In 1997, the Texas Constitution was amended to allow home equity loans.[i] The purpose of the amendment was “to expand the types of liens for loans that a lender, with the homeowner’s consent, could place against the homestead.”[ii]Article XVI, section 50(a)(6), of the Texas Constitution establishes the terms and conditions a home-equity lender must satisfy to make a valid loan.[iii] Section 50(a)(6) further prescribes a “Draconian consequence” for noncompliance—loss of the right of forced sale and forfeiture of all principal and interest.[iv]
B. Priester: Four-Year Statute of Limitations Applies.
Given the myriad technical requirements of section 50(a)(6)[v] and the prospect of the Texas Constitution’s sever forfeiture remedy, Texas consumers have for years attempted to evade foreclosure of home equity loans by filing lawsuits alleging violations of section 50(a)(6). One of the strongest defenses to 50(a)(6) claims had historically been the application of Texas’ residual four-year statute of limitations,[vi] which the federal courts had consistently applied to bar borrower claims.[vii] However, the Southern District of Texas’ opinion in Smith v. JPMorgan Chase Bank, Nat’l Ass’n, created a split within the Fifth Circuit. In Smith, the Court conducted an in-depth analysis of 50(a)(6) and found that non-conforming loans are void ab initio, as opposed to merely voidable,[viii] and that no statute of limitations applies to claims that a home-equity loan, and the lien securing it, are absolutely void.[ix]
In 2013, the Fifth Circuit issued its opinion in Priester v. JP Morgan Chase Bank, N.A., 708 F.3d 667 (5th Cir. 2013), resolving the conflict created by Smith and dealing a death blow to the vast majority of would-be 50(a)(6) plaintiffs. In Priester, the Fifth Circuit determined that the cure provision contained in Section 50(a)(6)(Q) rendered nonconforming home-equity loans merely voidable, as opposed to void.[x] The Court went on to hold that Texas’ residual four (4) year limitations period[xi] applies to alleged constitutional infirmities under section 50(a)(6), and that the statutory period begins to run at the closing of the loan.[xii] A Texas intermediate appellate court has since adopted the Priester analysis.[xiii]
C. Walker: Tex. R. Civ. P. 736 Does Not Extend Statute of Limitations.
Over the past year or so, Texas consumer plaintiffs have attempted several procedural maneuvers to overcome the roadblock to 50(a)(6) claims. One of the most recent incarnations was foreclosed in Walker v. Citimortgage, Inc., No. H-13-03111, 2014 WL 67245, at *3-5 (S.D. Tex. Jan. 8, 2014). In Walker, Citimortgage initiated a judicial foreclosure proceeding pursuant to Texas Rule of Civil Procedure 736.[xiv] Rule 736 is a special procedure that provides for expedited foreclosure of home-equity loans and does not permit counterclaims to be filed.[xv] However, a proceeding under Rule 736 is automatically stayed and dismissed if the borrower, among other things, files a separate, original proceeding in a court of competent jurisdiction challenging the origination, servicing or enforcement of the loan.[xvi] Walker filed a separate action alleging constitutional infirmities under section 50(a)(6), resulting in the dismissal of Citimortgage’s expedited foreclosure under Rule 736. Walker then argued that the four (4) year limitations period was inapplicable to his constitutional claims because Rule 736.11 grants an express right to file a separate action challenging the validity of the loan. The Court declined to adopt Walker’s argument, noting “[t]his rule gives individuals who are defendants in TRCP 736 foreclosure cases the right to bring a separate claim contesting the origination, servicing, or enforcement of the loan agreement. It does not extend the statute of limitations for these types of claims . . . .”[xvii]
Different variations of this argument are currently working their way through Texas courts. In the pending case Puga v. Bank of America, N.A., the plaintiffs have argued that Rule 736’s prohibition on “counterclaims” justifies treating the borrowers as “counter-plaintiffs” in their separate, original action, thereby implicating the limitations extending provision of Tex. Civ. Prac. & Rem. Code Ann. § 16.069(a).[xviii] The Court has yet to rule on this theory, but a decision in Puga may provide further insight regarding whether Texas borrowers will gain any ground in their fight for a limitations-free shot at home-equity loan forfeiture.
[i] Stringer v. Cendant Mortg. Corp., 23 S.W.3d 353, 355 (Tex. 2000).
[iii] Tex. Const. art. XVI, § 50(a)(6)(B).
[iv] Finance Com’n of Texas v. Norwood, 418 S.W.3d 566, 572 (Tex. 2013).
[v] Tex. Const. art. XVI, § 50(a)(6)(A)–(Q).
[vi] See Tex. Civ. Prac. & Rem. Code Ann. § 16.051.
[vii] See, e.g., Reagan v. U.S. Bank Nat’l Ass’n, No. H-10-2478, 2011 WL 472984, at *3-4 (S.D. Tex. Oct. 6, 2011); In re Ortegon, 398 B.R. 431, 440 (Bankr. W.D. Tex. 2008); Hannaway v. Deutsche Bank Nat’l Trust Co., No. A-10-CV-714-LY, 2011 WL 891669, at *3-5 (W.D. Tex. Mar. 11, 2011); Williams v. Deutsche Bank Nat’l Trust Co., No. A-10-CV-711-LY, 2011 WL 891645, at *3-4 (W.D. Tex. Mar. 11, 2011).
[viii] Smith v. JPMorgan Chase Bank, Nat’l Ass’n, 825 F.Supp.2d 859, 861 (S.D. Tex. 2011).
[ix] Id. at 868.
[x] Priester v. JP Morgan Chase Bank, N.A., 708 F.3d 667, 674 (5th Cir. 2013) (stating “a ‘void’ lien could not be ‘voided’ by future action.”).
[xi] See Tex. Civ. Prac. & Rem. Code Ann. § 16.051.
[xii] Priester, 708 F.3d at 674-676.
[xiii] Williams v. Wachovia Mortg. Corp., 407 S.W.3d 391, 396 (Tex. App.—Dallas 2013, pet. denied).
[xiv] Walker, 2014 WL 67245, at *1.
[xv] Tex. R. Civ. P. 736.5(d).
[xvi] Id. at 736.11.
[xvii] Walker, 2014 WL 67245, at *1 (emphasis in original).
[xviii] See, e.g., Puga v. Bank of Am., N.A., No. 3:13-cv-04414-M-BN (N.D. Tex. 2013).