Thursday, January 24, 2019

FYI: 5th Cir Finds Ambiguity in DOT's Provisions for Real Estate Taxes and Escrow

The U.S. Court of Appeals for the Fifth Circuit held that ambiguity in the deed of trust regarding the lender's right to pay real estate taxes and establish an escrow account precluded entry of summary judgment in favor of the loan servicer on the borrower's breach of contract claim. 


Additionally, the Court vacated a counterclaim for foreclosure in favor of the loan servicer and remanded the claim for reconsideration, noting that foreclosure would only be available if the servicer could show that it complied with contractual requirements.


Finally, the Fifth Circuit affirmed the trial court's rulings in favor of the servicer on the borrower's claims under federal Real Estate Settlement Procedures Act ("RESPA"), the Texas Debt Collection Practices Act ("TDCA"), and for unclean hands.


A copy of the opinion is available at:  Link to Opinion


The borrower ("Borrower") executed a home equity note on his property and secured the loan with a deed of trust, which contained an escrow waiver agreement ("Waiver Agreement").


The Waiver Agreement provided that the lender would "elect[] not to collect monthly escrow deposits to pay real estate taxes" subject to the condition that "[a]ll real estate taxes are paid when due, and evidence is furnished to Lender at that time." 


The Waiver Agreement also permitted the lender to revoke the escrow waiver at any time.


In April 2010, the Borrower's former loan servicer sent him a letter advising him that it had discovered that the Borrower was delinquent on his taxers for 2009.  The letter further requested that the Borrower pay the taxes within 30 days of the date of the notice or, if he had already paid the taxes, that he forward proof of payment.


The Borrower did not pay his taxes until June 30, 2010. 


The Borrower subsequently received a "Notice of Transfer" that informed him that a new servicer ("Servicer") would replace the prior servicer, but that the terms of the financing agreement would remain in place. 


The Notice of Transfer further stated that "[i]f you are currently responsible for payment of your real estate taxes you will continue to be responsible for payment of these items after your account transfers to [Servicer]."


Finally, the Notice of Transfer provided an address for the borrower to send any qualified written request ("QWR") under RESPA. 


On December 16, 2010, and without prior notice, the Servicer paid the Borrower's 2010 property taxes.  Unaware of this payment, the Borrower also paid his 2010 taxes in January 2011, and the tax authorities subsequently refunded that amount.


On June 6, 2011, the Servicer sent the Borrower a letter labeled "Annual Escrow Account Disclosure Statement Account History" that stated the Borrower had a total shortage of $4,740.64 for the escrow period.  The letter did not mention the Waiver Agreement. 


The Borrower defaulted on the loan in August 2011, and on January 3, 2012 the Servicer sent a notice of default and intent to accelerate. 


On January 27, 2012, the Borrower sent a purported QWR, but did not send it to the designated address listed in the Notice of Transfer.


The Servicer responded anyway, and also indicated that the Borrower "may" send written correspondence to the same address where he sent the purported QWR, which was different than the designated QWR address.


The Borrower sent two more purported QWRs, but neither went to the Servicer's designated address listed in the Notice of Transfer.  The Servicer did not respond to either purported QWR.


The Borrower then filed a lawsuit against the Servicer asserting claims for: (1) breach of contract, (2) unclean hands, (3) violation of RESPA, and (4) violation of the TDCA.  The Servicer filed a counterclaim for foreclosure.


After the Servicer prevailed entirely on its motion for summary judgment, the Borrower appealed.


On appeal, the Fifth Circuit first analyzed the claims for breach of contract, unclean hands, and foreclosure.  The Borrower argued that the Servicer breached the deed of trust by paying his 2010 taxes, starting to escrow, and then increasing his monthly mortgage payments without notice.


In analyzing the issue, the Fifth Circuit noted that "[t]he first breach-of-contract question is whether the contract permitted [the Servicer] to pay [the Borrower's] non-delinquent 2010 taxes on December 16, 2010," and "[t]he second issue is whether [the Servicer] provided contractually required notice of that action and of [the Servicer's] revocation of the Waiver Agreement." 


The Servicer argued that it was permitted to pay the 2010 taxes, because the deed of trust provided that the Borrower's "fail[ure] to perform the covenants and agreements contained in" the deed of trust permitted it to "do and pay for whatever is reasonable or appropriate to protect Lender's interest in the Property and rights under this Security Instrument."


The Servicer further argued that because the Borrower failed to timely pay his 2009 taxes, it had the right to pay the 2010 taxes, even though at the time the Servicer paid the 2010 taxes the Borrower had already paid the 2009 taxes and the 2010 taxes were not yet delinquent.


However, the Fifth Circuit noted that the contractual provision only permitted what is "reasonable or appropriate," and also that other provisions in the deed of trust could be interpreted to only permit the Servicer to pay for past due taxes, even though yet other provisions permitted the Servicer to revoke the escrow waiver at any time, which "would suggest that [the Servicer] might have the right to pay taxes preemptively without a triggering condition." 


The Fifth Circuit therefore held that "[g]iven the two plausible readings . . ., the deed of trust is ambiguous," and "ambiguity precludes summary judgment." 


Accordingly, the Court ruled that the Borrower "was entitled to proceed to trial on his claim that [the Servicer] breached the contract by paying his 2010 taxes before the tax lien attached and before they became delinquent." 


Moreover, the Court determined that because the Servicer did not give notice to the Borrower that it would begin collecting taxes through an escrow account until June 6, 2011, which was six months after it paid the 2010 taxes, notice was also insufficient and "it was error for the trial court to conclude as a matter of law that [the Servicer] had provided contractually adequate notice of its revocation of the Waiver Agreement."


The Fifth Circuit affirmed the trial court's granting summary judgment on the unclean hands claim, because "unclean hands is only a defense to a request for equitable relief." 


With respect to the Servicer's foreclosure counterclaim, the Fifth Circuit noted that "the foreclosure remedy would only be available if [the Servicer] shows that it complied with contractual requirements," and "[a]t this state, it is premature to conclude that [the Servicer is entitled to summary judgment on its foreclosure counterclaim."

Accordingly, the Court "vacate[d] the foreclosure ruling and remand[ed] for reconsideration." 


With respect to the Borrower's RESPA claim, the Fifth Circuit noted that "a loan servicer need not answer a misaddressed QWR," and "responding to such letter does not trigger RESPA duties . . . if the servicer set an exclusive address." 


Thus, the Fifth Circuit affirmed the trial court's grant of summary judgment in the Servicer's favor on the RESPA claim.


With respect to the Borrower's TDCPA claim, the Fifth Circuit noted that "[w]hen [the Servicer] moved for summary judgment on the TDCA claim," the Borrower's "opposing focused exclusively on the other actions."


Accordingly, the Fifth Circuit held that "the trial court properly concluded that [the Borrower] elected not to address his TDCA claim based on [the Servicer's] alleged harassing phone calls and therefore deemed that claim 'abandoned.'"


Summary judgment in the Servicer's favor on the TDCA claim was therefore affirmed.





Ralph T. Wutscher
Maurice Wutscher LLP
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