Generally under Texas law, when you sue on a note and recover a judgment, you are limited to your remedies in the judgment under the “merger” doctrine, in which the note merges into the judgment. The merger doctrine is an application of res judicata, which stops parties from litigating causes of action that have already been decided.
But what if the promissory note provides that the party is liable for post-judgment attorneys’ fees and costs for collection?
A Texas bankruptcy court recently held such an obligation can survive a judgment. In re Graves, 555 B.R. 603, 610 (Bankr. W.D. Tex. 2016).
In this case, the bankruptcy court analyzed a note which specifically provided that the obligor was liable for post-judgment costs and fees. Actions based on facts developed after the judgment are not barred by res judicata. City of Lubbock v. Stubbs, 160 Tex. 111, 327 S.W.2d 411, 412 (Tex.1959) (zoning ordinance had changed since prior judgment ruled it arbitrary and unreasonable). Further, a party on a continuing contract, where a party sues on part of the contract, but continues the contract with the other party, may sue for post-judgment breaches. Ben C. Jones & Co. v. Gammel Statesman Pub. Co., 100 Tex. 320, 99 S.W. 701, 703 (1907). Further, claims that cannot be sued upon without reasonable diligence are not barred. Barr v. Resolution Trust Corp. ex rel. Sunbelt Fed. Sav., 837 S.W.2d 627, 628 (Tex.1992). Based on this case law, the court held a clause in a note that allows for post judgment fees and expenses does not merge into the judgment.
Other cases avoid the implication of res judicata in some circumstances. Marino v. State Farm Fire & Cas. Ins. Co., 787 S.W.2d 948, 950 (Tex. 1990) (res judicata did not prevent lawsuit brought after change in decisional law recognizing a new cause of action after original judgment); Hernandez v. Del Ray Chem. Intern., Inc., 56 S.W.3d 112, 116 (Tex. App.—Houston [14th Dist.] 2001, no pet.) (suit against majority shareholder for fraudulent transfer not res judicata against fraudulent transfer suit as to subsequent transfer made after trial); Hudspeth v. Hudspeth, 673 S.W.2d 248, 252 (Tex. App.—San Antonio 1984, writ ref’d n.r.e.) (res judicata of “facts and conditions that existed at the time of the judgment” but not “where facts have changed or new facts arise which alter the rights or relations of the parties”).
This case of first impression, however, appears to be a unique and creative application of the exceptions to res judicata. The parties intended the debtor to be liable for post-judgment attorney’s fees. Graves, 555 B.R. at 604. Upon suit, the judgment creditor recovered judgment on the note plus pre-judgment attorney’s fees and filed an application to garnish a brokerage account. Id. The debtor filed bankruptcy six months later, the garnishment was stayed, and the garnishment made the judgment creditor secured in the brokerage account. Id. The judgment creditor filed a proof of claim for the amount of the judgment, pre-petition attorneys’ fees and its post-judgment attorney’s fees. Id. The trustee objected based on the merger doctrine and res judicata, and as discussed above, the court rejected that defense. Id. at 610. Because the judgment amount and post-judgment attorney’s fees made up almost the entirety of the amount in the brokerage account, the judgment creditor recovered the proceeds to the detriment of the other creditors of the estate.
Many notes contain clauses that allow for the collection of attorney’s fees post-petition. As a result, this case has broad implications for collection practice in this state.