Four-Year Statute of Limitations Applied in Home Equity Litigation in Texas

Despite numerous provisions in the Texas Constitution and statutory regulations that establish how to make a home equity loan, the Texas Legislature did not include a law establishing the statute of limitations for bringing a home equity lien violation.

While there has been conflict in this area most cases are concluding that limitations runs four years after the closing date. There isn’t a “discovery rule.” That is, a borrower can claim that he never learned of the violation until later – usually after a foreclosure suit is brought and borrower’s counsel starts examining the closing documents for possible violations.

Four- Year Limitation From Closing Date

The Texas Supreme Court has not had a case to determine this issue but three Texas court of appeals have ruled that the residual four-year statute of limitations applies in home equity litigation cases. Williams v. Wachovia Mortgage Corp., 2013 WL 3477570 (Tex. App. – Dallas July 11, 2013, no writ history); Rivera v. Countrywide Home Loans, Inc., 262 S.W.3d 834, 839 (Tex. App. – Dallas 2008, no pet.) and Schanzle v. JPMC Specialty Mortg. LLC, 2011 Tex. App. LEXIS 1748 (Tex. App. – Austin 2011, no pet.)

Two federal cases have followed the rationale of the Texas court of appeals cases. In Priester v. JP Morgan Chase Bank, N.A., 2013 U.S. App. LEXIS 3097 (5thCir. 2013) the Fifth Circuit Court of Appeals in New Orleans applied what is called an “Erie guess” (where federal courts decide how to apply the appropriate state law in cases where there is no definitive answer in that state) and ruled that the four-year residual statute of limitations at section 16.051 of the Texas Civil Practices and Remedies Code applied to claims brought under 50(a)(6) of the Texas Constitution.

Following Priester is the recent case of Prutzman v Wells Fargo Bank, 2013 WL 4063309 (S.D. Tex. 2013) from the district court in the Southern District of Texas. The Prutzman case involved five violations of the Texas Constitution at Article XVI, § 50(a)(6) including: (1) closing the loan before the 12-day waiting period as required by §50(a)(6)(M)(I); (2) failing to disclose the constitutional restrictions imposed on lenders required by §50(a)(6)(M)(K) and §50(g); (3) charging more than three percent of the total loan amount for fees associated with funding and closing prohibited under §50(a)(6)(E); (4) enforcing a second home equity loan on a homestead with an existing home equity loan as prohibited by §50(a)(6)(k); and (5) failing to cure constitutional violations within sixty days after notice has been giving under §50(a)(6)(Q)(x). Because the loan was taken out in 2004 and the suit was not filed until 2011, more than seven years after the closing, the case could not proceed.

The district court found that “[A]fter reviewing Priester’s constitutional analysis, the court finds that Priester’s holding applies to §50(a)(6) in its entirety.” The court found that the second home equity lien was voidable and not void and was not a cloud on the title because it could be cured. The “cure is thus constrained by the residual four-year limitations period.” The court wrote that “Priester remains controlling, and the residual four-year statute of limitations applies to all § 50(a)(6) claims.” Prutzman v. Wells Fargo Bank, N.A., 2013 WL 4063309 (S.D. Tex. Aug. 12, 2013).

The Fifth Court of Appeals in Dallas recently followed the rationale of Priester in the case of Williams v. Wachovia Mortgage Corp., 2013 WL 3477570 (Tex. App. – Dallas July 11,
2013, no writ history).The Fifth Court of Appeals found the analysis in Priester to be persuasive and that the four-year statute of limitations would apply to home equity liens because non-compliance renders the liens voidable, not void. Although Kroupa did not sign the home equity lien the defect was voidable because non-compliance was subject to the cure provision. The court found that Kroupa first learned of the home equity lien in 2002 but did not file her suit until 2008 which was well outside the four-year statute of limitations. The court affirmed the trial court’s grant of summary judgment that barred the suit based on the four-year statute of limitations under section 16.051 of the Texas Civil Practices and Remedies Code.

No Discovery Rule

What if the borrower does not discover the errors in the home equity loan until more than four years after the closing? The district court in Prutzman found that the Discovery Rule did not apply to the §50(a)(6) violations of the Texas Constitution. The Priester court clearly held that “the legal injury rule applies to the creation of unconstitutional liens.” Priester, 708 F.3d at 675. The court ruled that while Prutzman may not have known that he suffered an injury when he entered into the second home equity loan, there is no evidence that his injury was “inherently undiscoverable.” The borrower knew of the existence of both home equity loans and could have reviewed Texas law to determine that two outstanding home equity loans on a homestead violate the Texas Constitution. The court reaffirmed that the discovery rule did not apply to claims arising under § 50(a) (6). Id. at 676–77; Prutzman v. Wells Fargo Bank, N.A., 2013 WL 4063309 (S.D. Tex. Aug. 12, 2013).

Borrowers will need to examine their closing files carefully to determine whether there could be violations of the Texas Constitution and not wait to review the file until the lender begins enforcement proceedings.