Steven Steptoe and Patricia Carballo v. JPMorgan Chase Bank, N.A. ( 2015 )


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  • Opinion issued March 19, 2015
    In The
    Court of Appeals
    For The
    First District of Texas
    ————————————
    NO. 01-14-00813-CV
    ———————————
    STEVEN STEPTOE AND PATRICIA CARBALLO, Appellants
    V.
    JPMORGAN CHASE BANK, N.A., Appellee
    On Appeal from the 61st District Court
    Harris County, Texas
    Trial Court Case No. 2013-32035
    OPINION
    JPMorgan Chase Bank, N.A. (JPMC) filed suit against Steven Steptoe and
    Patricia Carballo, seeking non-judicial foreclosure on a home-equity loan. Steptoe
    and Carballo moved for summary judgment on the ground that JPMC’s claim was
    a compulsory counterclaim that should have been brought by JPMC in an earlier
    suit. JPMC responded that its claim fell within an exception to the compulsory
    counterclaim rule. It filed a cross motion for summary judgment, asserting that it
    was entitled to judgment permitting non-judicial foreclosure, as a matter of law.
    The trial court granted JPMC’s motion for summary judgment and denied
    that of Steptoe and Carballo. On appeal, Steptoe and Carballo raise one issue in
    which they assert that the trial court erred in its ruling on the motions for summary
    judgment.
    We affirm.
    Background
    On August 29, 2007, Steven Steptoe entered into a home-equity loan
    transaction with Chase Bank USA, as permitted by article XVI, section 50(a)(6) of
    the Texas Constitution. Steptoe signed a home-equity note, borrowing $184,000
    from Chase Bank, and agreeing to make monthly payments. The note was secured
    by a lien on real property located at 1908 Taft Street, Houston, Texas. The lien
    was evidenced by a home-equity security instrument signed by Steptoe and Patricia
    Carballo (collectively “Appellants”).        Significant in this case, the security
    instrument contained a power-of-sale provision.
    On October 5, 2010, JPMC, as successor to Chase Bank, filed suit in state
    district court, seeking an order to allow it to proceed against Appellants with an
    expedited, non-judicial foreclosure of the home-equity loan under Texas Rule of
    2
    Civil Procedure 736 (suit referred to hereinafter as “JPMC I”). JPMC alleged that
    Steptoe had failed to make the monthly payments as required under the home-
    equity loan agreement. JPMC later dismissed the suit when it was determined that
    notice of default was deficient. JPMC later mailed new notices of default and
    notices of acceleration to Appellants.
    On August 26, 2011, Steptoe filed suit in state district court against JPMC,
    alleging that the home-equity lien violated Texas Constitution, article XVI, section
    50(a)(6) (suit referred to hereinafter as “Steptoe I”). JPMC removed the action to
    federal court. Soon after, JPMC filed a motion for summary judgment. The
    federal court granted JPMC’s motion and signed a take-nothing judgment against
    Steptoe.
    On May 29, 2013, JPMC filed the instant suit against Appellants in state
    district court, requesting a declaratory judgment (referred to hereinafter as “JPMC
    II”). JPMC sought to establish that it had “a valid and subsisting first lien” on the
    Taft property securing the loan agreement.       JPMC also sought a declaratory
    judgment, authorizing non-judicial foreclosure of its lien. JPMC asserted that it
    was entitled to non-judicial foreclosure “pursuant to” (1) article XVI, section
    50(a)(6) of the Texas Constitution, (2) section 51.002 of the Texas Property Code,
    and (3) “the terms of the Loan Agreement.” In addition, JPMC requested a writ of
    possession and attorney’s fees.
    3
    Appellants answered the suit, asserting a number of affirmative defenses.
    Among these, Appellants claimed that JPMC had “waived its right to foreclose by
    failing to file a compulsory counterclaim for judicial and/or non-judicial
    foreclosure in a prior lawsuit (“Steptoe I”) involving these same issues.”
    The parties filed cross-motions for summary judgment. JPMC moved for
    summary judgment on its claims for non-judicial foreclosure and for attorneys’
    fees under the terms of the home-equity loan.
    In their motion, Appellants asserted that the compulsory counterclaim rule
    barred JPMC’s claims in this suit because the claims should have been brought as a
    counterclaim in Steptoe I. JPMC responded, asserting that an exception to the
    compulsory counterclaim rule, known as the Kaspar rule, applies in secured
    transaction cases such as this. See Kaspar v. Keller, 
    466 S.W.2d 326
    , 329 (Tex.
    Civ. App.—Waco 1971, writ ref’d n.r.e.).
    The trial court signed two orders. One order granted JPMC’s motion for
    summary judgment, and the other denied Appellants’ motion.              This appeal
    followed in which Appellants raise one issue, asserting that the trial court erred by
    denying their motion for summary judgment and by granting that of JPMC.
    Standard of Review
    This court reviews an order granting or denying a motion for summary
    judgment de novo. Tex. Mun. Power Agency v. Pub. Util. Comm’n of Tex., 253
    
    4 S.W.3d 184
    , 192 (Tex. 2008). Under the traditional summary judgment standard,
    the movant has the burden of showing that no genuine issue of material fact exists
    and that he is entitled to summary judgment as a matter of law. See Am. Tobacco
    Co. v. Grinell, 
    951 S.W.2d 420
    , 425 (Tex. 1997).
    When both sides move for summary judgment and the trial court grants one
    motion and denies the other, reviewing courts consider both sides’ summary
    judgment evidence, determine all questions presented, and “render the judgment
    the trial court should have rendered.” Gilbert Tex. Constr., L.P. v. Underwriters at
    Lloyd’s London, 
    327 S.W.3d 118
    , 124 (Tex. 2010). Each party must carry its own
    burden to establish entitlement to summary judgment by conclusively proving all
    the elements of the claim or defense as a matter of law. See TEX. R. CIV. P.
    166a(c); Frost Nat’l Bank v. Fernandez, 
    315 S.W.3d 494
    , 508 (Tex. 2010).
    Analysis
    On appeal, Appellants continue to assert that the compulsory counterclaim
    rule bars JPMC’s foreclosure claim in this suit because JPMC failed to pursue
    foreclosure as a counterclaim in Steptoe I. Appellants acknowledge the exception
    to the compulsory counterclaim established by the Kaspar rule; however, they
    assert that the rule does not apply to foreclosure claims based on home-equity
    liens. See 
    Kaspar, 466 S.W.2d at 329
    .
    5
    In Kaspar, Henry Kasper purchased real property from Keller. 
    Id. at 327.
    He signed a note that was secured by a deed of trust lien on the property. 
    Id. Kasper later
    sued Keller to rescind the purchase contract and to cancel the note,
    asserting that the sale had been induced by fraud. 
    Id. Keller did
    not file a
    counterclaim; however, he indicated his intention to foreclose under the power of
    sale provision in the deed of trust. 
    Id. In response,
    Kasper obtained a temporary
    injunction, prohibiting foreclosure while the fraud suit was pending. 
    Id. Keller prevailed
    at trial, obtaining a take-nothing judgment against Kaspar.
    
    Id. Keller then
    completed the foreclosure under the power of sale provision in the
    deed of trust.   
    Id. After the
    non-judicial foreclosure sale of the property, a
    deficiency remained on the note, and Keller sued Kaspar to recover it. 
    Id. The trial
    court rendered summary judgment in Keller’s favor, awarding him
    $236,712.85 against Kaspar. 
    Id. at 327–28.
    Kasper appealed, urging that Keller’s deficiency claim should have been
    brought in his earlier fraud suit as a compulsory counterclaim, pursuant to Texas
    Rules of Civil Procedure Rule 97(a). 
    Id. at 328.
    The court acknowledged that
    Keller’s deficiency claim satisfied “the literal requirements of the Rule so as to
    constitute it, by its terms, a compulsory counterclaim.” 
    Id. The court
    concluded,
    however, that under the circumstances, an exception to compulsory counter claim
    rule was justified. See 
    id. The court
    held:
    6
    [T]he mortgagor [Kasper] should not be permitted to destroy or impair
    the mortgagee’s [Keller’s] contractual right to foreclosure under the
    power of sale by the simple expedient of instituting a suit, whether
    groundless or meritorious, thereby compelling the mortgagee to
    abandon the extra-judicial foreclosure which he had a right to elect,
    nullifying his election, and permitting the mortgagor to control the
    option as to remedies.
    
    Id. at 329.
    In their brief, Appellants assert, “Kaspar and its progeny hold that the lender
    cannot be forced to choose judicial remedies only if it has contracted for non-
    judicial remedies.” According to Appellants, the Kaspar rule has no application to
    foreclosure of home-equity liens because lenders have no right to a non-judicial
    remedy even when the lender has contracted for such as remedy. Appellants point
    to article XVI, section 50(a)(6)(D) of the Texas Constitution, which requires that a
    home-equity loan be “secured by a lien that may be foreclosed upon only by a
    court order.” TEX. CONST., art. XVI, § 50(a)(6)(D). From this, Appellants posit
    that, because a home-equity lien may only be foreclosed by “court order,” the only
    remedy that a lender has to foreclose such a lien is “a judicial remedy.” Thus, the
    distinctions found in Kaspar have no application in a foreclosure of a home-equity
    lien.
    Appellants, however, read Kaspar too narrowly. As the Fifth Circuit Court
    of Appeals has pointed out, the underlying purpose of the Kaspar rule is to
    “prevent a borrower from depriving its lender of a choice of remedies.” Douglas v.
    7
    NCNB Tex. Nat’l Bank, 
    979 F.2d 1128
    , 1130 (5th Cir. 1992). When, as in this
    case, the security instrument in a home-equity loan contains a power of sale
    provision, the lender has a choice of remedies. See TEX. R. CIV. P. 735.3.     Under
    these circumstances, the lender may choose to file a claim for judicial foreclosure.
    See id.; see also In re Erickson, 566 FED. APP’X 281, 284 (5th Cir. 2014) (holding
    that, under Texas law, a mortgagor with a home-equity lien, which includes a
    power of sale provision, may pursue judicial foreclosure). As Appellants point out,
    a claim for judicial foreclosure could be filed as a counterclaim in a suit initiated
    by the borrower, which, as in Steptoe I, challenges the propriety of the loan
    agreement.
    Rule of Civil Procedure 736 furnishes another remedy to the lender. “Rule
    736 provides the procedure for obtaining a court order . . . to allow foreclosure of a
    lien containing a power of sale in the security instrument, . . . including a lien
    securing . . . a home equity loan . . . .” TEX. R. CIV. P. 735.1(a). Thus, a home-
    equity lender, who has contracted for the right of non-judicial foreclosure under a
    power of sale provision, may choose to pursue the special procedure found in Rule
    736 to obtain an order allowing it to proceed with a non-judicial foreclosure under
    the Texas Property Code. See TEX. R. CIV. P. 735.1(a); see also TEX. R. CIV. P.
    736.9 (“After an order [under Rule 736] is obtained, a person may proceed with the
    foreclosure process under applicable law and the terms of the lien sought to be
    8
    foreclosed.”); TEX. PROP. CODE ANN. § 51.002(a) (Vernon 2014) (describing
    procedures for non-judicial foreclosure under power of sale conferred by deed of
    trust).
    We have previously provided the following analysis of Rule 736:
    When read as a whole, rule 736—titled “Expedited Foreclosure
    Proceeding”—does not contemplate an ordinary lawsuit. As its name
    suggests, Rule 736 provides a faster, more streamlined alternative to
    judicial foreclosure. A lender initiates the “proceeding” by filing an
    “application,” not an original petition, and the borrower may file a
    “response,” not an original answer. Compare TEX. R. CIV. P. 736(1)
    (describing proceeding and contents of application), with TEX. R. CIV.
    P. 45(a) (requiring a petition and answer in each lawsuit), and TEX. R.
    CIV. P. 47 (describing contents of a petition or counterclaim).
    Only one issue may be decided under rule 736: “the right of the
    applicant to obtain an order to proceed with foreclosure under the
    security instrument and Tex. Prop. ANN. § 51.002.” TEX. R. CIV. P.
    736(7); see TEX. PROP. CODE ANN. § 51.002. The rule contemplates a
    single hearing at which the district court must determine whether the
    applicant has satisfied its burden to prove “the grounds for the
    granting of the order sought in the application”; there is no provision
    for any other determination to be made by a factfinder. See TEX. R.
    CIV. P. 736(6). The application must be denied if the respondent
    establishes that the applicant has not satisfied any element under the
    rule. See 
    id. The district
    court’s determination of whether to grant or
    deny the application is not intended to be a binding adjudication of the
    merits of any disputes between a lender and a borrower. Indeed, the
    rule expressly states that the district court’s determination is without
    any preclusive effect. TEX. R. CIV. P. 736(9) (“No order or
    determination of fact or law under Rule 736 shall be res judicata or
    constitute collateral stopped or estoppel by judgment in any other
    proceeding or suit.”). The limited nature of a rule 736 foreclosure
    proceeding is further underscored by the rule’s prohibition against
    discovery. TEX. R. CIV. P. 736(6) (“No discovery of any kind shall be
    permitted in a proceeding under Rule 736”).
    9
    Huston v. U.S. Bank Nat’l Ass’n, 
    359 S.W.3d 679
    , 682 (Tex. App.—
    Houston [1st Dist.] 2011, no pet.).
    Although not expressly addressed by Rule 736, it is evident from the above
    discussion that a Rule 736 proceeding cannot be brought as a counterclaim in a
    borrower’s suit against the lender. See 
    id. Rather, it
    is a special, expedited
    proceeding with a unique procedural mechanism that is not compatible with the
    administration of a suit brought by a borrower to challenge the propriety of a loan
    agreement.    Cf. 
    id. at 682–83
    (holding that borrower could not assert a
    counterclaim in a Rule 736 proceeding).
    Were we to hold that the Kaspar rule does not apply to a home-equity lien,
    which includes a bargained-for power-of-sale provision, we would necessarily be
    requiring such a lender to assert a counterclaim to preserve its foreclosure rights.
    This would result in the impairment of the lender’s right to pursue one its
    remedies, namely a Rule 736 proceeding.           To abridge a creditor’s remedy,
    particularly one specifically crafted to provide a remedy under a special set of
    circumstances, would be antithetical to the underlying purpose of the Kaspar rule,
    which is to preserve the lender’s remedy choice and to curtail a debtor’s ability to
    control what remedy a creditor may pursue. See 
    Kaspar, 466 S.W.2d at 329
    .
    Requiring a lender to assert a counterclaim to preserve its foreclosure rights has the
    potential to encourage the filing of meritless suits by borrowers for the purpose of
    10
    interfering with a creditor’s choice of remedy. In keeping with the purpose of the
    Kaspar rule, a mortgagor, who has the bargained-for right of non-judicial
    foreclosure should not be limited only to those remedies that may be brought as a
    counter-claim. When, as here, a home-equity lien allows for alternate remedies on
    the mortgagor’s default, the Kaspar rule applies. See 
    id. Thus, we
    hold that JPMC was not required to assert a compulsory
    counterclaim in Steptoe I to preserve the foreclosure claim that it has asserted,
    here, in JPMC II. See Huston v. U.S. Bank Nat’l Ass’n, 
    988 F. Supp. 2d 732
    , 740
    (S.D. Tex. 2013) (holding that mortgagor, which had a home-equity lien permitting
    alternate foreclosure remedies, had not been required to assert a counterclaim in
    earlier suit in order to preserve its foreclosure rights); see also In re Erickson, 566
    Fed. App’x. at 284 (recognizing, in a home-equity case, that “judicial foreclosure
    and the ability of a trustee to foreclose under the power of sale in a deed of trust
    are separate and distinct remedies, either of which the trustee may elect to
    pursue”); Soin v. JPMorgan Chase Bank, N.A., No. H–14–1861, 
    2014 WL 4386003
    , at *3 (S.D. Tex. Sept. 14, 2104) (applying holdings in Erickson and
    Huston to determine that the bank “had both judicial and nonjudicial avenues
    available for enforcement of the Security Agreement and, therefore, were not
    required to seek enforcement of the Security Agreement as a compulsory
    11
    counterclaim”). ∗   We further hold that the trial court did not err by denying
    Appellants’ motion for summary judgment and granting that of JPMC.
    We overrule Appellants’ sole issue.
    Conclusion
    We affirm the judgment of the trial court.
    Laura Carter Higley
    Justice
    Panel consists of Justices Jennings, Higley, and Huddle.
    ∗
    Appellants rely on the following language found in a footnote from an
    unpublished federal case from the Northern District of Texas: “Under Texas law,
    if the loan is a home-equity loan, the purported contractual right to non-judicial
    foreclosure is a nullity and therefore cannot be waived, and the compulsory
    counterclaim rule applies.” Witt v. Countrywide Home Loans, Inc., No. 3:06-CV-
    1384-D, 
    2007 WL 2296538
    , at *4 n.8 (Tex. N.D. Aug. 10, 2007). We, however,
    find the holdings by the federal courts in Erickson, Huston, and Soin to be more in
    keeping with the Kaspar rule, as 
    discussed supra
    .
    12
    

Document Info

Docket Number: NO. 01-14-00813-CV

Judges: Jennings, Higley, Huddle

Filed Date: 3/23/2015

Precedential Status: Precedential

Modified Date: 10/19/2024