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.
In Feuerbacher v. Wells Fargo Bank, Nat’l Ass’n, No. 4:15-cv-00059-ALM, 2016 WL 3669744 (E.D. Tex. July 11, 2016), the court addressed an important issue arising from but not answered by Wood and Garofolo: when do causes of action for quiet title and breach of contract based on alleged noncompliance with section 50(a)(6)’s terms and conditions accrue?
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.
Quiet-title actions pursuant to section 50(a)(6) are not subject to limitations, but they are subject to judicial estoppel and they accrue on the date the loan is made.
The court disagreed with the Feuerbachers, holding that their suit to quiet title and their cause of action for breach of contract both accrued when the loan was made. With regard to the quiet-title claim, the court pointed out that, in Priester v. JP Morgan Chase Bank, N.A., 708 F.3d 667 (5th Cir. 2013), the Fifth Circuit decided two issues: (1) whether a statute of limitations applies to quiet-title actions based on noncompliance with section 50(a)(6); and (2) when the cause of action accrues. The Fifth Circuit held that a statute of limitations applies and that the cause of action accrues when the loan is made. Wood overturned the Fifth Circuit’s ruling on the first issue; but because Wood did not address the second issue of accrual, that portion of Priester remains binding law in the Fifth Circuit.
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.
Breach-of-contract claims seeking forfeiture of all principal and interest on a home-equity loan typically accrue on the date the loan is made.
With regard to the breach-of-contract claim, the court observed that, in both Wood and Garofolo, the Texas Supreme Court was careful to distinguish between the remedy of forfeiture and the underlying cause of action for breach of contract. Thus, the court held that, although a borrower may not have access to the forfeiture remedy until the lender fails to cure, that is not the relevant inquiry. The correct inquiry is when the underlying breach-of-contract action accrued. Applying well-settled Texas law on accrual of breach-of-contract claims, the court concluded that the Feuerbachers’ cause of action for breach of contract accrued when the loan was made because that was when the alleged breaches of the terms and conditions of the loan occurred, if at all. The court further observed that the Feuerbachers did not have to wait to sue for breach of contract until the remedy of forfeiture became available because an alleged breach had already occurred and an injury had been sustained—i.e., an invalid lien being claimed on the property. Thus, the court held that the Feuerbachers’ breach-of-contract claim accrued on the date the loan was originated. Consequently, it was barred by judicial estoppel.
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.