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Wells Fargo Bank v. Farkas

United States District Court, W.D. Texas, Austin Division

April 28, 2017




         Before the Court is the above-entitled cause of action. The parties appeared for a bench trial and the Court heard testimony and evidence on December 12, 2016. Pursuant to the Court's Order the parties filed post-trial briefing. The last of all the Court-ordered briefing was received January 30, 2016. Having considered the evidence and testimony and post-trial briefing, the Court enters the following Memorandum Opinion and Order.

         I. FINDINGS OF FACT [1]

         This case arises from a suit to foreclose on real property owned by Janos Farkas. Wells Fargo Bank, N.A. (Wells Fargo) brought suit for foreclosure alleging that Farkas had defaulted on a 2007 Home Equity Loan. Farkas argued that the lien on the property was invalid and unenforceable due to deficiencies in the lien documents. Shortly before the trial was scheduled, Wells Fargo dismissed its foreclosure claim as the loan was no longer in default. However, Farkas, in his answer to Wells Fargo's third amended complaint, added a counterclaim for quiet title based on the allegedly invalid lien. Specifically, Farkas claimed that the lien documents-the Wells Fargo Home Equity Account Agreement and Disclosure Statement (Agreement) and Texas Deed of Trust (Deed)-did not include three terms required by the Texas Constitution: Article XVI, Section 50(a)(6)(J), (P), & (Q)(xi).[2]These omissions, he argued, make the lien invalid. The parties were unable to come to an agreement on this claim, and a bench trial commenced on December 12, 2016.

         This parties do not dispute the relevant facts. The only evidence submitted was the Agreement and Deed. Farkas also testified to his method of searching for the allegedly missing terms.

         The following are the relevant factual findings of the Court:

• The heading of the Agreement states “THIS IS AN EXTENSION OF CREDIT AS DEFINED BY SECTION 50(a)(6) and (t), ARTICLE XVI OF THE TEXAS CONSTITUTION.” (Dkt. No. 97, Exh. 2 at 1).
• Section 2 of the Deed provides that “This Agreement is intended to evidence an ‘Extension of Credit' as that term is defined by Section 50(a)(6) and (t), Article XVI of the Texas Constitution. . . .” (Dkt. No. 97, Exh. 3 at 1).
• Section 29 of the Agreement states that “The Bank shall comply with any of its obligations under Sections 50(a)(6), 50(e)-(i), or 50(t) Article XVI, Texas Constitution . . . .” (Dkt. No. 97, Exh. 2 at 14).


         Under Texas law, “[a] suit to clear or quiet title- also known as suit to remove cloud from title-relies on the invalidity of the defendant's claim to the property.” Essex Crane Rental Corp. v. Carter, 371 S.W.3d 366, 388 (Tex. App.-Houston [1st Dist.] 2012, pet. denied). This equitable action “exists to ‘enable the holder of the feeblest equity to remove from his way to legal title any unlawful hindrance having the appearance of better right.'” Hahn v. Love, 321 S.W.3d 517, 521 (Tex. App.-Houston [1st Dist.] 2009, pet. denied) (quoting Thomson v. Locke, 66 Tex. 383, 1 S.W. 112, 115 (1886)). The elements of a quiet-title claim are “(1) an interest in a specific property; (2) title to the property is affected by a claim by the defendant; and (3) the claim, although facially valid, is invalid or unenforceable.” Cruz v. CitiMortgage, Inc., No. 11-cv-2871, 2012 WL 1836095, at *4 (N.D. Tex. May 21, 2012) (citing Sadler v. Duvall, 815 S.W.2d 285, 293 n.2 (Tex. App.-Texarkana 1991, writ denied)). Neither party disputes that Farkas has established the first two elements. However, they disagree as to the invalidity of the lien.

         Farkas argues that because the extension of credit fails to comply with Section 50(a)(6), Article XVI of the Texas Constitution, Wells Fargo's claim to the property is invalid or unenforceable. In 2003, the Texas Constitution was amended to provide additional protections to the homestead. In particular, Section 50(a)(6) provides that: “[t]he homestead of a family, or of a single adult person, shall be, and is hereby protected from forced sale, for the payment of all debts except for . . . an extension of credit that” complies with this section. It includes a list of requirements that the lien must meet in order to be foreclosure eligible. Section 50(c) then provides that: “[n]o mortgage, trust deed, or other lien on the homestead shall ever be valid unless it secures a debt described by this section . . . .” Under Section 50(c), a party may file suit for quiet title, voiding the lien, when it fails to comply with the requirements listed in Section 50(a)(6). Wood v. HSBC Bank USA, N.A., 505 S.W.3d 542, 548-49 (Tex. 2016). Thus, not only may the lender lose the ability to foreclose on the lien if it does not comply with the Texas Constitution, but the owner may also quiet title to void the lien entirely. This right, in part, is limited by Section 50(a)(6)(Q)(x)-(xi), which gives the lender an opportunity to cure any defects within sixty days of notice by the owner of the property.

         Farkas's sole argument in support of his claim for quiet title is that the terms of the lien failed to include three of the required provisions under Section 50(a)(6): (J), (P), and (Q)(xi). Wells Fargo contends that though these three provisions were not explicitly included[3] in the Agreement or Deed, Section 50(a)(6) was incorporated in its entirety by reference in two sections of the Agreement.[4]Under Texas law, “[a] written contract must be construed to give effect to the parties' intent expressed in the text as understood in light of the facts and circumstances surrounding the contract's execution.” Houston Exploration Co. v. Wellington Underwriting Agencies, Ltd., 352 S.W.3d 462, 469 (Tex. 2011). Contracts that “can be given a certain or definite legal meaning or interpretation” will be construed as a matter of law. Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983). A term in the contract “is ambiguous when its meaning is uncertain and doubtful or it is reasonably susceptible to more than one meaning.” Id.

         Texas contract law provides that “an unsigned paper may be incorporated by reference” in a signed document. In re Prudential Ins. Co. of Am., 148 S.W.3d 124, 135 (Tex. 2004). The language used to refer to the incorporated document “is not important provided the document signed . . . plainly refers to another writing.” Id. (quoting Owen v. Hendricks, 433 S.W.2d 164, 166 (Tex. 1968)). This incorporated document becomes part of the contract, and “both instruments must be read and construed together.” Bob Montgomery Chevrolet, Inc. v. Dent Zone Cos., 409 S.W.3d 181, 189 (Tex. App.-Dallas, 2013, no pet.). Texas courts have interpreted the “plainly refers” requirement as meaning “clearly refers” and have held that a “mere reference” to another document is not enough to establish a wholesale incorporation of the referenced document “when the facts and circumstances surrounding the agreement do not indicate that incorporation was intended.” Al Rushaid v. Nat'l Oilwell Varco, Inc.,757 F.3d 416, 420 (5th Cir. 2014). When the reference to another document “is clear and the circumstances indicate that the intent of the parties was incorporation, [Texas] courts have held that a document may be incorporated, even in the absence of specific language of incorporation.” Id. at 420; cf. Gray & Co. Realtors, Inc. v. Atlantic Hous. Found., Inc., 228 S.W.3d 431, 436 (Tex. App.-Dallas 2007, no pet. h.) (“[A]ll that is required is that ...

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