Home Equity Loan Complaints – Beware of Sec 16.069 of the TCPRC

Beware of Section 16.069 of the Texas Civil Practices and Remedies Code

The Texas Supreme Court has not ruled on the applicable statute of limitations for alleging non-compliance with the Texas Constitution for home equity loans. Texas appellate courts and federal courts have uniformly applied the residual four year statute of limitations at Section 16.051 of the Texas Civil Practices and Remedies Code as to grounds of non-compliance. Priester v. JP Morgan Chase Bank, N.A., 708 F.3d 667 (5th Cir. 2013) cert. denied, 134 S. Ct. 196 (U.S. 2013); Williams v. Wachovia Mortgage Corp., 2013 WL 3477570 (Tex. App. – Dallas 2013, pet. filed); 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 WL 832170, at *4 (Tex.App.-Austin 2011, no writ).

Bankruptcy Court for the Western District of Texas

The first reported bankruptcy decision in Texas to apply the statute of limitations to a home equity loan case was in the case of In re Ortegon, 398 B.R. 431 (Bank. W.D. Tex. 2008). There the home equity loan was made on April 16, 2003, and the debtor filed for bankruptcy on July 6, 2007. The bankruptcy court applied the four year limitations under section 16.051 of the Texas Civil Practices & Remedies Code.

Bankruptcy Court for the Eastern District of Texas: Mixed Results

In the case of In re Chambers, 419 B.R. 652, 680 (Bankr. E.D. Tex. 2009) subsequently aff’d, 2013 WL 5915238 (5th Cir. May 3, 2013) the bankruptcy trustee and a non-debtor spouse filed suit to invalidate a home equity lien taken out in 1999. The bankruptcy court found that debtors’ claims were barred by limitations because the complaint had to be filed by 2003 to challenge the lien. The court applied Rivera from the Dallas Court of Appeals and Ortegon from the Bankruptcy Court for the Western District of Texas in its holding.

But in the case of In re Johnson, 2009 WL 2982783 (Bankr. E.D. Tex. 2009) the same bankruptcy court found that the debtor’s claim to invalidate a home equity loan closed in 2001 and the complaint not filed until 2007 was not barred by limitations. The parties even agreed that the four year statute of limitations applied in that case. The bankruptcy court disregarded the parties agreement and wrote that it “appears, at first blush, that the Johnsons claims are barred by limitations.” The bankruptcy court invalidated the lien.

Then in the case of In re Shankles, 2013 WL 5348879 (Bankr. E.D. Tex. Sept. 23, 2013) the bankruptcy court invalidated a home equity lien that was placed on agricultural property that the borrower verified by affidavit that the property was not of agricultural use. The loan was taken out in July 2007 and the complaint was made in September 2011. No notice of non-compliance was made within four years after the closing. The court found that the complaint was not barred by the statute of limitations.

What made the decision in Johnson and Shankles different from the holdings in Ortegon or Chambers decision? The difference was that the court applied Section 16.069 of the Texas Civil Practices and Remedies Code as part of the objections to claims process:

(a) If a counterclaim or cross claim arises out of the same transaction or occurrence that is the basis of an action, a party to the action may file the counterclaim or cross claim even though as a separate action it would be barred by limitation on the date the party’s answer is required.

(b) The counterclaim or cross claim must be filed not later than the 30th day after the date on which the party’s answer is required.

The bankruptcy court in In re Johnson and In re Shankles analyzes the filing of a proof of claim as analogous to the filing of a complaint in a civil action, with the bankrupt’s objection the same as the answer. The bankruptcy court in the case of Ortegon made no discussion of this and the creditor filed a proof of claim in that case.

Sigaran v. U.S. Bank Nat. Ass’n Raises Questions About Johnson and Shankles Decisions from Eastern District of Texas

The bankruptcy court’s rationale in the case of In re Johnson and In re Shanklesis questionable in light of the case of Sigaran v. U.S. Bank Nat. Ass’n, 13-20367, 2014 WL 1688345 (5th Cir. Apr. 30, 2014) where the court affirmed dismissal of a complaint based on constitutional violations under section 50(a)(6) of the Texas Constitution as being time-barred. The borrowers contended that their constitutional claims were “cast primarily as defenses” to the bank’s foreclosure action and therefore the statute of limitations did not apply. The court wrote:

“The problem with these arguments, as the district court correctly noted, is that this Court has previously held the four-year residual statute of limitations applies to constitutional infirmities under section 50(a)(6) of the Texas Constitution. See Priester, 708 F.3d at 673–74. Like the Sigarans, the borrowers in Priester, in an attempt to avoid foreclosure, sought a declaratory judgment that the lien against their home was void because it was executed in violation of section 50(a)(6) of the Texas Constitution. Id. at 671–72. We “conclude[d] that a [four-year] limitations period applies to constitutional infirmities under Section 50(a)(6),” id . at 674, and we also held that the claim accrues at the time the loan is made, id. at 676.”

Although the Sigaran case was not a bankruptcy case the same rationale should have applied in bankruptcy court in the Johnson and Shankles decisions that are contradictory to Texas state court cases and the Fifth Circuit. The mere filing of a proof of claim is no different than a creditor filing an in rem procedure under Rule 735 of the Texas Rules of Civil Procedure to foreclose the home equity loan. But in bankruptcy court the creditor’s proof of claim is viewed as the filing of a lawsuit. That being the case why were the defenses resurrected in bankruptcy court but not in federal court litigation such as in Sigaran? Moreover, the debtor’s complaint to invalidate the home equity lien was filed as a counterclaim to a complaint for non-dischargeability based on a fraudulent financial statement and was not actually a “defense” to the fraudulent financial statement but a new cause of action to invalidate the home equity lien. The only “notice” of the constitutional violation was made in response to a motion to lift stay that was filed more than four years after the closing. The Shankles decision is extremely troubling because the borrower made vague allegations of constitutional violations more than four years after the closing and later filed a counterclaim for declaratory relief to invalidate the home equity lien as a defense to the complaint to determine non-dischargeability of debt based on a false financial statement. The borrower’s counterclaim to invalidate the home equity lien was not a defense to the complaint for fraud and did not fit within the purpose of section 16.069 of the Texas Civil Practices and Remedies Code.

In light of In re Johnson and In re Shankles from the Bankruptcy Court for the Eastern District of Texas, a creditor should check with an attorney before filing a proof of claim in bankruptcy court if the borrower has previously asserted constitutional violations against the home equity loan.