Opinion
Civil Action No. SA-98-CA-0491 OG.
August 19, 1999.
MEMORANDUM AND RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE
TO: Honorable Orlando Garcia United States District Judge
Before the Court is defendant's Rule 12(b)(6) motion to dismiss for failure to state a claim or alternatively for summary judgment and plaintiffs' motion for summary judgment. I have jurisdiction to enter this Memorandum and Recommendation under 28 U.S.C. § 636(b) and the District Court's Order referring all pretrial matters in this proceeding to me for disposition by order or to aid in their disposition by recommendation where my authority as a Magistrate Judge is statutorily constrained.
Docket Entry No. 11.
Docket Entry No. 12.
Factual and Procedural Background
This case involves the validity of a home equity loan. Plaintiffs seek a declaratory judgment that the lien defendant asserts against their homestead pursuant to a home equity loan is invalid. Plaintiff's also seek restitution of all funds paid to defendant, as well as the forfeiture of all principal and interest, removal of the lien, and attorney's fees.
Plaintiffs, Kenneth and Betty McMahan, (the McMahans), first pursued a home equity loan with the defendant, Long Beach Mortgage Company, shortly after Texas voters approved the constitutional amendment permitting home equity loans in November of 1997. Plaintiffs sought the $127,000 loan to reduce their large amount of personal debt. The McMahans completed their loan application on December 23, 1997 and eventually closed on the loan on February 16, 1998. Long Beach Mortgage Company required the McMahans to pay off twelve of their creditors with the proceeds from the loan. Two of the creditors, the Internal Revenue Service and Temple Inland Mortgage Company, had liens on the McMahan home. The debt to the other ten creditors largely consisted of credit card obligations, and was therefore not secured by any lien. The fact that the defendant required the McMahans to repay approximately $30,000 of the proceeds of the loan to these ten unsecured creditors is the basis of this lawsuit.
Docket Entry No. 11, Appendix C, Exhibit 4.
Docket Entry No. 11, Appendix C, Exhibit 1, 6-12.
In March of 1998 plaintiffs began to contest the validity of their home equity loan. The McMahans originally filed this lawsuit in state court on April 22, 1998, just two months after receiving their loan. Defendant timely removed the action to federal court. Because plaintiffs have failed to state a claim upon which relief could be granted, I recommend that all of plaintiffs' claims be dismissed.
Docket Entry No. 12, Appendix 3, LONB 00005, Letter from the McMahans dated March 24, 1998.
Docket Entry No. 1.
Standard for Dismissal
Motions to dismiss for failure to state a claim are viewed with disfavor and rarely justified. The complaint must be liberally construed in favor of the plaintiff with the court accepting as true all well-pleaded facts. A motion to dismiss fails unless it appears certain that a plaintiff can prove no set of facts in support of its claims, or that the allegations accepted as true do not present a claim upon which relief can be obtained.
Mahone v. Addicks Util. Dist. of Harris County, 836 F.2d 921, 926 (5th Cir. 1988).
Kaiser Aluminum Chem. Sales, Inc. v. Avondale Shipyard, Inc., 677 F.2d 1045, 1050 (5th Cir. 1982), cert. denied 459 U.S. 1105 (1983).
Adolph v. Federal Emergency Management Agency , 854 F.2d 732, 735 (5th Cir. 1988); Conley v. Gibson , 355 U.S. 41, 45-46 (1957).
The complaint need only comply with the standards of "notice pleadings" under Rule 8 of the Federal Rules of Civil Procedure, which requires nothing more than "a short and plain statement of the claim" that gives the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests. Litigants may plead generally, relying on liberal pretrial discovery procedures to develop the precise factual basis for their claims.
Morrison v. City of Baton Route , 761 F.2d 242, 244 (5th Cir. 1985).
Summary Judgment
A party is entitled to summary judgment upon motion if the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Mere allegations of a factual dispute between the parties will not defeat an otherwise proper motion for summary judgment; the requirement is that there be no genuine issue of material fact. A fact is material if it might affect the outcome of the lawsuit under the governing law. A dispute about a material fact is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Therefore, summary judgment is proper if, under governing laws, there is only one reasonable conclusion as to the verdict; if reasonable finders of fact could resolve a factual issue in favor of either party, summary judgment should not be granted.A party seeking summary judgment bears the initial responsibility of informing the Court of the basis for its motion and identifying those portions of the record which it believes demonstrate the absence of a genuine issue of material fact. However, Rule 56 does not require that the moving party support its motion with evidentiary materials negating the opponent's claim. Regardless of whether the moving party accompanies its summary judgment motion with affidavits, the motion must be granted if the evidence before the Court demonstrates that the standard for entry of summary judgment, as set forth in Rule 56(c), is satisfied. Thus, when a motion for summary judgment is made and supported as provided in Rule 56, the nonmoving party may not rest upon the mere allegations or denials in his pleading. Rather, the nonmoving party's response must set forth facts showing that there is a genuine issue for trial. If the nonmovant does not so respond, the Court must enter summary judgment against him.
Celotex Corp. v. Catrett , 477 U.S. at 323; Wise v. E.I. DuPont Nemours Co ., 58 F.3d at 195; Burfield v. Brown. Moore. Flint. Inc ., 51 F.3d 583, 588 (5th Cir. 1995).
Edwards v. Aguillard, 482 U.S. 578, 595 n. 16 (1987); Celotex Corp. v. Catrett , 477 U.S. at 323.
Id .
Fed.R.Civ.P. 56(e); Anderson v. Liberty Lobby. Inc ., 477 U.S. at 250; State of Texas v. Thompson , 70 F.3d 390, 393 (5th Cir. 1995).
Celotex Corp. v. Catrett , 477 U.S. at 324; Neff v. American Dairy Queen Corp ., 58 F.3d at 1065; Engstrom v. First Nat'l Bank , 47 F.3d 1459, 1462 (5th Cir. 1995), cert. denied, 516 U.S. 818 (1995).
Lujan v. National Wildlife Federation , 497 U.S. 871, 884 (1990); Celotex Corp. v. Catrett , 477 U.S. at 323.
Discussion
Plaintiffs allege that their home equity loan is invalid under two theories. Plaintiffs first claim that the defendant required them to use approximately $30,000 of the proceeds from the loan to pay off several unsecured creditors contrary to Section 50(a)( 6)(Q)(i), Article XVI of the Texas Constitution. Secondly, plaintiffs claim that the defendant did not wait the constitutionally mandated twelve days before closing the loan.1. Repayment of Other Debt
The constitutional amendment permitting home equity loans in Texas became effective on January 1, 1998. Section 50(a)( 6), Article XVI of the Texas Constitution promulgates the regulations and procedures for home equity loans. Included among the many protections afforded consumers in that section is a restriction in § 50(a)(6)(Q)(i) on the application of the proceeds of the loan to other outstanding debt:
(a) 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 for: (6) an extension of credit that: (Q) is made on the condition that: (i) the owner of the homestead is not required to apply the proceeds of the extension of credit to repay another debt except debt secured by the homestead or debt to another lender; . . .
TEX. CONST. art. XVI, § 50(a)( 6)(Q)(i) (emphasis added).
Thus, the lender cannot require the borrower to apply the proceeds of the loan to repay other debts, with the exception of loans secured by the homestead or debts to lenders other than the home equity lender.
The Texas Constitution further requires lenders making an extension of credit pursuant to § 50(a)(6) to notify borrowers on a separate written instrument of their legal rights. This required notice contains a section informing the borrower of limitations on the application of loan proceeds to other debt:
TEX. CONST. art. XVI, § 50(g).
(Q) LOANS DESCRIBED BY SECTION 50(a)( 6), ARTICLE XVI, OF THE TEXAS CONSTITUTION MUST: (1) NOT REQUIRE YOU TO APPLY THE PROCEEDS TO ANOTHER DEBT THAT IS NOT SECURED BY YOUR HOME OR TO ANOTHER DEBT TO THE SAME LENDER;
TEX. CONST. art. XVI, § 50(g).
Presumably this section should mirror the provisions in § 50(a)(6)(Q)(i), but confusion arises since the two provisions are not identical: the borrower's notice in § 50(g) prohibits debts to the same lender whereas § 50(a)(6)(Q)(i) may be read to also prohibit debts to other lenders. The less than ideal drafting of these sections creates some ambiguity as to whether a lender can require a home equity borrower to apply the loan proceeds to debts from another lender if those debts are not secured by the home.
Defendant moves to dismiss this claim on the grounds that the language in § 50(a)(6)(Q)(i) clearly indicates that it is constitutionally permissible to have required the plaintiffs to pay off approximately $30,000 debt to other lenders. Plaintiffs interpret this section differently, since they plead that "Contrary to the provisions of Section 50(a)(6)(Q)(i), defendant required plaintiffs to apply in excess of $30,000 of the proceeds from the extension of credit to repay other debts which were not debts secured by the homestead." Because plaintiffs' claim turns on the interpretation of § 50(a)(6)(Q)(i), if defendant's interpretation is correct then plaintiffs have clearly failed to state a claim. Plaintiffs, on the other hand, move for summary judgment on the validity of the loan, alleging that the defendant violated the language in the notice to borrowers in § 50(g) of the Texas Constitution by requiring the plaintiffs to use the proceeds to pay off debt to other lenders.
Docket Entry No. 1, Plaintiffs' Original Petition, ¶ V.
Section 50(a)(6)(Q)(i) states unequivocally that it is permissible for the defendant to have required the McMahans to use the proceeds of the loan to pay off approximately $30,000 to other unsecured lenders: the borrower "is not required to apply the proceeds of the extension of credit to repay another debt except . . . debt to another lender." The language is clear and there is no ambiguity. Defendant argues that these two phrases must be read as having the same meaning since the language in the borrower's notice attempts to summarize the substantive provisions in § 50(a)(6). This argument is persuasive since the borrower's notice does state that it is a "NOTICE CONCERNING EXTENSIONS OF CREDIT DEFINED BY SECTION 50(a)( 6), ARTICLE XVI, TEXAS CONSTITUTION."
TEX. CONST. art. XVI, § 50(g).
Plaintiffs only argument in support of disregarding the clear meaning of § 50(a)(6)(Q)(i) is that to do otherwise would render protections for borrowers meaningless, since all "unsecured debt to entities such as Sears, JC Penney would become secured by the McMahans' homestead." But this argument is seriously flawed: Once these unsecured creditors are paid off, the creditors unsecured status does not become secured because the debt ceases to exist. Plaintiffs articulate no reason other than this patently frivolous argument why § 50(a)(6)(Q)(i) should not be given its clear meaning.
Docket Entry No. 12, ¶ 6(b).
The United States District Court for the Eastern District of Texas addressed this same issue late last year in Stringer v. Cendant Mortgage Corporation. In that case Judge John Hannah, Jr. dismissed an identical claim in which the plaintiffs alleged their home equity loan was invalid because they had been required to apply the proceeds of the loan to repay other unsecured lenders. Judge Hannah found that the two constitutional provisions had different meanings, but that the constitution permitted a lender to require the repayment of an unsecured debt so long as that creditor was not also the home equity lender. I find his reasoning persuasive since it gives effect to both of the sections and does not render either of the provisions meaningless, as plaintiffs would have the court do in disregarding § 5O(a)(6)(Q)(i). Accordingly, because plaintiffs have failed to state a claim upon which relief could be granted, I recommend that their claim — that the lien on their homestead is invalid because they were required to apply proceeds of the loan to repay debt to other lenders — be dismissed.
Docket Entry No. 11, Exhibit B, Stringer v. Cendant Mortgage Corp ., No. 6:98cv664 (E.D. Tex. Dec. 14, 1998).
2. Twelve-Day Waiting Period
Section 50(a)( 6)(M)(i), Article XVI of the Texas Constitution also requires that a lender may not close the extension of credit before the twelfth day following the submission of the borrower's application. The Texas Attorney General has held that it was permissible for potential borrowers to have completed their applications for a home equity loan prior to the January 1, 1998 effective date of the amendment, provided that the loan was closed after January 12, 1998.
TEX. CONST. art. XVI, § 50(a)( 6)(M)(i).
Tex. Att'y Gen. Op. DM-452, 1997 WL 756591 (Tex. A.G. Nov. 6, 1997).
Plaintiffs allege in their motion for summary judgment that their loan is invalid since they applied for and defendant closed on the loan on the same day, thereby violating the twelve-day waiting period. The plaintiffs' complaint states that they applied for the loan in December of 1997 and the loan was eventually closed on February 16, 1998. Defendant has produced a copy of the December 1997 loan application, to which plaintiffs have not responded. Accordingly, the facts fail to establish a claim that defendant violated the mandated twelve-day waiting period. Therefore, I recommend that plaintiffs' motion for summary judgment be denied, defendant's motion for summary judgment granted, and that this claim be dismissed as well.
Docket Entry No. 1, Plaintiffs' Original Petition, ¶ IV.
Docket Entry No. 11, Appendix C, Exhibit 1. Plaintiffs apparently filled out a handwritten application in December of 1997. Defendant provided a typed copy of the original application on February 16, 1998, the day the loan was closed.
Recommendation
Because plaintiffs have failed to state a claim upon which relief could be granted, I recommend that defendant's motion to dismiss or in the alternative for summary judgment be GRANTED, plaintiffs' motion for summary judgment be DENIED, and that all of plaintiffs' claims be DISMISSED.
Instructions For Service and Notice of Right To Appeal/Object
The United States District Clerk shall serve a copy of this Memorandum and Recommendation on all parties either (I) by certified mail, return receipt requested, or (2) by facsimile if authorization to do so is on file with the Clerk. Under 28 U.S.C. § 636(b)(1), and Rule 4(b) of the Local Rules for the Assignment of Duties to United States Magistrates (Appendix C to the Local Court Rules for the Western District of Texas), any party who desires to object to this report must file written objections to the Memorandum and Recommendation with the Clerk of this Court, and serve the Magistrate Judge and all parties, within ten (10) days after being served with a copy of this Memorandum and Recommendation. A party filing objections must specifically identify those findings or recommendations to which objections are being made. The District Court need not consider frivolous, conclusive, or general objections. A party's failure to file written objections to the proposed factual findings, legal conclusions, and recommendations contained in this report shall bar the party from a de novo determination by the District Court. Additionally, any failure to file written objections to the proposed findings, conclusions, and recommendations contained in this report within ten (10) days after being served, shall bar the aggrieved party from appealing the factual findings and legal conclusions that are accepted by the District Court, except on grounds of plain error. SIGNED August 19, 1999.
United States v. Wilson , 864 F.2d 1219, 1221 (5th Cir. 1989), cert. denied, 492 U.S. 918 (1989).
Battle v. U.S. Parole Comm'n , 834 F.2d 419, 421 (5th Cir. 1987).
Thomas v. Arn , 474 U.S. 140, 150-55 (1985); United States v. Raddatz , 447 U.S. 667, 673-76 (1980); 28 U.S.C. § 636 (b)(1).
Douglass v. United Serv. Auto. Ass'n , 79 F.3d 1415 (5th Cir. 1996).
NANCY STEIN NOWAK United States Magistrate Judge