Castaneda v. Abacus Funding Group, LLC
Dallas Court of Appeals, No. 05-23-00623-CV (February 4, 2025)
Justices Smith, Miskel (Opinion, linked here), and Breedlove
A cautionary tale about the scope of res judicata: Final judgment on the merits bars not just claims actually litigated, but also other claims arising from the same transaction or subject matter that were not asserted but could have been. And that’s true even with respect to a claim for declaratory relief that anticipates an affirmative defense.
The Castanedas purchased a house in 1997 using seller-financing. In 2018, a dispute arose about the mortgage; the Castanedas believed it was paid off, but the sellers contended a significant balance remained unpaid. With that dispute unresolved, the sellers sold the mortgage to Abacus. Abacus then sent the Castanedas a notice of non-judicial foreclosure. The Castanedas responded by suing the sellers and Abacus, arguing generally that the loan was paid in full and asserting that Abacus had committed statutory real estate fraud by sending them a proposed “Modification and Extension Agreement” even though it knew, or should have known, that they had already paid the note in full. Abacus secured a summary judgment denying the Castanedas’ statutory fraud claim against it, as well as an order severing Abacus from the remainder of the case, resulting in a final take-nothing judgment for Abacus.
Abacus then served the Castanedas with another notice of non-judicial foreclosure. Again, the Castanedas filed a declaratory judgment action to prevent the foreclosure, arguing both that the note was paid in full—as they had in the first lawsuit—and, for the first time, that limitations barred Abacus from enforcing the mortgage lien. Abacus responded with another summary judgment motion, arguing that the Castanedas’ declaratory claims were barred by res judicata, based on the first judgment. The trial court granted that motion, and the Dallas Court of Appeals affirmed.
The Castanedas argued that res judicata could not bar their claim for declaratory relief based on limitations, which they had not asserted in the first lawsuit. The Court of Appeals disagreed, explaining that “Texas follows the transactional approach to res judicata, under which ‘a subsequent suit is barred if it arises out of the same subject matter as the prior suit, and that subject matter could have been litigated in the prior suit,’” quoting Citizens Ins. Co. v. Daccach, 217 S.W.3d 430, 449 (Tex. 2007). “[A] final judgment on an action extinguishes the right to bring suit on the transaction, or series of connected transactions, out of which the action arose,” regardless of the specific claims asserted in either case. The appeals court concluded that the “First and Second Lawsuits arise out of the same facts and are based on the same subject matter,” and that “the Castanedas could have asserted their limitations claim in the First Lawsuit.” It rejected the Castanedas’ argument that they should not be expected to have “preemptively file[d] an affirmative defense of limitations” to a claim that Abacus had not yet asserted. But, of course, they did just that in the second lawsuit—filing suit and asserting their claim for declaratory relief based on limitations before Abacus filed any counterclaim of its own.
