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The Texas Supreme Court’s Decision in Wood v. HSBC Bank USA

 

     On May 20, 2016, the Texas Supreme Court issued a pivotal opinion regarding the applicability of the Texas statute of limitations on a claim regarding the validity of a lien securing a constitutionally established home-equity loan. The Texas Supreme Court held that “liens securing constitutionally noncompliant home-equity loans are invalid until cured and thus not subject to any statute of limitations” and that therefore “no statute of limitations applies to cut off a homeowner’s right to quiet title to real property encumbered by an invalid lien under section 50(c).” Wood v. HSBC Bank USA, N.A., No. 14-0714, 2016 WL 2993923, at *6 (Tex. May 20, 2016).
     

     In reaching its holding, the Texas Supreme Court reasoned that the Texas Constitution, Article XVI §50(c) dictates that no lien on a homestead shall ever be valid unless it secures a debt that meets §50(a)(6)’s requirements. Conversely, a lien which does not meet §50(a)(6)’s requirement can be made valid by lender’s compliance with a cure provision in §50(a)(6). The Court further found that §50 and case law suggests that noncompliant liens are invalid until made valid. (Doody v. Ameriquest Mortgage Co., Tex. 2001). Holding otherwise would be ignoring the Constitution and allowing foreclosure of homes of borrowers who did not realize that their home-equity loans violated the Constitution. The Court examines the distinction between a “void” lien and a “voidable” lien: “A voidable lien is presumed valid unless later invalidated, see Slaughter [162 S.W.2d 671, 674 (Tex. 1942)], while section 50 and Doody [49 S.W.3d 342, 343 (Tex. 2001)] contemplate precisely the opposite: that noncompliant liens are invalid until made valid, see TEX. CONST. ART. XVI, § 50(c).” Since a home-equity lien which is noncompliant with the requirements of Texas Constitution, Article XVI §50(a), et seq. is void from origination, there is no statute of limitations for a borrower to bring a suit to quiet title against a foreclosing lender.


     Prior to the Wood opinion, in 2013, the Fifth Circuit made an educated guess about Texas state law and held that the Texas four-year statute of “limitations period applies to constitutional infirmities under Section 50(a)(6)” relating to a home equity loan secured by a lien on a homestead. Priester v. JP Morgan Chase Bank, N.A., 708 F.3d 667, 674 (5th Cir. 2013). In the context of future Fifth Circuit litigation, this means the Fifth Circuit will likely follow the Wood decision rather than the Priester decision. Broussard v. S. Pac. Transp. Co., 665 F.2d 1387, 1389 (5th Cir. 1982) (en banc) (holding that prior Fifth Circuit opinions on state law no longer control if there is “a subsequent state court decision or statutory amendment which makes [the Fifth Circuit’s] (prior) decision clearly wrong); see also St. Paul Fire & Marine Ins. Co. v. Convalescent Servs., Inc., 193 F.3d 340, 345 n.10 (5th Cir. 1999). Lawyers may be able to do some creative lawyering to distinguish Wood from Priester, but most likely, the Fifth Circuit will begin to apply the Wood decision as controlling. The good news is, any previous litigation by based on the Priester decision will probably not be overturned. See Batts v. Tow-Motor Forklift Co., 66 F.3d 743, 748 (5th Cir. 1995) (holding that “a change in state decisional law, rendered after this court makes an Erie prediction, will not normally constitute an extraordinary circumstance, and cannot alone be grounds for relief from a final judgment pursuant to Rule 60(b)(6)”).

 

     Regarding originations of Texas home-equity loans, the Court has put the burden on lenders to ensure that a home-equity loan is compliant with the stringent requirements of the Texas Constitution from the time of origination. To protect itself, lenders should not only have a system in place to ensure proper lending services (i.e. notice at origination, language in origination documents and compliant closing costs), but lenders should ensure that they have a comprehensive title policy which includes the property home-equity extension of credit endorsements. For servicers holding Texas home-equity loans, the Wood case reiterates the importance of policies and procedures for identifying borrower complaints and escalating these matters as needed, including putting title claims counsel on notice immediately upon receipt of a dispute regarding the validity of the constitutional lien. There are cure provisions provided for lenders under Texas Constitution, Article XVI §50(a)(6)(Q)(x), which allow a void lien to subsequently be validated. However, there are strict deadlines and defects must be cured within sixty days. If anything, the Wood decision has brought to light the protective nature of Texas law-makers regarding a homeowner’s homestead and the theory that the lender carries the obligation to ensure strict compliance with constitutional requirements when lending to said homeowners.

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