FYI: Texas Sup Ct Rules Equitable Subrogation Not Barred By Failure to Timely Foreclose

In a per curiam ruling, the Supreme Court of Texas recently held that the holder of a deed of trust was entitled to foreclose through equitable subrogation, even after it had failed to timely foreclose on its deed of trust.

 

Answering a certified question presented by the U.S. Court of Appeals for the Fifth Circuit, the Supreme Court of Texas held that a lender is entitled to equitable subrogation where it failed to correct a curable constitutional defect in the loan documents under § 50 of the Texas Constitution in.  Fed. Home Loan Mortg. Corp. v. Zepeda, 601 S.W.3d 763, 764 (Tex. 2020).

 

Applying Zepeda to the facts in this case, the Supreme Court of Texas held that the mortgagee maintained its equitable subrogation rights to assert a preexisting lien that was paid off with the proceeds from its loan, and its failure to timely foreclose under the deed of trust did not bar its subrogation rights.

 

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

 

In 2003, husband and wife borrowers ("Borrowers") purchased a home with loans secured by two purchase-money liens on their property.  Two years later, Borrowers refinanced the mortgages with a new loan (the "Loan") through a different lender (the "Original Lender") and paid off the purchase-money mortgages.  The note and deed of trust securing the Loan (the "Deed of Trust Lien") were subsequently assigned to and acquired by a new lending entity ("Mortgagee").

 

After the Borrowers stopped making payments on the Loan, in January 2009, the Mortgagee notified the Borrowers of their default and intent to accelerate the Loan., and five months later, accelerated the note.  Meanwhile, the Original Lender initiated foreclosure proceedings against the Borrower despite having assigned the Loan to Mortgagee, which resulted in a foreclosure sale of the property to the Original Lender. 

 

The Borrowers filed suit against the Original Lender seeking to set aside the foreclosure sale on this basis, while adding the Mortgagee as an interested party defendant.  After the trial court declared the foreclosure void ab initio as to the Original Lender, in January 2015, the Mortgagee asserted counterclaims against the Borrowers seeking to foreclose the Deed of Trust Lien, or alternatively, judgment declaring its right to foreclose through equitable subrogation should the trial court determine that the four years statute of limitations to foreclose after acceleration had lapsed.   The Mortgagee also filed a separate suit against the Borrowers alleging breach of the Loan, which was consolidated with the underlying action. 

 

In ruling on the parties' joint motion for judgment based on stipulated facts, the trial court entered judgment against the Mortgagee, declaring the Loan's note and Deed of Trust Lien unenforceable.  The Mortgagee appealed.

 

On appeal, the Mortgagee argued that because the Borrowers had used the Loan's proceeds to discharge the two pre-existing purchase-money mortgages, it held an equitable lien on the Borrowers' property. 

 

Noting that the Mortgagee failed to take corrective action after the Borrowers' suit provided notice to the Mortgagee that the wrong entity had foreclosed the property, the court of appeals affirmed the trial court's judgment, holding that the Mortgagee's negligent failure to timely foreclose the Deed of Trust Lien barred its subrogation rights. 

 

The appellate court's ruling relied in part on the Supreme Court's opinion in Zepeda v. Federal Home Loan Mortgage Association, which presented similar facts:  the plaintiff borrower purchased a home with a loan secured by a mortgage lien, and later refinanced the debt, using its proceeds to pay off the balance of the first loan.

 

The borrower in Zepeda later notified the refinancing lender that its loan documents contained a constitutional defect, and requested that it cure the defect, but it failed to do so before selling the loan.  After the new noteholder similarly failed to cure the defect, the borrower in Zepeda filed sued to quiet title in federal court, which held that the noteholder was not entitled to equitable subrogation because it negligently had failed to cure the constitutional defect in its loan documents.

 

Two months after the court of appeals' ruling in this case, the lender in Zepeda appealed to the U.S. Court of Appeals for the Fifth Circuit, which certified the question of whether "[] a lender [is] entitled to equitable subrogation, where it failed to correct a curable constitutional defect in the loan documents under § 50 of the Texas Constitution?" to the Supreme Court of Texas, which answered in the affirmative.  Zepeda v. Fed. Home Loan Mortg. Corp., 935 F.3d 296, 301 (5th Cir. 2019); Fed. Home Loan Mortg. Corp. v. Zepeda, 601 S.W.3d 763, 764 (Tex. 2020). 

 

In answering the Fifth Circuit's certified question, the Supreme Court of Texas reasoned that equitable-subrogation rights become fixed at the time the proceeds from a later loan are used to discharge an earlier lien, and a lender's negligence in preserving its rights under its own lien does not deprive the lender of its rights in equity to assert an earlier lien that was discharged using proceeds from the later loan. Zepeda, 601 S.W.3d at 766.

 

Based on this ruling, the Mortgagee petitioned the Supreme Court of Texas for review, contending that the opinion in Zepeda required reversal of the court of appeals' judgment. 

 

Applying Zepeda to this case, the Supreme Court of Texas agreed that the Mortgagee's failure to timely foreclose under the Deed of Trust Lien did not bar its subrogation rights, reasoning that subrogation operates as a hedge against the risk of refinancing the outstanding amount of an existing loan, permitting a lender to assert rights under a lien its loan has satisfied when the lender's own lien is infirm.  Zepeda, 601 S.W.3d at 768.

 

The Court rejected the Borrowers' attempts to distinguish Zepeda by arguing that this case involved purchase-money mortgages rather than a home-equity loan at issue in Zepeda, and their argument that a statutory default —- the Mortgagee's failure to timely take action on the Deed of Trust Lien — bars subrogation when a constitutional defect does not.  Because the Borrower's additional arguments that Mortgagee's subrogation rights were time-barred and not permitted under the Deed of Trust Lien were not addressed by the appellate court, these issues were remanded to the court of appeals for consideration.

 

Accordingly, the Court reversed the court of appeals' judgment declaring the Mortgagee's equitable subrogation rights unenforceable and remanded for further proceedings consistent with its opinion.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 7th Cir Requires Evidentiary Hearing for Factual Disputes as to Standing

The U.S. Court of Appeals for the Seventh Circuit recently vacated a trial court's judgment of dismissal and remanded with instructions to hold an evidentiary hearing limited to the issue of whether the trial court had subject matter jurisdiction over plaintiff's claim that a dunning letter violated the federal Fair Debt Collection Practices Act because it did not clearly state that interest would accrue on the debt.

 

In so ruling, the Seventh Circuit held that, "[o]nce the allegations supporting standing are questioned as a factual matter — either by a party or by the court — the plaintiff must support each controverted element of standing 'with competent proof,'" which requires "'a showing by a preponderance of the evidence, or proof as to a reasonable probability, that standing exists[.]'"

 

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

 

A debt collector sent a consumer a collection letter seeking to collect medical debts. The letter stated the date and the total balance of the debt, but didn't indicate whether the amount may increase due to accrued interest.

 

The consumer sued, alleging that the letter was misleading because it "did not provide the amount of the debt." The debt collector moved to dismiss the complaint, arguing that the plaintiff lacked standing to sue and also failed to state a claim upon which relief can be granted under Fed. R. Civ. P. 12(b)(6).

 

The trial court held that the plaintiff had sufficiently alleged standing because "the violation she alleged amounted to a concrete injury by itself".  Nevertheless, the trial court agreed with the debt collector on the merits and dismissed the complaint. The debtor appealed.

 

On appeal, the Seventh Circuit explained that it was presented with two questions: "one question about subject-matter jurisdiction (whether [plaintiff] has Article III standing to sue), and one question about the merits of the parties' dispute (whether [plaintiff's] complaint states a claim upon which relief can be granted)."

 

The Court never reached the merits, however, "because jurisdiction is a threshold matter that needs to be further assessed on remand."

 

The Seventh Circuit explained that "[s]tanding is a threshold requirement because it derives from the Constitution's limit on federal courts' authority to resolve 'cases' and 'controversies.' … The plaintiff, as the party invoking the court's jurisdiction, must establish the elements of standing: she must prove that she has suffered a concrete and particularized injury that is both fairly traceable to the challenged conduct and likely to be redressed by a favorable judicial decision."

 

In the words of the Court, "[b]ecause standing is an essential ingredient of subject-matter jurisdiction, it must be secured at each stage of the litigation. … At the pleading stage, 'general factual allegations of injury resulting from the defendant's conduct may suffice.'"

 

"But even when a plaintiff's allegations sufficiently demonstrate standing at the outset of the action, they don't show standing for long. Once the allegations supporting standing are questioned as a factual matter — either by a party or by the court — the plaintiff must support each controverted element of standing 'with competent proof,' … which we've understood as 'a showing by a preponderance of the evidence, or proof as to a reasonable probability, that standing exists[.]'"

 

The Court reasoned that there are two ways to raise the defense of lack of subject matter jurisdiction under Rule 12(b)(1): "a facial or a factual attack on the plaintiff's allegations. … A facial attack tests whether the allegations, taken as true, support an inference that the elements of standing exist. … In this way, a facial attack does not challenge the alleged facts themselves. But a factual attack does, testing the existence of jurisdictional facts underlying the allegations. … Accordingly, a plaintiff undergoing only a facial attack enjoys treatment of her allegations as true, but that benefit does not carry into the context of a factual challenge. … In that context, the court may consider and weigh evidence outside the pleadings to determine whether it has power to adjudicate the action."

 

The Court pointed out that although the debt collector did not make clear "whether it was launching a facial or factual attack on [plaintiff's] allegations[,]" the debt collector did make "a factual assertion that conflicts with an inference one could reasonably draw from [plaintiff's] complaint: while [plaintiff's] allegations support an inference that interest was accruing on the debt, the collector asserted that interest was not accruing."

 

Because the trial court did not address this factual dispute and "instead decided the jurisdictional matter on the pleadings, alone, based on its reasoning in Larkin[,] the Court explained that although the trial court "concluded that an alleged violation of § 1692e or § 1692f of the FDCPA by itself amounts to a concrete injury[,] … '[i]t's not enough for an FDCPA plaintiff to simply allege a statutory violation; he must allege (and later establish) that the statutory violation harmed him or 'presented an appreciable risk of harm to the underlying concrete interest that Congress sought to protect.' So a plaintiff must do more than allege an FDCPA violation to establish standing; she must also show personal harm."

 

The Seventh Circuit then turned to address "the key question in this case: Did [plaintiff] suffer—or has she faced a real risk of suffering—a concrete injury from the collection letter's lack of information about whether the debt amount was increasing from the accrual of interest?"

 

The Court reasoned that "[t]he nonreceipt of information to which a plaintiff is entitled under a statute may amount to a concrete injury, but only if it impairs the plaintiff's 'ability to use [that information] for a substantive purpose that the statute envisioned.' … In other words, a 'bare procedural violation, divorced from any concrete harm,' does not satisfy the injury-in-fact requirement of Article III."

 

The Seventh Circuit the found that plaintiff's "allegations may support an inference that she suffered a concrete injury" because she alleged that the letter did not contain information to which she was entitled, "which resulted in a misleading or inaccurate statement of the debt's amount. … Her complaint thus suggests that interest was accruing on the debt. And her allegations may also support an inference that the lack of information about accruing interest detrimentally altered her choice about how to response to and repay her debts."

 

For example, the Court noted, discovery could reveal that "not knowing that the debt mentioned in the letter was accruing interest, [she] chose to pay another debt with a lower interest rate, causing her to lose the difference between the interest that accrued under the two rates.

 

Thus, the Seventh Circuit held, even if the plaintiff "may have sufficiently alleged a concrete injury" at the pleading stage, "the action may not proceed without additional inquiry into whether she actually suffered such a harm … because the collector has challenged the truth of the jurisdictional facts underlying [her] allegations, and that factual dispute about the court's adjudicatory competency must be resolved before the court can address the merits (if the court has jurisdiction to do so. The collector specifically maintains that no interest has or will accrue on the debt, implying that [plaintiff] could not have sufferance an injury from the letter's omission concerning interest accrual. The truth of this assertion, along with [plaintiff's] actions or inactions in response to the letter's exclusion of information about interest, should be determined through an evidentiary hearing."

 

Even though the debt collector did not "highlight its factual challenge to [plaintiff's] standing, waiver is off the table when it comes to subject-matter jurisdiction. Federal courts 'have an independent obligation to ensure that they do not exceed the scope of their jurisdiction, and therefore they must raise and decide jurisdictional questions that he parties either overlook or elect not to press.'"

 

Accordingly, the Seventh Circuit vacated the judgment and remanded the case "for an evidentiary hearing on whether [plaintiff] has standing to sue."

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

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