Deutsche Bank Nat'l Trust Co. v. Burke

286 F.Supp.3d 802

DEUTSCHE BANK NAT'L TRUST CO., as Trustee of the Residential Asset Securitization Trust 2007–H Under the Pooling and Servicing Agreement Dated June 1, 2007, Petitioner,

v.John BURKE and Joanna Burke, Defendants.

CIVIL ACTION NO. H–11–1658

United States District Court, S.D. Texas, Houston Division.

Signed December 21, 2017

Mark Daniel Hopkins, Shelley L. Hopkins, Hopkins Law, PLLC, Austin, TX, for Petitioner.

Constance Pfeiffer, Beck Redden et al, Houston, TX, for Defendants.

OPINION ON REMAND

Stephen Wm Smith, United States Magistrate Judge

Judge Learned Hand believed that above the portals of every courthouse should be inscribed the famous admonition of Oliver Cromwell: "I beseech ye in the bowels of Christ, think that ye may be mistaken."¹ This opinion is written in that spirit.

I. Procedural Background

Deutsche Bank brought this suit to foreclose on a home equity lien. After a bench trial in 2015, this court ruled in favor of the homeowners, holding that Deutsche Bank based its foreclosure claim entirely upon a deed of trust assignment which was void and invalid. Dkt. 94. Among other deficiencies, the purported assignment was executed by an entity (MERS) acting solely as agent for a principal (IndyMac Bank) that no longer existed. After entry of judgment, Deutsche Bank filed a motion to alter or amend the judgment, which was denied in a written opinion.² One of the arguments considered and rejected was that MERS had executed the assignment as a principal on its own behalf, rather than merely as agent on behalf of a disclosed principal. Id. at 960.

On appeal the Fifth Circuit disagreed, concluding in an unpublished opinion that MERS had validly assigned its right to foreclose under the deed of trust to Deutsche Bank. The final judgment was vacated and the case remanded to this court "to determine whether Deutsche Bank met the remaining requirements to foreclose under Texas law and, if so, grant a final judgment for Deutsche Bank and rule on any outstanding request for attorneys' fees." Deutsche Bank Nat'l Trust Co. v. Burke , 655 Fed.Appx. 251, 255 (5th Cir. 2016).

Upon remand, this court directed the parties to submit additional briefing on whether Deutsche Bank had satisfied the requirements of the Texas Constitution for a valid and enforceable home equity lien. Dkt. 119. The parties were also directed to consider the impact of a recent decision by a Texas appellate court upon the panel's ruling.

For reasons explained below, the court finds that the Burkes' constitutional challenges to the lien have no merit. However, binding Texas Supreme Court precedent,³ as well as at least three Fifth Circuit decisions adhering to that precedent,⁴ compel the conclusion that the panel's Erie guess about the validity of the assignment is clearly erroneous and, if followed, would work a manifest injustice.

II. Validity of Lien under the Texas Constitution

When the Burkes initially applied to IndyMac Bank for a home equity loan in 2007, they were turned down. Both were then retired, and neither had employment income. Sometime later, another representative of IndyMac Bank called to advise that the loan would be approved, and that the Burkes' previous contact at the bank had been fired. On May 21, 2007, Joanna Burke signed a note promising to repay a loan from Indymac Bank in the amount of $615,000 plus interest, secured by a deed of trust placing a lien on the Burkes' homestead in Kingwood, Texas. Four days after closing, the Burkes received loan documents from IndyMac, including an unsigned loan application falsely claiming that the Burkes had employment income of $10,416.67 per month. Because the Burkes had never claimed any employment income during the loan process, they promptly notified the bank of the error. The bank took no steps to cure that defect.

Article XVI Section 50 of the Texas Constitution imposes exacting requirements for a homestead lien in Texas. A constitutionally noncompliant lien is invalid unless and until the noncompliance is cured. Wood v. HSBC Bank USA, N.A., 505 S.W.3d 542, 543 (Tex. 2016). The Burkes maintain that the home equity lien failed to satisfy the requirements of Section 50 in several respects:

1. The application for the extension of credit was not voluntary, written, and consented to by the homeowners, in violation of Tex. Const. art. XVI, § 50 (a)(6)(A), (Q)(v);

2. The lender failed to cure the defect in the loan application after notice from the homeowners, violating § 50(a)(6)(Q)(x);

3. The value of the total indebtedness exceeded 80% of the home's total value, violating § 50(a)(6)(B);

4. The loan closed sooner than 12 days after the borrower applied for it, violating § 50(a)(6)(M)(i);

5. The loan closed sooner than one day after the homeowner received a copy of the loan application, violating § 50(a)(6)(M)(ii); and

6. The lender failed to provide a copy of the loan application documents at closing, as required by § 50(a)(6)(Q)(v).

Dkt. Nos. 121, 131. For reasons explained below, none of these challenges have merit.

The first two challenges center on the bank's falsification of the Burkes' employment income on the unsigned loan application. While this may well be evidence of the bank's intent to defraud underwriters and subsequent investors, it does not signify a violation of the cited constitutional provisions.⁵ Subsection 50(a)(6)(A) requires "a voluntary lien on the homestead created under a written agreement with the consent of each owner." It says nothing about the loan application, which may be given orally or electronically and need not be submitted in writing. Cerda v. 2004–EQR1 L.L.C., 612 F.3d 781, 788–89 (5th Cir. 2010) (citing 7 Tex. Admin. Code § 153.12(2) ). The other cited provision, Subsection 50(a)(6)(Q)(v), requires only that the owner receive a copy of the final loan application as well as all documents signed by the owner at closing. Those requirements were met here. While the final loan application may have contained incorrect (and even fraudulent) information, it was the final loan application, and it was provided to the borrowers as required.

The third challenge—excessive loan to home value ratio—is unsupported by evidence at trial. At closing the Burkes signed an affidavit in which they expressly represented that the amount of the loan "does not exceed eighty percent (80%) of the fair market value of the Property on the date the Extension of Credit is made." See Texas Home Equity Affidavit and Agreement § I.E. (attached as Ex. A to D.Ex. 11). The amount of the loan was $615,000, and no evidence was introduced at trial suggesting that this loan amount exceeded 80% of fair market value. Nor did the Burkes offer evidence to justify disregarding the representation of value made in their affidavit at closing.

The closing date challenges (items 4 and 5) are similarly without merit, but for different reasons. The alleged violation of Subsection 50(a)(6)(M)(i)—that the loan must close no earlier than 12 days after the loan application—hinges on the assertion that the Burkes never applied for the loan they received. They contend that their initial loan application was turned down, and they never reapplied. However, the most natural interpretation of the events here is that they constituted a single loan transaction—after the initial rejection, the Burkes' loan application was simply reactivated by the bank, and the Burkes ratified that process by going forward with the loan transaction. See Cerda, 612 F.3d at 789 (holding that a final loan amount higher than originally applied for did not trigger another 12–day waiting period, since it was all "part of the same loan transaction."). As for the alleged violation of Subsection 50(a)(6)(M)(ii)—that the loan must close no less than one business day after the date the homeowner receives a copy of the loan application—the bank correctly observes that this provision of the Texas Constitution did not take effect until December 4, 2007, more than six months after the Burkes' loan was closed. See TEX. CONST. art. 16, § 50, historical notes (citing Acts 2007, 80th Leg., H.J.R. No. 72). Thus the closing date challenges are not well taken.

The sixth and final challenge is the failure to provide a copy of the final loan application "at closing." This contention misreads Subsection 50(a)(6)(Q)(v), which provides as follows:

(v) at the time the extension of credit is made, the owner of the homestead shall receive a copy of the final loan application and all executed documents signed by the owner at closing related to the extension of credit[.]

(emphasis added). The final loan application is thus not due at closing, but "at the time the extension of credit is made." This wording makes clear that these two dates are not necessarily synonymous. This makes sense, because the borrower's mandatory three-day revocation period renders it unlikely that the actual extension of credit will occur the same day as the closing. The record in this case does not disclose exactly when the extension of credit was made. It is undisputed the Burkes received the loan application four days after closing. Transcript (Dkt. 74) at 79. Absent proof that credit was actually extended before that date, there is no basis to invalidate the lien on this ground.

For all these reasons, the Burkes' contention that the home equity lien was constitutionally deficient must be rejected.

III. Validity of Assignment under Texas Common Law

Nevertheless, this court remains convinced that Deutsche Bank is not entitled to foreclose on the Burkes' property, because the assignment underlying its claim is void. Acutely aware that the panel reached the opposite conclusion, this court accepts that the basis for its earlier judgment was misunderstood. The balance of this opinion aims to correct that misunderstanding, and show how starkly the panel's conclusion deviates from binding precedent of both the Texas Supreme Court and the Fifth Circuit. See Seagraves v. Wallace, 69 F.2d 163,...