Home Equity Lending – Key Bankruptcy Decisions

DEVELOPMENTS IN TEXAS HOME EQUITY LITIGATION IN BANKRUPTCY COURT

I. BACKGROUND

Since home equity lending was introduced in Texas one should not be surprised to learn that there is a body of bankruptcy court opinions construing the Texas constitutional home equity laws and deciding the validity of home equity security interests. The chances of a lender with an insured home equity lien navigating in the bankruptcy court can be expected because upon default and foreclosure efforts by the lender the borrowers will seek to reinstate their mortgages, walk away from them or litigate the validity of them in the bankruptcy forum. More forfeitures of home equity loans occur in the bankruptcy courts than in state or federal courts.

Key Decisions. The Fifth Circuit has been on the front lines having to make some of the key decisions in interpreting Tex. Const. art. XVI, § 50. By relying on certified questions from the Texas Supreme Court in Doody v. Ameriquest Mortgage Co., 49 S.W.3d 342 (Tex.2001) the court determined that a constitutional violation under Section 50(a)(6) the Texas Constitution results in a (1) voidable rather than a void lien, (2) the legal injury occurs when the lien is created, and (3) there is nothing undiscoverable about the lien. Priester v. JP Morgan Chase Bank, N.A., 708 F.3d 667, 674 (5th Cir. 2013) cert. denied, 134 S. Ct. 196, 187 L. Ed. 2d 256 (2013). The net effect is that even if a home equity lender makes a patently invalid home equity loan and the borrower fails to discover it within four years of the closing the lien is valid because it was not invalidated. The lien was voidable meaning that it could potentially be invalidated but the borrower’s failure to do so within four years of the closing resulted in the otherwise voidable lien being validated. The borrower’s remedy was to timely notify the lender of the constitutional violation and giving the lender the opportunity to cure the violation within sixty days of notification. The failure to cure within the sixty days of notification results in the forfeiture of lien. In some instances the lien is incurable as a matter of law. There is nothing inherently undiscoverable about the constitutional violation because the borrower should be given a complete package of the loan documents at the closing and has the ability to determine whether there is an issue. In some instances their attorney’s find such a violation years later as they are ready to file for bankruptcy. In some cases the lender has proceeded on to file a claim in the bankruptcy court on the belief that the debtor’s notice is untimely because it was made more than four years after the closing. The next section becomes important.