Wells Fargo Bank, N.A. v. Leath
Dallas Court of Appeals, No. 05-11-01425-CV (January 6, 2013)
Justices Moseley, O’Neill, and Brown (Opinion)
Dallas Court of Appeals, No. 05-11-01425-CV (January 6, 2013)
Justices Moseley, O’Neill, and Brown (Opinion)
The Texas Constitution requires that a home-equity loan (combined with all other outstanding loans secured by the homestead) not exceed 80% of the fair market value of the homestead. If, after receiving notice, a lender fails to cure a violation of this provision, the consequences are Draconian: the lender forfeits all security, principal, and interest on the loan. In this case, based on a jury’s determination of the value of the plaintiff’s home, the amount of the loan was 80.7% of the home’s value. The trial court therefore rendered judgment that the lender’s lien was void, ordered the principal and interest on the loan forfeited, and awarded attorneys’ fees to the borrower—even though the borrower had, at the closing of the loan, stipulated to a higher value for the home and represented that the loan did not exceed 80% of the home’s value. The Court of Appeals affirmed, rejecting the lender’s arguments that it was deprived of notice and an opportunity to cure any constitutional violation, that the jury’s valuation was not supported by legally or factually sufficient evidence, that the testimony of the borrower’s expert should have been excluded, and that the lender should at least be equitably subrogated for the portion of the loan proceeds used to pay off the borrower’s previous mortgage (about $280,000).
Plaintiff Lonzie Leath took out a home-equity loan in 2005. The loan was pooled and ultimately transferred to Wells Fargo. An appraisal at the time of the loan valued the home at $425,000, and the loan amount was $340,000—exactly 80% of the appraised value. When Leath defaulted on the loan in 2008, Wells Fargo sought an order of foreclosure. Leath answered and also filed a declaratory-judgment action to abate the foreclosure. Leath’s action was submitted to a jury on a single question asking for the fair market value of the property on the date of the loan. The jury returned a verdict of $421,400, making the $340,000 loan 80.7% of the homestead value. The trial court therefore rendered judgment that Wells Fargo’s lien was void, ordered the principal and interest on the loan forfeited, and awarded attorneys’ fees to Leath.
On appeal, Wells Fargo argued the trial court erred by declaring the lien invalid without submitting a question to the jury about Leath’s notification and Wells Fargo’s failure to cure the alleged constitutional violation. But the Court of Appeals noted that “when the evidence conclusively establishes a claim or element, the claim may be part of the judgment, even if no jury question on the claim was submitted.” The Court pointed to Leath’s answer in the foreclosure action, which specifically pleaded that the loan violated the Texas Constitution because it exceeded 80% of the home’s value, as conclusive evidence that Wells Fargo was notified of the constitutional violation, triggering its 60-day opportunity to cure. It was undisputed that Wells Fargo never attempted to cure after receiving Leath’s pleading. The Court did not address the fact that a key element of the notice—the value of the home—was in genuine dispute at the time, as demonstrated by its being the sole issue submitted to the jury.
Wells Fargo also argued that the evidence was legally and factually insufficient to support the jury’s valuation, relying primarily on Leath’s sworn statements in closing documents that the value of the home was $425,000 and that the loan amount did not exceed 80% of the home’s value. The Court, however, observed that the appraiser who performed the appraisal underlying the loan admitted at trial that $3,600 worth of unperformed electrical work should be deducted from the $425,000 valuation to arrive at the as-is market value. The jury’s valuation thus accounted for the appraised value referenced in the closing documents, as well as the appraiser’s explanation of the meaning of that figure. The Court concluded the jury’s valuation was supported by sufficient evidence.
Wells Fargo also complained that the trial court erred by admitting the testimony of Leath’s appraisal expert, urging that her opinions were not timely or properly disclosed. The Court noted that Leath’s expert testified the value of the home at the time of the loan was $268,000. The jury’s verdict of $421,400 was consistent with the testimony of Wells Fargo’s expert and reflected that the jury did not credit Leath’s expert. The Court therefore concluded admission of Leath’s expert testimony was, at most, harmless error.
Finally, Wells Fargo argued that, even if the loan did not comply with constitutional standards, Wells Fargo at least was entitled to equitable subrogation for the nearly $280,000 in loan proceeds advanced to pay off Leath’s prior debt. The Court of Appeals found that Wells Fargo had waived this issue, however, because it never raised it in the trial court. The Court did not comment on whether the theory would have been viable absent such a waiver.
