Jay H. Cohen, Individually and as Trustee of the JHC Trust I and II v. Sandcastle Homes, Inc. , 469 S.W.3d 173 ( 2015 )

Opinion issued February 26, 2015
In The
Court of Appeals
For The
First District of Texas
————————————
NOS. 01-13-00267-CV
01-13-00233-CV
———————————
JAY H. COHEN, INDIVIDUALLY AND AS TRUSTEE OF THE JHC
TRUSTS I AND II, Appellant
V.
SANDCASTLE HOMES, INC., Appellee
****
JAY H. COHEN, INDIVIDUALLY AND AS TRUSTEE OF THE JHC
TRUST I AND II, Appellant
V.
NEWBISS PROPERTY, LP, Appellee
On Appeal from the 234th District Court
Harris County, Texas
Trial Court Case Nos. 2010-20973A & 2010-20973B
OPINION
In related proceedings, appellant Jay H. Cohen, Individually and as Trustee
of the JHC Trusts I and II, challenges the trial court’s summary judgments granted
in favor of appellees Sandcastle Homes, Inc. and NewBiss Property, LP
Specifically, Cohen challenges the trial court’s conclusion that the Sandcastle and
NewBiss established their status as bona-fide purchasers of certain real property in
which Cohen claims an interest. The primary issue we must resolve is whether the
purchaser of real property can establish bona-fide purchaser status if that purchaser
has actual knowledge about information contained in a notice of lis pendens that
has been filed, and then later expunged, on the property. We answer that question
in the affirmative, and affirm the trial court’s judgments.
BACKGROUND
The underlying suit involves Cohen’s claims against numerous defendants
related to several parcels of real estate. The summary judgments at issue in favor
of Sandcastle and NewBiss were severed from the remaining claims against other
parties, rendering them final and appealable.1 Because only these two judgments
1
The summary judgment in favor of NewBiss was severed into 2010-20973A; the
summary judgment in favor of Sandcastle was severed into cause number 2010-
20973B.
2
are at issue, we limit our discussion to basic background facts and discussion of the
summary-judgment evidence relevant to these judgments.
Through a series of transfers over the years, Cohen transferred several pieces
of real estate into different partnerships. In the underlying lawsuit, Cohen claims
that defendant Mathew Dilick acted wrongfully and fraudulently (both individually
and through entities he controlled) with respect to management of the properties
through a series of transfers, sales, and debt encumbrances. In conjunction with
his lawsuit, Cohen also filed numerous notices of lis pendens on various properties.
This appeal involves properties covered by Cohen’s July 27, 2010 Second
Supplemental Notice of Lis Pendens. That notice impacts several properties,
including the property at issue in this case, i.e., 2.4373 acres known as the “West
Newcastle Property.” That notice identifies the underlying suit and states its
purpose is to set aside certain transfers of real property, including the prior transfer
of the West Newcastle Property from Flat Stone II, Ltd. to West Newcastle Ltd,
and to “set aside and cancel liens” granted by Flat Stone II to Regions Bank.
Several defendants in the underlying proceedings filed emergency motions
to expunge the notices of lis pendens.
3
September 1 & 7, 2010. The trial court signed orders granting all the
motions to lift the lis pendens notices,2 concluding that Cohen failed to state direct
real-property claims, and specifically noting that it “did not consider evidence or
make a determination of the sufficiency of the evidence.” Cohen challenged these
interlocutory expungement orders in this Court, filing a petition for writ of
mandamus and a motion to stay the trial court’s orders.
September 30, 2010. This Court granted Cohen’s motion to stay the trial
court’s orders expunging the notices of lis pendens.
October 8, 2010. Defendant Dilick made the first of two property transfers
relevant to the subject matter of this appeal. Specifically, he effectuated the sale
from titleholder West Newcastle Ltd. of a 0.95 acres portion of the West Newcastle
Property (“West Newcastle Tract I”) to appellant Sandcastle Homes for $750,000.
April 14, 2011. This Court conditionally granted Cohen’s request for
mandamus relief from the trial court’s orders expunging all of the notices of lis
pendens. In re Cohen, 340 S.W.3d 889, 899–900 (Tex. App.—Houston [1st Dist.]
2011, orig. proceeding). In our opinion, we first noted that—because of recent
statutory amendments—there are two ways to successfully establish that a notice
of lis pendens should be expunged, i.e., by establishing that: (1) the pleadings do
not “contain a real property claim” or (2) that the claimant has not shown the
2
The order relating to the West Newcastle Property at issue here was signed on
September 7, 2010.
4
“probable validity” of the claim. Id. at 892 (citing TEX. PROP. CODE ANN. §
12.0071(c)). We held that the trial court erred by concluding that the face of
Cohen’s pleadings did not articulate a real-property claim. Id. at 899. Although
we accordingly directed the trial court to vacate its orders expunging the notices of
lis pendens based on the pleadings, we expressed no opinion about whether Cohen
could demonstrate the “probable validity” of his claims following an evidentiary
hearing. Id. at 900.
May 11, 2011. Cohen added Sandcastle as a defendant in the underlying
suit, seeking to set aside its purchase of West Newcastle Tract I.
May 17, 2011. The trial court held another hearing, this time to hear
evidence Cohen offered in support of his July 27, 2010 Second Supplemental
Notice of Lis Pendens, which burdened the entire West Newcastle Property and
other properties.
June 23, 2011. Defendant Dilick transferred the remaining 1.483 acre
portion of the West Newcastle Property (West Newcastle Tract II) from titleholder
West Newcastle, Ltd. to a previous titleholder, Flat Stone II.
June 29, 2011. The trial court entered an order stating that Cohen “failed to
establish by a preponderance of the evidence the probable validly of a real property
claim” and that the “Second Supplemental Notice of Lis Pendens filed by Plaintiff
on July 27, 2010 is void.” Accordingly, the court ordered the notice burdening the
5
West Newcastle Property (now split into Tracts I and II) was “cancelled and
expunged in its entirety.”
Cohen filed a petition for writ of mandamus and motion for emergency stay
in this Court challenging the trial court’s expungement orders. We denied the
motion and petition.
September 26, 2011. Defendant Dilick made the second property transfer
relevant to this appeal. He effectuated a sale of West Newcastle Tract II to from
Flat Stone II to appellee NewBiss for approximately $1.8 million.
November 10, 2011. Cohen added NewBiss as a defendant in the
underlying suit, seeking to set aside its purchase of West Newcastle Tract II.
SUMMARY JUDGMENTS
A. Sandcastle Homes
Sandcastle filed a traditional motion for summary judgment on its
affirmative defense that it was a “bona fide purchaser, based on the fact that it
purchased [West Newcastle Tract I] from West Newcastle, Ltd., in good faith, for
value, and without knowledge of any competing claims of Cohen or the Cohen
Trusts.” Sandcastle acknowledged that there was a lis pendens in effect on the
property at the time of purchase, but argued that “[s]ince the instrument was
subsequently declared void, it has no force and effect and cannot serve as
‘constructive’ notice to Sandcastle.” Sandcastle contended that its summary-
6
judgment evidence otherwise established its status as a bona fide purchaser as a
matter of law.
Cohen responded that summary judgment in Sandcastle’s favor was not
appropriate because, he alleged, (1) there was a fact issue about whether
Sandcastle had actual notice, (2) there was a fact issue about whether Sandcastle
had constructive notice, (3) the trial court erred by expunging the lis pendens, and
(4) the statute providing for expungement of notices of lis pendens is
unconstitutional.
On September 12, 2012, the trial court granted Sandcastle’s motion. On
February 22, 2013, the trial court severed the summary judgment in favor of
Sandcastle and rendering judgment between Cohen and Sandcastle final.
B. NewBiss
NewBiss filed a traditional motion for summary judgment, also asserting
that it was entitled to summary judgment because its summary-judgment evidence
established, as a matter of law, that it was a protected bona-fide purchaser for
value. It acknowledges that it was aware of this lawsuit, but argued that it
“rightfully relied on [the] court’s order of expungement as an affirmative
determination of [Cohen’s] lack of right or interest” in the West Newcastle Tract
II. Because, it asserted, it had “no independent knowledge of any other facts that
7
would place it on notice that Flat Stone II did not have full authority to convey” the
property, “NewBiss was a good faith purchaser as a matter of law.”
Cohen responded that summary judgment in NewBiss’s favor was not
appropriate because, he alleged, (1) NewBiss had actual notice of his lawsuit,
which was not legally impacted by expungement of the lis pendens, (2) the trial
court erred by expunging the lis pendens, (3) the statute providing for
expungement of notices of lis pendens is unconstitutional, (4) NewBiss’s summary
judgment motion did not address his direct claim against NewBiss.
On September 12, 2012, the trial court granted NewBiss’s motion. On
February 8, 2013, the trial court severed the summary judgment in favor of
NewBiss, rendering judgment between Cohen and NewBiss final.
ISSUES ON APPEAL
A. Issues Cohen raises challenging the Sandcastle judgment
1. “The trial court erred in granting Sandcastle’s summary
judgment because Cohen raised a fact issue as to whether
Sandcastle had actual notice of his claims.”
2. “The trial court erred in granting Sandcastle’s summary
judgment because Cohen raised a fact issue as to whether
Sandcastle had constructive notice of his claims.”
3. “To the extent that the trial court concluded that its June 29,
2011 order expunging Mr. Cohen’s Second Supplemental
Notice of Lis Pendens obliterated from existence and from all
effect any other kind of notice arising independently of the Lis
Pendens obtained by Sandcastle in any manner and at any time
whatsoever, such conclusion was erroneous as a matter of law.”
8
4. “The trial court erred in granting Sandcastle’s summary
judgment because Cohen’s Second Supplemental Lis Pendens
should not have been expunged and therefore Sandcastle was
not a bona fide purchaser.”
5. “Even if Sandcastle was a bona fide purchaser, the trial court
erred in granting summary judgment because the sale to
Sandcastle was void, and therefore Sandcastle could not take
good title.”
6. “The trial court erred in granting Sandcastle’s summary
judgment because Tex. Prop. Code § 12.0071 is
unconstitutional and did not provide the trial court a permissible
basis by which to expunge Mr. Cohen’s lis pendens, and
therefore Sandcastle is not a bona fide purchaser.”
7. “The trial court abused its discretion by expunging Mr. Cohen’s
Second Supplemental Lis Pendens.”
B. Issues Cohen raises challenging the NewBiss judgment
1. “The trial court erred in granting NewBiss’s summary judgment
because NewBiss failed to conclusively establish its bona fide
purchaser affirmative defense.”
2. “The trial court erred in granting NewBiss’s summary judgment
because Cohen’s summary judgment evidence raised a fact
issue as to whether NewBiss had actual notice of Cohen’s
claims.”
3. “To the extent that the trial court concluded that its June 29,
2011 order expunging Cohen’s Second Supplemental Notice of
Lis Pendens obliterated from existence and from all effect any
other kind of notice arising independently of the lis pendens,
however or whenever obtained by NewBiss, such conclusion
was erroneous as a matter of law.”
4. “The trial court erred in granting NewBiss’s summary judgment
because Cohen’s Second Supplemental Lis Pendens should not
have been expunged and therefore NewBiss is not a bona fide
purchaser.”
9
5. “Even if NewBiss was bona fide purchaser, the trial court erred
in granting summary judgment ‘in all respects,’ because the
sale to NewBiss was void, and therefore NewBiss could not
take good title.”
6. “The trial court erred in granting NewBiss’s summary judgment
because the statute pursuant to which the trial court expunged
Cohen’s lis pendens is unconstitutional and did not provide the
trial court a permissible basis by which to expunge Cohen’s lis
pendens, and therefore NewBiss was not a bona fide
purchaser.”
7. The trial court abused its discretion by expunging Cohen’s
Second Supplemental Lis Pendens.”
8. “The trial court abused its discretion by expunging Cohen’s
November 14, 2012 lis pendens.”
STANDARD OF REVIEW
We review a summary judgment de novo. Valence Operating Co. v.
Dorsett, 164 S.W.3d 656, 661 (Tex. 2005). Under the traditional summary-
judgment standard, the movant has the burden to show that no genuine issues of
material fact exist and that it is entitled to judgment as a matter of law. TEX. R.
CIV. P. 166a(c); Nixon v. Mr. Prop. Mgmt. Co., 690 S.W.2d 546, 548 (Tex. 1985).
In determining whether there are disputed issues of material fact, we take as true
all evidence favorable to the nonmovant and indulge every reasonable inference in
the nonmovant’s favor. Nixon, 690 S.W.2d at 548–49. A defendant moving for
summary judgment must conclusively negate at least one essential element of each
of the plaintiff’s causes of action or conclusively establish each element of an
affirmative defense. Sci. Spectrum, Inc. v. Martinez, 941 S.W.2d 910, 911 (Tex.
10
1997). If the summary judgment does not specify the grounds on which it was
granted, the appealing party must demonstrate on appeal that none of the proposed
grounds is sufficient to support the judgment. Rogers v. Ricane Enters., Inc., 772
S.W.2d 76, 79 (Tex. 1989); Tilotta v. Goodall, 752 S.W.2d 160, 161 (Tex. App.—
Houston [1st Dist.] 1988, writ denied).
LIS PENDENS
“[D]uring the pendency of an action involving title to real property, the
establishment of an interest in real property, or the enforcement of an encumbrance
against real property,” a party seeking affirmative relief may file a lis pendens in
the real property records of the county where the property is located. TEX. PROP.
CODE ANN. § 12.007(a) (West 2014). The notice must contain certain information,
including the style and cause number of the proceedings, the court where it is
pending, the names of the parties, identification of the kind of proceedings, and a
description of the property affected. Id. § 12.007(b).
A properly filed lis pendens is not itself a lien, but rather it operates as
constructive notice “to the world of its contents.” See TEX. PROP. CODE ANN. §
13.004(a) (West 2014); see also B & T Distribs., Inc. v. White, 325 S.W.3d 786,
789 (Tex. App.—El Paso 2010, no pet.) (“The purpose of a notice of lis pendens is
to put those interested in a particular tract of land on inquiry about the facts and the
11
issues involved in the suit and to put prospective buyers on notice that they acquire
any interest subject to the outcome of the pending litigation.”).
The Property Code expressly provides that a properly filed notice of lis
pendens prevents a purchaser for value from acquiring property free and clear of
the encumbrance referenced in the lis pendens:
A transfer or encumbrance of real property involved in a proceeding
by a party to the proceeding to a third party who has paid a valuable
consideration and who does not have actual or constructive notice of
the proceeding is effective, even though the judgment is against the
party transferring or encumbering the property, unless a notice of the
pendency of the proceeding has been recorded and indexed under that
party’s name as provided by Section 12.007(c) in each county in
which the property is located.
TEX. PROP. CODE § 13.004(b); see also Cherokee Water Co. v. Advance Oil & Gas
Co., 843 S.W.2d 132, 135 (Tex. App.—Texarkana 1992, writ denied) (“The rule
effectively prevents a grantee from being an innocent purchaser.”).
A notice of lis pendens may be expunged, however, if certain procedures are
followed and the trial court determines that the party filing the notice either has not
pleaded a real-property claim or demonstrated the probable validity of the claim:
(a) A party to an action in connection with which a notice of lis
pendens has been filed may:
(1) apply to the court to expunge the notice; and
(2) file evidence, including declarations, with the motion to
expunge the notice.
....
(c) The court shall order the notice of lis pendens expunged if the
court determines that:
12
(1) the pleading on which the notice is based does not contain a
real property claim; [or]
(2) the claimant fails to establish by a preponderance of the
evidence the probable validity of the real property claim;
....
TEX. PROP. CODE § 12.0071(c). If an order expunging a notice is properly
recorded, there are statutory limitations on the ability of a party to charge a
purchaser with notice based upon the notice of lis pendens:
(f) After a certified copy of an order expunging a notice of lis pendens
has been recorded, the notice of lis pendens and any information
derived from the notice:
(1) does not:
(A) constitute constructive or actual notice of any
matter contained in the notice or of any matter relating to
the proceeding;
(B) create any duty of inquiry in a person with
respect to the property described in the notice; or
(C) affect the validity of a conveyance to a
purchaser for value or of a mortgage to a lender for
value; and
(2) is not enforceable against a purchaser or lender described by
Subdivision (1)(C), regardless of whether the purchaser or lender
knew of the lis pendens action.
TEX. PROP. CODE § 12.0071(f).
WHAT IS THE EFFECT OF AN EXPUNGED LIS PENDENS?
The parties disagree about how the trial court’s expungement of the notices
of lis pendens on Tract I and Tract II impacted Sandcastle’s and NewBiss’s ability
to establish bona-fide purchaser status. The notice of lis pendens on Tract I was
13
expunged after Sandcastle’s purchase; the notice of lis pendens was expunged on
Tract II before NewBiss’s purchase. Cohen asserts that, in both cases, the
purchasers were not entitled to bona-fide purchaser protection because they
otherwise had notice of his lawsuit. We disagree.
A. Sandcastle
With regard to Sandcastle, in his first issue Cohen points to evidence he
contends raises a fact issue about Sandcastle’s actual notice of his lawsuit.
Specifically, he cites Dilick’s deposition testimony that he told Sandcastle—both
prior to its purchase and again at closing—about the lawsuit. Dilick also altered
the disclosure statement at closing to change “Owner is not a part to any pending
law suits” to “Owner is not a future party to any pending future known law suits.”
Cohen argues that while the lis pendens operated as constructive notice “to the
world of its contents,” TEX. PROP. CODE § 13.004(a), “actual notice is binding
independent of any question of constructive notice.” Hexter v. Pratt, 10 S.W.2d
692, 693–94 (Tex. Comm. App. 1928, judgm’t adopted). Thus, he asserts, “[b]y
granting Sandcastle’s motion for summary judgment, the trial court may have
impermissibly conflated the issue of actual notice with the issue of constructive
notice.”
Alternatively, in his second issue Cohen argues that his filing this Court’s
stay of the order expunging the lis pendens on Tract I in the real-property records
14
put Sandcastle on constructive notice of his lawsuit because it was in the chain of
title. See Hexter, 10 S.W.2d at 693. Thus, he contends, “[b]ecause on the day it
purportedly purchased the [Tract I] Sandcastle had constructive notice of Cohen’s
claims thereto (and presumed actual knowledge as well), from publically available
information other than that derived from Cohen’s lis pendens, i.e., from a separate,
independent and publicly filed document, Sandcastle did not qualify as a bona fide
purchaser, and summary judgment in its favor was improper.”
Finally, in his third issue, Cohen argues to the extent that the trial court
concluded its order expunging the lis pendens on Tract I “obliterated from
existence and from all effect any other kind of notice arising independently of the
lis pendens, however or whenever obtained by Sandcastle, such conclusion was
erroneous as a matter of law.” Cohen acknowledges that that this “issue appears to
be one of first impression,” and argues that section 12.0071(f) should be construed
narrowly, such that a party cannot be a bona-fide purchaser—even if a notice of lis
pendens has been expunged—if the party has obtained any information about the
lawsuit independent of the actual lis pendens.
B. NewBiss
With regard to NewBiss, in his first issue Cohen points to NewBiss’s own
summary-judgment evidence that he contends conclusively establishes NewBiss’s
actual notice of his lawsuit. Specifically, he cites an affidavit by Greg Lewis, a
15
NewBiss representative, which states “[d]uring our discussion on the terms of the
sale, Dilick advised me a lis pendens had been filed on the Property.” Thus, Cohen
contends, NewBiss “admitted [it] did not learn of Cohen’s lis pendens, or the
information within it, via the lis pendens itself.” Because Dilick instead told Lewis
about the notice of lis pendens, Cohen argues that NewBiss had actual notice that
rendered the lis pendens and its expungement irrelevant.
In his second issue, Cohen alternatively argues that his summary-judgment
evidence raises a fact issue about NewBiss’s actual notice. Cohen cites an
affidavit by John Riddle, who stated that—when he learned that NewBiss had
Tract II under contract—he asked Lewis if he knew about Cohen’s lawsuit and
offered to get Lewis a copy of the petition. Lewis declined the offer, telling Riddle
that “he knew all about it.” Cohen contends that this evidence defeats any
argument that NewBiss did not have actual knowledge about his lawsuit.
Finally, Cohen argues that, if the trial court’s summary judgment was
premised upon its conclusion that the expungement of his Second Supplemental
Notice of Lis Pendens obliterated all forms of notice (actual and constructive)
about his claims, that holding is erroneous.
C. Analysis
Cohen’s first three issues with regard to both the Sandcastle and NewBiss
judgments require us to determine, as a matter of first impression, the impact of the
16
trial court’s expungement of the notices lis pendens on the Newcastle Property
Tract I and Tract II on the appellees’ ability to avail themselves of bona-fide
purchaser status.
In Texas, prior to 2009, if a party pleaded a real-property claim, it could
effectively encumber a property with a lis pendens notice until the underlying
proceedings concluded without regard for the merits of the underlying claim. This
approach had been criticized because it allowed real-property interests to be
significantly burdened with no evidentiary support and with no showing that the
notice of lis pendens was filed in good faith. See, e.g., Herbert A. Janzen, Texas
Statutory Notice of Lis Pendens: A Deprivation of Property Interest without Due
Process?, 19 ST. MARY’S L.J. 377, 385 (1987) (“Under the [prior version of] the
Texas statute, the only way a seller c[ould] remove the cloud on his title caused by
a lis pendens notice [was] to post a bond or give an undertaking pursuant to the
statute, or proceed to trial on the underlying suit and obtain a favorable
judgment.”). Recognizing that a lis pendens notice “produces a cloud on title
which may devastate the marketability of the encumbered property,” some states
“enacted statutes requiring a trial court to determine, in a hearing on discharge, that
the claim is probably valid, or that the proponent is likely to prevail in the action.”
Hon. David M. Gersten, The Doctrine of Lis Pendens: the Need for a Balance, 59
FLORIDA BAR J. 83 (June 1995) (citing CAL. CIV. PROC. CODE § 405.32 (West
17
1995) (“[T]he court shall order that the notice be expunged if the court finds that
the claimant has not established by a preponderance of the evidence the probable
validity of the real property claim.”); NEV. REV. STAT. §14.015.3 (1993) (requiring
party filing notice of lis pendens to establish it was “not brought in bad faith or for
an improper motive” and that it “is likely to prevail in the action” or “has a fair
chance of success on the merits in the action” and that harm from lifting the notice
would be sufficiently serious); N.J. REV. STAT. §2A:15-7(b)(1995) (“If the court
determines that there is a sufficient probability of final judgment in favor of the
plaintiff, the notice of lis pendens shall be continued of record. . . . If the court fails
so to determine, the court shall forthwith order the notice of lis pendens discharged
of record.”)).
In 2009, the Texas Legislature similarly amended section 12.0071 of the
Texas Property Code to require a trial court to “order the notice of lis pendens
expunged if the court determines that . . . the claimant fails to establish by a
preponderance of the evidence the probable validity of the real property claim.”
Probable validity is not defined in the statute, but other jurisdictions have defined
this phrase in the lis pendens expungement context to mean “where it is more
likely than not that the plaintiff will obtain a judgment against the defendant on
that claim.” CAL. CIV. PROC. CODE § 481.190.
18
Cohen’s Second Supplemental Notice of Lis Pendens was expunged under
this new provision. The parties disagree about the effect of that expungement,
which is governed by section 12.0071(f):
(f) After a certified copy of an order expunging a notice of lis pendens
has been recorded, the notice of lis pendens and any information
derived from the notice:
(1) does not:
(A) constitute constructive or actual notice of any
matter contained in the notice or of any matter relating to
the proceeding;
(B) create any duty of inquiry in a person with
respect to the property described in the notice; or
(C) affect the validity of a conveyance to a
purchaser for value or of a mortgage to a lender for
value; and
(2) is not enforceable against a purchaser or lender described by
Subdivision (1)(C), regardless of whether the purchaser or lender
knew of the lis pendens action.
TEX. PROP. CODE § 12.0071(f).
Cohen urges us to interpret this provision to mean that expungement
extinguishes only (1) constructive notice caused by the filing of the notice of lis
pendens, and (2) actual notice derived by reading the notice of lis pendens. Thus,
under Cohen’s interpretation, if a party learns of a lis pendens or the underlying
lawsuit other than by reading the actual lis pendens notice, the party has “actual
notice” of that claim, defeating bona-fide purchaser status regardless of whether
the lis pendens is expunged.
19
Sandcastle and NewBiss argue that Cohen’s interpretation eliminates the
benefit of—and is contrary to the purpose of—the expungement statute because it
allows a party to burden title to property even when that party cannot meet the
threshold requirement of adequately pleading and establishing the probable validity
of an alleged real-property claim. We agree.
“We use definitions prescribed by the Legislature and any technical or
particular meaning the words have acquired, but otherwise, we construe the
statute’s words according to their plain and common meaning unless a contrary
intention is apparent from the context, or unless such a construction leads to absurd
results.” FKM P’ship, Ltd. v. Bd. of Regents of Univ. of Houston Sys., 255 S.W.3d
619, 633 (Tex. 2008) (citing TEX. GOV’T CODE § 311.011; Univ. of Tex. Sw. Med.
Ctr. v. Loutzenhiser, 140 S.W.3d 351, 356 (Tex. 2004)). We presume the
Legislature intended a just and reasonable result by enacting the statute. TEX.
GOV’T CODE § 311.021(3).
A notice of lis pendens is designed to put persons who might acquire the
property on notice that there is a potential claim to the property. There are two
methods to terminate a lis pendens. Anyone interested in a burdened property can
petition for a “cancellation” of lis pendens if the court determines “the party
seeking affirmative relief can be adequately protected by the deposit of money into
court or by giving of an undertaking.” TEX. PROP. CODE § 12.008. In other words,
20
without regard to the merits of a real property claim, a party can unburden real
property by providing security in its place.
But section 12.0071—the provision at issue here—uses the word “expunge”
rather than “cancel.” Unlike section 12.008 (providing for cancellation based upon
posting security), a court under 12.0071 must find that the plaintiff either did not
plead a real-property claim or has not shown the probable validity of its claims
before expungement is appropriate. “Expunge” means to “erase or destroy”; to
“declare . . . null and outside the record,” so that it “is noted in the original record
as expunged, and redacted from all future copies.” BLACK’S LAW DICTIONARY
(10th ed. 2014). Once a notice of expungement has been properly filed, “the notice
of lis pendens and any information derived from the notice” does not amount to
constructive, actual, or inquiry notice about the underlying lawsuit, and is “not
enforceable against a purchaser or lender . . . regardless of whether the purchaser
or lender knew of the lis pendens action.”
Cohen argues the concepts of actual and constructive notice are different and
that expungement of a notice of lis pendens can operate only to extinguish
constructive notice, but not actual notice (except the actual notice that comes from
physically reading a lis pendens notice). We reject that argument because the plain
language of section 12.0071 shows that—for purposes of establishing bona fide
purchaser status—expungement of a lis pendens notice extinguishes both actual
21
and constructive notice. See TEX. PROP. CODE § 12.0071(f)(1)(A) (“After a
certified copy of an order expunging a notice of lis pendens has been recorded, the
notice of lis pendens and any information derived from the notice . . . does not . . .
constitute constructive or actual notice of any matter contained in the notice or of
any matter relating to the proceeding.” (emphasis added)), § 12.0071(f)(2) (“After
a certified copy of a notice of lis pendens has been recorded, the notice of lis
pendens any information derived from the notice . . . is not enforceable against a
purchaser. . . regardless of whether the purchaser . . . knew of the lis pendens
action.” (emphasis added)). What is less clear, however, is exactly what
expungement extinguishes actual and constructive notice of.
The statute states that expungement extinguishes “notice of lis pendens and
any information derived from the notice.” (emphasis added). Our resolution of
this appeal turns on what “any information derived from” means. Cohen advances
a narrow interpretation of this provision, insisting that expungement of a lis
pendens should have no effect on any actual notice unless the purchaser gained the
actual notice from reading the notice of lis pendens. Under this interpretation,
whether an expungement can remove the cloud of a lis pendens does not turn on
whether the party encumbering the real property can demonstrate a probable right
of recovery on an underlying real-property claim, but instead on details about
22
exactly how the purchaser seeking to rely on an expungement learns of the
underlying claim.
For example, under Cohen’s interpretation, if a potential purchaser first
learns of a lawsuit involving a claim to real property by reading a properly filed
notice of lis pendens in the real property records, then the potential seller’s
successfully moving to expunge that lis pendens—either before or after the
purchaser came across the lis pendens notice—would restore that purchaser’s
ability to take the property as a bona-fide-purchaser.
The result would be different, however, if the day before inspecting the real
property records, that same potential purchaser was told by a real estate agent
showing the property:
The seller told me that there is a lawsuit in which someone was
claiming an interest in this property. The plaintiff in that suit filed a
notice of lis pendens on the property, but the seller went to court and
got that notice expunged, so everything is fine now.
Under Cohen’s interpretation, the buyer told about the suit by the realtor could
never take the property as a bona-fide purchaser, despite a trial court finding that
the plaintiff in the underlying lawsuit failed to establish, by a preponderance of the
evidence, the probable validity of the real-property claim.
The statutory provisions providing for expungement of lis pendens notices—
the aim of which is to curtail burdening of real property pretrial, for lengthy
periods, without evidentiary support—would be of little use if every case
23
necessitated inquiry into, and turned on, whether a purchaser physically read the lis
pendens or was told about the lis pendens or the underlying lawsuit by another
person. Read as a whole, the lis pendens and expungement scheme is designed to
differentiate cases in which the proponent of the notice of lis pendens can
demonstrate a probable right of recovery on an underlying real-property claim
from cases in which the proponent cannot; nothing indicates that the legislature
intended the determination of whether title to a property is encumbered to turn
instead on whether each potential buyer learns of an underlying claim that is the
subject of a lis pendens notice by literally reading the notice or by some other
means.
We thus conclude that the more reasonable interpretation intended by the
legislature is that a lawsuit identified in a notice of lis pendens does not preclude
subsequent purchasers from proving bona-fide purchaser status if the trial court has
expunged that lis pendens following a determination that the proponent has not
shown the probable validity of the real-property claim. Unlike the dissent’s
interpretation of the statute, ours has the benefit of furthering the purpose of the
statute and creating a bright-line rule.
The dissent criticizes our interpretation as too broad and argues that section
12.0071 should instead be interpreted to extinguish only notice that came from the
notice of lis pendens itself or from information derived from that recorded notice.
24
It contends that our interpretation “imbu[es] an expungement of a notice of lis
pendens with the claim-preclusive effect of a full-blown adverse judgment on the
merits.” The dissent acknowledges, as it must, that the statute expressly mandates
such a result for some types of actual and constructive notice about the underlying
lawsuit, but argues that result should not extend to other types of actual notice. In
support of its interpretation, the dissent expresses a concern that “the procedural
standard for expunging a notice of lis pendens is much lower than the standard that
would apply to defeat the underlying claim on the merits.” But, by the same token,
a plaintiff’s filing a notice of lis pendens wields power not available to a plaintiff
in any other context, i.e., the ability to effectively completely encumber a
defendant’s property before any right to that property is litigated.3
Cohen does not argue that Sandcastle or NewBiss had notice of any legal
claims other than those identified in his Second Supplemental Notice of Lis
Pendens burdening the West Newcastle Property. He argues only that fact issues
exist about whether Sandcastle’s and NewBiss’s knowledge about those claims
came from the actual lis pendens or from other sources providing information
about the claims and/or lis pendens. Because we have held that expunction of
notices of lis pendens for failure to establish the probable validity of the underlying
3
We also note that expungement under section 12.0071 does not impact a plaintiff’s
ability to enforce a perfected lien against real property if its claim to the property
meets the statutory prerequisites, nor does it impact the plaintiff’s ability to
recover monetary damages from the defendant.
25
claims effectively extinguishes “notice” of the claims identified in the notice of lis
pendens, we overrule Cohen’s first three issues in the Sandcastle appeal and the
first three issues in the NewBiss appeal.
THE EXPUNGEMENT
In issues four and seven related to the Sandcastle appeal and in issues
four and seven related to the NewBiss appeal, Cohen argues that the trial court
erred by expunging his Second Supplemental Notice of Lis Pendens, rendering the
summary judgments in favor of Sandcastle and NewBiss erroneous. In his eighth
issue in the NewBiss appeal, he complains that the trial court erred in expunging
another notice of lis pendens he filed on Tract II of the West Newcastle property
on November 14, 2012. Specifically, he argues that expunging his notices of lis
pendens was improper because he established the probable validity of his real-
property claims against the Dilick defendants in the underlying lawsuit.
Orders related to lis pendens are addressable by mandamus 4 and, in some
situations, on direct appeal from the final judgment resolving the alleged real-
4
E.g., First Nat’l Petroleum Corp. v. Lloyd, 908 S.W.2d 23, 24–25 (Tex. App.—
Houston [1st Dist.] 1995, orig. proceeding) (“Mandamus has been recognized as
the appropriate remedy when issues have arisen concerning the issuance of notices
of lis pendens.”); see also Flores v. Haberman, 915 S.W.2d 477, 478 (Tex. 1995)
(orig. proceeding) (granting mandamus relief from trial court’s erroneously denial
of motion to cancel notice of lis pendens without analysis of adequate remedy by
appeal).
26
property claim for which the lis pendens gives notice.5 Neither of these situations
is presented here. Cohen raised the same arguments he makes here in the petition
for writ of mandamus he filed, and we denied, when the trial court expunged his
notices of lis pendens. See In re Cohen, 01-11-00544-CV (Dec. 22, 2011). And
the underlying real-property claims against the Dilick defendant upon which the
notices of lis pendens gave notice are still pending in in the trial court. We will not
consider Cohen’s collateral challenge to the trial court’s expungement orders in
this direct appeal from severed summary judgments establishing Sandcastle’s and
NewBiss’s bona-fide purchaser status.
We accordingly overrule Cohen’s fourth and seventh issues in the
Sandcastle appeal and his fourth, seventh, and eighth issues in the NewBiss appeal.
SALES TO SANDCASTLE AND NEWBISS VOID?
In his fifth issues in both the Sandcastle and NewBiss appeals, Cohen argues
that the trial court erred in granting summary judgment because even if Sandcastle
and NewBiss were bona-fide purchasers, their purchases were void. Specifically,
5
See In re Moody Nat’l Kirby Houston S, LLC, 412 S.W.3d 570, 571 (Tex. App.—
Houston [1st Dist.] 2013, orig. proceeding) (denying mandamus petition
challenging trial court’s denial of motion to expunge lis pendens because
mandamus was filed after notice of appeal from final judgment resolving real-
property claim in underlying proceeding rendering appeal from final judgment
(into which interlocutory order denying expungement merged) an adequate
remedy). But see Nat’l City Bank of Indiana v. Ortiz, 401 S.W.3d 867, 887 (Tex.
App.—Houston [14th Dist.] 2013, pet. denied) (addressing merits of mandamus
petition challenging denial of motion to expunge notice of lis pendens that was
filed after notice of appeal filed from final disposition of underlying real-property
dispute).
27
Cohen alleges that the sales to Sandcastle and NewBiss amounted to improper and
illegal diversion of partnership property because Dilick took the sales proceeds for
improper personal use, which violated his fiduciary duties and the Texas Penal
Code.
Sandcastle and NewBiss argue that the transactions were not void. They
dispute that Dilick’s actions were improper or violated any law, and argue that—in
any event—Dilick’s actions were within the scope of his authority such that his
misuse of sale proceeds would not void the sale. We agree that Cohen has not
demonstrated that the sales were void.
Cohen does not dispute that Dilick was specifically authorized under the
relevant partnership agreements to conduct transactions involving the West
Newcastle property, including the authority to sell or encumber the property. In
other words, Dilick did not exceed the scope of his authority by conveying the
properties. The two cases Cohen cites for the proposition that we should
nonetheless void the sales as being against public policy are inapposite and do not
support his argument that a sale within an agent’s authority to a third party is void
if the agent involved in the sale later improperly diverts proceeds from the sale for
an impermissible personal use. See GNG Gas Sys, Inc. v. Dean, 921 S.W.2d 421,
426–27 (Tex. App.—Amarillo 1996, writ denied); Guaranty Bank (S. Oak Cliff
Bank) v. Nat’l Surety Corp., 508 S.W.2d 928, 929 (Tex. Civ. App.—Dallas 1974,
28
writ ref’d n.r.e.). In Guaranty Bank, the court of appeals affirmed a summary
judgment that the defendant was not liable for tortious interference of a contract
because performance of that contract required the misappropriation of trust funds
that would have violated public policy. 508 S.W.2d at 932–33. In GNG Gas
Systems, Inc., 921 S.W.2d at 427, the court articulated the general proposition that
a corporate transaction in which an officer or director diverts assets of the
corporation for his own use, “the transaction is presumptively fraudulent and
void.” The “transaction” that is subject to being voided, however, is the
transaction that allegedly violated the fiduciary duty. Applying this general
principle, and accepting Cohen’s allegations as true, the voidable transaction here
would not be the authorized sales to NewBiss and Sandcastle, but instead the one
in which Dilick allegedly diverted funds.
Because Cohen has not demonstrated that the sales to Sandcastle and
NewBiss were void, we overrule Cohen’s fifth issues in both the Sandcastle and
NewBiss appeals.
CONSTITUTIONALITY
In Cohen’s sixth issue in both the Sandcastle and NewBiss appeals, he
argues that section 12.0071 of the Texas Property Code is unconstitutional.
Specifically, he contends it violates the open courts provision of the Texas
29
Constitution, and his due process rights under both the United States and Texas
Constitutions. Tex. Const. art. I, §13; U.S. CONST. amend. XIV, §1.
A. Open Courts
The open-courts provision prohibits arbitrary or unreasonable legislative
action that abrogates well-established, common-law remedies. Lebohm v. City of
Galveston, 154 Tex. 192, 199 275 S.W.2d 951, 955 (1955) (op. on reh’g). It
ensures that Texas citizens bringing common-law causes of action will not
unreasonably be denied the right to redress in the courts. Rose v. Doctor’s Hosp.,
801 S.W.2d 841, 843 (Tex. 1990).
We review the constitutionality of a statute de novo, see Stockton v.
Offenbach, 336 S.W.3d 610, 614–15 (Tex. 2011), beginning with the presumption
that the statute is constitutional. TEX. GOV’T CODE ANN. § 311.021(1) (West
2013); Sax v. Votteler, 648 S.W.2d 661 664 (Tex. 1983); see also Methodist
Healthcare Sys. of San Antonio, Ltd. v. Rankin, 307 S.W.3d 283, 285 (Tex. 2010).
To establish an open-courts violation, Cohen must demonstrate that (1) the
statute restricts a well-recognized, common-law cause of action (the well-
recognized prong) and (2) the restriction is unreasonable or arbitrary when
balanced against the Act’s purpose (the balance prong). Thomas v. Oldham, 895
S.W.2d 352, 357 (Tex. 1995); Sax, 648 S.W.2d at 666. A statute does not violate
the open courts provision of the Texas Constitution if there are adequate substitute
30
methods for obtaining redress. Liggett v. Blocher, 849 S.W.2d 846, 851 (Tex.
App.—Houston [1st Dist.] 1993, no writ) (“In determining the restrictive effect of
the statutory provision at issue, the court must also consider whether the legislature
has avoided an unconstitutional result by providing a substitute remedy or by
leaving a reasonable alternative at common law.”). A statute may, however,
violate the open-courts provision “when it makes a remedy by due course of law
contingent on an impossible condition.” In re D.M., 191 S.W.3d 381, 391 (Tex.
App.—Austin 2006, pet. denied).
Cohen argues that the procedures for expunging notices of lis pendens under
section 12.0071 are “unreasonably truncated,” and may cause a person filing a
notice of lis pendens to “forever lose[] its ability to obtain rescission of the
wrongful conveyance or to impose a constructive trust on the property wrongfully
conveyed.” In other words, Cohen does not argue that he has lost the right to
pursue a particular cause of action, but instead argues that—by requiring him to
comply with section 12.0071—he may lose the “ability to obtain remedies (i.e.,
retrieve the property wrongfully conveyed) provided [him] under common law,
thereby restricting, in a rather profound way, [his] common law claims.”
We reject Cohen’s open-courts challenge because he has not been deprived
of a common law right. Cohen has not been prevented from suing for damages
under the theories of breach of fiduciary duty, fraud, constructive fraud, and breach
31
of contract. Cohen’s challenge is directed only at the statutory provision allowing
for expungement of a lis pendens if the requisite evidentiary showing is not met.
TEX. PROP. CODE §12.0071(c)(2). A lis pendens is not a cause of action or a lien; it
is a means of providing constructive notice of an alleged real property claim. TEX.
PROP. CODE §13.004(a). Cohen was allowed, by statute, to file a notice of lis
pendens to serve as constructive notice of his claims. He was given the
opportunity to maintain that notice of lis pendens by demonstrating the probable
validity of his real property claim. He had the opportunity to challenge, in an
original proceeding in this Court, the trial court’s determination that he had not
demonstrated the probable validity of his real property claim. He has not
established an open courts violation. Cf. Francis v. Coastal Oil & Gas, Inc., 130
S.W.3d 76, 92 (Tex App—Houston [1st Dist.] 2003, no pet.) (holding that statute
eliminating liability of property owner for independent contractor’s injuries unless
the property owner exercises sufficient control over the work and has knowledge
of the danger does not violate the open courts provision because it only “delineates
the evidentiary showing a plaintiff must meet to prevail on a claim of negligence
against a property owner”); Freedman v. Univ. of Houston, 110 S.W.3d 504, 508
(Tex. App.—Houston [1st Dist.] 2003, no pet.) (holding that statute requiring
legislative consent to sue university for breach of contract did not violate open
courts because it does not eliminate right to sue).
32
B. Due Process
Finally, Cohen argues that section 12.0071 violates his procedural and
substantive due process rights.
Procedural due process requires reasonable notice and the opportunity to be
heard at a meaningful time and in a meaningful manner. Univ. of Tex. Med. Sch. v.
Than, 901 S.W.2d 926, 930 (Tex. 1995). The trial court held a hearing on the
motion to expunge Cohen’s Second Supplemental Notice of Lis Pendens. The
parties filed evidence and the court accepted testimony at the hearing. Other than
his claims that the expungement procedure is “truncated” such that the court
should err “on the side of preserving the status quo,” Cohen cites no authority in
support of his argument that he was deprived of procedural due process.
Cohen likewise does not articulate how section 12.0071’s application to him
violates substantive due process. He argues only that the state needed “a
compelling interest to curtail” his property rights, and “must do it as narrowly as
possible.” Cohen has not provided argument or authority to overcome the
presumption that section 12.0071 is constitutional.
We overrule Cohen’s sixth issue in both the Sandcastle and NewBiss
appeals.
CONCLUSION
We affirm the trial court’s judgments.
33
Sherry Radack
Chief Justice
Panel consists of Chief Justice Radack and Justices Massengale and Huddle.
Justice Massengale, dissenting.
34