Smith v. JPMorgan Chase Bank, Nat'l Ass'n

• Decision Date: 21 November 2011
• Docket Number: Civil Action No. C–11–260.
• Parties: E. Boyd SMITH, Plaintiff, v. JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, Defendant.
• Court: U.S. District Court — Southern District of Texas

825 F.Supp.2d 859

E. Boyd SMITH, Plaintiff,

v.JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, Defendant.

Civil Action No. C–11–260.

United States District Court, S.D. Texas, Corpus Christi Division.

Nov. 21, 2011.

David Zuehl Conoly, Attorney at Law, Corpus Christi, TX, for Plaintiff.

William Lance Lewis, Baron Taylor Oursler, Marcie L. Schout, Quilling Selander Lownds Winslett & Moser P.C., Dallas, TX, for Defendant.

ORDER DENYING MOTION TO DISMISS

NELVA GONZALES RAMOS, District Judge.

“Don't mess with Texas homesteads” has been a clear message to lenders since the very early days of Texas. The prohibition is so unequivocal that any lien purporting to encumber homestead property is, and for 166 years has continuously been, beyond the reach of creditors for forced sale absent compliance with rigid constitutional requirements.¹ The current constitutional language reads,

No mortgage, trust deed, or other lien on the homestead shall ever be valid unless it secures a debt described by this section, whether such mortgage, trust deed, or other lien, shall have been created by the owner alone, or together with his or her spouse, in case the owner is married. All pretended sales of the homestead involving any condition of defeasance shall be void.Tex. Const. art. XVI, § 50(c) (emphasis added).

A. Void Liens

A noncompliant mortgage lien against a homestead is thus void ab initio. Moore v. Chamberlain, 109 Tex. 64, 195 S.W. 1135 (1917); Florey v. Estate of McConnell, 212 S.W.3d 439, 447 (Tex.App.-Austin 2006, pet. denied). As early as 1890, the Supreme Court of Texas held:

The constitution forbidding the fixing on the homestead of liens other than such as are thereby expressly permitted, no estoppel can arise in favor of a lender, who has attempted to secure a lien on homestead in actual use and possession of the family, based on declarations of the husband and wife, made orally or in writing, contrary to the fact. To hold otherwise would practically abrogate the constitution. If property be homestead in fact and law, lenders must understand that liens cannot be fixed upon it, and that declarations of husband and wife to the contrary, however made, must not be relied upon. They must further understand that no designation of homestead, contrary to the fact, will enable parties to evade the law, and incumber [sic] homesteads with liens forbidden by the constitution.

Texas Land & Loan Co. v. Blalock, 76 Tex. 85, 13 S.W. 12, 13 (1890) (emphasis added). One hundred years later, this opinion was followed by the Fifth Circuit. Matter of Rubarts, 896 F.2d 107, 112 (5th Cir.1990).

More specifically, “The question of whether [a] deed is void or voidable depends on its effect upon the title at the time it was executed and delivered. If it was a mere nullity, passing no title and conferring no rights whatsoever, it was absolutely void....” Slaughter v. Qualls, 139 Tex. 340, 162 S.W.2d 671, 674 (1942). Ordinarily, a lien on homestead is so completely invalid that it cannot be made valid later, by ratification. Collier v. Valley Building & Loan Ass'n, 62 S.W.2d 82 (Tex. Comm'n App.1933, holdings approved). Such a lien is void.

B. The Claim of a Constitutional Violation is “Plausible”

In this case, there appears to be little question that the lender, JPMorgan Chase Bank, N.A. (JPMC), has violated the borrower's, E. Boyd Smith's (Smith's), homestead rights under the Texas Constitution. Smith has so alleged; and JPMC has admitted as much in written correspondence to Smith, dated May 12, 2010, stating: “It has come to our attention that the above-referenced home equity line of credit account secured by your homestead was apparently made in violation of Texas Constitution Section 50(a)(6)(K) in that there was already a prior equity loan secured by your homestead.” Under the Twombly rule, for purposes of JPMC's motion to dismiss (D.E. 11), the Court assumes the truth of these statements. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1966, 167 L.Ed.2d 929 (2007).

Smith already had a home equity lien from another lender encumbering his homestead and the Texas Constitution allows only one such lien at a time. Tex. Const. art. XVI, § 50(a)(6)(K). It would then appear that this is a simple case. But JPMC contends that its constitutional violation is of no consequence because, on the face of the pleadings, Smith's constitutional complaint that the lien is void is barred by limitations.

C. Limitations

While limitations is an affirmative defense, it is subject to adjudication in the context of a Rule 12(b)(6) motion if the application of the defense is apparent on the face of the pleadings. Jones v. Bock, 549 U.S. 199, 215, 127 S.Ct. 910, 920–21, 166 L.Ed.2d 798 (2007). JPMC's rights, and thus the application of its limitations defense, must be determined pursuant to the home equity loan revisions to the Texas Constitution, which went into effect in 1997. Those provisions prescribe procedures, or at least strong clues regarding procedures, for the manner in which homestead violations are identified and addressed. In other words, the Court looks to the constitutional language to determine who had the duty to act and when that duty was triggered.

1. The Constitutional Cure Provision

Pursuant to the home equity provisions of the Texas Constitution, the lender forfeits all principal and interest if it fails to comply with the constitutional requirements and fails to correct its noncompliance not later than the sixtieth day after the borrower notifies the lender of the violation. Tex. Const. art. XVI, § 50(a)(6)(Q)(x). Apparently, because the cure provision only references forfeiture of principal and interest, Smith argues that it does not apply to his effort to reclaim his property and quiet title by eliminating the purported lien. This contention is incorrect. According to the Supreme Court of Texas,

When we read all the amendment's provisions together, we conclude that section 50(a)(6)(Q)(x) is a cure provision that applies to all of section 50(a) and is not limited to protecting the loan's principal and interest. Rather, this provision also operates as a cure provision that validates a lien securing a section 50(a)(6) extension of credit.

Doody v. Ameriquest Mort. Co., 49 S.W.3d 342, 346–47 (Tex.2001). In other words, a void home equity lien may be made valid upon proper cure. This is a completely new development in the law protecting Texas homesteads.

Clear from the Texas Supreme Court's opinion is the context in which home equity liens arise: a home equity loan in Texas must, by definition, be made pursuant to a nonrecourse note. Tex. Const. art. XVI, sec. 50(a)(6)(C). Consequently, if there is a constitutional infirmity that renders the lien against the homestead void, then the lender effectively loses everything. That is because a nonrecourse note, upon default, is payable only out of the specific collateral, with no possibility of a deficiency judgment against the debtor, personally. Pineridge Associates, L.P. v. Ridgepine, LLC, 337 S.W.3d 461, 465 (Tex.App.-Fort Worth 2011, no pet.) (describing the effect of a nonrecourse note).

To mitigate that drastic result, the constitution contains a series of cure provisions that are designed to provide the lender with a chance to salvage its lien from any constitutional infirmity so that it may ultimately recover from the real estate collateral in the event of the borrower's default. Tex. Const. art. XVI, sec. 50(a)(6)(Q)(x). As noted, according to those provisions, a borrower can give notice of the constitutional violation after which the lender has sixty days to cure the violation.

2. No Time Limits on the Borrower's Duty to Give Notice

As this Court's jurisdiction is based on diversity of citizenship, the task presented by JPMC's motion is to determine and apply Texas law. Erie R.R. v. Tompkins, 304 U.S. 64, 78–79, 58 S.Ct. 817, 82 L.Ed. 1188 (1938) (requirement that the law of the forum state applies in diversity cases); Guaranty Trust Co. v. York, 326 U.S. 99, 111–12, 65 S.Ct. 1464, 89 L.Ed. 2079 (1945) (limitations is a matter of state law to be determined pursuant to Erie ).

It is axiomatic that in Texas, along with other jurisdictions, the law abhors a forfeiture. Aquaplex, Inc. v. Rancho La Valencia, Inc., 297 S.W.3d 768, 773 (Tex.2009); Sirtex Oil Industries, Inc. v. Erigan, 403 S.W.2d 784 (Tex.1966). With this in mind, the Texas Constitution prescribes the borrower's first step on the journey to his remedy as being the provision of notice of any violation to the lender. Thereafter, the lender has its sixty-day opportunity to cure. Nothing in the constitution prescribes when the borrower is required to give the lender notice.

JPMC skips over this first step and its consequences, arguing that, if the borrower fails to file suit within four years of the closing of the loan, the borrower's remedies are forever barred. Skipping past the notice and cure stage may very well be intentional because, according to the pleadings, Smith did in fact give JPMC notice of the constitutional violations in 2008, before the expiration of four years from the closing of the loan. Again relying on the factual matters contained in the pleadings, the Court can conclude that JPMC did not take advantage of its sixty-day opportunity to cure at that time. So even assuming arguendo that the four-year statute applied to the prerequisite of notice, Smith met that requirement. The Court does not reach the question of whether that 2008 notice and failure to cure is determinative of the issues in this case because that question is not raised by the present motion.

3. No Time Limits on Suit to Quiet Title

Moving past the notice and cure procedures and evaluating the question as addressing when suit must be brought, Smith contends that, because the lien is presumptively void ab initio pursuant to the pleading and constitutes a cloud on his title, there is no limitations period running against him. “...