PNC Mortg. v. Howard

651 S.W.3d 154

PNC MORTGAGE, a Division of PNC Bank, N.A. Successor to National City Bank and National City Mortgage, a Division of National City Bank of Indiana, Appellants

v.John HOWARD and Amy Howard, Appellees

No. 05-17-01484-CV

Court of Appeals of Texas, Dallas.

Opinion Filed September 17, 2021

Mark D. Hopkins, Shelley Hopkins, Hopkins Law, PLLC, Austin, Brian Engel, Barrett Daffin Frappie Turner & Engel, LLP, Austin, Robert Davis Forster II, Barrett Daffin Frappie Turner & Engel, LLP, Addison, Robert F. Maris, Maris & Lanier, P.C., Dallas, for Appellant.

J. Neal Prevost, Prevost, Shaff, Mason & Carns PLLC, Plano, Julia F. Pendery, Cowles & Thompson, P.C., Dallas, for Appellee.

Before Justices Molberg, Reichek, and Garcia

OPINION ON REMAND

Opinion by Justice Reichek On remand, the Texas Supreme Court has directed us to consider two issues: (1) whether the equitable subrogation lien claim asserted in this case is time-barred and (2) whether language in the deed of trust precludes assertion of the subrogation claim. See PNC Mortg. v. Howard ("Howard II "), 616 S.W.3d 581, 585 (Tex. 2021) (per curiam). Because we conclude the subrogation lien claim brought by PNC Mortgage, a division of PNC Bank, N.A. ("PNC"), is barred by the applicable statute of limitations, we affirm the trial court's judgment declaring any lien or power of sale held by PNC on the subject property void and unenforceable. Based on our resolution of the first issue, it is unnecessary for us to address the second issue.¹

The relevant, undisputed facts are as follows. John and Amy Howard purchased a home in 2003 with two purchase-money mortgages. Two years later, the Howards refinanced these mortgages and executed a new note and deed of trust on the property. Using nearly all the proceeds from the refinancing loan, the Howards paid off the two existing mortgages. The new note and deed of trust were later assigned to National City Bank.

In 2008, the Howards stopped making payments on the note. In January 2009, National City Bank notified the Howards they were in default and, unless they cured the default, the maturity date of the loan would be accelerated. The note was then accelerated on June 19, 2009. Shortly thereafter, National City Bank merged with PNC.

All parties agree the acceleration of the note was proper and there is no allegation that the acceleration was abandoned. PNC does not dispute that National City Bank's acceleration is binding on it as the successor in interest on the note and deed of trust. PNC did not initiate foreclosure proceedings against the Howards until more than five years after the note was accelerated. In response to PNC's claim for foreclosure, the Howards asserted various affirmative defenses including the statute of limitations.

Under section 16.035 of the Texas Civil Practice and Remedies Code, a suit for foreclosure of a real property lien must be brought within four years after the cause of action accrues. See TEX. CIV. PRAC. & REM. CODE ANN. § 16.035. A cause of action to foreclose on a real property lien accrues when the loan is accelerated. Khan v. GBAK Props., Inc. , 371 S.W.3d 347, 353 (Tex. App.—Houston [1st Dist.] 2012, no pet.) ; see also GMAC v. Uresti , 553 S.W.2d 660, 663 (Tex. App.—Tyler 1977, writ ref'd n.r.e.) ("acceleration" is the change of maturity of a note from future to present). Because PNC did not seek foreclosure until more than five years after the debt was accelerated, PNC's ability to foreclose its deed of trust lien was barred by the statute of limitations. Id. PNC does not challenge this result. See PNC Mortg. v. Howard ("Howard I "), 618 S.W.3d 75, 83–84 (Tex. App.—Dallas 2019), rev'd on other grounds , 616 S.W.3d at 585 (Tex. 2021).

Instead, PNC asserts it is entitled to foreclose on the Howards’ property based on the doctrine of equitable subrogation. Equitable subrogation allows a third-party who discharges a lien on the property of another to step into the original lienholder's shoes and assume that lienholder's security interest on the property. LaSalle Bank Nat'l Ass'n v. White , 246 S.W.3d 616, 619 (Tex. 2007) (per curiam). Under this doctrine, if the contractual lien created as part of the refinancing is infirm for some reason, the lender can assert whatever lien rights were held by the previous lender whose loan was paid off. Howard II , 616 S.W.3d at 585.

Recently, in Federal Home Loan Mortgage Corp. v. Zepeda , 601 S.W.3d 763, 769 (Tex. 2020), the supreme court answered a certified question from the Fifth Circuit Court of Appeals and held that a refinancing lender's negligence in preserving its contractual rights does not deprive it of its right to enforce an equitable subrogation lien. This is because the lender's equitable rights arise and become fixed at the time the proceeds from the refinancing loan are used to discharge the earlier debt and are not affected by the new lender's subsequent conduct. Id. But the conduct at issue in Zepeda was the lender's failure to resolve a curable defect in the loan documents signed at closing, an infirmity not present in the loan to which the lender became subrogated. In contrast, the "infirmity" in PNC's deed of trust lien – the expiration of the limitations period – is, as explained below, as much a problem for the subrogation lien as it is for the deed of trust lien. While subrogation may permit a new lender to assume the prior lender's lien position, the rights assumed by the new lender are limited to only those that could have been asserted by the prior lien holder. Howard II , 616 S.W.3d at 584–85 ; see also Mid-Continent Ins. Co. v. Liberty Mut. Ins. Co. , 236 S.W.3d 765, 774 (Tex. 2007).

PNC correctly asserts there is no specific statute of limitations for subrogation actions. Brown v. Zimmerman , 160 S.W.3d 695, 700 (Tex. App.—Dallas 2005, no pet.). Instead, the action is subject to the same statute that would apply had the action been brought by the subrogee. Guillot v. Hix , 838 S.W.2d 230, 233 (Tex. 1992). In this case, if the original lender had brought a suit to enforce its real property lien, the suit would be governed by the four-year limitations period found in section 16.035. Zimmerman , 160 S.W.3d at 701. Accordingly, the same statute governs PNC's subrogation action seeking that relief. Id.

The more difficult issue is determining when PNC's cause of action to enforce its subrogation lien accrued. A claim to foreclose a real property lien must be based on the borrower's failure to pay a secured debt that has either matured under its own terms or had its maturity properly accelerated. See Wilmington Tr. Nat'l Ass'n. v. Rob , 891 F.3d 174, 177–78 (5th Cir. 2018) ; Famous Koko, Inc. v. Member 1300 Oak, LLC , No. 05-17-00906-CV, 2018 WL 6065256, at *3 (Tex. App.—Dallas Nov. 20, 2018, no pet.) (mem. op.). Limitations on the lien claim begins to run on the date of maturity. Holy Cross Church of God in Christ v. Wolf , 44 S.W.3d 562, 566 (Tex. 2001). Because a refinancing lender steps into the shoes of the original lender in a subrogation claim, the question arises as to whether the maturity date of the original loan or of the refinancing loan controls. Unfortunately, Texas case law gives conflicting answers to this question.

The issue was first addressed nearly one hundred years ago in Kone v. Harper , 297 S.W. 294 (Tex. Civ. App. – Waco 1927), aff'd , 1 S.W.2d 857 (Tex. Comm'n App. 1928). In Kone , the debtor asserted that limitations barred the refinancing lender's subrogation claim because the debt that had been paid off had a maturity date of more than four years before the foreclosure suit was brought. Id. at 299. The debtor contended that, because the refinancing lender steps into the shoes of the original lender for purposes of subrogation, the maturity date of the original loan should control for limitations purposes. The Waco court disagreed, stating that the refinancing acted in the same way as if the original debt had been renewed and extended and, therefore, the relevant maturity date was the one for the new loan. Id. at 299-300. Ten years later, in Hays v. Spangenberg , 94 S.W.2d 899 (Tex. Civ. App. – Austin 1936, no writ), the Austin court followed Kone and held that limitations begins to run on a subrogation claim on the "due date" of the refinancing loan, rather than the date the paid-off loan would have become due. Id. at 902.

In 2005, this Court addressed a debtor's assertion of limitations as a defense to a subrogation lien claim in Brown v. Zimmerman , 160 S.W.3d at 701. Although we did not directly address the lien claim's accrual date, two opinions out of the United States District Court for the Southern District of Texas, Gillespie v. Ocwen Loan Servicing, LLC and Zepeda v. Federal Home Loan Mortgage Ass'n , have read Zimmerman to hold that an equitable subrogation lien claim accrues at the time the original loan is paid off. See Gillespie v. Ocwen Loan Servicing, LLC , No. 4:14-CV-00279, 2015 WL 12582796, at *4 n.5 (S.D. Tex. Oct. 28, 2015) ; Zepeda v. Fed. Home Loan Mortg. Ass'n. , No. 4:16-cv-3121, 2018 WL 781666, at *5 (S.D. Tex. Feb. 8, 2018), rev'd , 967 F.3d 456 (5th Cir. 2020).² We do not agree with this reading of our opinion.

The facts in Zimmerman were unusual. The case began as a divorce action. Zimmerman , 160 S.W.3d at 699. Husband was the founder and president of a bank that refinanced a home loan debt owed by Wife. Id. at 698–99. Husband and Wife then signed a separate contract in which they agreed to pay off the refinancing note with proceeds from their life insurance policies. Id. at 699. Shortly thereafter, the parties divorced and the separate agreement to pay off the loan was nullified by the trial court. Id. Although the real property made the subject of the loan was awarded to Wife, the divorce decree did not address the parties’ liability on the refinancing note, and Husband's bank placed a lien on the property. Id. Based on these facts, and the unique loan repayment plan,...