Fifth Circuit Applies Four Year Statute of Limitations to Home Equity Loan Violations

It is interesting to see when United States federal district courts differ with Texas appellate courts over the interpretation of Texas law. That was the case when it came to determining when a borrower could file suit against the lienholder for violation of the home equity loan provisions under Tex. Const. art. XIV, Section 50(a)(6). Two Texas appellate courts held that a claim could not be filed more than four years after the date of the loan closing. Rivera v. Countrywide Home Loans, Inc., 262 S.W.3d 834, 839 (Tex. App.–Dallas 2008, no pet.); Schanzle v. JPMC Specialty Mortg. LLC, 2011 Tex. App. LEXIS 1748 (Tex. App. –Austin 2011, no pet.).

Three federal district courts rejected the four-year limitation period applied in Rivera. These cases are: Santos v. CitiMortgage, Inc., 2012 U.S. Dist. LEXIS 43775 (N.D. Tex. 2012); Bolton v. Bank of N.Y. Mellon, 2012 U.S. Dist. LEXIS 156505
(N.D. Tex. 2012); and Smith v. JP Morgan Chase Bank, N.A., 825 F. Supp. 2d 859 (S.D. Tex. 2011).

On February 13, 2013, the Fifth Circuit Court of Appeals in Priester v JP Morgan Chase, 2013 U.S. LEXIS 3097 (5th Cir. 2013) followed the Texas court of appeals holdings of Rivera and Schanzle and applied the residual four year statute of limitations at Section 16.051 of the Texas Civil Practices & Remedies Code. That is the statute that provides that when there is no express statute of limitations, except an action for the recovery of real property, then the action must be brought not later than four years after the day the cause of action accrues.

When do home equity loan violations accrue? When the borrower has a “legal injury.” In Priester the violations were clear. The loan was closed in the borrower’s home instead of an office of an attorney, lender or title company and the borrowers did not receive notice 12 day disclosure notice prior to the closing. Both of these actions violate the express provisions of the Texas Constitution. However, the Texas Constitution allows lenders to cure violations of the constitution at Section 50(a)(6)(Q). Therefore liens that are contrary to Section 50(a) are voidable rather than void. The “legal injury” for determining when the statute of limitations began to run was the creation of the unconstitutional lien. The lien was created at the closing date. Therefore, if a home equity loan violation is not filed within four years after the closing of the loan then the claim is barred by limitations. The Fifth Circuit affirmed the dismissal of the case under Federal Rule 12(b)(6).

Now there will be consistency between the decisions in federal court and state court on when the statute of limitations will apply in home equity loan cases. Lenders can rely on this date as a cut off point for litigation. Borrowers should not wait long to notify the creditor of violations of Section 50(a)(6).