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Texas Supreme Court Vacates Default Against Mortgage Asset Trustee, Clarifies Rules for Service on Financial Fiduciaries

Texas mortgage lawThe Supreme Court of Texas recently set aside default judgment against a mortgage asset securitization trust after finding that its trustee had not been properly served as required by Section 17.028 of the Texas Civil Practice and Remedies Code.

A copy of the opinion in U.S. Bank National Ass’n v. Moss is available at:  Link to Opinion.

The issue on appeal arose out of the two Texas statutes which address how lawsuits can be served on financial institutions that act as fiduciaries: (1) Section 17.028 of the Texas Civil Practice and Remedies Code, which allows service of a citation on a financial institution by serving its “registered agent,” and (2) Chapter 505 of the Texas Estates Code, which provides that a foreign corporate fiduciary must appoint the Secretary of State as its “agent for service of process.”

In the underlying matter, plaintiff, a homeowner (“Homeowner”) served the Secretary of State under Chapter 505 of the Texas Estates Code rather than the registered agent that the defendant (“Financial Institution”) had designated under the Texas Business Organizations Code.

Financial Institution had not updated its Chapter 505 designation of whom the Secretary should forward process to and so did not receive the citation.

As a result, default judgment was rendered against Financial Institution. Financial Institution subsequently filed an equitable bill of review, but its attempts to set the judgment aside were rejected by both the trial court and court of appeals.

The questions addressed by the Supreme Court of Texas were whether (1) Homeowner was required to comply with section 17.028 of the Texas Civil Practice and Remedies Code; and, if so, (2) whether the Secretary of State was Financial Institution’s registered agent.

The Supreme Court of Texas found that section 17.028 of the Texas Civil Practice and Remedies Code provides the mandatory methods of serving a financial institution. The Court also held that, for purposes of section 17.028, service on the Secretary as a foreign corporate fiduciary’s “agent” under Chapter 505 of the Texas Estates Code did not constitute service on a financial institution’s “registered agent.”

Section 505.004 of the Texas Estates Code provides that the Secretary must be appointed as a foreign corporate fiduciary’s agent for service of process “in an action or proceeding relating to a trust, estate, fund, or other matter within this state with respect to which the fiduciary is acting in a fiduciary capacity.” TEX. EST. CODE § 505.004(a)(2).

The Secretary issued a certificate documenting that the citation had been sent to the person whom Financial Institution had designated as their person to receive process under Chapter 505 of the Texas Estates Code. However, the citation was returned to the Secretary indicating “Return to Sender, No Such Number, Unable to Forward.”

Financial Institution learned about the default judgment approximately two months after it was rendered.

Financial Institution contended that service was improper because section 17.028 of the Texas Civil Practice and Remedies Code was the exclusive method of serving a financial institution. Homeowner argued that either Chapter 505 or section 17.028 could be given effect without contradiction.

The Supreme Court of Texas addressed Financial Institution’s argument that a plaintiff must comply with section 17.028 of the Texas Civil Practice and Remedies Code when suing a financial institution.

Section 17.028(b) provides that “citation may be served on a financial institution by: (1) serving the registered agent of the financial institution; or (2) if the financial institution does not have a registered agent, serving the president or a branch manager at any [Texas] office.” TEX. CIV. PRAC. & REM. CODE § 17.028(b).

Homeowner argued that the legislature’s use of the word “may” signaled an intent that service under section 17.028 was permissive, but the Supreme Court of Texas disagreed. The Court found that “may” was used to introduce two alternative methods of service, which method used, depending on whether the institution has a registered agent. See, id.

The Court found the remainder of section 17.028 to confirm this interpretation. Subsection (d) provides: “[i]f citation has not been properly served as provided by this section, a financial institution may maintain an action to set aside the default judgment … entered against the financial institution.” TEX. CIV. PRAC. & REM. CODE § 17.028(d) (emphasis added).

The Supreme Court of Texas found this subsection to show that the legislature intended section 17.028 as the exclusive means of service. Thus, the Court held that when the defendant was a financial institution, compliance with section 17.028 is mandatory.

The Court next addressed whether service on the Secretary of State was service on a financial institution’s “registered agent” as required by section 17.028.

Homeowner argued that he properly served Financial Institution pursuant to section 17.028 by serving the Secretary of State because Financial Institution had appointed the Secretary as its agent for service under Chapter 505 of the Texas Estates Code.

Under Chapter 505, a foreign corporate fiduciary can serve in a fiduciary capacity in Texas without meeting certain requirements, if it executes and files a written instrument that is irrevocable and of indefinite duration appointing the Secretary of State “as the fiduciary’s agent for service of process … in an action or proceeding relating to a trust, estate, fund or other matter within this state with respect to which the fiduciary is acting in a fiduciary capacity.” TEX. EST. CODE § 505.004(a)(2). In compliance with this, Financial Institution appointed the Secretary as its “agent.”

The Supreme Court of Texas found that the Secretary as appointed “agent” under Chapter 505 of the Texas Estates Code was not also its “registered agent” for purposes of section 17.028 of the Texas Civil Practice and Remedies Code.

The Court first referenced sections 5.251 and 9.004 of the Texas Business Organizations Code which it found referred to the Secretary as an “agent” but that they treated the Secretary as separate from any “registered agent” maintained by the entity. The Court further noted that Chapter 505 of the Texas Estates Code does not refer to the Secretary as a “registered agent.”

Thus, the Supreme Court of Texas found that neither the applicable chapters of the Texas Business Organizations Code nor Chapter 505 of the Texas Estates Code identified the Secretary as a “registered” agent. In fact, the Court noted Chapters 5 and 9 distinguished between a registered agent and the Secretary as agent.

Finally, the Court noted that Chapter 505 of the Texas Estates Code expressly provides that the requirement that a foreign financial institution must register with the Secretary and thus appoint a registered agent was “in addition to, and not a limitation on,” certain portions of the Texas Finance Code including section 201.102. Id. § 505.002(b).

In addition, the Court noted section 201.102 required out-of-state financial institutions to register with the Secretary “notwithstanding a provision … that purports to limit or prohibit its applicability to financial institutions.” TEX. FIN. CODE § 201.102.

Thus, the Supreme Court of Texas found that Financial Institution was not properly served and the default judgment must be set aside. The Court reversed the judgment, rendered summary judgment granting the bill of review, and remanded for further proceedings on the merits of the underlying lawsuit.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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