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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,
v.
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
1Circuit Judge of the Eighth Circuit, sitting by
designation.
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("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
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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.
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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
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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
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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.
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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
2Whether 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.
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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.

9