Locke Lord QuickStudy: Texas Home Equity Loan Litigation Update: Eastern District of Texas Reaffirms that Quiet-Title and Breach-of-Contract Claims Arising From Alleged Defects Under Section 50(a)(6) of the Texas Constitution Accrue at Loan Origination Post-Wood and Garofolo

On May 20, 2016, the Texas Supreme Court issued two opinions dealing with the home-equity lending provisions in article XVI, section 50 of the Texas Constitution. In Wood v. HSBC Bank USA, N.A., ___ S.W.3d ___, 2016 WL 2993923 (Tex. 2016), the Court held that no statute of limitations applies to suits to quiet title based on alleged noncompliance with the terms and conditions for home-equity loans set forth in section 50(a)(6).  In Garofolo v. Ocwen Loan Servicing, L.L.C., ___ S.W.3d ___, 2016 WL 2986237 (Tex. 2016), the Court answered two questions certified by the United States Court of Appeals for the Fifth Circuit, holding that (1) section 50(a)(6) lays out the terms and conditions a home-equity loan must include to make the loan foreclosure-eligible, but it does not create a constitutional cause of action or remedy for a lender’s breach of those terms or conditions; and (2) a breach of those terms and conditions may give rise to a breach-of-contract claim for which forfeiture can sometimes be an appropriate remedy, but when forfeiture is unavailable, the borrower must show actual damages or seek some other remedy such as specific performance to maintain a suit.

Background
The Feuerbachers obtained a home-equity loan secured by a lien on their homestead on June 5, 2006.  On October 6, 2009, Billie Feuerbacher filed for bankruptcy under chapter 7 of the Bankruptcy Code, and she received a discharge on January 6, 2010.  Five years later, the Feuerbachers filed suit against the mortgagee, mortgage servicer, and a prior mortgagee, alleging the lien on their homestead was invalid because it failed to comply with certain requirements under section 50(a)(6) when it was made.  The Feuerbachers’ claims were inconsistent with the representations in Billie’s bankruptcy schedules and other bankruptcy filings.

The defendants initially moved for summary judgment on both limitations and judicial-estoppel grounds.  While the motion was pending, the Texas Supreme Court decided Wood and Garofolo.  The parties then filed supplemental briefs addressing the effect of those decisions on the defendants’ motion for summary judgment, agreeing that limitations no longer barred the quiet-title claim, but disagreeing on whether the claims were still barred by judicial estoppel and whether limitations still barred the breach-of-contract claim.  The Feuerbachers argued their claims were not barred because such claims do not accrue until a lender fails to cure alleged constitutional defects within sixty days after receiving notice from the borrower.  According to the Feuerbachers, the failure to cure did not occur until after they filed suit, which was well after the bankruptcy proceeding upon which the judicial-estoppel defense was based.

The court also analyzed when the elements of a quiet-title action were satisfied with respect to the Feuerbachers’ loan.  Those elements are: (1) the plaintiff has an interest in a specific property; (2) title to the property is affected by a claim by the defendant; and (3) the claim, although facially valid, is invalid or unenforceable.  The court noted it was undisputed that the first two elements were satisfied at the time the Feuerbachers’ loan was made because the Feuerbachers owned their homestead and their title was affected by the defendants’ claim of a lien on the date of closing.  With respect to the third element, the court observed that in Wood, Garofolo, and Sims v. Carrington Mortg. Servs., L.L.C., 440 S.W.3d 10 (Tex. 2014), the Texas Supreme Court held that the validity of a home-equity lien is determined at the time the loan is originated and that “[a] lien that was invalid from origination remains invalid until cured.”  Wood, 2016 WL 2993923, at *5.  Thus, the court concluded that the third element was likewise satisfied at the time of origination.

Practical Takeaways
Although borrowers are no longer barred by limitations from bringing a quiet-title action based on noncompliance with section 50(a)(6)’s requirements, the court’s ruling on accrual in Feuerbacher means that borrowers’ access to the forfeiture remedy may still be barred by limitations if they do not bring a breach-of-contract claim within four years of the loan’s origination. When combined with equitable subrogation, a limitations defense to the breach-of-contract claim could significantly soften the impact to the lender if a lien is invalidated due to noncompliance with section 50(a)(6).  In addition, home-equity lenders may still have a judicial-estoppel defense to quiet-title and breach-of-contract claims if the borrowers made inconsistent representations in a bankruptcy proceeding that were relied upon by the bankruptcy court in granting a discharge or confirming a plan.  Finally, for cases in federal court involving alleged noncompliance with section 50(a)(6)’s requirements, Priester appears to still be binding law with regard to the issue of accrual.