Saturday, May 14, 2016

FYI: 5th Cir Rejects Borrower's Challenge to Lender's Auto-Pay Services Under Texas DTPA

The U.S. Court of Appeals for the Fifth Circuit recently affirmed the dismissal of a borrower's claims against her lender arising out of a foreclosure, holding among other things that alleged discrepancies as to the lender's automatic payment withdrawal services did not state a claim under the Texas Deceptive Trade Practices Act ("DTPA").


In so ruling, the Court also affirmed the denial of a plaintiff borrower's motion to join a non-diverse defendant holding that the motion was improperly brought for the purpose of defeating diversity jurisdiction.


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


A borrower's ex-husband obtained a purchase-money loan secured by a deed of trust ("DOT").  The borrower signed the note, but not the DOT. 


The borrower later underwent a divorce proceeding and was awarded legal possession of the house.  The borrower became the sole obligor on the note.  The borrower later defaulted and the lender sent statutorily required notices to the residence and her mother's residence.  The lender eventually foreclosed on the house.


The borrower sued the lender and a local employee in Texas state court alleging breach of contract, negligence, wrongful foreclosure, and violations of the Texas Deceptive Trade Practices Act ("DTPA"). 


The lender removed the action to federal court arguing that that the lender's local employee was fraudulently joined to defeat diversity jurisdiction, and also moved to dismiss the allegations raised.  The borrower dismissed the local employee, and moved to amend her substantive claims against the lender and add a claim against her husband for intentional infliction of emotion distress ("IIED").  ,


The district court denied the borrower's motion to join a non-diverse defendant and granted the lender's motion to dismiss.  The borrower appealed.


The Fifth Circuit first addressed the borrower's purported claims.  The Court noted that a breach of contract claim has three elements under Texas state law: 1) existence of a valid contract, 2) performance or tendered performance by the plaintiff, 3) breach of contract by the defendant, and 4) damages to the plaintiff resulting from the breach.  


The borrower argued that the lender breached the loan contract by failing to send default notices to her new address, and by making automatic withdrawals from her checking account for her mortgage payments. Rejecting these argument, the Court found that the borrower failed to allege her own performance.  In fact, the Fifth Circuit held, the default notices attached to the lender's motion to dismiss evidenced the borrower's failure to perform.


The Fifth Circuit next addressed the borrower's negligence claims.  The borrower argued that the lender negligently failed to make automatic withdrawals from her checking account, and negligently failed to send her the statutorily required default notices to her new residence.  The Court recited that a negligence claim has three elements under Texas state law: 1) a legal duty, 2) a breach of duty, and 3) damages proximately cause from the breach. 


The Court again rejected the borrower's argument, holding that "if the defendant's conduct . . . would give rise to liability only because it breaches the parties' agreement", the claim arises out of contract and not tort.  The Fifth Circuit found that the lender's duties to make automatic withdrawals and send default notices arose out of the contract between her and the lender and therefore affirmed the dismissal of her negligence claim.


The Fifth Circuit then addressed the borrower's wrongful foreclosure claims.  The Court identified the three elements of a wrongful foreclosure claim under Texas law as: 1) a defect in the foreclosure proceedings, 2) a "grossly inadequate selling price", and 3) a "causal connection between the defect and the grossly inadequate selling price." 


The Court noted that the borrower needed to allege a "grossly inadequate selling price" unless the borrower alleged that the foreclosing mortgagee "deliberately chilled bidding at the foreclosure sale."  The borrower alleged a defect in that the lender failed to send default notices to her new address, but did not allege a "grossly inadequate" selling price or a deliberately "chilled bidding".  Thus, the Fifth Circuit affirmed the dismissal of her wrongful foreclosure claims.


The Court also rejected the borrower's DTPA arguments.  A claim under the DTPA requires that: 1) the plaintiff is a consumer, 2) the defendant was false, misleading, or deceptive, and 3) the defendant's acts were a producing cause of the plaintiff's damages.  To qualify as a consumer under the DTPA, the borrower must have "sought or acquired goods or services" and those "goods or services . . . must form the basis of the complaint."  The goods or services must be an "objective of the transaction and not merely incidental to it."


The Fifth Circuit found that automatic withdrawal "services" that the lender provided were "incidental to the loan" and served no other purpose but to facilitate loan.  According, the Court affirmed the dismissal of the borrower's DTPA claim.


Last, the Court addressed the borrower's appeal of the denial of her motion to add a non-diverse, indispensable party. 


The Fifth Circuit noted that the district court has wide discretion on whether to allow a party to be added.  Specifically, the district court should scrutinize such an amendment and consider whether the purpose is to defeat federal jurisdiction, whether the plaintiff was dilatory in her request, and whether the plaintiff will be significantly injured by a denial. 


The Court determined that the borrower's intent in joining her ex-husband was to defeat diversity jurisdiction, that she had been dilatory by waiting over two months before her attempt to join, and she would not be injured because she could pursue her IIED claims in state court.


Accordingly, the Fifth Circuit affirmed the district court's ruling.






Ralph T. Wutscher
Maurice Wutscher LLP
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