by Ryan Bourgeois, Esq.
Barrett Daffin Frappier Turner & Engel, LLP
USFN Member (AZ, CA, CO, GA, NV, TX)

The Texas Supreme Court handed mortgage lenders a significant victory in Texas over statute of limitations claims by borrowers. The court ruled in PNC Mortg. v. Howard, ___ ‎S.W.3d ___, 2021 WL 297579, at *1 (Tex. 2021) (per curiam) that despite a mortgagee’s deed of trust being barred by the statute limitations, the mortgagee may still assert equitable subrogation rights in a separate action.

The borrowers in this case purchased their house in 2003 with two purchase money loans. In 2008, the borrowers refinanced their home with Bank of Indiana and paid off the two purchase money loans. The loan was later assigned to National City Mortgage which later merged with PNC, eventually defaulted, and Bank of Indiana foreclosed on the property. The borrower sued alleging Bank of Indiana did not have standing to sue since the loan had been assigned to National City Mortgage. The trial court voided the foreclosure, leaving only the borrowers remaining claims.

PNC then counterclaimed for judicial foreclosure, but due to concerns over the statute of limitations, added a claim for foreclosure under its equitable subrogation rights. PNC argued that, under Texas Law, a lender which pays off a prior lien on a property steps into the shoes of that prior lender up to the amount advanced to pay off the prior lien. The lender may exercise the same rights the prior lender may have had in that prior lien. However, the trial court held that PNC’s right to foreclose was barred by the statute of limitations including its rights under equitable subrogation which was barred when the underlying lien became unenforceable. The appeals court later confirmed this decision.

After the appellate court issued its ruling, the Texas Supreme Court in Fed. Home Loan Mortg. Corp. v. Zepeda, 601 S.W.3d 763, 764 (Tex. 2020) ruled that a lender was entitled to enforce a lien based on equitable subrogation even when the lender had failed to cure a fatal defect in a Texas Home Equity Loan. Based on this ruling, PNC appealed to the Supreme Court arguing that the appellate court decision should be reversed based on the opinion in Zepeda.

The Supreme Court agreed with PNC and held that the equitable subrogation claims of PNC were not barred by the statute of limitations having run on the underlying loan. Based on its ruling in Zepda, the court held that equitable subrogation rights are fixed at the time the proceeds are used to discharge an earlier lien. A lender’s failure to protect its own lien does preclude the lender of its rights in equity to bring claims under an earlier lien that was satisfied from the proceeds of its lien. The court reasoned that allowing equitable subrogation provides a hedge to lenders against the risk of paying of prior liens thereby increasing the availability of credit to borrowers.

This ruling gives lenders additional protections should their lien become unenforceable by the statute of limitations. In order to enforce the equitable subrogation rights, the lender will need to file a separate action again the borrower. Their rights would also only be protected up to the amount they advanced to pay off prior liens and lenders should consult with local counsel on how best to enforce these new rights on qualifying loans.

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Spring 2021 USFN Report