11 Jun Texas Judicial Update
Rivera v. Bank of Am., N.A. (5th Cir. 4/23/2015), U.S. App. LEXIS 6753
The Fifth Circuit Court of Appeals (the “Court”) recently issued an unpublished opinion regarding a mortgage foreclosure case from the United States District Court for the Eastern District of Texas where Bank of America (the “Bank”) and Mortgage Electronic Registration Systems (“MERS”) (collectively “Lender”) abandoned the acceleration of the loan by accepting payments made by the borrowers. The Court held that where mortgage borrowers received an acceleration notice in 2004, the Lender abandoned acceleration by continuing to accept payments from the borrowers in 2006 until Lender invoked its right to accelerate the balance in 2010, and therefore, Lender’s 2013 foreclosure action was within the 4-year statute of limitations period under Texas law.
Factual and Procedural Background
In 2001, the borrowers obtained a home-equity loan to refinance their mortgage. The loan was secured by a deed of trust naming MERS as the beneficiary. The note was ultimately assigned to the Bank. The loan agreement contained an acceleration clause that entitled the Lender, in the event of several missed payments, to accelerate the loan. This required the borrower to either immediately pay the total balance or face foreclosure.
The borrowers defaulted on their loan payments in 2003. In January 2004, the borrowers received a letter informing them that the Lender intended to invoke the acceleration clause. In May 2004, the borrowers filed for Chapter 13 bankruptcy. After their first bankruptcy petition was dismissed in April 2005, the borrowers again filed for bankruptcy in May 2005, and their second bankruptcy filing was closed in July 2005.
In 2006, the borrowers made, and the Lender accepted, several payments on the note, which were applied to the balance. These payments brought the loan current through March 2004. In 2010, the Lender sent the borrowers a notice of default and intent to accelerate the entire balance of the loan.
In 2012, the Lender sent the borrowers a loan modification application under the federal Making Homes Affordable Program. The borrowers repeatedly sent completed applications and forms to Lender, only to hear from the Lender either that the documents had been sent to the wrong place, or that the documents were incomplete. In February 2013, the Lender notified the borrowers that their home would be posted for foreclosure sale on March 5, 2013.
After inquiring again with the Lender about the status of their loan-modification application and after receiving no meaningful response, the borrowers sued the Lender in Texas state court seeking a declaratory judgment prohibiting the Lender from foreclosing because the statute of limitations had run.
Lender removed the case to federal district court and the district court granted summary judgment to the Lender. The borrowers appealed arguing that the Lender was time barred from foreclosing on their home.
Under Texas law (Tex. Civ. Prac. & Rem. Code § 16.035(a)), a secured lender must foreclose on its real property lien not later than four years after the cause of action accrues. If the deed of trust secured by real property contains an optional acceleration clause, default does not start limitations running on the note. Rather, the action accrues only when the holder actually exercises its option to accelerate. Even if the noteholder notifies the borrower of the holder’s intent to accelerate, the holder can abandon acceleration if the holder continues to accept payments without exacting any remedies available to it upon declared maturity.
According to the Court, the central issue on appeal was whether the Lender “abandoned acceleration” by continuing to accept payments from the borrowers in 2006, or whether the cause of action accrued when the borrowers were first notified of the Lender’s intent to accelerate in 2004. The borrowers admitted that they made payments in 2006, which the Lender applied retroactively to the borrowers’ payments. But, relying on an intermediate appellate decision, the borrowers contended there exists a fact issue whether the Lender exacted remedies and thus acted inconsistently with abandonment. Lender countered that, between its acceptance of the borrowers’ payment in 2006, the notice of default in 2010, and the borrowers’ loan-modification application documents through 2012, the parties treated the Lender’s prior acceleration as abandoned until the Lender invoked the acceleration clause in 2010. In reply, the borrowers stressed that their 2006 payment was applied “retroactively” to their missed payments from 2004 and that the Lender failed to foreclose on the property prior to August 2011. The Lender argued that they provided sufficient summary judgment evidence to create a fact issue whether acceleration had been abandoned.
The Court held that the Lender abandoned its prior acceleration by accepting continued payments and that its foreclosure claim was timely. The undisputed evidence established that the Lender accepted payments from the borrowers in 2006. The borrowers did not point to contrary summary-judgment evidence that the Lender nonetheless invoked its right to accelerate the loan and foreclose at any other point before 2010. Thus, the Lender effectively abandoned its prior acceleration in 2004 by accepting payments in 2006. Accordingly, the cause of action did not accrue until the Lender again invoked the acceleration clause in 2010. Therefore, the Lender’s foreclosure action in 2013 was within the four-year limitations period.