COURT OF APPEALS
SECOND DISTRICT OF TEXAS
FORT WORTH
NO. 2-06-296-CV
BOB ARLINGTON APPELLANT
V.
DOUG MCCLURE APPELLEE
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FROM THE 355TH DISTRICT COURT OF HOOD COUNTY
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MEMORANDUM OPINION 1
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This is a suit on a note. Appellant Bob Arlington appeals from the trial
court’s judgment awarding Appellee Doug McClure the principal sum of
$64,500 plus $112,403.08 in interest and $57,939.62 in attorney’s fees. In
nine issues, Arlington argues that the trial court erred by rendering judgment in
favor of McClure because (1) the underlying transaction was an illegal loan from
1
… See T EX. R. A PP. P. 47.4.
an ERISA plan; (2) there is no note; (3) Arlington was not the maker of the
note; (4) McClure is not the holder of the note; (5) nothing is owed on the note
because McClure paid off the balance years ago; (6) the suit is barred by
limitations; (7) if the trial court based its judgment on McClure’s suit for debt,
it erred by so doing; and (8) if the trial court based its judgment on McClure’s
quantum meruit claim, it erred by so doing. We affirm.
Factual and Procedural History
In 1999, Arlington, McClure, and Merv Reagan agreed to acquire and
develop real property in Hood County. To this end, they formed a corporation,
BMD Eagles Crest, Inc., with Arlington, McClure, and Reagan each owning a
third of the corporation. Arlington was to serve as president of BMD and would
be primarily responsible for its management and operation.
Arlington, McClure, and Reagan agreed to fund the purchase of the
subject property with a loan from the employee retirement plan (“the Plan”) of
McClure’s business, McClure Development, Inc. They agreed that Arlington
would sign the note as maker, and the note would be secured by a deed of
trust lien on the property. They further agreed that they would each be
obligated to repay one third of the loan and that they would each contribute to
BMD one third of the development costs, annual taxes, holding costs, and
maintenance expenses associated with the property.
2
BMD closed on the property on October 14, 1999. At the closing,
Arlington signed a promissory note in the principal sum of $275,000 payable
to the Plan. He also signed a deed of trust granting the Plan a lien on the
property to secure the note.
Arlington made some of the interest payments on the note until May 14,
2001. Meanwhile, Arlington, McClure, and Reagan contributed $41,000 each
to BMD for the property’s development. On May 11, 2000, Reagan purchased
two of the property’s six platted lots from BMD for $146,000, which was paid
to the Plan and credited against the note, leaving a principal balance of
$129,000. Reagan then relinquished his one-third interest in BMD, and
Arlington and McClure each owned half of BMD thereafter.
On August 31, 2000, McClure paid to the Plan the entire balance owed
on the note.
On March 15, 2001, Arlington, individually, and McClure, as the Plan’s
trustee, signed a written agreement extending the maturity date of the note to
June 30, 2001. On May 14, 2002, they signed another agreement extending
the maturity date of the note until someone other than Reagan purchased one
of the remaining lots. McClure signed the second extension in his individual
capacity. The second extension recited the amount owed on the note as of
May 14, 2002, as $64,500.
3
Although McClure had already paid the note in full, the Plan demanded
payment on the note from Arlington on June 4, 2002. On December 13, 2004,
the Plan notified Arlington of its intent to post the property for foreclosure
under the note and deed of trust.
Arlington and BMD sued the Plan on January 3, 2005, to enjoin the
foreclosure and to have the note and deed of trust declared invalid and
unenforceable. In a single pleading filed on January 24, 2005, the Plan filed a
counterclaim and McClure intervened in the suit, seeking judgment for the
principal amount of the note plus interest, attorney’s fees, and costs.2
Arlington took McClure’s deposition on January 5, 2006, and learned that
McClure had paid the balance on the note on August 31, 2000. After the
deposition, on January 25, 2006, McClure—individually and as Plan
trustee—executed a document to “memorialize” and “acknowledge” the
transfer of the note and the deed of trust from the Plan to McClure.
The parties tried the case to the bench. The trial court rendered judgment
in favor of McClure for $64,500 on the note plus $112,403.08 in interest and
2
… McClure also sued Arlington on a second, $10,000 note. The trial
court ultimately granted McClure a directed verdict on the second note.
According to McClure’s brief, Arlington paid the second note after trial, and that
note is no longer in controversy.
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$57,939.62 in attorney’s fees and costs, for a total judgment of $170,342.70;
it denied relief to all other parties. Arlington filed this appeal.
Standard of Review
Findings of fact entered in a case tried to the court have the same force
and dignity as a jury’s answers to jury questions. Anderson v. City of Seven
Points, 806 S.W.2d 791, 794 (Tex. 1991). The trial court’s findings of fact are
reviewable for legal and factual sufficiency of the evidence to support them by
the same standards that are applied in reviewing evidence supporting a jury’s
answer. Ortiz v. Jones, 917 S.W.2d 770, 772 (Tex. 1996); Catalina v. Blasdel,
881 S.W.2d 295, 297 (Tex. 1994). When findings of fact are filed and are
unchallenged, they occupy the same position and are entitled to the same
weight as the verdict of a jury; they are binding on an appellate court unless the
contrary is established as a matter of law or there is no evidence to support the
finding. McGalliard v. Kuhlmann, 722 S.W.2d 694, 696 (Tex. 1986); Raman
Chandler Props., L.C. v. Caldwell’s Creek Homeowners Ass’n, Inc., 178 S.W.3d
384, 390 (Tex. App.—Fort Worth 2005, pet. denied).
Arlington argues that the trial court’s judgment is incorrect as a matter
of law for several reasons. A party asserting a “matter of law” issue must
surmount two hurdles. First, we examine the record for any evidence
supporting the trial court's findings, disregarding all evidence to the contrary.
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Second, if there is no evidence to support the findings, we examine the entire
record to see if the contrary proposition is established as a matter of law.
Sterner v. Marathon Oil Co., 767 S.W.2d 686, 690 (Tex.1989).
Discussion
1. Illegality under ERISA as a bar to enforcing the note.
In his first issue, Arlington argues that the note is unenforceable because
the underlying transaction was an illegal loan from an ERISA plan to an entity
in which a “party in interest”—McClure—owned an interest. See 29 U.S.C.A.
§ 1106 (West 1999) (prohibiting loan or transfer of assets from an ERISA plan
to or for the benefit of a party in interest).
Courts generally will not enforce illegal contracts. Plumlee v. Paddock,
832 S.W.2d 757, 759 (Tex. App.—Fort Worth 1992, writ denied). The policy
is not to protect or punish either party to the contract, but is for the benefit of
the public. Id. Courts will generally leave the parties to an illegal contract
where it finds them and are no more likely to aid one attempting to enforce
such a contract than they are disposed in favor of the party who uses the
illegality to avoid liability. Id. But where the illegality does not appear on the
face of the contract, it will not be held void unless the facts showing its
illegality are before the court. Lewis v. Davis, 145 Tex. 468, 199 S.W.2d 146,
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149 (1947). Illegality is an affirmative defense, and the party seeking to avoid
the contract has the burden of proving its illegality. T EX. R. C IV. P. 94.
In this case, the contract in question is not illegal on its face, and
Arlington failed to prove its illegality as a matter of law because—as McClure
points out—ERISA contains exceptions that permit loans even to a party in
interest. The Plan made the loan underlying the note to Arlington, individually,
not to McClure or BMD. Thus, under the provisions of ERISA identified by
Arlington, the loan was not on its face a prohibited loan to a party in interest.
See 29 U.S.C.A. § 1106. Other evidence, and especially McClure’s own
testimony, shows that Arlington, individually, was a strawman and that
McClure intended the loan to benefit BMD; McClure testified that he knew he
was not supposed to loan money from the Plan to an entity with which he was
involved and that he told Arlington that he (McClure) could not loan the money
to himself and would therefore loan the money to Arlington, personally, who as
manager of BMD could “do with it as necessary.”
But ERISA provides for at least two exceptions to the prohibition on loans
from a plan to a party in interest. Section 1101(a)(1) provides that the
prohibition does not apply to “a plan which is unfunded and is maintained by
an employer primarily for the purpose of providing deferred compensation for
a select group of management or highly compensated employees.” Id.
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§ 1101(a)(1) (West 1999). Second, the prohibition does not apply to “[a]ny
loans made by the plan to parties in interest who are participants or
beneficiaries of the plan if such loans . . . are available to all such participants
and beneficiaries on a reasonably equivalent basis.” Id. § 1108(b)(1) (West
1999). Arlington presented no evidence regarding these two exceptions.
Thus, while there is some evidence that the loan was prohibited by
ERISA, the evidence does not prove that the loan was illegal as a matter of law.
Thus, Arlington did not carry his burden of proving illegality as a matter of law,
and we overrule his first issue. See Sterner, 767 S.W.2d at 690.
2. The existence of the note.
In his second issue, Arlington argues that the trial court erred by granting
judgment on the note “because there is no note.” Arlington explains that
because the note did not reflect the reality of the transaction—a loan from the
Plan to BMD—the note is a sham, which, he argues, precludes McClure from
establishing the existence of the note as a matter of law. See Doncaster v.
Hernaiz, 161 S.W.3d 594, 602 (Tex. App.—San Antonio 2005, no pet.)
(setting out essential elements of suit on a note, including existence of a note).
Arlington cites no authority for the proposition that a note is not a note
when it does not accurately reflect the reality of a transaction, and our own
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research finds none. McClure proved the existence of a note by offering the
note itself into evidence. We therefore overrule Appellant’s second issue.
3. Arlington as the maker of the note.
In a similar vein, Arlington argues in his third issue that the trial court’s
judgment is erroneous as a matter of law because Arlington was not the maker
of the note. See id. (identifying the defendant’s signature on a note as an
essential element of a suit on a note). Arlington contends that all three parties
to the transaction—Arlington, McClure, and Reagan—agree that Arlington
signed the note in a representative capacity and, therefore, that Arlington is not
personally liable on the note. In this connection, Arlington cites section
3.402(b) of the business and commerce code, which provides in pertinent part,
“the representative is liable on the instrument unless the representative proves
that the original parties did not intend the representative to be liable on the
instrument.” T EX. B US. & C OMM. C ODE A NN. § 3.402(b) (Vernon 2002).
The testimony cited by Arlington does not prove conclusively that the
original parties did not intend him to be liable on the instrument. McClure
testified, “[W]e made an agreement . . . that [Reagan] would be responsible --
to [Arlington] for one-third of it and I personally would be responsible to
[Arlington] for one-third of it, and he would be responsible for the other third.”
Reagan testified, “My understanding was that we each owed a third of it.”
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Arlington alone testified that his own obligation on the note was only through
his participation in BMD.3 Rather than prove conclusively that Arlington was
not personally liable for the note or any part of it, the foregoing testimony
shows that McClure and Reagan intended that Arlington would be liable for a
third of the note and, by an oral side agreement, that McClure and Reagan
would assume liability for one-third each.
Arlington poses a hypothetical: If Reagan had failed to pay one-third of
the note, could McClure or the Plan sue Reagan on the note? Arlington says
the answer is “no,” and we do not disagree. Reagan did not sign the note;
Arlington did. If McClure had attempted to enforce the note against Reagan,
this litigation might have had a different result. But the undisputable fact
remains that Arlington signed the note, and the evidence does not prove
conclusively that the parties did not intend Arlington to be liable on the
instrument. Therefore, we overrule Arlington’s third issue.
3
… Arlington also cites a post-trial brief in which McClure stated, “There
is no dispute that Arlington signed in a representative capacity . . . .” McClure
has abandoned that statement on appeal; in his appellate brief, he states, “But
the note itself was in evidence, and it shows that Arlington signed the note
individually.”
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4. McClure as the holder of the note.
In his fourth issue, Arlington argues that McClure cannot recover on the
note because he is not the note’s holder. See Doncaster, 161 S.W.3d at 602
(identifying the plaintiff’s status as holder of the note as an essential element
of a suit to enforce the note). Arlington contends that because the Plan did not
transfer the note to McClure until five and half years after McClure paid the
note, McClure does not have the right to enforce the note.
Arlington cites the following parts of business and commerce code
section 3.203 in support of his argument:
(a) An instrument is transferred when it is delivered by a person
other than its issuer for the purpose of giving to the person
receiving delivery the right to enforce the instrument.
(b) Transfer of an instrument, whether or not the transfer is a
negotiation, vests in the transferee any right of the transferor to
enforce the instrument, including any right as a holder in due
course. The transferee cannot acquire rights of a holder in due
course by a transfer, directly or indirectly, from a holder in due
course if the transferee engaged in fraud or illegality affecting the
instrument.
T EX. B US. & C OMM. C ODE A NN. § 3.203(a)-(b) (Vernon 2002). Arlington argues
that there is no evidence that the Plan delivered the note to McClure before
January 26, 2006; thus, he contends, McClure is not entitled to enforce the
note.
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Arlington’s argument implies that something prohibited the Plan from
delivering the note to Arlington on January 26, 2006, but he does not explain
why the January 26 delivery and transfer was not effective or why the passage
of time between McClure’s payment of the note and delivery is significant.
Accordingly, we hold that McClure was entitled to enforce the note. See T EX.
B US. & C OMM. C ODE A NN. § 3.301 (Vernon 2002) (identifying persons entitled
to enforce instruments, including the holder of the instrument and a nonholder
in possession of the instrument who has the rights of a holder).
Arlington also argues that section 3.203(b) precludes McClure from
enforcing the note because he engaged in “illegality affecting the instrument”
when he caused the Plan to make a loan prohibited by ERISA. But as we have
already concluded, Arlington failed to prove that ERISA prohibited the
transaction as a matter of law, and we reject his argument that the alleged
illegality precludes McClure from enforcing the note. We overrule Arlington’s
fourth issue.
(5) McClure’s payment of the note as a bar to recovery.
In his fifth issue, Arlington contends that nothing is owed on the note
because McClure paid the note in full on August 31, 2000. See Doncaster,
161 S.W.3d at 602 (identifying a balance due and owing under a note as an
essential element of a suit on a note). Arlington cites no authority to support
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his argument on this issue. Rule 38.1(h) requires a brief to contain both citation
to authority and substantive analysis in regard to an issue, and the failure to
include either waives an issue on appeal. T EX. R. A PP. P. 38.1(h); Huey v.
Huey, 200 S.W.3d 851, 854 (Tex. App.—Dallas 2006, no pet.); McIntyre v.
Wilson, 50 S.W.3d 674, 682 (Tex. App.—Dallas 2001, pet. denied).
Moreover, business and commerce code section 3.602(a) provides that
“an instrument is paid to the extent payment is made . . . by or on behalf of a
party obliged to pay the instrument.” T EX. B US. & C OMM. C ODE A NN. § 3.602(a)
(Vernon Supp. 2007). Here, the evidence clearly shows that while McClure
repaid the Plan, he did not make such payment on behalf of Arlington. Thus,
the note was not “paid,” and a balance was due and owing at the time of trial.
We overrule Arlington’s fifth issue.
(6) Limitations
In his sixth issue, Arlington argues that McClure’s suit is barred by
limitations. His argument comprises two alternative thrusts: First, he argues
that the four-year statute of limitations set out in civil practice and remedies
code section 16.035, rather than the six-year limitations period set out in
business and commerce code section 3.118, applies because McClure’s suit is
an action involving a real property lien. Second, he argues in the alternative
that McClure’s suit is really an attempt to enforce the oral side deal between
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McClure, Arlington, and Reagan rather than a suit on the note, and the oral side
agreement is subject to a four-year statute of limitations.
Business and commerce code section 3.118(a) establishes a six-year
limitations period for an action to enforce the obligation of a party to pay a
note. Id. § 3.118(a) (Vernon 2002). But subsection (h) provides that section
3.118 does not apply to an action involving a real property lien covered by civil
practice and remedies code section 16.035. Id. § 3.118(h). Civil practice and
remedies code section 16.035 establishes a four-year limitations period for suits
for the recovery of real property under a real property lien or the foreclosure of
a real property lien. T EX. C IV. P RAC. & R EM. C ODE A NN. § 16.035(a) (Vernon
2002).
Arlington argues that McClure’s suit is governed by section 16.035’s
four-year limitations period because it involves a real property lien. The Corpus
Christi court rejected a similar argument in Aguero v. Ramirez, 70 S.W.3d 372
(Tex. App.—Corpus Christi 2002, pet. denied). In that case, Aguero signed a
note payable to Ramirez, secured by a deed of trust and a vendor’s lien. Id. at
373. Aguero defaulted, and five years later Ramirez filed suit on the note. Id.
Aguero argued that Ramirez’s suit was barred by section 16.035’s four-year
limitations period; Ramirez argued that his suit was timely under section
3.118(a)’s six-year limitations period. Id. at 373–74. The court of appeals held
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that the six-year statute applied. Id. at 375. Where there is a debt secured by
a note, which is, in turn, secured by a lien, the note and lien constitute separate
obligations. Id. at 374. Because Ramirez sued to enforce the note, not the
lien, the six-year statute applied:
If Ramirez was suing to enforce the lien, the deed of trust, or
seeking to foreclose on the property used as security, the four-year
statute of limitations would apply. After the expiration of a
four-year period, the right to sue to enforce the lien and to
foreclose on the property is lost. [Citation omitted.] However,
Ramirez is only suing to enforce payment on the promissory note.
His suit is still actionable.
Id. at 375.
Like Ramirez, McClure sued to enforce the note, not to enforce the lien
or foreclose on the property. Therefore, section 3.118(a)’s six-year limitations
period applies. The note’s original maturity date was May 14, 2000. McClure
intervened in the lawsuit and asserted his suit on the note on January 24,
2005, less than six years later. Thus, even if we ignore the two agreements
extending the note’s maturity date, McClure’s claim was timely under the six-
year statute of limitations.
In the second part of his limitations argument, Arlington contends that
McClure’s suit is subject to the four-year limitations period set out in civil
practice and remedies code section 16.004(a)(3) because McClure is really
suing to enforce the oral side agreement between McClure, Arlington, and
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Reagan to each pay one-third of the note. See T EX. C IV. P RAC. & R EM. C ODE
A NN. § 16.004(a)(3) (Vernon 2002) (establishing a four-year limitations period
on suits for debt). Arlington reasons that if McClure were actually suing on the
note, rather than the side agreement, he would have claimed the full amount
of the note less payments, not one-third of the note less payments. He also
points to McClure’s post-trial brief, in which McClure stated, “All McClure is
requesting is that Arlington pay his one-third per the parties[‘] agreement.”
We disagree with Arlington’s characterization of McClure’s suit. On its
face, McClure’s claim is a suit on the note. McClure could have sued Arlington
for the face value of the note less payments; had he done so, Arlington could
have asserted the side agreement as a defense to two-thirds of the debt. The
fact that McClure limited his demand under the note in light of the side
agreement works in Arlington’s favor by limiting his liability on the note by two
thirds; it does not convert McClure’s claim from a suit on the note to a suit on
the side agreement. We therefore hold that McClure’s claim is timely under
section 3.118(a)’s six-year limitations period, and we overrule Arlington’s sixth
issue.
Conclusion
Having overruled Arlington’s first six issues, we need not reach his
seventh and eighth issues, in which he argues that McClure was not entitled to
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recover on his alternative claims for debt and quantum meruit. See T EX. R. A PP.
P. 47.1. We affirm the trial court’s judgment.
ANNE GARDNER
JUSTICE
PANEL A: HOLMAN, GARDNER, and MCCOY, JJ.
DELIVERED: March 20, 2008
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