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Zepeda v. Federal Home Loan Mortgage Corp.

United States Court of Appeals, Fifth Circuit

August 15, 2019

SYLVIA ZEPEDA, Plaintiff - Appellee

          Appeal from the United States District Court for the Southern District of Texas

          Before HAYNES, GRAVES, and HO, Circuit Judges.


         To protect homeowners, the Texas Constitution imposes a number of requirements before a lender may execute a deed of trust on a homestead to secure a loan. See generally Tex. Const. art. XVI, § 50. At the same time, Texas courts have on various occasions allowed lenders to invoke the doctrine of equitable subrogation to obtain partial repayment of the loan, in the event that one of the requirements of the Texas Constitution is not met. See, e.g., Benchmark Bank v. Crowder, 919 S.W.2d 657, 662 (Tex. 1996). This case requires us to decide a dispute that falls at the intersection of these two competing principles of Texas law, under circumstances not directly addressed by a previous decision of the Texas Supreme Court, but that may recur in future cases. We believe this dispute presents a pure question of law that "should be answered by the only court that can issue a precedential ruling that will benefit all future litigants, whether in state or federal court." JCB, Inc. v. Horsburgh & Scott Co., 912 F.3d 238, 239 (5th Cir. 2018). Accordingly, we certify one question to the Supreme Court of Texas.

         This case also presents a question of contractual subrogation which we do not certify to the Texas Supreme Court because, as we shall explain, Texas law already provides a clear answer. As the district court correctly concluded, a secondary lender is not entitled to contractual subrogation without a valid contract.



         The Texas Constitution states that "[n]o . . . lien on the homestead shall ever be valid unless it secures a debt described by this section." Tex. Const. art. XVI, § 50(c). Among other things, the homeowner and the lender must satisfy various procedural requirements to secure a loan that uses a homestead as collateral. Tex. Const. art. XVI, § 50(a)(6)(Q). At issue here is the requirement that both "the owner of the homestead and the lender [must] sign a written acknowledgment as to the fair market value of the homestead property on the date the extension of credit is made." Tex. Const. art. XVI, § 50(a)(6)(Q)(ix) (emphasis added).

         In the event the lender fails to comply, the borrower may notify the lender of the mistake. Tex. Const. art. XVI, § 50(a)(6)(Q)(x). If the lender does not correct the failure within sixty days, it may forfeit all principal and interest of the loan. Id. "[A] lien securing a constitutionally noncompliant home-equity loan is not valid before the defect is cured." Wood v. HSBC Bank USA, N.A., 505 S.W.3d 542, 547 (Tex. 2016).

          Even in the event of noncompliance, however, some lenders under certain circumstances may be able to recover on the loan under the doctrine of equitable subrogation. LaSalle Bank Nat. Ass'n v. White, 246 S.W.3d 616, 620 (Tex. 2007). Subrogation provides that a "subsequent lender will succeed to the rights of prior lenders and become entitled to 'all rights of the prior creditors in relation to the debt.'" Vogel v. Veneman, 276 F.3d 729, 735 (5th Cir. 2002) (quoting Means v. United Fid. Life Ins. Co., 550 S.W.2d 302, 308 (Tex. Civ. App.-El Paso 1977, writ ref'd n.r.e.)).

         Generally, subrogation works as follows: A homeowner takes out a loan using the homestead as collateral. Later, the homeowner takes out a second loan, and asks the second lender to pay the balance on the first loan. The second lender is subrogated to the first lender's rights under the original lien. Whatever the terms of the original loan agreement, at a minimum, the second lender stands in the shoes of the first lender. See Restatement (Third) of Property: Mortgages § 7.6 (Am. Law Inst. 1996). Without subrogation, the risk of forfeiture may discourage some lenders from refinancing homestead property. LaSalle Bank, 246 S.W.3d at 620.


         In 2007, Sylvia Zepeda took out a purchase-money loan for $65, 000 from CIT Group/Consumer Finance, Inc., to buy her homestead. Zepeda secured the loan using her homestead as collateral. Four years later, Zepeda took out a second loan from Embrace Home Loans, Inc., for $56, 500 to refinance her current debt. Embrace and Zepeda executed an agreement for an extension of credit under § 50 of the Texas Constitution, secured by a lien on her homestead. The agreement required Embrace to pay the balance of Zepeda's first lien with CIT and release the remainder of the funds to her. The agreement contained an express subrogation provision, which provided that Embrace would be subrogated to all rights of any other holder of liens or debts outstanding before the agreement was executed. Upon Embrace's payment of the balance of Zepeda's debt to CIT, CIT released its claim on the homestead.

         In 2015, Zepeda notified Embrace that the loan documents contained a constitutional deficiency-namely, that Embrace's signature did not appear on the acknowledgement of fair market value. In response, Embrace did not sign the document, but instead sent a new copy ...

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