remained pledged to secure it. Another portion of the settlement agreement provided
as follows:
5. Except f or the agreements set forth herein and contingent upon the performance of the obligations set forth herein the parties hereby agree to release, discharge, and forever hold the other harmless from any and all claims, demand, or suits, known or unknown, fixed or contingent, liquidated or unliquidated, whether or not asserted in the above case, as of this date, arising from or related to the events and transactions which are the subject matter of this cause. (Emphasis added )

. The italicized portion of this provision was han dwritten into a typewritten provision of the settlement agreement. It indicates that the releases set out in the agreement were contingent upon the performance of the obligations set out in the agreement. Thus, the settlement agreement specifically recog nized ongoing obligations among the parties after its execution. Appellants’ continuing indebtedness to the bank is central to our analysis because equitable subrogation is a legal fiction whereby one party stands in the shoes
of a creditor to pursue a c laim belonging to that creditor. Frymire , 259 S.W.3d at 142; Murray , 257 S.W.3d at 299 ; Chase Manhattan Mortg. Corp. v. Cook , 141 S.W.3d 709, 714 (Tex. App.

— Eastland 2004, no pet.) (“ Subrogation substitutes another person in the place of a creditor so that the person in whose favor it is applied9

succeeds to the right of the creditor in relation to the debt .”)

. Furthermore, the settlement agreement does not contain any provisions that preclude HTI from acquiring the bank’s right to collect from Appellants
, which in this case occurred six years after the execution of the settlement agreement. We agree with HTI’s contention that its right to seek equitable subrogation does not arise from the pledging of its property for Appellants’ debt, a matter that was addressed by the
settlement agreement

. Instead, HTI’s claim of equitable subrogation arises from the subsequent payment of Appellants’ debt to the bank. Accordingly, we conclude that the settlement agreement does not preclude HTI from seeking a money judgment for the indebtedness it paid to the bank to extinguish Appellant s ’ indebtedness. There is an additional matter that we must consider pertaining to the trial
court’s judgment awarding HTI a lien on other properties owned by Appellants, specifically a tract referre d to as the “Toyota pro perty.” Appellants assert that, since
HTI asserted claims in the previous lawsuit against the Toyota property, the settlement agreement’s broad release language released HTI ’ s subrogation claims against Appel lants regarding that property. We disagree. The provisions of the settlement agreement pertaining to the claims asserted by HTI against the Toyota property in the prior lawsuit are not relevant to our analysis. Once again
, we focus on the liens possessed by Citizens National Bank
after the execut ion of the settlement agreement because HTI is stepping into the bank’s shoes by claiming equitable subrogation. See Gant v. Stewart , 34 7 S.W.2d 1, 4 (Tex. Civ. App.

— Waco 1961, writ ref’d n.r.e.) ( A s ubrogation claimant is entitled to enforce “ all rights, liens and equities of a prior lien holder .”)

. While the settlement agreement contained a handwritt en provision to the effect that “Bob Boatright, President of Citizens National Bank at Brownwood, shall request to the
Board of Directors of said Bank that the property owned by Holley & Taylor, Inc. in Brown County, Texas shall secure only the [ $ ] 1,200,000 note , ” there is no10

evidence that the bank’ s board approved this request. The settlement agreement does not indicate that the bank affirmatively agreed to release the Toyota property

a s collateral for the $1.2 million note, but rather that the bank would consider the request to release the Toyota property by presenting the request to the board of
directors for consideration

. At trial, Boatright testified t hat the bank maintained that
th e $1.2 million note was a lso still secured by the Toyota property because it was
“cross

- collateralized” with another $800,000 note made by Appellants to the bank
for which the Toy ota property had been pledged. Accordingly, t he settlement agreement did not release the bank’s lien on the To yota property for the $1.2 million

note , nor did it preclude HTI from subsequently obtaining the bank’s lien. We overrule Appellants’ first issue. In their second and third issues, Appellants contend that the trial court erred in finding that HTI had a lien by virtue of equitable subrogation because the re was no evidence or insufficient evidence that HTI paid the debt involuntarily and because Appellees failed to prove all of the ele m ents of equitable subrogation. Appellants’
second and third issues ar e evidentiary challenges that they have briefed together

. In support of these issues, Appellants assert that the trial court’s letter ruling constituted findings o f fact and conclusion s of law. We disagree with this
contention. The trial court issued a letter dated December 8, 2014, to the attorneys of record announcing the court’ s rulings i n the case and directing HTI’s attorney to prepare a judgmen t for the trial court to sign. However, the letter did not have any findings other than a statement that the tr ial court “finds” that HTI “has a lien by virtue of the doctrine of equitable subrogation after balancing the equities and finding that all of the elements for this type of c laim have been proven by a

p reponderance of the evidence.” Generally, a trial court’ s prejudgment letter may11

not serve as findings of fact and conclusions of law. See Cherokee Water Co. v. Gregg C ty

. Appraisal Dist. , 801 S.W.2d 872, 877

– 78 (Tex. 1990).
W hen no findings of fact or conclusions of law were requested or filed in the
trial court , it is implied that the trial court made all the findings necessary to support its judgment. Worford v. Stamper , 801 S.W.2d 108, 109 (Tex. 1990). I mplied finding s of fact, like the trial court’ s findings, may be challenged for legal and factual sufficiency. Curtis v. Comm ’ n for Lawyer Discipline , 20 S.W.3d 227, 231 (Tex. App.

— Houston [14th Dist.] 2000, no pet.). In determining whether some evidence supports the judg ment and the implied findings of fact, “it is proper to consider only that evidence most favorable to the issue and to disregard entirely that which is opposed to it or contradictory in its nature.” Worford , 801 S.W.2d at 109 (quoting Renfro Drug Co. v. L ewis , 235 S.W.2d 609, 613 ( Tex. 1950)). The trial court’ s judgment must be affirmed if it can be upheld on any legal basis that has support in
the record. Id

. ; Curtis , 20 S.W.3d at 231. The trial court judges the credibility of the witnesses, determines the weight of testimony, and resolves conflicts and inconsistencies in the testimony. See Sw. Bell Media, Inc. v. Lyles , 825 S.W.2d 488, 493 (Tex. App.

— Houston [1st Dist.] 1992, writ deni ed). If the evidence falls “within [ the ] zone of reasonable disagreement,” we will not substitute our judgment for that of the fact finder. City of Keller v. Wilson , 168 S.W.3d 802, 822 (Tex. 2005). In determining whether legally sufficient evidence sup ports the finding under review, we consider evidence favorable to the finding, if a reasonable fact finder could consider it, and disregard evidence contrary to the finding, unless a reasonable fact finder could not disregard
it. Id

. at 827. In a factual sufficiency review, we view all of the evidence in a neutral light and set aside the finding only if the finding is so contrary to the overwhelming weight of the evidence such that it is clearly wrong and unjust. Plas

- Tex, Inc. v. U.S.12

Steel Corp.
, 772 S .W.2d 442, 445 (Tex. 1989); Cain v. Bain , 709 S.W.2d 175, 176 (Tex. 1986). Equitable subrogation applies “in every instance in which one person, not acting voluntarily, has paid a debt for which another was primarily liable and which in equity should have been paid by the latter.” Mid

- Continent Ins. Co. v. Liberty
Mut. Ins. Co. , 236 S.W.3d 765, 774 (Tex. 2007). Thus, the doctrine consists of two elements: (1) the person whose debt was paid was primarily liable on the debt and (2) the debt was paid involuntarily. Murray , 257 S.W.3d at 299. Additionally, viewing the totality of the circumstances, the balance of equities must favor subrogation. Frymire , 259 S.W.3d at 142; Murray , 257 S.W.3d at 300. Appellants first argue that HTI acted voluntarily in paying the debt to Citizens
National Bank because it was under no compulsion to sell the property. “Texas

courts are ‘ liberal in their determinations that payments were made involuntarily. ’ ” Frymire , 259 S.W.3d at 145 (quoting Keck , 20 S.W.3d at 702)

. It is well settled that a mortgage may be given to secu re the debt of a third person. Wilbanks v. Wilbanks
, 330 S.W.2d 607, 608 ( Tex. 1960)

. “[T] he person who gives a mortgage to secure the note of a third person becomes a surety for the third person, even though the mortgagor may not be a party to the note

. ” 30 T EX

. J UR . 3d Deeds of Trust and Mortgages § 44 (2016 ) (citing Planters’ & Mechanics’ Nat. Bank v. Robertson , 86
S.W. 643 , 645 (Tex. Civ. App. 1905 , no writ ) ) . Thus, HTI became a surety for Appellants on their indebtedness for the $1.2 million note to the bank. “ A person with an interest in the property, a surety, or a person who pays the debt at the request of the debtor, is not a mere volunteer and is entitled to subrogation. ” 1 W. Mike Baggett & Brian Thompson Morris
, Texas Practice Guide: Real Estate Litigation § 4:210 (2016) ( citing Farm Credit Bank of Texas v. Ogden , 886 S.W.2d 305, 312 (Tex. App.

— Houston [1st Dist.] 1994, no writ) )

.13

Appellants contend that there is no evidence that the bank made a demand
that
, HTI sell the property or pay the debt. However, a letter from Boatright to HTI’s attorney indic ated that Appellants’ $1.2 million note was in default and that if the closing did not occur on HTI’s p roperty as planned in 2014, the bank could post the propert y for foreclosure “if need be.” Boat wright testif ied at trial that he told HTI
that the bank would foreclose if the conveyance did not occur. Appellee Pamela Holley also testified that HTI would not have paid the remainin g indebtedness on the $1.2 million note had the bank not required it. A party is not a volunteer if it paid the debt in good faith and under a reasonable belief that the payment is necessary for its protection. See Keck , 20 S.W.3d at 702. Accordingly, the trial court’s implied finding that H TI did not voluntarily pay Appellants’ indebtedness is supported by legally and factually sufficient evidence. Appellant next contends that the balan ce of eq ui t i es clearly disfavors a finding that HTI was equitably subrogated to the bank ’ s lien. “We will not disturb a trial court’s ruling balancing the equities unless it is shown that it would be inequitable
not to do so.” Murray , 257 S.W.3d at 300. While not an element of the doctrine, a general purpose of equitable subrogation is to prevent un just enrichment. See Frymire , 259 S.W.3d at 146 (using the doctri ne of unjust enrichment in the c ourt’s balance of the equities); see also Smart v. Tower Land & Inv. Co. , 597 S.W.2d 333, 337 (Tex. 1980) (“Subrogation to the creditor’s rights is available

. . . only when t he debtor was enriched unjustly. ”). Appellants contend that the loan proceeds were used to benefit HTI and that it, therefore, should not be able to benefit from the loan a second time by being subrogated to the bank’s lien. In some res pects , Appellants are challenging the element of equitable subrogation requiring that they be primarily liable for the debt. However, under the express terms of the $1.2 million note, Appellants were primarily liable for t he debt. Appellants base their c ontention pertaining to equities14

on John’s trial testimony. He testified that the proceeds of the $1.2 million loan were
loaned to HCC and that HCC made al l of the payments on the note. However, there
is no evidence that HTI benefited from the loan. Furthermore, the trial court was not required to accept John’s testimony that varied from the express terms of the $1.2 million note regarding the parties liable for its payment. Accordingly, we will
not disturb the trial court’s ruling that balanced the equities in this case. Appellants’
second and third issues are overruled. This Court’s Ruling
We deny Appellants’ motion to disqualify Judge Ellis
, and w e affirm the judgment of the trial court.

JOHN M. BAILEY
JUSTICE

February 10
, 2017
Panel consists of: W right , C.J., Willson, J. , and Bailey, J.