The U.S. Court of Appeals for the Fifth Circuit recently upheld the dismissal of a borrower's allegations that the lien securing their home equity loan was invalid under section 50(a)(6) of the Texas Constitution because the allegations were time-barred under the four-year statute of limitations, when borrowers' signed their loan documents more than five years before they filed suit.
The Court also ruled that: (1) the borrowers' defamation claim also failed, because the defendant bank's statements as to their delinquent payments were true and the bank's lien was valid as a result of the expiration of the limitations period; and (2) the lower court was within its discretion to strike the second and third amended complaints, as the complaints would have destroyed diversity jurisdiction.
Plaintiffs homeowners ("Borrowers") obtained a home equity loan secured by a lien on their home. The loan closing supposedly took place in their home. Borrowers eventually fell behind on their loan payments, and, over five years after signing their loan documents, sent a letter to the lender, alleging that the circumstances of the loan closing violated the Texas Constitution's requirement that loan closings must occur at the office of an attorney, the lender, or a title company. They also contended that they did not receive notice of their rights twelve days before the closing as required by the Texas Constitution. Accordingly, Borrowers' letter sought "cure" of the alleged deficiencies.
Having received no response from the original lender because the loan had been acquired by defendant bank ("Bank"), Borrowers sent a letter to Bank, similarly requesting cure of the alleged constitutional deficiencies. Bank also took no action to cure the alleged constitutional defects in the loan transaction.
Borrowers subsequently filed suit against various entities (collectively "Defendants") in state court seeking a declaratory judgment that both the loan and the lien against their home were void and that, because Defendants had failed to cure the alleged constitutional violations, Bank was required to forgive the loan entirely. Borrowers also sought actual and punitive damages and attorney's fees for defamation based on Bank's supposedly libelous reporting of Borrowers' delinquent loan payments to credit reporting agencies.
Bank removed to federal court, where it moved to dismiss the law suit as barred under the four-year statute of limitations. Although the lower court initially denied Bank's motion to dismiss and allowed Borrowers to file an amended complaint, it ultimately dismissed the lawsuit, but struck Borrowers' second and third amended complaints because they would have destroyed jurisdiction by joining non-diverse parties. Borrowers appealed.
The Fifth Circuit affirmed, concluding in part that: (1) Borrowers' claims failed because the four-year statute of limitations barred Borrowers' constitutional claims; (2) Bank's statements regarding Borrowers' delinquent payments were true; and (3) the lower court was within its discretion in striking Borrowers' second and third amended complaints to preserve federal diversity.
As you may recall, Section 50(a)(6) of the Texas Constitution provides that a "homestead . . . shall be, and is hereby protected from forced sale, for the payment of all debts except for . . . (6) an extension of credit that: (M) is closed not before: (i) the 12th day after the later of the date that the owner of the homestead submits a loan application to the lender for the extension of credit or the date that the lender provides the owner a copy of the notice prescribed by Subsection (g) of this section." Tex. Const. Art. XVI § 50(a)(6)(M)(i).
In addition, the Texas Constitution further provides that a lien on a homestead is valid only if it "is closed [. . .] at the office of the lender, an attorney at law, or a title company" and that "no lien on a homestead is valid unless it secures a debt described by [Section 50]." Id. § 50(a)(6)(N), (c) ("Section 50(a)(6)").
Moreover, if a lien is made in violation of these requirements, a party notified of the violation has 60 days to "cure." Section 50(a)(6)(Q)(x).
Finally, Texas law also provides that "[e]very action for which there is no express limitations period, except an action for the recovery of real property, must be brought not later than four years after the day the cause of action accrues." Tex. Civ. Prac. & Rem. Code § 16.051 ("Section 16.051").
Noting that other courts have applied the so-called "residual" four-year limitations period in Section 16.051 to defects in homestead liens, the Fifth Circuit similarly concluded that the limitations period applied to constitutional defects under Section 50(a)(6). See, e.g., Rivera v. Countrywide Home Loans, Inc., 262 S.W.3d 834, 839(Tex. App. 2008)(ruling that the four-year statute of limitations applies to constitutional and fraudulent lien causes of action arising under Texas Constitution); Schanzle v. JPMC Specialty Mortg. LLC, No. 03-09-00639-CV, 2011 WL 832170, at *4 (Tex. App.)(applying four-year statute of limitations to violations of constitutional requirements for home equity loans); Ho v. University of Texas at Arlington, 984 S.W.2d 672, 686 (Tex. App. 1998)(applying residual statutory limitations period to constitutional claims); Boutari v. JP Morgan Chase Bank N.A., 429 F. App'x 407 (5th Cir. 2011)(affirming judgment that four-year limitations period applies to Section 50(a)(6) claims).
Turning next to the issue of claim accrual, the Fifth Circuit applied the so-called "injury rule" in concluding that Borrowers' claims accrued when the alleged wrongful conduct caused a legal injury, which in this case was at the time of the loan closing.
Rejecting Borrowers' assertion that the limitations period began to run when they discovered the constitutional violations and sent the demand for cure, and noting that nothing made their injury "undiscoverable," the Court concluded that Borrowers' claims accrued at the time they created the lien by signing the loan documents in their home and failed to receive the requisite 12-day notice.
In so doing, the Fifth Circuit also rejected Borrowers' other arguments, including the assertion that Bank was estopped from asserting a limitations defense because it "fraudulently concealed" its disclosure violation. Noting that fraudulent concealment consists of four elements, none of which applied in this case, the Court explained in part: "it would be impossible to conceal the fact that the closing occurred in [Borrowers'] living room. . . . [Bank] did not 'conceal' the fact that [it] did not provide the required constitutional notices. . . [and ] [i]t is difficult to imagine how a party could conceal a lack of disclosure."
The Fifth Circuit also rejected Borrowers' assertion that Bank's failure to disclose was tantamount to fraudulent concealment because Bank owed them a "duty to disclose" akin to a fiduciary duty. See DiGrazia v. Old, 900 S.W.2d 499, 503 (Tex. App. 1995)(ruling there is no fraudulent concealment when defendant owes no duty to disclose); Federal Dep. Ins. Corp., v. Coleman, 795 S.W.2d 706, 709 (Tex. 1990)(noting that mortgagor-mortgagee relationship does not include fiduciary duties).
Turning to Borrowers' defamation claim, the Court ultimately concluded that the claim failed because Bank's reporting of their delinquent payments was truthful under Texas libel law. In reaching this conclusion, the Fifth Circuit reasoned that because the limitations period expired, the lien that was once voidable under Section 50(a)(6) became valid and that the now-valid lien, combined with Bank's truthful credit reporting, provided a complete defense to the defamation claim. See Doody v. Ameriquest Mortgage Co., 49 S.W.3d 342 (Tex. 2001)(suggesting that liens created in violation of Section 50(a)(6) are voidable rather than void and thus can be "cured" and rendered valid).
Finally, as to the appeal of the lower court's striking of their second and third amended complaints, the Fifth Circuit rejected Borrowers' assertion that they were simply relying on the lower court's scheduling order which, they claimed, allowed them to amend essentially as many times as they wanted by the deadline. In so doing, the Court noted that the lower court had not waived the presumptive requirement of leave to amend and that the lower court was within its discretion to strike the amended complaints because they sought to join non-diverse parties. See, e.g., Hensgens v. Deere & Co., 833 F.2d 1179, 1182 (5th Cir. 1987)(pointing factors to consider in determining whether to permit joinder of non-diverse parties).
As did the lower court, the Fifth Circuit observed in part that Borrowers intentionally attempted to add additional defendants to destroy diversity jurisdiction, and that they would not be injured by denial of the second and third amended complaints.
Accordingly, the Fifth Circuit affirmed the dismissal in all respects.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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