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Surrey Oaks LLC v. Evanston Insurance Co.

United States District Court, N.D. Texas, Fort Worth Division

July 19, 2017

SURREY OAKS LLC, STANLEY XU, and NANLING CHEN, Plaintiffs,
v.
EVANSTON INSURANCE COMPANY, Defendant.

          MEMORANDUM OPINION AND ORDER

          JOHN MCBRYDE, UNITED STATES DISTRICT JUDGE

         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 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.

         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] and Fannie Mae, ISAOA [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 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 plaintiffs' claims ...


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