Introduction

In Texas, lenders and loan servicers have relied on the Fifth Circuit ruling in Priester v. JP Morgan Chase Bank, N.A., 708 F.3d 667, 674-677 (5th Cir. 2013) that a four-year limitations period applies to suits seeking to invalidate constitutionally defective homestead liens, which such claims accrued at the time of closing. Lenders and servicers have since argued that the Texas Constitutional violation claims under 50(a)(6) were cured once the period of limitations had passed as the lien would no longer be voidable and would be considered valid. In other words, Texas Constitutional violations would be cured merely through passage of time rather than by taking the lender or servicer taking any action.

On May 20 2016, the Supreme Court of Texas delivered an opinion regarding the statute of limitations in the context of potential forfeiture of principal and interest on a home-equity loan that was argued to be invalid at the time of closing. See, Wood v. HSBC Bank USA, N.A., –S.W.3d–, 2016 WL 2993923 (Tex. May 20, 2016).

The primary issue in front of the Wood Court was whether a statute of limitations applies to an action to quiet title where a lien securing a home-equity loan does not comply with constitutional parameters, specifically Article XVI Section 50(a)(6)(E) of the Texas Constitution.

After analyzing the law and the facts, the Supreme Court of Texas held in Wood that (1) a lien that was invalid from origination remains invalid until cured and (2) no statute of limitations applies to cut off a homeowner’s right to quiet title to real property encumbered by an invalid lien.

Background

On July 2, 2004, a husband and wife, (the “Borrowers”) obtained a home-equity loan secured by their homestead. Nearly eight years later, the Borrowers notified the current note holder and loan servicer that the home-equity loan allegedly did not comply with the Texas Constitution in several respects, including that the closing fees exceeded 3% of the loan amount. Neither the note holder nor the loan servicer (the “Lenders”) attempted to cure the alleged defects. On July 9, 2012, the Borrowers sued the Lenders, seeking to quiet title and asserting claims for constitutional violations, breach of contract, fraud, and a declaratory judgment that the lien securing the home-equity loan is void, that all principal and interest paid must be forfeited, and that the Borrowers have no further obligation to pay.

The Borrowers moved for summary judgment, arguing that the lien was void because the evidence showed as a matter of law that the closing fees exceeded 3% and the Lenders did not cure after proper notice. The Lenders also moved for summary judgment on traditional and no-evidence grounds, asserting in pertinent part that the lien is voidable, not void, and that the statute of limitations barred all claims. The trial court granted summary judgment for the Lenders on all claims and denied the Borrowers’ cross-motion. The only issue the Borrowers raised on appeal to the court of appeals was whether their claims based on constitutional noncompliance, including their claims to quiet title and for a declaration of forfeiture, are subject to a statute of limitations. The court of appeals affirmed, holding that liens securing constitutionally noncompliant home-equity loans are voidable, not void and that the residual four-year statute of limitations applied to the Borrowers’ claims, accruing from the date of closing.

The Supreme Court of Texas then granted the Borrowers’ petition for review.

Texas Supreme Court Ruling

On appeal, the Wood Court first addressed the extent of the protections outlined in Section 50(a) of the Texas Constitution, including a borrower’s access to the forfeiture remedy. In general, section 50(a) protects the homestead and strictly limits the types of loans that may be secured by a homestead lien. Homestead liens securing home-equity loans are limited by Section 50(a)(6)(A)-(Q) and are made on the condition that forfeiture of all principal and interest is available if the loan is constitutionally noncompliant and the lender fails to cure within sixty days of being given notice by the borrower. See, Tex. Const. art. XVI, § 50(a)(6)(Q)(x).

The Wood Court first held that section 50(a) does not create substantive rights beyond a defense to foreclosure of a home-equity lien securing a constitutionally noncompliant loan. Borrowers may access the forfeiture remedy through a breach-of-contract action based on the inclusion of those terms in their loan documents, as the Constitution requires to make the home-equity lien foreclosure-eligible. Section 50(c), on the other hand, expressly addresses the validity of any homestead lien, declaring the lien invalid if the underlying loan does not comply with section 50. See, TEX. CONST. art. XVI, § 50(c). Following from that logic, the Supreme Court stated that a homestead lien that may not have complied with constitutional requirements at the outset can be made valid at a later date if the power to do so exists under our constitution or statutes. The Court went on to state that complying with a cure provision validates a lien securing a section 50(a)(6) extension of credit. Therefore, upon the cure, the lender has established the terms and conditions the lender must satisfy to make a lien valid under section 50(c). In other words, a home-equity lien securing a constitutionally noncompliant loan is invalid until the defect is cured.

The Court then applied this holding to answer whether a statute of limitations applies to a quiet title action in the context of an invalid home equity lien.

In recent years, loan servicers and lenders argued that Texas Constitutional claims under 50(a)(6) can be automatically cured once the period of limitations has passed as the lien is no longer voidable and is valid. See Priester v. JP Morgan Chase Bank, N.A., 708 F.3d 667, 674-677 (5th Cir. 2013); Williams v. Wachovia Mrtg. Corp., 407 S.W.3d 391, 397 (Tex.App.—Dallas 2013, no pet.); Thompson v. Deutsche Bank Nat. Trust Co., 775 F.3d 298, 307 (5th Cir. 2014); Portillo v. DLJ Mortgage Capital, Inc., No. CIV.A. H-13-3679, 2015 WL 729918 (S.D. Tex. Feb. 19, 2015). A four-year limitations period was applied to these claims. See Tex. Civ. Prac. & Rem. Code Ann. § 16.051 (West). The accrual date of these claims were said to arise at the time of origination or closing of the loan. See, Priester, 708 F.3d at 675-676; see also Thompson, 775 F.3d at 307. Under Texas law, “a cause of action [generally] accrues when a wrongful act causes a legal injury, regardless of when the plaintiff learns of that injury . . . .” Priester, 708 F.3d at 675 (quoting Provident Life & Acc. Ins. Co. v. Knott, 128 S.W.3d 211, 221 (Tex. 2003)). Therefore, lenders and servicers have argued that the limitations period on allegations of violations of Section 50(a)(6) begins to run at the time the home equity loan in question closed because the injury occurred when the lien was created. Id. at 675-676.

Aware of this precedent, the Wood Court instead held that a home equity lien that was invalid from origination remains invalid until it is cured. Based on that holding, the Court then held that no statute of limitations can apply to cut off a homeowner’s right to quiet title to real property encumbered by an invalid lien under section 50(c). Thus, following Wood, unless a home equity lien complies with section 50(c), a suit to remove that lien as a cloud on title cannot be time barred.

The Borrowers also brought a declaratory judgment action for forfeiture of all principal and interest paid on their home-equity loan. The Court held that because Section 50(a) does not create substantive rights beyond a defense to a foreclosure action on a home-equity lien securing a constitutionally noncompliant loan and that forfeiture is not a constitutional remedy, the forfeiture provision in section 50(a)(6)(Q)(x) does not create a constitutional cause of action to access that remedy and must instead be litigated in the context of the borrower’s loan agreement.

Analysis

Before Wood, the Priester decision indicated that any claim involving Texas constitutional infirmities was limited to a four-year statute of limitations from the date of closing. The Supreme Court of Texas has narrowed the use of statute of limitations as a lender and loan servicer defense against claims based on such constitutional infirmities in Wood v. HSBC Bank USA, N.A. At the same time, however, the Wood Court limited the use of constitutional infirmities as a direct cause of action for borrowers.

In the Court’s view, the Borrowers correctly implemented Sections 50(a) and 50(c) by bringing an underlying cause of action for quiet title. In other words, if the conditions of Section 50(a) were not met, then Section 50(c) applies and the lien is void. If the lien is void, then Borrowers have a cause of action for quiet title.

Following from Wood, it appears that Lenders in Texas courts can no longer use the Priester ruling to bar a quiet title claim based a four-year statute of limitations if the lien is void or invalid.

Given that the Court allowed a quiet title claim based on a void lien per Section 50(a) and Section 50(c), it would follow that the Borrowers could potentially also seek a declaratory judgment action to declare the lien void, which could also give them access to attorney fees.

Although in Wood the Borrowers were unsuccessful in their attempt to implement the forfeiture remedy of Section 50(a)(6)(Q)(x) through a declaratory judgment action, the Court ruled that the forfeiture remedy could not be implemented through a declaratory judgment action because this remedy must be pursued as a breach of contract claim. The Court’s exact words are that the forfeiture provision, “…must be litigated in the context of the borrower’s loan agreement.” That said, a breach of contract action also potentially provides a borrower access to an attorney’s fee claim.

The Court’s limitation of access to the forfeiture remedy of Section 50(a)(6)(Q)(x) through a breach of contract action has further implications regarding applicability of a statute of limitations. For instance, the Court did not indicate that a statute of limitations would not apply to all underlying causes of action that involve Texas constitutional infirmities as its ruling was limited to a quiet title action based on an invalid lien. It follows that if a borrower brings a breach of contract action in order to implement the forfeiture remedy of Section 50(a)(6)(Q)(x), then the traditional four-year statute of limitations for breach of contract could apply, which usually runs at the time of breach, or in this context, the time of closing.

Conclusion and Mitigation

Lenders and loan servicers can no longer rely on Priester’s absolute bar on claims based on constitutional infirmities brought four or more years after closing. Thus, if a valid constitutional violation notice is received, then the lender or loan servicer should work to cure all actual violations and assume that a statute of limitations does not begin to apply until after cure. However, if an actual violation cannot be specifically cured, the Texas Constitution provides a catchall cure of one thousand dollars and an offer of refinance at no cost. Thus, record retention of the cure should be a priority, regardless of its method. Additionally, an acknowledgement from the borrower that he or she received all documents and that the lender complied with the Texas Constitution should be clear regarding these issues as it can be used to refute such violation claims.

In conclusion, while the Court’s ruling may seem daunting for lenders and loan servicers, if a valid violation occurs, it can certainly be mitigated.

No information in this article is intended to constitute legal advice. For specific legal advice, please contact an attorney.

If you have any questions or would like more information about applicability of statute of limitations to claims of validity and forfeiture of home-equity liens or suits to quiet title, please contact Eric Mettenbrink at 713.220.9141 or emettenbrink@hirschwest.com.