Opinion
NUMBER 13-15-00504-CV
04-26-2018
RESIDENTIAL CREDIT SOLUTIONS, INC. AND FEDERAL NATIONAL MORTGAGE ASSOCIATION, Appellants, v. JOE PADILLA, Appellee.
On appeal from the 404th District Court of Cameron County, Texas.
MEMORANDUM OPINION
Before Chief Justice Valdez and Justices Rodriguez and Benavides
Memorandum Opinion by Justice Rodriguez
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. 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.
Tina Snyder, Padilla's former girlfriend, also signed the documents at issue. Snyder is not a party to this lawsuit.
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). 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.
Although Padilla sued First Franklin Financial Corp., an Operating Subsidiary of Merrill Lynch Bank & Trust Company, FSB (First Franklin), it is undisputed that First Franklin did not participate at trial and is not a party to this appeal. On April 11, 2011, First Franklin assigned Padilla's Note and transferred the lien to Residential Credit Solutions, Inc. (RCS), a loan servicing company. At that time, RCS became the holder of the Note and the associated Deed of Trust at issue in this case.
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. The Deed of Trust allowed for foreclosure of the Bayview Property upon Padilla's default.
Tina Snyder also signed the Note and the Deed of Trust as a borrower. But Snyder is not a party to this litigation.
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. 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 new principal balance included the following:
| Principal: | $340,170.58 |
| Interest through 04/30/2009: | $10,183.97 |
| Escrow Shortage: | $10,065.49 |
| Less Mortgagor Contribution: | ($0.00) |
| Less Suspense: | ($0.00) |
|---|---|
| $360,420.04 |
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. 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.
It is undisputed that RCS and Fannie Mae removed the case to federal court. However, the federal district court remanded the case to state court after determining that incomplete diversity destroyed its jurisdiction. See Padilla v. Fed. Nat'l Mortg. Ass'n, No. 1:13-CV-29 (S.D. Tex. Brownsville Div. Apr. 17, 2013) (order).
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.
In the alternative, Padilla asked for (1) an award of $117,000 in actual damages, which is arguably the equity in his house (the fair market value of $500,000 minus the mortgage balance of $383,000); (2) attorney's fees of $20,000; and (3) exemplary damages of $100,000. Another alternative suggested by Padilla was actual damages of $470,000, which represents $140,000 in payments, his $80,000 down payment, and $250,000 for improvements made to the Bayview Property.
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, (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. 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.
After the foreclosure of the Bayview Property but prior to trial, Padilla made payments of approximately $35,000 into the trial court's registry.
The trial court ordered Padilla to pay the monthly installments into the registry of the trial court during any appeal.
II. WAIVER OF ANY DEFAULT
By their first issue, RCS and Fannie Mae contend that the trial court erred in excusing Padilla's default under the Loan Modification Agreement. This issue challenges the trial court's order that "any past or present default is hereby waived under the terms of the Note (including any and all modifications thereof) and Deed of Trust dated May 31, 2007 . . . ."
RCS and Fannie Mae first argue that "Padilla did not allege that the Loan Modification Agreement was procured by fraud or is otherwise unenforceable, and thus, "the trial court was obligated to enforce the contract as written." They also complain that Padilla did not "allege or present any evidence that RCS waived Padilla's default" and that he "did not allege or present any legal defense to excuse his breach." Premised on these arguments, RCS and Fannie Mae conclude with the following: "Thus, there is legally and factually insufficient evidence to support the trial court's judgment waiving Padilla's default under the Loan Modification Agreement."
Padilla brought suit alleging fraud and negligent misrepresentation on the part of RCS's predecessor First Franklin. He claimed that RCS and Fannie Mae were aware of First Franklin's fraudulent acts. Padilla alleged a breach of contract against RCS for rejecting his partial payments of $4500 and $2400. And during trial, he arguably claimed common-law wrongful foreclosure, suggesting that RCS took affirmative action when it added approximately $20,000 to the principal balance of the mortgage that was foreclosed, failing to comply with statutory or contractual terms or detrimentally affecting the fairness of the foreclosure process. See First State Bank v. Keilman, 851 S.W.2d 914, 921-22 (Tex. App.—Austin 1993, writ denied) (op. on reh'g) ("[A] debtor may recover damages for common-law wrongful foreclosure only if the mortgagee either (1) fails to comply with statutory or contractual terms, or (2) complies with such terms, yet takes affirmative action that detrimentally affects the fairness of the foreclosure process.").
To the extent RCS and Fannie Mae assert that Padilla's allegations were not adequate, we disagree. As detailed above, Padilla presented allegations for his position that either a default did not exist or he had defenses to the acceleration of the Note and the sale of the Bayview Property, thus, providing a legal basis for the trial court's waiver of Padilla's past or present default.
To the extent RCS and Fannie Mae complain of insufficient evidence to show a waiver, we conclude that their argument is inadequately briefed. See TEX. R. APP. P. 38.1(i). They provide only cursory assertions and no citation to supporting authority. See id. We overrule the first issue.
III. CHALLENGE TO THE SUFFICIENCY OF THE EVIDENCE IF THE TRIAL COURT'S
RESCISSION OF THE FORECLOSURE WAS BASED ON A WRONGFUL FORECLOSURE CLAIM
In their second issue, RCS and Fannie Mae complain that the trial court erred in rescinding the foreclosure conducted by RCS. After noting that "[t]he trial court rescinded the foreclosure, but failed to articulate on what basis the foreclosure was rescinded," RCS and Fannie Mae challenge the legally and factually sufficiency of the evidence to support a claim for wrongful foreclosure. They also argue that, even if grounds for a wrongful foreclosure exist, Padilla failed to do equity, which bars any remedy. Finally, they claim that the trial court erred in rescinding the foreclosure because RCS had the right to foreclose under Texas law.
"The elements of a wrongful foreclosure claim are: (1) a defect in the foreclosure sale proceedings; (2) a grossly inadequate selling price; and (3) a causal connection between the defect and the grossly inadequate selling price." Sauceda v. GMAC Mortg. Corp., 268 S.W.3d 135, 139 (Tex. App.—Corpus Christi 2008, no pet.); see First State Bank v. Keilman, 851 S.W.2d 914, 921-22 (Tex. App.—Austin 1993, writ denied) (holding that a debtor may recover damages for common-law wrongful foreclosure for defects within the foreclosure sale itself).
See Pachter v. Woodman, 534 S.W.2d 940, 946 (Tex. Civ. App.—Tyler 1976) (holding to seek equity, one must do equity), reversed on other grounds, 547 S.W.2d 954 (Tex. 1977).
The traditional elements for a suit on a note are: (1) the existence of the note; (2) the defendant had signed the note; (3) the plaintiff was the holder of the note; and (4) a balance was due and owing under the note. See Doncaster v. Hernaiz, 161 S.W.3d 594, 602 (Tex. App.—San Antonio 2005, no pet.); Scott v. Commercial Servs. of Perry, Inc., 121 S.W.3d 26, 29 (Tex. App.—Tyler 2003, pet. denied).
As noted above, while Padilla did not include the words "wrongful foreclosure" in his petition, he did argue common-law wrongful foreclosure and presented trial testimony to support his allegations. Nonetheless, Padilla also pleaded fraud as a basis for his lawsuit. RCS and Fannie Mae do not challenge the sufficiency of the evidence to support this additional claim, and the trial court could have based the rescission of the foreclosure on the fraud claim. It was RCS and Fannie Mae's burden to show that the trial court's judgment was not supported by any legal theory raised by the evidence. See Point Lookout West, Inc. v. Wharton, 742 S.W.2d 277, 278 (Tex. 1987) (per curiam); see also McMaster v. Davidson, No. 13-03-533-CV, 2005 WL 2000789, at *6 (Tex. App.—Corpus Christi Aug. 22, 2005, pet. denied) (mem. op.). RCS and Fannie Mae's arguments are neither persuasive nor dispositive. See TEX. R. APP. P. 47.1. We overrule RCS and Fannie Mae's second issue.
IV. CHALLENGE TO THE TRIAL COURT'S REFORMATION OF THE TERMS OF THE AGREEMENT
By their third issue, RCS and Fannie Mae complain that the trial court erred in modifying the parties' agreement. They argue that Padilla neither pleaded nor proved a basis to rewrite his loan agreement.
In review, the Loan Modification Agreement set out, in relevant part, the following: (1) a principal loan balance of $360,420.04, which included unpaid interest of approximately $10,000 and an escrow shortage of $10,000; (2) a monthly payment for principal and interest of $1708.20; (3) a forty-two year maturity date of 2049; and (4) "the establishment and maintenance of an escrow account for the payment of taxes . . . for the remaining life of the loan." In its July 1, 2015 judgment, after rescinding the substitute trustee deed and removing it from the records and after waiving any past or present default by Padilla, the trial court ordered that the 2007 Note and the 2009 Loan Modification Agreement held by RCS be modified as follows: (1) a new principal balance of $318,000 ($353,000 less $35,000 to be paid by Padilla into the registry of the court and to be issued to RCS); (2) a new maturity date of thirty years from the date of the judgment; (3) a new monthly payment of $1868.11; and (4) no escrow requirement because Padilla "shall be responsible for the timely payment of [the taxes and insurance premiums for the remaining life of the loan]."
The judgment did not modify the fixed annual interest rate of 4.875%.
RCS and Fannie Mae argue the following:
The trial court modified the parties' agreement despite the fact that Padilla failed to plead any basis for doing so and failed to seek reformation of the agreement. Padilla did not allege or offer any evidence suggesting the terms of Loan Modification Agreement were ambiguous or the result of mistake or fraud. Accordingly, there is no basis for the court to "interpret" the agreement in a way that varies its express terms. Indeed, in the case of the escrow requirement in particular, the trial court simply struck this express provision even though this is an unambiguous material term to which the parties agreed.As their authority, RCS and Fannie Mae rely on In re Rains and section 26.02 of the Texas Business and Commerce Code. See In re Rains, 473 S.W.3d 461, 469 (Tex. App.—Amarillo 2015, orig. proceeding) (setting out that a court does not "have the inherent authority to modify or rewrite that agreement on behalf of the parties" and a court "cannot make new contracts between the parties, but must enforce the contracts as written") (citations omitted); see also TEX. BUS. & COMM. CODE ANN. § 26.02 (West, Westlaw through 2017 1st C.S.) (requiring a loan agreement exceeding $50,000 to be in writing, thus, creating a statute of frauds for certain loan agreements).
Even if Padilla alleged that there were different terms to the Loan Modification Agreement (which he did not), this still would not be a basis for the trial court to rewrite the parties' agreement.
We agree that the trial court did not have inherent authority to rewrite the parties' agreement. See In re Rains, 473 S.W.3d at 469. But we do not agree with RCS and Fannie Mae that Padilla failed to plead any basis for the court to rewrite the agreement, failed to seek reformation of the agreement, or failed to allege or offer evidence that the terms of the Loan Modification Agreement were the result of mistake or fraud.
Padilla sued RCS and Fannie Mae for, among other things, common law fraud and negligent misrepresentation. He asserted that First Franklin misrepresented the terms of both the original Note and the Loan Modification Agreement and led him to believe that the terms of the respective agreement would only require him to make a monthly payment of approximately $1700 per month. As to RCS and Fannie Mae, Padilla asserted that they were "well aware" of First Franklin's fraudulent acts. Padilla offered evidence that the terms of the Loan Modification Agreement were the result of fraud on the part of RCS and Fannie Mae and that he was mistaken as to what those terms were. Padilla also requested that the trial court set aside the foreclosure and reinstate the note and deed of trust, reforming it to reflect a principal amount of $353,000, an interest rate of 4.875 percent, a monthly payment of $1708.20 for principal and interest, and a term of thirty years.
"It is well settled that when there has been a mistake by one party, accompanied by fraud of the other party the remedy of reformation is available." Zurich Ins. Co. v. Bass, 443 S.W.2d 371, 375 (Tex. Civ. App.—Dallas 1969, no pet.). In this case, there were claims of fraud on the part of RCS and Fannie Mae and evidence that supported those claims, allowing for reformation of the parties' agreement. See id. We conclude that the trial court did not err in reforming the parties' agreement because Padilla pleaded and proved a basis for the trial court to rewrite the agreement. See id. We overrule the third issue.
V. CONCLUSION
We affirm the judgment of the trial court.
NELDA V. RODRIGUEZ
Justice Delivered and filed the 26th day of April, 2018.