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Residential Credit Solutions, Inc. v. Padilla

Court of Appeals of Texas, Thirteenth District, Corpus Christi-Edinburg

April 26, 2018

JOE PADILLA, Appellee.

          On appeal from the 404th District Court of Cameron County, Texas.

          Before Chief Justice Valdez and Justices Rodriguez and Benavides


          NELDA V. RODRIGUEZ Justice

         Appellee Joe Padilla filed suit against appellants Residential Credit Solutions, Inc. (RCS) and Federal National Mortgage Association (Fannie Mae), complaining of the foreclosure of the mortgage on his home.[1] Following a bench trial, the trial court granted judgment in favor of Padilla. By three issues, RCS and Fannie Mae argue that the trial court erred in (1) excusing Padilla's default; (2) rescinding the foreclosure; and (3) rewriting the terms of the loan documents. We affirm.

         I. Background

         The evidence before the trial court reveals that in 2007, Padilla signed a thirty-year, Adjustable Rate Note (the Note) in the original principal amount of $344, 000. The Note originated with First Franklin Financial Corp., an Operating Subsidiary of Merrill Lynch Bank & Trust Co., FSB (First Franklin).[2] It called for an initial interest rate of 8.99 percent per annum and initial monthly payments of $2765.43. The Note provided for a fluctuating rate of interest that could change the monthly payment.

         Regarding the Note, Padilla signed a Deed of Trust, pledging real property commonly known as 118 E. San Jose Road, Bayview, Texas 78566 (the Bayview Property) as collateral for payment of the Note. [3] The Deed of Trust allowed for foreclosure of the Bayview Property upon Padilla's default.

         Trial testimony and exhibits also show that in April of 2009, Padilla executed a Loan Modification Agreement with First Franklin. The Loan Modification Agreement adjusted the principal balance of the loan upward to $360, 420.04.[4] It also reduced the interest rate on the Note to a fixed rate of 4.87 percent, reduced the monthly principal and interest payment on the Note to $1708.20, and extended the maturity of the Note through 2049. Finally, the Loan Modification Agreement specifically set out that Padilla agreed "that the establishment and maintenance of an escrow account for the payment of taxes is required for the remaining life of the loan."

         The last monthly payment made by Padilla to RCS was on or about August 1, 2011. On February 16, 2012, RCS sent a notice-of-default and intent-to-accelerate letter to Padilla. The letter set out that the total amount due was $19, 335.59 and informed Padilla that if this amount, together with additional payments that come due, was "not cured by 03/17/2012, RCS intend[ed] to accelerate the sums evidenced by the Note and [Deed of Trust]." Further, as required by section 22 of the Deed of Trust, the letter provided that Padilla could dispute the delinquency or calculation of amount due by contacting RCS and that he could "bring a court action to assert the non-existence of a default or any other defense to acceleration or foreclosure sale." It is undisputed that Padilla made partial payments of $4500 and $2400 and that RCS returned those partial payments as insufficient to pay the outstanding balance.

         On April 2, 2012, RCS accelerated the maturity of the Note by written notice of acceleration, which enclosed a notice of the substitute trustee's sale. Fannie Mae purchased the Bayview Property at a foreclosure sale on May 1, 2012.

         On February 19, 2013, Padilla filed his original petition for injunction and damages. By his second amended original petition filed on June 4, 2013, Padilla sued RCS and Fannie Mae for common law fraud, negligent misrepresentation, and breach of contract.[5]Among other things, Padilla more specifically asserted that First Franklin had misrepresented the terms of both the original Note and the Loan Modification Agreement. Padilla claimed that before entering each agreement, First Franklin led him to believe that the terms of the respective agreement would only require him to make a monthly payment of roughly $1700 per month rather than the much higher payment required under the instruments. Padilla further contended that the foreclosure of the Bayview Property was a "direct consequence of the fraud and misrepresentations perpetrated upon [Padilla] by . . . First Franklin." As to RCS and Fannie Mae, Padilla asserted that they were "well aware" of First Franklin's fraudulent acts. Padilla further asserted that his "good faith efforts to make his residential home mortgage payments [of $4500 and $2400] were unilaterally rejected by [RCS] without any indication as [to] . . . the amount needed to 'bring [the] account current.'" In addition to his claims for fraud, negligent misrepresentation, and breach of contract, Padilla sought a judgment declaring that the note and deed of trust were not valid legal instruments. He also sought injunctive relief from being evicted from his homestead.

         Padilla requested the following remedies, which were either included in the prayer of his second amended petition or requested at trial, without objection: (1) a temporary restraining order and a temporary injunction; (2) that the trial court set aside the foreclosure and reinstate the note and deed of trust with the principal and interest amount as $353, 000, an interest rate of 4.875 percent, and a principal and interest monthly payment of $1708.20 for thirty years; (3) attorney's fees of $20, 000 either for his breach-of-contract claim or his declaratory-judgment action; (4) exemplary damages of $100, 000; and (5) actual damages of $58, 707.50, which arguably represented the difference between what Padilla should have paid and what he had paid.[6]

         RCS and Fannie Mae answered, generally denying Padilla's allegations. They also pleaded numerous affirmative defenses, including the failure to state a claim upon which relief could be granted and failure to mitigate damages, if any.

         On July 21, 2015, following a bench trial, the court entered judgment in favor of Padilla without stating the basis. It set aside the May 2, 2012 foreclosure of Padilla's Bayview Property, waived any past or present default under the terms of the Note and Deed of Trust, and withdrew the Substitute Trustee's Deed. In addition, the judgment set the following terms of the Note and Loan Modification Agreement: (1) a principal balance of $318, 000, which accounted for the $35, 000 paid by Padilla into the registry of the trial court, [7] (2) a fixed annual interest rate of 4.875 percent, (3) a term of thirty years from the date of the judgment, and (4) a monthly principal and interest payment of $1868.11. The judgment also ordered Padilla to timely pay insurance premiums and taxes; RCS was not to maintain an escrow account.[8] Finally, the judgment set out that RCS and Fannie Mae were to pay Padilla's costs and $5000 of his attorney's fees. The judgment awarded no actual damages or exemplary damages. RCS and Fannie Mae appeal from this judgment.

         II.Waiver of Any ...

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