Texas Supreme Court Decides in Favor of Home Equity Lenders
Barry D. Johnson
SettlePou
Dallas, Texas
www.settlepou.com
On December 21, 2007, the Texas Supreme Court decided an important case which will greatly benefit Texas home equity lenders in “invalidity” lawsuits.
This case is LaSalle Bank Nat. Ass’n v. White (Tex., 2007), which has not yet been released for publication. The LaSalle case establishes that the doctrine of equitable subrogation is available to lenders who, facing an invalid home equity loan, can now assert an “equitable lien” against the debtor’s property.
The Texas Constitution sets forth the terms and conditions of a legal home equity loan. The Constitution provides that if a lender fails to follow the terms of the Constitution, and the lender fails to cure any alleged constitutional violation, then the lender will forfeit all principal and interest and will be forced to release its lien on the property.
In LaSalle, the lender held an “invalid” home equity loan. However, at the time the loan was made, a significant portion of the loan proceeds was used to pay in full an existing (valid) lien secured by the debtor’s homestead property. The remainder of the loan proceeds was paid “cash back” to the borrower. The Supreme Court held that while the home equity loan was in and of itself invalid and unenforceable against the debtor’s homestead property, the portion of the loan which was used to repay the existing debt was validly secured by the debtor’s homestead property under the concept of equitable subrogation.
For many years, Texas has recognized the concept of equitable subrogation. Equitable subrogation is a legal concept which states, in this context, that one lender (in this case, the home equity lender) is subrogated to, or succeeds to, the rights of an existing lender if that new lender pays in full an existing lender’s loan. While it really is not as simple as this, the essential idea is that the debtor begins and ends the transaction with the same amount of debt secured by his homestead. This is true whether or not the new loan is valid or invalid under Texas law.
The Court of Appeals had originally ruled against the lender in this case because it believed that there was a conflict between the concept of equitable subrogation and the punitive nature of the sanctions against a lender who makes an invalid home equity loan. The Supreme Court held that the Texas Legislature, in drafting the Constitutional Amendment, had not expressly overturned the concept of equitable subrogation as it relates to home equity loans. Given the fact that equitable subrogation has been used extensively in past instances to “validate” otherwise invalid liens secured by homestead property, the Court held that unless the Legislature had expressly overruled the doctrine, the doctrine would be available to a home equity lender.
In the LaSalle case, the Supreme Court has confirmed that an important defense exists to invalidity cases. All hope is not lost if a lender has done something to violate the Constitution. In defending an invalidity case, a lender and its attorney need to look carefully at the HUD I Settlement Statement to demonstrate what debts were paid at closing. To the extent that closing proceeds were applied to existing debts secured by the property, the lender steps into the shoes of the previous lender and has an opportunity to preserve at least a portion of its debt secured by the property.
