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5th Cir. Holds No ‘Detrimental Reliance’ Exception to Unilateral Withdrawal of Acceleration Notice

The U.S. Court of Appeals for the Fifth Circuit recently held that Texas law contains no detrimental reliance exception to a lender’s unilateral right to withdraw an acceleration notice.

A copy of the opinion in Jatera Corporation v. U.S. Bank National Association is available at:  Link to Opinion.

A borrower defaulted on a Texas home equity fixed adjustable rate note secured by a Texas home equity security instrument. In 2010, the mortgagee through its then loan servicer sent the borrower notice of its intent to accelerate the note and demanded full payment of the debt.

The mortgagee filed suit and obtained an agreed final judgment of foreclosure in 2011.  The borrower then vacated the property.

In 2012, the mortgagee’s new loan servicer sent a new notice of default demanding less than the full amount of the debt to cure her default.  In 2015, the borrower conveyed her interest in the property to a third party via special warranty deed.  In turn, the third party transferred its interest in the property to a corporation.

The mortgagee’s servicer re-initiated the prior foreclosure proceeding.  In response, the corporation filed a state court action against the mortgagee and its servicer alleging that the lien on the property was void because the foreclosure was not filed within the four-year statute of limitation.

The mortgagee and the servicer removed the case to federal court on diversity grounds.  The corporation amended its complaint to allege that the borrower’s detrimental reliance on the acceleration notice barred the mortgagee and the servicer from abandoning the 2012 acceleration.

The parties filed cross-motions for summary judgment.  The trial court found the corporation could not show that it detrimentally relied on the acceleration notice and entered summary judgment in favor of the mortgagee and its servicer.

This appeal followed.

Initially, the Fifth Circuit noted that under Texas law, “[a] person must bring suit for . . . the foreclosure of a real property lien not later than four years after the day the cause of action accrues” or the lien becomes void.  Tex. Civ. Prac. & Rem. Code Ann. § 16.035(a); § 16.035(d).  Further, if the note contains an optional acceleration clause, then “the action accrues only when the holder actually exercises its option to accelerate.”

The lender may abandon the acceleration “either by the lender’s unilateral actions or by agreement, thereby suspending the limitations period until the lender exercises its option to re-accelerate the note.” Requesting payment of less than the full debt owed after accelerating the full amount owed is “an unequivocal expression of the bank’s intent to abandon or waive its initial acceleration.”

In 1998, in Swoboda v. Wilshire Credit Corp., a Texas intermediate appellate court declared in dicta:  “Even if a creditor exercises the option to accelerate and makes a declaration to that effect, the election to accelerate can be revoked or withdrawn at any time, so long as the debtor has not detrimentally relied on the acceleration.”  However, the Fifth Circuit observed that no Texas court “ever held detrimental reliance is an exception” to a lender’s right to unilaterally withdraw an initial acceleration.

In 2015, the Texas legislature passed the Texas Civil Practice and Remedies Code § 16.038; subsection (a) of which provides that:  “If the maturity date of a series of notes or obligations or a note or obligation payable in installments is accelerated, and the accelerated maturity date is rescinded or waived . . . before the limitations period expires, the acceleration is deemed rescinded and waived and the note, obligation, or series of notes or obligations shall be governed . . . as if no acceleration had occurred.”

This statute provides no exceptions to a lender’s right to unilaterally withdraw the acceleration. “A statute is presumed to have been enacted by the legislature with complete knowledge of the existing law and with reference to it.”

The Texas legislature “chose not to include in the statute any exception to the lender’s right to unilaterally withdraw an acceleration notice.”  The Fifth Circuit presumed it did this “with knowledge of the case law.”  Thus, “it is unlikely the Texas Supreme Court would be willing to read such language into the statute.”

Accordingly, the Fifth Circuit held that “detrimental reliance is not an exception to the lender’s right to unilaterally withdraw an acceleration notice under Texas law” and affirmed the trial court’s order granting the mortgagee’s motion for summary judgment.

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Ernest Wagner practices in Maurice Wutscher's Commercial Litigation and Consumer Litigation groups, and leads the firm’s Insurance Recovery and Advisory group. Based in Chicago, he also supports the firm’s litigation matters in its Miami office. Ernest has substantial experience in various types of commercial and insurance recovery litigation. He has conducted more than 35 jury trials, and more than 150 arbitrations for plaintiffs and defendants. He has also successfully represented clients in numerous appeals, in various jurisdictions. Ernest earned his Juris Doctor from Emory University School of Law in Atlanta, Georgia, and his Bachelor of the Arts from the University of Iowa.

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