Lender Strikes Back – But Appeals Court Reverses In Personum Legal Fee Award Against Borrowers on Non-Recourse Home Equity Note

Murphy v Wells Fargo Bank, N.A. , 2013 Tex. App. LEXIS 1283 (Tex. App. — Houston [14th Dist.] 2013, no pet. history)

When a home equity loan goes into default and must be enforced, the best thing a lender can hope for is enforcement of the note and lien at minimal cost and without a significant challenge by the home owner obligated on the note.

When the debtor does make a challenge to the lender’s foreclosure – be prepared. The cost of recovery can be significant and the legal fees associated with foreclosing the home equity note can only be assessed against the real property serving as collateral and not personally against the debtor. That is because the Texas Constitution provides for personal liability only in the event that the borrower obtained the extension of credit by fraud. Thus, in the absence of fraud, legal fees incurred in defending the case are collectable against the real property and not against the debtor. Moreover, contested home equity loan cases result in delay of the foreclosure, the loan accruing interest, the property declining in value and the borrower in some cases residing in the home without paying for taxes or insurance. Lenders must be diligent to prevent the non-paying debtors from abusing the collateral and protecting their collateral valuation during this delay.

In the case of Murphy v Wells Fargo Bank, N.A., 2013 Tex. App. LEXIS 1283 (Tex. App. — Houston [14th Dist.] 2013, no pet. history), the lender successfully recovered legal fees personally against the borrowers at the trial court level on a non-recourse home equity note by reason of being successful in its counterclaim under that act. The borrower filed a complaint under the Texas Declaratory Judgment Act (DJA) accusing the bank of not refinancing the debt, fraud and Deceptive Trade Practices. The borrower failed in his complaint under the DJA, but the lender prevailed on its counterclaim. Accordingly, the trial court granted legal fees in favor of the lender because the DJA provides for recovery under Section 37.009 in its discretion.

Not so fast according to the 14^th Court of Appeals in Houston that reversed the award. The Texas Constitution § 50(a)(6)(C) and the home equity note documents provide for non-recourse liability except in the case of fraud. The lender’s counterclaim was effectively for enforcement of the note and the DJA could not be used to enforce the contract claims.

The Murphy decision included a strong dissenting opinion that argued that the DJA provided a proper statutory basis for recovery of legal fees because the lender successfully defended the DJA claim and because it was a party who obtained declaratory relief.

Legal Fees Otherwise Available in Declaratory Judgment Act Cases

In a DJA case, the trial court is authorized to award costs and “reasonable and necessary” attorney’s fees that are “equitable and just.” Tex. Civ. Prac. & Rem. Code § 37.009; Querencia Props. v. New Querencia Capital, 224 S.W. 3d 348, 352-353 (Tex. App. — Dallas 2006, no pet.); Indian Beach Prop. Owners’ Ass’n v Linden, 222 S.W. 3d 682, 706 (Tex. App. — Houston [1st Dist.] 2007, no pet.). The decision to grant or deny attorney’s fees in declaratory judgment actions is within the discretion of the trial court. Neeley v. W. Orange-Cove Consol. Indep. Sch. Dist., 176 S.W. 3d 746, 799 (Tex. 2005) A non-prevaling party can be awarded attorney’s fees if it equitable and just under the circumstances. Quick v. Plastic Solutions of Texas, Inc., 270 S.W. 3d 173, 191 (Tex. App. — El Paso 2008, no pet.)

In the Murphy case the lender correctly filed a counterclaim in response to the borrowers’ claim under the DJA to invalidate the home equity note. Based on non-home equity note cases under the DJA the lender’s judgment for legal fees should have prevailed as long as the award was confined within the limits of that statute. Courts so far are not taking that view and reviewing whether such an award would violate the express terms of the Texas Constitution that does not allow for in personum liability in the absence of fraud.

Will there Be a Change in the Law?

I sense that there will be a movement in the courts to change this predicament for lenders. Non-recourse liability presumes that there will be an efficient and speedy recovery of the property. When the debtor affirmatively attacks the validity of the note and lien through the DJA, then the full limits of the DJA should be available to all parties.

If the lender and borrower stay within the terms of the Texas Constitution then recovery on the note would be non-recourse. If the borrower strays into other statutes such as the DJA or Deceptive Trade Practices Act where legal fees are available in those acts, then legal fees should be recoverable in the discretion of the courts. The debtors in the Murphy case escaped a close call that would have changed the landscape of home equity loan litigation.