Blog

The answer depends on what you do post-bankruptcy.

Guest blog by Megan Baumer

The Supreme Court recently finally resolved a Texas student loan discharge adversary which started in 2016. The court by denying a writ of certiorari in June of 2021 in Thelma McCoy v. U.S., 2021 WL 2519193.

The “automatic stay” is imposed when someone files a bankruptcy case. Sec. 362(a)(3) prohibits “ any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” [Emphasis added.] If the person filing bankruptcy owns a vehicle on the date of the bankruptcy filing, it becomes property of the estate when the case is filed. I have been a bankruptcy attorney for 37 years, and it has always been the rule that if a creditor repossessed a car prior to the bankruptcy but it had not disposed of it, the creditor had to return the car to the debtor once the bankruptcy case was filed. This is particularly true in Chapter 13 cases where a repayment plan has been filed and the vehicle is insured. In January 2021, the Supreme Court issued an opinion in City of Chicago v. Fulton which held that “passive retention” of a vehicle does not constitute exercising control. The court held that the statute requires an “affirmative” act and simple “passive retention” of the car was not an affirmative act. In this case, the City impounded the vehicle for traffic violations, but the legal issues are the same for a creditor who repossesses a vehicle for non-payment of the car note. The opinion doesn’t address some of the actual facts, but in most big cities, cars that are impounded are held in an impound lot with a fence and police or security staff. That doesn’t sound like mere “passive retention” to me, but I’m not going to quibble with the Supreme Court about the meaning of “passive.” In the final paragraph of the opinion, the court stated: Though the parties debate the issue at some length, we need not decide how the turnover obligation in §542 operates. Nor do we settle the meaning of other subsections of §362(a). We hold only that mere retention of estate property after the filing of a bankruptcy petition does not violate §362(a)(3). The “other subsections” of §362(a) mentioned in the opinion are §362(a)(4) and (6). 362(a)(4) operates as a stay of “ any act to create, perfect, or enforce any lien against property of the estate.” [Emphasis added.] 362(a)(6) operates as a stay of “ any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title.” [Emphasis added.] The Supreme Court remanded the Chicago v. Fulton case to the 8th Circuit Court of Appeals by order dated April 12, 2021, to consider whether passive retention of property of the estate violates §362(a)(4) or (6). Although the Supremes remanded for further consideration, I believe the opinion on 362(a)(3) tells us the answer. Section 362(a)(3) prohibits “any act.” Section 362(a)(4) and (a)(6) also prohibit “any act.” It is a basic rule of statutory construction that a word used in a statutory scheme has the same meaning anywhere it is used in that statutory scheme. (the phrase “any act” is not just used elsewhere in thee Bankruptcy Code, it is used in various subsections of the same section. [By the way, (a)(5) also contains the “any act” language.]  In dissent, Justice Sotomayor addresses the practical realities of asserting claims under §542(a) rather than §362(a). Section 542(a) provides: Except as otherwise provided in subsection (c) or (d) of this section, an entity, other than a custodian, in possession, custody, or control, during the case of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate. [Emphasis added.] The practical reality is that §542 requires an adversary proceeding, which requires a filing fee and a request for a temporary restraining order which only lasts 10 days. There must be a hearing on a temporary injunction and a bond may be required. If the creditor wants to draw the process out, it depends on how much patience the judge has with the stall tactics. (I would suggest that FRBP 9011 comes into play, but that is a question for another day.) Section 542(a) requires the creditor to “deliver to the trustee” the property in question, which raises other practical issues. If the car has been claimed as exempt, the trustee is not going to want to have any part in this process - the trustee is not going to be paid anything for participating and will simply deliver the car to the debtor who (hopefully) will make the plan payments and all of this fuss will be a waste of everyone’s time, effort, and money. Congress could fix this with a simple amendment to §362 but that is unlikely. I suspect that Bankruptcy Courts around the country will address this through standing orders or local rules that will probably work, but uniformity would be in all parties’ best interests.

The requirements for foreclosure of real property in Texas depend on the type of mortgage that is being foreclosed upon. There are several types of mortgages, but there are three that are by far the mort common: * (1) a purchase money mortgage; * (2) a purchase money second lien and; * (3) a home equity loan or home equity line of credit. A purchase money loan is what it sounds like – a loan to purchase the home. In some cases the original loan was refinanced to get a better interest rate but no new funds are advanced. In a “conventional loan,” the borrower/buyer of the home typically makes a down payment of at least 10% of the purchase price. The mortgage is in the amount of the balance of the purchase price. Many borrowers are unable to make a down payment of 10% or 20% so they have to resort to alternative sources of financing. These may include government guaranteed loans where the borrower/buyer makes a minimal or no down payment but the government guarantees the loan so the mortgage lender is assured of payment. These may also include “80/20” loans or “80/15/5” loans. In these cases, the borrower/buyer makes a down payment of 5% or less of the purchase price and executes a first lien of 80% and a second lien of 15% or 20%. Homeowners may also borrow against the equity in their home by taking out a home equity loan or home equity line of credit. There are many restrictions on equity lending in Texas, but most of those technicalities are beyond the scope of this article. Texas residents can also obtain a home improvement loan to make repairs or improvements to the home. Unlike a home equity loan, which can be used for virtually anything, a home improvement may only be used to make improvements to the home. As a result, home equity loans are far more common than home improvement loans. If a lender is foreclosing on a purchase money lien (whether it is a first lien or second lien), there is a two step process that the lender must comply with. First, the lender must send a notice letter to the borrower(s) that notifies him that the loan is in default and that if the borrower does not cure the default, the lender intends to accelerate the balance of the loan and foreclose on the property. “Accelerate” means that the lender is calling the promissory note due. After acceleration, instead of owing monthly payments for many years, the borrower now owes the entire principal balance plus any accrued interest and collection costs. How much notice the lender is required to give is controlled by the loan documents. Approximately 90% of residential mortgages in the U.S. are on FNMA forms which require 30 days notice, so we commonly call this notice a “30 day notice.” If the loan documents are not standard forms, the notice requirements may be different. ·After the lender sends the 30 day notice, the lender must then send the actual foreclosure notice. In Texas, that notice is called a “Notice of Trustee’s Sale.” The lender must give at least 21 days notice of the sale. In Texas, notice starts on the date of mailing of the notice, not the date of receipt. A mortgage lender may only foreclose on real property on the first Tuesday of the month, so timing can be an issue. For instance, if the lender sends the 30 day letter on March 20, the 30 days to cure the default ends on April 19. There is not enough time to give 21 days notice to foreclose in May, so the lender would have to wait until at least June to foreclose. Most major mortgage lenders do not start the actual foreclosure process until the loan is at least 90 days delinquent. After the borrower reaches 90 days delinquent, the lender sends the 30 day letter and the actual legal process starts. The result is that most foreclosures take at least 5 months from default to the actual foreclosure. If the mortgage is a home equity loan or home equity line of credit, there is an additional step to foreclose the loan. After the lender sends the 30 day letter, the lender must file an application for an order allowing the foreclosure in the state district court in the county where the property is located. The application must be served on the borrower and the borrower has 38 days from mailing of the application to file a response. If the borrower files a response to the application, the court has to set a hearing on the application. The Texas Rules of Civil Procedure provide that the application must be set for hearing on an expedited basis. The reality is that the hearing is set for expedited hearing only if the lender requests an expedited hearing. We routinely see cases where the lender files the application, we file a response for the borrower and the lender waits weeks or months to set the application for hearing. Once the application is granted, the lender still has to send the actual foreclosure notice, so the process takes at an absolute minimum of 89 days (30 days, plus 38 days, plus 21 days). The practical reality is that the process may take several more months.

The good news is that it is much easier to rebuild your credit after a bankruptcy filing than it was in the past. I have been a bankruptcy lawyer in Texas for 35+ years. I tell clients all the time that 30 years ago if you filed bankruptcy your mom wouldn’t loan you money for 10 years. (The credit reporting agencies could report a bankruptcy filing for 10 years,) Things have changed. I have clients all the time who tell me that shortly after their bankruptcy is discharged they receive credit offers that start with “Sorry to hear about your bankruptcy. Would you like a credit card?” Assuming you have sufficient income, most people can qualify for a mortgage with a decent interest rate two years after your discharge. You need positive payment history after your bankruptcy. To rebuild your credit score your credit report will need to show positive payment history after your discharge. If you reaffirm secured debt – car loans, mortgages – and continue paying student loans, all of them will show that your payments are current. If you get credit card offers apply for a few and use them. Your score will be higher if you carry a balance. Shortly after you file bankruptcy the interest rate will be high but if you carry a nominal balance you don’t care what the interest rate is. Check your credit report after your bankruptcy. After your discharge you should check your credit report. All of the debts that were discharged can still be listed but the balances should be zero and the comments or status should say discharged in bankruptcy. It is particularly important to check your credit if a lot of your debts have gone to collection. If discharged debts still show a balance or the status is listed as in collection you can dispute the errors by going to the credit reporting companies’ web sites.  Michael Baumer

Typically, business related cases have made up 20%+/- of our cases. In the last year it has been approx. 50%+. Some of these calls have been people who are just looking for information about what happens if…? More than half have been “We’re done. What do we do now?” The mix has been more diverse than I saw coming. As expected, I have been hearing from restaurants, bars, hair salons… Many have received PPP loans, so they can pay their employees and their rent, but they have minimal income to pay all of their other normal operating expenses. If their business does not start generating substantial income, they won’t be able to stay open. I have also heard from several business owners who have businesses I would not have anticipated. Many of them were “non-essential” so they had to close for 60 days. Even as they were allowed to reopen, many remain non-essential so people are just not buying their goods or services yet. My neighborhood Home Depot has been packed all through the stay at home order. I was contacted by a business owner who operates a specialty hardware store that sells primarily to do-it-yourselfers who want to spruce up their homes. Not many people are buying their inventory right now. I have been a regular customer at Half Price Books for years. I haven’t been in any of their stores for almost a year. I am getting my hair cut less often that I normally would. What do all of the business owners have in common? They are truly small businesses. Under the original Payroll Protection Program “small” businesses are defined as 500 or less employees. The ones I am talking to are 50 or less and many are 15 or less. My law firm has six employees. My concern is that these are the businesses that will not survive. Many are family enterprises so both spouses and maybe the kids work at the business, so what happens to all of them if the business fails? To be fair, many large businesses are in trouble too. The airlines are all suffering. Hotels are empty or nearly so. Retail is not selling – JC Penney, Nieman Marcus, Stage Stores, Payless, Gymboree, J.Crew, and Sur la Table have all filed Chapter 11. Retail has been struggling for years and this crisis may be the death knell for some of these companies. Malls have been struggling for years because people go to malls less often. More malls will close, which will depress the value of other mall properties. I saw an interview with a CEO of a national restaurant chain who said his company will survive because a large chunk of his company’s sales have always been drive through and they have access to “billion dollar lines of credit.” (Lines – plural.) He actually expressed concern for small family restaurants because they tend to be “sit down” restaurants rather than drive-throughs and they don’t have access to lines of credit. They can’t survive sales with at 25% – or even 50% – of normal. I am seeing a lot of reporting about concerns for commercial real estate. As more people work remotely, companies are re-evaluating whether all of their employees need to physically be in the office, they may need less space. Facebook has announced that by 2030 they expect that 50% of its employees will work remotely. If more and more employees work remotely will businesses reduce their leased or owned real estate? If they do, will rental rates decline? Will commercial real estate values decline? There has also been a lot of discussion about how fast the economy will recover. I tried to think of some event that might offer a clue. After 9/11 it took two and a half years for air travel to return to previous levels. 9/11 was a one day event. COVID-19 is an ongoing event. (I have no intention of going to an airport, or car rental agency, or …any time soon.) I looked at some unemployment numbers from previous recessions and the pattern has been “unemployment happens fast, re-employment happens slowly.” I think that the unemployment numbers are seriously misleading. The U.S. labor force is 165 million people. It doesn’t count the people who lost their jobs and haven’t been able to file unemployment claims because some state unemployment systems have been overwhelmed. It doesn’t count people in the “gig economy” who are not employees but independent contractors. It doesn’t count people who have given up looking for a job. In prior recessions some older people who were approaching retirement age couldn’t find new work so they gave up and retired. They are no longer “unemployed.” This is also an international pandemic – it is not just impacting the U.S. – it is impacting all of “US” everywhere. If economies around the world don’t recover quickly there will be less international trade. Supply chains have slowed down. If auto manufactures are building less cars, they are buying less parts. (From Mexico and China.) The COVID -19 relief packages may help many small businesses survive the crisis but the long term consequences may overwhelm them. Many small businesses received PPP loans, which helped keep them going in the short term and which they will not have to repay. Many of these businesses also secured EIDL loans, which they do have to pay back over a long term at low interest rates. Many small businesses operate at low profit margins, so this additional debt may compromise their ability to survive.  -Michael Baumer

In the latest installment of the homestead proceeds saga, the US District Court for the Western District has issued an opinion reversing Judge Gargotta’s opinion in In re DeBerry, 2015 WL 6528024. The District Court opinion can be found on the Western District Court website under Case N. 5:15-cv-01135-RCL, Docket No. 9. This case starts with an unusual fact pattern as the property in question was the separate property of the debtor husband at the time of filing. The property was sold pursuant to a court order post-petition and the trustee requested and obtained a paragraph in the order approving the sale that stated: ORDERED, ADJUDGED and DECREED that nothing in this Order shall prohibit John Patrick Lowe, as Chapter 7 Trustee (the “Trustee”) for the bankruptcy estate (the “Estate”) of the Debtor, or any other successor trustee, from seeking to recover the proceeds from the sale of the real property located at 8 Tudor Glen, San Antonio, TX 78257 as an asset of the Estate under 11 U.S.C. §541, to the extent the proceeds from such sale are no longer exempt under Texas Prop. Code §41.001. Upon sale of the homestead on September 26, 2014, the Debtor netted $364,592. The proceeds were deposited into a bank account solely in the name of the non-filing spouse. $85,000 of those proceeds were subsequently transferred into another account, also solely in the name of the non-filing spouse. Out of that account $50,000 was transferred to Goldstein, Goldstein & Hilley, a criminal defense firm that had previously been engaged to represent the Debtor, by check dated September 29, 2014. The $85,000 in proceeds were not reinvested in another homestead within six months of the sale of the property. (The record is unclear what happened to the remaining $280,000 in proceeds.) Mr. Lowe then filed an adversary in which he sought declaratory relief that the proceeds of Mr. Deberry’s separate property homestead were also his separate property and that the proceeds became property of the bankruptcy estate, and sought turnover of the proceeds from the non-filing spouse, the criminal defense attorneys and unidentified Jane or John Does. The defendants filed a motion to dismiss contending that the Texas Proceeds Rule and In re Frost, 744 F.3d 384 (5th Cir.2014) do not apply in Chapter 7 cases. Judge Gargotta agreed, relying primarily on Judge Davis’ opinion in In re D’Avila, 498 B.R. 150 (Bankr.W.D.Tex.2013) and rejecting Judge Bohm’s opinion in In re Smith, 514 B.R. 838 (Bankr.S.D.Tex.2014). Mr. Lowe appealed and on March 10, 2017, the District Court issued its ruling holding that Judge Gargotta was incorrect and that Frost and the Texas Proceeds Rule do apply in Chapter 7 cases, relying primarily on Judge Bohm’s opinion in Smith. The court also relied on In re England, 975 F.2d 1168 (5th Cir.1992) for its oft cited statement that the purpose of the proceeds exemption “was solely to allow the claimant to invest the proceeds in another homestead, not to protect the proceeds in and of themselves.” The court also relied on In re Zibman, 268 F.3d 298 (5th Cir.2001) which held that a debtor who sold his homestead prior to filing Chapter 7 and was holding proceeds on the petition date was subject to the Texas Proceeds Rule. This is an important and binding opinion for attorneys in the Western District of Texas and is clearly an important opinion for attorneys everywhere in Texas. (At least until the Fifth Circuit tells us what the official answer is.) Now for my soapbox. Please feel free to stop reading at this point. 1. Texas enacted the first version of what is now Texas Property Code Sec. 41.001(c) in 1897. That’s 120 years ago. The statute provides, in total: “The homestead claimant’s proceeds of a sale of a homestead are not subject to seizure for a creditor’s claim for six months after the date of sale.” There is nothing in the statute (nor has there ever been) that says that the homestead claimant cannot use the proceeds for some other lawful purpose. What if the debtor needs to buy a car to get to and from work? What if he needs to acquire tools or equipment to perform his vocation? What if he needs to feed his kids? It is not the function of the courts to create statutory limitations through judicial gloss when the legislature has failed to act to impose those limitations. 2. There is a clear rule of statutory construction that Texas exemption statues are to be liberally construed, particularly with respect to homesteads. Woods v. Alvarado State Bank, 19 S.W.2d 35 (Tex. 1929): “The rule that homestead laws are to be liberally construed to effectuate their beneficient purpose is one of general acceptation.” Trawick v. Harris, 8 Tex. 312 (Tex.1852): “Profoundly impressed with the wisdom in which our homestead policy is founded, and fully impressed with its ameliorating influences, we admit that it is entitled to the most liberal construction for the accomplishment of its object.” 3. As noted above, England is almost invariably cited for the proposition that proceeds were never meant to be protected as proceeds, but only to allow the debtor to re-invest the proceeds in another homestead. England cites no authority to support that “holding.” (It isn’t actually holding, by the way.) England is a 1992 opinion. Was there no precedent in 99 years that supports England’s statement? 4. The District Court opinion in DeBerry lists six bankruptcy sections that courts addressing this issue have relied upon: 541(a)(1), 541(a)(6), 522(c), 1306(a), 1306(b), and 1327(b). I have another one that DeBerry and none of the other homestead proceeds cases mentions – 1307(b) which provides: On request of the debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter. Any waiver of the right to dismiss under this subsection is unenforceable. [Emphasis added.]  It is my opinion that 1307(b) represents a fundamental difference between Chapter 13 (Frost) and Chapter 7 (Smith). 1307(b) allows a debtor in a Chapter 13 case to dismiss his/her case without any cause. One of the very basic goals of Chapter 13 is to encourage/allow debtors to save their home and vehicles and to pay something to unsecured creditors. Many of my debtor Chapter 13 clients file to try to keep their home that they are in default on. If they try to save their home by curing the default but are unable to do so, there are several options available: (1) allow the mortgage holder to foreclose; ( 2) sell the house while in a Chapter 13 and use the proceeds to buy a new homestead; (3) sell the homestead and turn over the proceeds to the Chapter 13 trustee; or (4) dismiss the Chapter 13 and use the proceeds to play “let’s make a deal” with the debtor’s unsecured creditors. 5. Unfortunately, the courts talk about the debtor buying a new homestead while in a pending bankruptcy case as if it is a realistic financial option. For most debtors, that is a false option. If the debtor has sufficient equity in the prior homestead to purchase a new homestead for cash, that is one reality. Most of my clients have relatively low amounts of equity – $50,000 to $100,000. That may suffice as a down payment on a home, but it won’t buy a home Austin, Texas. And lenders will not finance the purchase of a home for a debtor in a pending bankruptcy case.

This is a very long post describing some recent case law with respect to home equity litigation in Texas. These events are significant to a consumer bankruptcy practice, but if the subject is of no interest, you may want to skip it. The Texas Supreme Court issued two opinions on May 20, 2016 regarding issues related to the home equity loan forfeiture provisions of the Texas Constitution. These opinions make significant changes to Texas case law regarding applicability and enforcement of those provisions. The first case was Garofolo v. Ocwen Loan Servicing, L.L.C., 497 S.W.3d 474 (Tex.2016) and the second is Wood v. HSBC Bank USA, N.A., 2016 WL 2993923 (Tex.2016). It is important that the cases are read in sequential order as Wood relies on Garofolo in reaching its conclusion. (All references to the Texas Constitution herein are to Article XVI, section 50(a)(6) and its subsections unless otherwise noted.) I found these cases to be confusing (as did my sister who edits my posts) so I write to provide my understanding/interpretation of what they mean. To help you understand where we are going let me summarize at the beginning. Garofolo holds that there is no constitutional violation if a lender violates 50(a)(6) by not curing a violation if none of the cures enumerated in 50(a)(6)(Q)(x) will actually cure the violation. The court goes on to state (in dicta) that a borrower may have a breach of contract claim if the lender fails to cure after notice from the borrower and suffered actual damages. More significantly, Wood holds that if an equity lien does not include all of the terms and conditions required by 50(a)(6), it is not a valid lien under 50(c), and since it is not a valid lien, limitations does not start to run until the lender fails to cure after notice. (The statute of limitations ruling is the big news out of these two cases.) Wood also confirms Garofolo’s statements that a borrower may assert a claim for forfeiture as a breach of contract claim if the claim is asserted under 50(c) as opposed to 50(a). In Garofolo, the Fifth Circuit certified two questions to the Texas Supreme Court because they involved interpretation of the Texas Constitution. Those two questions were: 1. Does a lender or holder violate Article XVI, Section 50(a)(6)(Q)(vii) of the Texas Constitution, becoming liable for forfeiture of principal and interest, when the loan agreement incorporates the protections of Section 50(a)(6)(Q)(vii), but the lender or holder fails to return the cancelled note and release of lien upon full payment of the note within 60 days after the borrower informs the lender or holder of the failure to comply? 2. If the answer to Question 1 is “no,” then, in the absence of actual damages, does a lender or holder become liable for forfeiture of principal and interest under a breach of contract theory when the loan agreement incorporates the protections of Section 50(a)(6)(Q)(vii), but the lender or holder, although filing a release of lien in the deed records, fails to return the cancelled note and release upon full payment of the note within 60 days after the borrower informs the lender or holder of the failure to comply? 50(a)(6)(Q)(vii) states that a home equity loan is made on the condition that: (vii) within a reasonable time after termination and full payment of the extension of credit, the lender cancel and return the promissory note to the owner of the homestead and give the owner, in recordable form, a release of the lien securing the extension of credit or a copy of an endorsement and assignment of the lien to a lender that is refinancing the extension of credit; To avoid the suspense, the Court answered both questions “no.” Garofolo starts with one atypical fact – the equity loan in question had been paid in full and the lender filed a release of lien in the real property records before litigation ensued. Ocwen, however, failed to send the borrower the cancelled promissory note and a release in recordable form within a reasonable time after full payment of the loan as required by 50(a)(6)(Q)(vii) and by the deed of trust and the lender failed to cure within 60 day after notice from the borrower as provided in 50(a)(6)(Q)(x). The Garofolo Court held that a breach of the terms of the extension of credit under the terms of the loan documents – in this case, failure to timely return the note and send a release after demand – did not give rise to a constitutional claim for forfeiture. “Our constitution lays out the terms and conditions a home-equity loan must include if the lender wishes to foreclose on a homestead following borrower default.” In other words, an equity lending violation is a shield not a sword, although how the sword is wielded is not made completely clear by Garofolo (or Wood). The court states that “we do not suggest Garofolo is not without recourse. Her remedy simply lies elsewhere – for instance, in a traditional breach-of-contract claim, in which a borrower seeks specific performance or other remedies contingent on a showing of actual harm.” [Emphasis added.] With respect to the breach of contract claim, however, the Court held that she did not have a claim for forfeiture under a breach of contract theory as it was undisputed that she had suffered no actual damages as a result of the breach. (Although the holder did not send her a release in recordable form, the holder did file an actual release in the real property records so there was no cloud on her title.) The court noted that the 2003 amendments to 50(a)(6) included a change to the forfeiture provision “whereas forfeiture under the original version was arguably triggered whenever a lender ‘fails to comply with [its]obligations,’ the current version does not implicate forfeiture until a lender ‘fails to correct the failure to comply… by’ performance of a corrective measure.” 50(a)(6)(Q)(x) was amended in 2003 to set out the methods by which a lender or holder may correct the failure to comply. The amended statute provides: Except as provided by Subparagraph (xi) of this paragraph, the lender or any holder of the note for the extension of credit shall forfeit all principal and interest of the extension of credit if the lender or holder fails to comply with the lender’s or holder’s obligations under the extension of credit and fails to correct the failure to comply not later than the 60th day after the date the lender or holder is notified by the borrower of the lender’s failure to comply by: (a) paying the owner an amount equal to any overcharge paid by the owner under or related to the extension of credit if the owner has paid an amount that exceeds an amount stated in the applicable Paragraph (E), (G), or (O) of this subdivision; [Paragraph (E) is the 3% cap on closing costs which is one of the more common violations. Paragraph (G) is the prohibition against pre-payment penalties. Paragraph (O) limits the interest rate to a “rate permitted by statute.”] (b) sending the owner a written acknowledgement that the lien is valid only in the amount that the extension of credit does not exceed the percentage described by Paragraph (B) of this subdivision, if applicable, or is not secured by property described under Paragraph (H) or (I) of this subdivision, if applicable; [Paragraph (B) is the 80% loan-to-value limitation. Paragraph (H) prohibits taking “any additional real or personal property other than the homestead” as collateral for the loan. Paragraph (I) prohibits taking an equity lien on ag exempt property.] (c) sending the owner a written notice modifying any other amount, percentage, term, or other provision prohibited by this section to a permitted amount, percentage, term, or other provision and adjusting the account of the borrower to ensure that the borrower is not required to pay more than an amount permitted by this section and is not subject to any other term or provision prohibited by this section; [This cure does not refer to any specific provision or prohibition.] (d) delivering the required documents to the borrower if the lender fails to comply with Subparagraph (v) of this paragraph or obtaining the appropriate signatures if the lender fails to comply with Subparagraph (ix) of this paragraph; [Subparagraph (v) is the provision that requires the lender to provide the borrower with copies of all documents signed by the borrower related to the extension of credit which were signed at closing. Subparagraph (ix) is the provision which requires the acknowledgment of value to be signed by the borrower and the lender.] (e) sending the owner a written acknowledgement, if the failure to comply is prohibited by Paragraph (K) of this subdivision, that the accrual of interest and all of the owner’s obligations under the extension of credit are abated while any prior lien prohibited under Paragraph (K) remains secured by the homestead; or [This one presents a problem. Paragraph (K) provides that a borrower may only have one equity loan at a time. The cure provision is that the lender must send the borrower a written acknowledgement that accrual of interest and all of the borrower’s obligations under the extension of credit (including making payments) are abated while any prior lien prohibited under Paragraph (K) remains secured by the homestead. But, assuming that the first lien equity loan is otherwise valid, then the first lien is not prohibited by Paragraph (K). The cure provision as drafted would seem to provide only a cure for a third lien equity loan. In short, the cure does not appear to match the violation.] (f) if the failure to comply cannot be cured under Subparagraphs (x)(a)-(e) of this paragraph, curing the failure to comply by a refund or credit to the owner of $1,000 and offering the owner the right to refinance the extension of credit with the lender or holder for the remaining term of the loan at no cost to the owner on the same terms, including interest, as the original extension of credit with any modifications necessary to comply with this section or on terms on which the owner and the lender or holder otherwise agree that comply with this section. In this case, the violation – failing to return the cancelled note and sending a release in recordable form – does not fall within the scope of subparagraphs (a) through (e) so it must fall, if anywhere, within the scope of the “catchall” provisions of subparagraph (f). The Court held, however, that under the circumstances the catchall cure would not actually provide a cure. The lender could offer to pay or credit $1,000 but could not refinance the extension of credit as there was no longer any debt to refinance. Garofolo concluded “…if a lender fails to meet its obligations under the loan, forfeiture is an available remedy only if one of the six corrective measures can actually correct the underlying problem and the lender nonetheless fails to timely perform the relevant corrective measure.” [Emphasis added.] The final paragraph of the opinion states: The terms and conditions required to be included in a foreclosure-eligible home-equity loan are not substantive constitutional rights, nor does a constitutional forfeiture remedy exist to enforce them. The constitution guarantees freedom from forced sale of a homestead to satisfy the debt on a home-equity loan that does not include the required terms and provision – nothing more. Ocwen therefore did not violate the constitution through its post-origination failure to deliver a release of lien to Garofolo. A borrower may seek forfeiture through a breach-of-contract claim when the constitutional forfeiture provision is incorporated into the terms of a home-equity loan, but forfeiture is available only if one of the six specific constitutional corrective measures would actually correct the lender’s failure to comply with its obligations under the terms of the loan, and the lender nonetheless fails to perform the corrective measure following proper notice from the borrower. If performance of none of the corrective measures would actually correct the underlying deficiency, forfeiture is unavailable to remedy a lender’s failure to comply with the loan obligation at issue. Accordingly, we answer “no” to both certified questions. [Emphasis added.] [Unfortunately, Garofolo does not make clear the distinction between 50(a) and 50(c). More on this infra.] My response to the Court’s summary: First sentence: The terms and conditions applicable to home equity loans contained in 50(a)(6) are not “required” to be “included” in the equity loan documents (although most of them typically are included). Second sentence: A borrower is protected from forced sale of a homestead if the loan “does not include the required terms and conditions – nothing more.”” The opinion suggests that defects in an equity loan are only a defense to foreclosure and not the basis for an affirmative claim against the lender, but… (Look at the fourth sentence). Fourth sentence: Notwithstanding the holding that there is no constitutional violation or remedy, the court also stated that a borrower may seek forfeiture under a breach of contract theory but: • only if one of the corrective measures contained in 50(a)(6)(Q)(x)(a)-(f) would actually cure the violation; • and the lender fails to perform the applicable corrective action following notice from the borrower; • and the borrower sustained actual damages as a result of the uncured violation. Fifth sentence: If none of the corrective measures enumerated in the 50(a)(6)(Q)(x)(a)-(f) would actually correct the violation, forfeiture is not an available remedy. The missing sentence: The Court states elsewhere that the borrower must be able to prove actual damages in order to invoke forfeiture under a breach of contract theory. Under the facts of the case, the borrower in Garofolo sustained no actual damages and has no remedy. Because of the atypical fact in this case that the loan was paid in full prior to the instigation of litigation, the holding should be limited in its application. (Although I am primarily a debtor’s attorney, I have to agree with the result in Garofolo. The violation was highly technical and the borrower suffered no damages, actual or otherwise. A borrower shouldn’t get a “free house” under those circumstances.) Wood is the follow up to Garofolo. Wood states: The primary issue in this case is whether a statute of limitations applies to an action to quiet title where a lien securing a home-equity loan does not comply with constitutional parameters. The parties also dispute whether petitioners are entitled to a declaration that respondents have forfeited all principal and interest on the underlying loan. We conclude that liens securing constitutionally noncompliant home-equity loans are invalid until cured and thus not subject to any statute of limitations. We further hold that in light of this Court’s decision today in Garofolo [citation omitted], petitioners have not brought a cognizable claim for forfeiture. [Emphasis added.] The determination that there is no applicable statute of limitations is a major change from prior case law which generally held that limitations accrues at closing if the violation was apparent at the time of closing. See, In re Priester, 708 F.3d 667 (5th Cir.2013); Schanzle v. JPMC Specialty Mortgage LLC, 2011 WL 832170 (Tex.App – Austin 2011); Santiago v. Novastar Mortgage, Inc., 443 S.W.3d 462 (Tex.App. – Dallas 2014); Estate of Hardesty, 449 S.W.3d 895 (Tex.App. – Texarkana 2014). [Judge Gargotta took an early lead on the limitations issue in In re Ortegon, 398 B.R. 431 (Bankr.W.D.Tex.2008), a case I lost. Somebody has to try the cases where we don’t know what the answer is.] The borrower did not have to be aware that the extension of credit violated 50(a)(6), as long as it was not concealed. For instance, if the closing costs exceeded the 3% cap on closing costs and that could be determined by doing the math on the HUD-1, the fact that the borrower was not aware of the 3% cap or how it was calculated does not delay limitations from running. Wood explains the holding in Garofolo, including the scope of that opinion. Our opinion today in Garofolo clarifies the extent of the protections outlined in section 50(a), including a borrower’s access to the forfeiture remedy. Specifically, we hold in Garofolo that section 50(a) does not create substantive rights beyond a defense to foreclosure of a home-equity loan securing a constitutionally noncompliant loan, observing that the terms and conditions in section 50(a) “are not constitutional rights and obligations unto themselves.” We also clarify that “the forfeiture remedy [is not] a constitutional remedy unto itself. Rather it is just one of the terms and conditions a home-equity loan must include to be foreclosure-eligible. We explain that borrowers may access the forfeiture remedy through a breach-of-contract action based on the inclusion of those terms in their loan documents, as the Constitution requires to make the home-equity loan foreclosure-eligible. In Garofolo we interpret only section 50(a), which sets the terms home-equity loans must include to foreclosure-eligible. Section 50(c), on the other hand, expressly addresses the validity of any homestead lien, broadly declaring the lien invalid if the underlying loan does not comply with section 50. [Internal citations omitted.] [Emphasis added.] 50(a) provides, in relevant part: “The 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: [a list which includes subparagraph (6) which describes home equity loans.] [Emphasis added.] 50(c) provides, in contrast: “No mortgage, trust deed, or other lien on the homestead shall ever be valid unless it secures a debt described by this section…” [Emphasis added.] Although Garofolo is less than crystal clear that its holding is based on 50(a) as opposed to 50(a)(6), Wood makes clear that the distinction is between 50(a) and 50(c). Although Garofolo and Wood may seem to say that a borrower may not bring a declaratory relief action regarding an alleged home equity defect, the actual holding is that a borrower may not bring a declaratory relief action based upon alleged constitutional violations. Both opinions make it clear that a borrower may bring an action for breach of contract if the loan is noncompliant and the lender/holder fails to cure after notice. This is significant as a claim for breach of contract gives rise to a request for attorney’s fees under Tex. Civ. Prac. & Rem. Code Sec. 38.001 and a claim for declaratory relief gives rise to a request for attorney’s fees under Tex. Civ. Prac. & Rem. Code Sec. 37.009. (I say “request” as both statutes are discretionary – the court “may” award attorney’s fees.) What it the message for practitioners? If a potential client comes to you and you identify a home equity violation, you should draft a notice of violation letter for the client’s signature which identifies the violation with sufficient specificity for the lender to identify the violation, i.e., if the violation is charging more than 3% for closing costs, say that. You do not have to identify the specific statutory sub-paragraph. Do not take any further action during the 60 day cure period. Assuming the lender does not cure, you have a couple of options. Have the borrower default, wait until the lender files an application for foreclosure, then sue the lender for declaratory relief and breach of contract. (And injunctive relief if necessary to stop a foreclosure.) Alternatively, don’t wait for the lender to take action and file a preemptive declaratory relief/breach of contract action. In your pleading, make certain that forfeiture of principal and interest is requested under 50(c), not 50(a). The declaratory relief is that the loan is invalid under 50(c). The breach of contract claim is that the lender failed to cure the violation pursuant to 50(a)(6)(Q)(x)(a)-(e) after notice pursuant to 50(a)(6)(Q)(x).  This is way beyond the scope of this post, but home equity violations may give rise to other claims and causes of action. For instance, there may be claims for DTPA violations. Texas case law holds that a loan is not a “good’ or “service” and will not serve as the basis for a DTPA violation. If, however, the home equity violation is charging closing costs in excess of the 3% cap, one or more of those costs may be a good or service – an appraisal, a survey, a tax certificate……. – which might bring the claim under the DTPA. There may also be RESPA violations, FDCPA violations, FCRPA violation,… (I have seen all of these. This is not meant to be an exhaustive list.) I mention the DTPA in particular as it may give rise to treble damages. (And attorneys fees)