Goldberg v. R.J. Longo Const. Co., Inc.

• Court: Court of Appeals for the Fifth Circuit
• Decided: June 13, 1995
• Docket: 94-20470
• Status: Published

Opinion

United States Court of Appeals,

Fifth Circuit.

No. 94-20470.

Billy B. GOLDBERG, Plaintiff,

v.

R.J. LONGO CONSTRUCTION CO., INC., Defendant-Third Party Plaintiff-Appellant,

MID-CONTINENT CASUALTY CO., Third-Party Defendant-Appellee.

June 13, 1995.

Appeal from the United States District Court for the Southern District of Texas.

Before LAY,1 DUHÉ and DeMOSS, Circuit Judges.

LAY, Circuit Judge:

Southwest Crossing Joint Venture ("Southwest") contracted with

R.J. Longo Construction Company ("Longo") to install two sewer

lines and a force main for residential use in public easements

adjacent to a tract of land in southwest Houston. Two months after

commencing work on the project, Longo and Southwest had a dispute

over the terms of the contract and Longo ceased work. Longo then

filed a mechanic's and materialman's lien against the property.

Because of the lien, title companies would not issue title policies

to the land. Certain title companies eventually agreed to issue

policies, but only if Southwest and a surety would indemnify any

loss arising from Longo's lien. Mid-Continent Casualty Company

1 Circuit Judge of the Eighth Circuit, sitting by designation.

1 ("Mid-Continent") as surety and Southwest as principal executed an

agreement to indemnify the title companies ("the indemnity

agreement"). Longo was neither a signatory to the indemnity

agreement nor a named beneficiary of it. These transactions

brought about a number of lawsuits.

1) The Prior Federal Case In November 1983, Longo sued

Southwest for breach of contract in federal court in New Jersey.

The suit was transferred to the Southern District of Texas in March

1984. Later that same month, Southwest filed suit against Longo in

federal court in Houston, Texas, alleging Longo committed various

torts in matters relating to the Southwest Crossing subdivision.

These two cases were consolidated into Southwest Crossing Venture

v. R.J. Longo Construction Co., Inc., C.A. No. H-84-1343, in the

District Court for the Southern District of Texas—Houston Division.

The court ordered the parties into binding arbitration. The

arbitrator awarded Longo $649,500 and Southwest nothing on their

respective claims. The court affirmed the award and dismissed the

consolidated cases with prejudice.

2) The State Court Case In December 1986, Longo filed an

abstract of its judgment against Southwest, thereby obtaining a

judgment lien against Southwest's property in the Southwest

Crossing subdivision. Longo was unable to collect on the judgment.

Longo also attempted to foreclose its mechanic's and materialmen's

lien.

In January 1987, Southwest filed suit in state court seeking

to enjoin Longo from attempting to foreclose on its mechanic's and

2 materialman's lien and to have the lien declared invalid.

Southwest Crossing Venture, Inc. v. R.J. Longo Constr., Inc., No.

87-03691, (D. 164 Harris Co. Tex.). Mid-Continent intervened in

the lawsuit and supported Southwest's position that the lien was

invalid. Both parties argued that Longo's lien no longer

constituted a valid claim because Longo had either waived the claim

by failing to raise it in its breach of contract suit filed in

federal court or the claim was barred under the doctrine of res

judicata.

In February 1987, Longo cross-claimed, seeking a declaratory

judgment that its lien was valid. Longo also claimed it was a

third-party beneficiary of the indemnity agreement executed by

Southwest and Mid-Continent. The third-party claim and the res

judicata and waiver issues were tried separately in August 1989,

but the trial judge never ruled on the issues due to illness.

3) "The Case Below" The parties use this nomenclature for the

suit involving this appeal, filed by a principal of Southwest,

Billy Goldberg, against Longo in state court for wrongfully

attempting to execute its judgment against Southwest and for other

torts. The case was removed to federal court on the basis of

diversity jurisdiction. Longo counter-claimed on grounds similar

to those raised in the state court case. Longo also impleaded Mid-

Continent, seeking a declaration that its mechanic's and

materialman's lien was valid and that Longo was a third-party

beneficiary of the indemnity agreement between Southwest and Mid-

Continent.

3 Once it became clear the issues tried in the state court case

were not going to be decided, Longo and Mid-Continent agreed to try

the issues in this suit. They made cross motions for summary

judgment, and the court, the Honorable John D. Rainey presiding,

decided in favor of Mid-Continent. The court found that under

Texas law, an action brought on the debt secured by a lien must

also assert the lien claim or it is deemed abandoned. Because

Longo failed to foreclose its lien in its suit on the debt in the

prior federal case, the court held that Longo had waived

foreclosure on the lien. The court also ruled against Longo on the

third-party beneficiary claim. The court found the indemnity

agreement was ambiguous in certain respects and that under Texas

law, it could not be construed to be made for the benefit of a

third party unless that was clearly the intention of the

contracting parties as apparent from the four corners of the

contract. Longo appeals both decisions.

THE MECHANIC'S AND MATERIALMAN'S LIEN

Longo contends that it could not have brought a foreclosure

claim in the prior federal case because under Texas law an

arbitrator cannot foreclose a mechanic's and materialman's lien,

Hearthshire Braeswood Plaza Ltd. Partnership v. Bill Kelly Co., 849

S.W.2d 380, 390 (Tex.Ct.App.1993). On this basis, Longo asserts

that under federal principles of res judicata its right to litigate

its present foreclosure action on its mechanic's and materialman's

lien is not barred. Longo argues the district court erred in

applying state rather than federal law in determining the

4 preclusive effect of the prior federal case.

Longo brought the prior federal action before a federal

district court which ordered Longo's claim on the debt be submitted

to arbitration. Sitting in diversity, the court applied Texas law

to substantive issues. That the court could not, under Texas law,

have ordered an arbitrator to decide the foreclosure claim in no

way implies the court could not decide the foreclosure claim on its

own if such a claim had been brought before it. Longo decided what

claims to bring in its pleadings. Its pleadings established the

claims before the court, not the court's subsequent decision to

order arbitration. Assuming Longo's argument that this question

must be resolved under federal principles of res judicata, Longo's

claim is still not enforceable. Under federal res judicata,

Longo's lien claim is precluded by the judgment in the prior

federal case.

Under federal law, res judicata bars "all claims that were or

could have been advanced in support of the cause of action on the

occasion of its former adjudication ... not merely those that were

adjudicated." Travelers Ins. v. Saint Jude Hosp., 37 F.3d 193, 195

(quoting In re Howe, 913 F.2d 1138, 1144 (5th Cir.1990) which

quotes Nilsen v. City of Moss Point, 701 F.2d 556, 560 (5th

Cir.1983) (en banc) (footnotes omitted)), cert. denied, --- U.S. --

--, 115 S.Ct. 1696, --- L.Ed.2d ---- (1995). In this case, Longo's

mechanic's and materialman's lien arose out of the same "common

nucleus of operative facts" as the damages Longo sought in its

breach of contract claim. Restatement (Second) of Judgments § 24

5 cmt. b (1982).

One goal of prohibiting claim splitting is to avoid litigating

matters that could have been or were previously litigated.

Mechanic's and materialman's liens secure labor and materials.

Longo's breach of contract claim alleged not only damages

consequent to Longo's provision of labor and materials but also

incidental damages, lost profits, delay damages, mobilization, and

overhead. The arbitrator made, and the court affirmed, a lump sum

judgment for Longo. The judgment did not specifically state the

value of the labor and materials Longo provided. For a court to

determine now the value of the labor and materials would

necessarily involve relitigating many of the issues adjudicated in

the prior federal case.

Texas case law specifically holds that a lien is inseparable

from the debt giving rise to it. Palmer v. Palmer, 831 S.W.2d 479,

482 (Tex.Ct.App.1992); Taylor v. Rigby, 574 S.W.2d 833, 839

(Tex.Civ.App.1978); University Savings & Loan Ass'n v. Security

Lumber Co., 423 S.W.2d 287, 292 (Tex.1967). As the court stated in

Taylor v. Rigby:

[w]here there is ... a debt secured by a lien, the lien is an incident of and inseparable from the debt. When one sues on the debt, the lien is thereby necessarily implicated, and both must be put in issue. If the lien is not put in issue, it is abandoned.

574 S.W.2d at 839 (citation omitted); see also Hubble v. Lone Star

Contracting Corp., 883 S.W.2d 379, 381 (Tex.Ct.App.1994); Shipley

v. Biscamp, 580 S.W.2d 52, 54 (Tex.Civ.App.1979); Holcroft v.

Wheatley, 112 S.W.2d 298, 299-300 (Tex.Ct.App.1937); Holford v.

6 Patterson, 257 S.W. 213, 214 (Tex.1923). Whether one adopts

federal principles of res judicata2 or the substantive provisions

of Texas law, once Longo brought an action against Southwest on its

debt, Longo also had to bring its claim on the lien or abandon it.

THE INDEMNITY AGREEMENT

In October 1986, Southwest as principal and Mid-Continent as

surety executed the general indemnity agreement. The agreement

states the parties desire three named title insurance companies and

one named title insurance agency to issue title insurance policies

on land owned by Southwest without exception to Longo's lien claim

affidavit. Because of that desire, the agreement continues,

Southwest and Mid-Continent promise to:

1. ... hold [the named companies] harmless as to any loss or liability ... arising out of the [Longo lien] matter or claim ...;

2. ... reimburse [the named companies] for all Court Costs, Attorney's fees and expenses of trial and investigation incurred in connection with said matter of claim;

3. ... pay and discharge, within five days after entry thereof, any final judgment establishing any matter or claim as a lien upon said property.

Longo contends it is a third-party creditor beneficiary of the

indemnity agreement executed by Southwest and Mid-Continent and as

2 Whether principles of federal or state res judicata apply to determine the preclusive effects of the prior federal judgment is not really germane to the resolution of this issue because both doctrines would preclude the separate action on the lien. Texas policies of res judicata bar "causes of action or defenses arising out of the same subject matter that might have been litigated in the first suit." Gracia v. R.C. Cola-7-Up Bottling Co., 667 S.W.2d 517, 519 (Tex.1984). The fact the district court ordered the claim on the debt into arbitration in no way prevented Longo from pursuing, or the court from adjudicating, the claim on the lien.

7 such can sue to enforce the agreement even if the agreement does

not identify Longo by name. See Quilter v. Wendland, 403 S.W.2d

335, 337 (Tex.1966); Brunswick Corp. v. Bush, 829 S.W.2d 352, 354

(Tex.Ct.App.1992). Longo asserts it is a third-party creditor

beneficiary because it would benefit if Southwest or Mid-Continent

performed their promises under the agreement because Southwest has

a duty to pay Longo under the judgment in the prior federal case.

Cumis Ins. Soc'y v. Republic Nat'l Bank, 480 S.W.2d 762, 766-67

(Tex.Civ.App.1972).

We agree Longo's claim to be a creditor beneficiary of the

agreement does not automatically fail simply because the agreement

does not so identify Longo. Restatement (Second) of Contracts §

308 (1981). This agreement, however, identifies its intended

beneficiaries explicitly in paragraph 4 and Longo is not among

them. Under Texas law:

[c]ourts will not create a third-party beneficiary contract by implication and the obligation must be clearly and fully spelled out or enforcement will be denied. MJR Corporation v. B & B Vending Company, 760 S.W.2d 4 (Tex.App.—Dallas 1988, writ denied). In that case, the Court noted that a benefit to the third party must have been within the contemplation of the contracting parties.

Foster, Henry, Henry & Thorpe, Inc. v. J.T. Constr. Co., 808 S.W.2d

139, 140 (Tex.Ct.App.1991). Further, "[a] third party is entitled

to recover upon a contract made between other parties only if the

parties intended to secure some benefit to that third party, and

only if the contract was entered into directly and primarily for

the third party's benefit." Economy Forms v. Williams Bros.

Constr. Co., 754 S.W.2d 451, 456 (Tex.Ct.App.1988) (citing

8 Dairyland County Mut. Ins. Co. v. Childress, 650 S.W.2d 770, 775

(Tex.1983) and Republic Nat'l Bank v. National Bankers Life Ins.

Co., 427 S.W.2d 76, 79 (Tex.Ct.App.1968)) (emphasis in original).

Even if it is assumed that Longo is a third-party creditor

beneficiary under the agreement, Longo's claim would be defeated by

the express language of the agreement. Paragraph 3 of the

indemnity agreement speaks of "any final judgment establishing any

matter or claim as a lien upon said property." (emphasis added).

The prior federal case did not result in a judgment that Longo had

a lien on the Southwest Crossing subdivision. The court awarded

Longo an in personam judgment against Southwest. Had Longo pursued

its mechanic's and materialman's lien claim in that case, the court

might have awarded Longo an in rem judgment against the property,

but Longo did not bring the claim.

As the district court noted, Longo retains its judgment lien

against any property Southwest sold after Longo abstracted its

judgment. But Longo has no rights under the indemnity agreement

and is barred from suing on its mechanic's and materialman's lien

claim.

We AFFIRM the judgment of the district court; appellant to

pay all costs.