In early 2012, the Dallas Court of Appeals reversed a temporary injunction that would have prevented BB&T from foreclosing on a pair of properties secured by a $10 million promissory note. Two and a half years later, matters have not improved for the borrowers, as the Court has now affirmed summary judgment for the bank.
In responding to the no-evidence summary judgment motion, the borrowers had “relied entirely on evidence presented at the temporary judgment hearing” to show that they had a valid contract with BB&T that superseded the bank’s right to foreclose. Because the Court had previously held that this evidence amounted to nothing more than an unenforceable “agreement to agree,” the law of the case doctrine prevented the outcome from being any different in this subsequent appeal. The same evidence was also held to be insufficient to support the borrowers’ claims for fraud and declaratory judgment, while a money had and received claim failed because the borrowers had made a $1.8 million payment with full knowledge of the facts and without fraud or duress. Finally, the trial court had not abused its discretion by striking the borrowers’ fifth amended petition because it had been filed outside the deadline in the court’s scheduling order, was not filed with leave of court, and was prejudicial to the bank because it sought to add a claim that “would effectively inject new substantive matters into the litigation by reinjecting old ones.”
TCI Luna Ventures, LLC v. Branch Banking & Tr. Co., No. 05-13-01221-CV
Homeowner Sheila Larry failed to pay her HOA fees. Eventually, the HOA took legal action to collect the unpaid dues. Like most HOA fees, they were secured by a contractual lien on Ms. Larry’s property. The HOA successfully moved for summary judgment, but the trial court refused to order foreclosure of the lien, and the HOA appealed.
Reversing the trial court, the Dallas Court of Appeals reasoned that the “purchase of property within a deed restricted subdivision carries with it the obligation to pay association fees,” and “the remedy of foreclosure is an inherent characteristic of that property right” — even if it may seem harsh.
Gateway Estates HOA v. Larry
Two years ago, the Dallas Court of Appeals ruled that PlainsCapital Bank was not entitled to judgment against a borrower because it based its deficiency claim on the price it obtained when the property was sold a year after foreclosure, rather than the fair market value of the property at the time it was foreclosed. Last summer, the Texas Supreme Court granted the bank’s petition for review and set the case for oral argument. This morning, the Supreme Court held that the Court of Appeals was correct in ruling that § 51.003 of the Texas Property Code controlled PlainsCapital’s deficiency claim. However, the Court also ruled that “fair market value” under the deficiency statute does not mean the price that a willing buyer would pay to a willing seller at the time of foreclosure. Because § 51.003(b)(5) permits the trier of fact to consider the forward-looking factor of discounts that may be applied to a future sales price, it was proper for the trial court to base its fair market value finding on the price the bank actually received in its post-foreclosure sale. The Supreme Court remanded to the Court of Appeals for consideration of additional issues.
Justice Boyd (joined by Justice Guzman) dissented, arguing that the majority had improperly cast aside the historical definition of fair market value, and that evidence of any future discounts in the sale price of the property was only relevant to consideration of the fair market value at the time of the foreclosure.
TLDR: To determine FMV at the time of foreclosure, you can look to values received in the future.
PlainsCapital Bank v. Martin (majority)
PlainsCapital Bank v. Martin (dissent)
Homeowners Nader and Fariba Daryapayma purchased a $1.5 million house and financed $735,000 of the purchase price with two loans secured by liens on the home. Shortly thereafter, the Daryapaymas applied for and obtained a home equity loan from Countrywide for $937,500, the purpose of which was to pay off their current mortgage (i.e. the existing $735k loans). Countrywide funded the home equity loan and the Daryapaymas used the proceeds to pay off the first two loans.
A few years later, the Daryapaymas defaulted on the home equity loan. Bank of New York Mellon (BONY), as the assignee of the loan, foreclosed on the Daryapaymas property and then filed a petition for forcible detainer. The Daryapaymas counterclaimed, contending that the home equity loan violated the Texas Constitution, which limits the amount of home equity loans, when combined with existing mortgages, to 80% of a home’s fair market value. The Daryapaymas argued that because the $937k home equity loan combined with their outstanding $735k mortgages exceeded 80% of the home’s value, the foreclosure was unenforceable. The trial court agreed and granted the Daryapaymas summary judgment.
The Dallas Court of Appeals reversed, holding that because the loan documents reflected that the $937k home equity loan was made, in large part, to pay off the existing mortgages, the trial court erred in including the balance of those loans in its calculation of the total amount of indebtedness.
Bank of New York Mellon v. Daryapayama
The Texas Supreme Court has unanimously affirmed the judgment of the Dallas Court of Appeals on petition for review from the case of Interstate 35/Chisam Road L.P. v. Moayedi. As regular readers will recall, Moayedi was the first of a string of cases from Dallas holding that borrowers and guarantors had contractually waived their statutory right to offset any deficiency if the foreclosure sale resulted in a price less than the collateral’s fair market value. Justice Willett, writing for the Supreme Court, agreed with that analysis, holding that section 51.003 of the Texas Property Code creates an affirmative defense that the borrower or guarantor can validly waive through a general waiver of defenses in the lending instruments. Unless the Legislature decides to step in, businesses and individuals can expect to see such waiver clauses become standard practice in property financing transactions.
Moayedi v. Interstate 35 Chisam Road LP, No. 12-0937
The Dallas Court of Appeals continues to be a hard place for borrowers and guarantors to claim the statutory right to offset deficiencies when collateral is sold in foreclosure for less than its fair market value. In this instance, the bank sued the guarantor of a $9.5 million loan. After the apartment complex that secured the debt was sold in foreclosure for only $4 million, the bank sought to recover the deficiency. The guarantor argued that the bank should only be permitted to recover the difference between the balance of the loan and the fair market value of the property, not the price realized in the foreclosure sale. See Tex. Prop. Code § 51.003(c). The trial court granted summary judgment for the bank, and the Court of Appeals affirmed. Although the opinion does not cite to the Moayedi case that started off this line of decisions (and that is currently pending before the Texas Supreme Court after oral argument in January), the Court once again held that the parties’ contract validly waived the guarantor’s right to offset. In this particular agreement, the waiver clause referred to “any and all rights or defenses based on suretyship or impairment of collateral” and “any claim of setoff.” Both clauses, the Court held, were sufficient to waive the statutory offset rights.
Nussbaum v. OneWest Bank, FSB, No. 05-13-00081-CV
The Court of Appeals has affirmed summary judgment for the lenders in a foreclosure dispute. Anil and Sheela Das sued Deutsche Bank and others to prevent them from foreclosing on their home. The Dases claimed that DB was not an owner or holder of the note. However, an affidavit from an analyst of the loan servicing company established that the note had been transferred to DB, and that the servicer maintained the original of the note on behalf of DB. Copies of the original instruments were also attached to the affidavit, and that uncontradicted evidence was enough for the Court of Appeals to determine that Deutsche Bank had met its summary judgment burden on the issue. The Court also rejected the borrowers’ argument that the bank was judicially estopped from relying on that copy of the note, as its use of an earlier, unendorsed copy of the note during prior bankruptcy proceedings was not clearly inconsistent with a later copy that included the subsequent endorsement.
Das v. Deutsche Bank Nat’l Trust Co., No. 05-12-01612-CV
HSBC Bank foreclosed on a residential property in Cedar Hill, but failed to pay assessments on the property to the local homeowners association. The HOA foreclosed on its assessment lien, and the property was purchased out of foreclosure by Khyber Holdings, LLC. HSBC sought to redeem the property as permitted by § 209.011 of the Texas Property Code. However, when the bank’s attorney sent the required notice to Khyber, the letter incorrectly identified Countrywide Home Loans as the owner seeking to redeem the home. The attorney testified that the error had occurred because he represented the servicer for both HSBC and Countrywide, and that Khyber had purchased lots owned by both lenders during the same foreclosure sale. HSBC sued for a declaratory judgment that it was entitled to redeem the property. When Khyber responded with a letter that stated the redemption price would be $80,000, the attorney responded with an $80,000 check and a letter that once again named Countrywide as the owner, although the redemption deed correctly identified HSBC as the grantee of the redemption sale. Khyber refused to allow redemption, the case proceeded to trial, and the jury returned a verdict in favor of HSBC. The Court of Appeals affirmed, concluding that only substantial compliance is required to fulfill the notice requirements of § 209.011, and that the series of back-and-forth exchanges between the parties was sufficient proof that the notice requirements had been fulfilled. The Court also affirmed the jury’s award of damages for trespass, concluding that HSBC was entitled to recover for lost rents during the period of time the property was improperly retained by Khyber.
Khyber Holdings, LLC v. HSBC Bank USA, N.A., No. 05-12-01212-CV
One of the legacies of Texas consumer protection laws was Article XVI, Section 50 of the Texas Constitution, which effectively prohibited home equity lending. In 1997, voters approved amendments to that section to permit home equity loans, but only under certain conditions. Among other restrictions, the loan cannot exceed 80% of the value of the equity in the home, and the lender must cure any violation of the constitutional requirements within 60 days of the date the borrower gives notice. If those requirements are not met, the lender forfeits all principal and interest and loses its lien on the property.
Lonzie Leath obtained a $340,000 home equity loan in 2005, and signed an acknowledgment that his home’s fair market value was $425,000. In 2008, the servicer sought to foreclose on the property, and Leath responded by alleging that the loan was illegal because it had actually exceeded 80% of the value of the home at the time it was made. The jury found that the property’s fair market value had been only $421,400, a finding that placed the principal of the loan barely over the 80% limit. The trial court therefore entered judgment forfeiting the principal and interest and invalidating the lender’s lien.
Although the servicer claimed that Leath had failed to provide notice of the alleged constitutional deficiency, the Court of Appeals agreed with Leath that his pleadings had given notice and started the clock on the lender’s 60-day cure period. The Court also held that the jury’s valuation finding was adequately supported by the evidence, including the admission of the servicer’s appraisal expert that he had not accounted for $3,600 of electrical work that needed to be performed at the time of the loan. The Court of Appeals therefore affirmed the judgment in favor of the borrower, leaving the lender without principal, interest, or the right to foreclose.
Wells Fargo Bank, N.A. v. Leath, No. 05-11-01425
In 2007, LG Auto Laundry sold a .8-acre tract to Shammy Man Auto Wash, with Shammy Man purchasing the land by means of a mortgage from Millennium State Bank. At the same time, LG and Shammy signed a ground lease permitting LG to possess .06 acres of the property containing a cell phone tower. LG and Millennium signed a Subordination, Non-Disturbance and Attornment Agreement (SNDA) providing that, in the event of foreclosure, LG’s possession of the leased property would not be disturbed. Shammy defaulted, but before Millennium could foreclose, the FDIC took over Millennium and transferred the assets to the State Bank of Texas. The plaintiff purchased the property from the State Bank of Texas and filed this lawsuit to establish that the foreclosure extinguished LG’s ground lease.
Although a valid foreclosure on a lien terminates leases, here the ground lease specifically stated that it was subordinate to Millennium’s deed, but the SNDA provided that LG’s possession would survive the foreclosure. However, because the FDIC took over Millennium, federal law prohibited LG from enforcing the SNDA. As a result, the Court found that the plaintiff acquired the land free and clear of LG’s lease.
Kimzey Wash v. LG Auto Laundry