Summary
holding that Texas law does not require production of the original promissory note
Summary of this case from Belanger v. Bac Home Loans Servicing, L.P.Opinion
CIVIL ACTION NO. W-10-CA-00350
04-26-2011
HUGH S. WELLS, et al., Plaintiffs, v. BAC HOME LOANS SERVICING, L.P. , f/k/a COUNTRYWIDE HOME LOANS SERVICING, L.P., et al., Defendants.
ORDER
Before the Court is the "Motion to Dismiss, or, in the Alternative, Motion for More Definite Statement" filed by the Defendant, BAC Home Loans Servicing, L.P. (BAC). Having considered the motion, the pleadings, and the applicable legal authority, the Court finds that the motion has merit and should be granted.
I. Statement of Facts
In January 2003, Hugh and Sharriah Wells (collectively, Wells) bought a home located at 1902 South 33rd Street in Temple, Texas. To finance the purchase, Wells signed a promissory note secured by a deed of trust on the property. BAC claimed that Wells defaulted and initiated foreclosure proceedings. Wells sought verify that BAC had the authority to foreclose, so he requested that BAC produce the original promissory note and any documents showing the transfer or assignment of either the note or the deed of trust. BAC refused.
On October 29, 2010, Wells sued BAC in Texas state court, alleging violations of the Texas Property Code, the Texas Business and Commerce Code, and the Texas Debt Collection Act. Wells also sought declaratory relief and to quiet title in his favor. BAC timely removed the case and moved to dismiss for "failure to state a claim upon which relief could be granted." See Fed. R. Civ. P. 12(b)(6). Wells did not respond.
II. Rule 12(b)(6) Standard
A motion to dismiss for failure to state a claim tests the sufficiency of the complaint under Federal Rule of Civil Procedure 8. Rule 8 requires a "short and plain statement of the claim showing that the pleader is entitled to relief." See Fed. R. Civ. P. 8(a)(2). To satisfy this Rule, the complaint must contain sufficient facts, which, if true, would "state a claim for relief that is plausible on face." See Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009).
Facial plausibility requires the plaintiff to allege facts supporting recovery under a viable legal theory. Although heightened fact pleading of specifics is not required, the plaintiff must include enough facts to provide fair notice of the nature of his claims and the grounds on which they rest. See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 n.3 (2007). Unsubstantiated accusations, conclusory assertions, or a "formulaic recitation of the elements of a cause of action will not do." See Iqbal, 129 S. Ct. at 1949 (quoting Twombly, 550 U.S. at 555). Furthermore, regardless of how well-pleaded they may be, the factual allegations must show an entitlement to relief under a valid legal theory. Complaints "based on an outlandish legal theory or on a close but ultimately unavailing one" should be dismissed. See Neitzke v. Williams, 490 U.S. 319, 327 (1989); McCormick v. Stadler, 105 F.3d 1059, 1061 (5th Cir. 1997).
When examining the complaint, the court engages in a two-part inquiry. First, it distinguishes between factual allegations and legal conclusions, because the latter are not entitled to a presumption of truth. See Iqbal, 129 S. Ct. at 1950. Second, the court determines whether the alleged facts "plausibly give rise to an entitlement to relief." See id. It will assume that the facts are true, construe them in the light most favorable to the plaintiff, and draw all reasonable inferences in his favor. See id. Those facts must allow the court, using its own experience and common sense, "to draw the reasonable inference that the defendant is liable for the misconduct alleged." See id. at 1949-50.
III. Analysis
Judged by this standard, Wells's claims are not plausible on their face. His factual allegations are inadequate, and, more importantly, his legal theories are untenable.
A. The "Show-Me-the-Note" Claims
The vast majority of Wells's claims rely on the same premise—BAC must prove that it possess the original promissory note before foreclosing. In support, Wells invokes Article 3 of the Uniform Commercial Code, which regulates promissory notes and other negotiable instruments. See Tex. Bus. & Com. Code § 3.102(a) (West 2002). Article 3 provides that only holders and non-holders in possession can enforce a note. A holder is a "person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession." See id. § 1.201(21)(A). Accordingly, Wells alleges that, before foreclosing, BAC must prove that it is a holder by producing the original promissory note.
A person not in possession can enforce an instrument only if: (1) the instrument has been lost, stolen, or destroyed; or (2) a prior payment has been recovered from that person. See Tex. Bus. & Com. Code §3.301.
This claim—colloquially called the "show-me-the-note" theory—began circulating in courts across the country in 2009. See Stein v. Chase Home Fin., LLC, Civ. No. 99-1995, 2010 WL 4736828, at *3 (D. Minn. Aug. 13, 2010) (collecting cases). "Advocates of this theory believe 'that only the holder of the original wet-ink signature note has the lawful power to initiate a non-judicial foreclosure.'" Id. (quoting Sundell-Bahrd v. Tiffany & Bosco, P.A., No. CV 10-8096-PCT-MHM, 2010 WL 2595083, at *1 (D. Ariz. June 24, 2010)). The courts, however, have roundly rejected this theory and dismissed the claims, because foreclosure statutes simply do not require possession or production of the original note. See id.; Mansour v. Cal-Western Reconveyance Corp., 618 F. Supp. 2d 1178, 1181 (D. Ariz. 2009). The "show me the note" theory fares no better under Texas law.
Texas law differentiates between enforcement of a promissory note and foreclosure. Foreclosure enforces the deed of trust, not the underlying note. See Slaughter v. Qualls, 139 Tex. 340, 346, 162 S.W.2d 671, 675 (1942) (stating that the trustee derives its authority to sell solely from the deed of trust); Aguero v. Ramirez, 70 S.W.3d 372, 375 (Tex. App.—Corpus Christi 2002, pet. denied). It is an independent action against the collateral and may be conducted without judicial supervision. See Tex. Prop. Code Ann. § 51.002 (West Supp. 2007); Tierra Sol Joint Venture v. City of El Paso, 311 S.W.3d 492, 499 (Tex. App.—El Paso 2009, pet. denied) (nothing that foreclosure is an in rem proceeding). Enforcement of the promissory note, on the other hand, is a personal action against the signatory and requires a judicial proceeding. See Tex. Bus. & Com. Code § 3.401(a); TrueStar Petroleum Corp. v. Eagle Oil & Gas Corp., 323 S.W.3d 316, 319 (Tex. App.—Dallas 2010, no pet.). Furthermore, Texas courts have refused to conflate foreclosure with enforcement of a promissory note. They have stated, "Where there is a debt secured by a note, which is, in turn, secured by a lien, the lien and the note constitute separate obligations." Aguero, 70 S.W.3d at 374 (emphasis added). The right to recover on the note and the right to foreclose are severable and may be enforced separately. See Carter v. Gray, 125 Tex. 219, 221, 81 S.W. 647, 648 (1935).
Furthermore, while suits on a promissory note typically require possession, TrueStar Petroleum Corp., 323 S.W.3d at 319, foreclosures do not. Under Texas law, a mortgage servicer can foreclose under a deed of trust, regardless of whether it is a holder. A mortgage servicer is "the last person to whom the mortgagor has been instructed by the current mortgagee to send payment for the debt secured by a security instrument." See Tex. Prop. Code Ann. § 51.0001(3) (West Supp. 2007). A mortgagee can be its own mortgage servicer. See id. Moreover, to administer the foreclosure process, the mortgage servicer need only receive written authorization from the mortgagee and disclose that fact to the mortgagors. See id. § 51.0025. Nothing requires the mortgage servicer to possess the original promissory note. See Broyles v. Chase Home Fin., No. 3:10-CV-2256-G, 2011 WL 1428904, at *3 (N.D. Tex. Apr. 13, 2011); Griffin v. BAC Home Loans Servicing, L.P., No. H-09-03842, 2011 WL 675285, at *2 (S.D. Tex. Feb. 26, 2011); Sawyer v. Mortg. Elec. Registration Sys., Inc., No. 3:09-CV-2303-K, 2010 WL 996768, at *3 (N.D. Tex. Feb. 1, 2010), adopted, 2010 WL 996917 (N.D. Tex. Mar. 17, 2010). Indeed, the Texas Property Code contemplates that the mortgage servicer will often represent the mortgagee, who may or may not possess the note itself. See Tex. Prop. Code § 51.0001(4) (stating that a mortgagee may be the "holder of a security instrument" or a "book entry system").
In addition, the statutory procedure for a deed-of-trust foreclosure does not require mortgage servicers to produce the original promissory note. The Texas Property Code provides a minimum level of protection for mortgagees by requiring constructive notice of foreclosure. See Hausmann v. Tex. Sav. & Loan Ass'n, 585 S.W.2d 796, 799 (Tex. Civ. App.—El Paso 1979, writ ref'd n.r.e.). The mortgage servicer need only provide notice of default, with an opportunity to cure, and notice of the actual foreclosure sale. See Tex. Prop. Code § 51.002(b), (d). Production of the original promissory note is not necessary. See Crear v. JP Morgan Chase Bank, N.A., No. 10-10875, 2011 WL 1129574, at *1 n.1 (5th Cir. Mar. 28, 2011) (per curiam).
In this case, Wells's claims under the Texas Property Code, the Texas Business and Commerce Code, and the Texas Debt Collection Act, as well as his request for declaratory relief, rest on the invalid "show-me-the-note" theory. Accordingly, those allegations fail to "state a claim for relief that is plausible on face" and must be dismissed. See Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009).
B. Notice of Acceleration
In addition to his "show-me-the-note" claims, Wells alleges that BAC failed to provide proper notice of the acceleration of his debt. He claims that the Property Code requires BAC to record all transfers of the lien prior to any acceleration or collection action on the note.
Wells, however, misstates the law again. First, the current version of the Property Code does not contain any provision requiring notice of acceleration, much less one mandating that all assignments or transfers be recorded. See Thomas v. Compass Bank, No. 01-01-00467-CV, 2002 WL 1340333, at *4 (Tex. App.—Houston [1st Dist.] June 20, 2002, no pet.). Second, although Texas courts have held that equity requires the creditor to send the debtor two notices of acceleration, neither notice mandates recording assignments of the deed of trust. See Ogden v. Gibralter Sav. Ass'n, 640 S.W.2d 232, 233 (Tex. 1982). The first notice must identify the default, give an opportunity to cure, and warn that failure to do so will result in acceleration. See id. The second notice must state that the creditor has accelerated the debt and that the entire amount is due and payable. See id. at 234. Therefore, because Texas law does not require recording assignments of the deed of trust before acceleration, Wells's claim is unavailing and must be dismissed.
C. Suit to Quiet Title
Moreover, Wells also seeks to quiet title to the property in his favor. He alleges that any party claiming an adverse interest either failed to record its interest or was tendered a defective instrument. Consequently, Wells asserts that any adverse interest is "invalid and void."
A suit to quiet title is an equitable action in which the plaintiff seeks to recover property wrongfully withheld. See Porretto v. Patterson, 251 S.W.3d 701, 708 (Tex. App.—Houston [1st Dist.] 2007, no pet.); Fricks v. Hancock, 45 S.W.3d 322, 327 (Tex. App.—Corpus Christi 2001, no pet.). The suit "enables the holder of feeblest equity to remove from his way to legal title any unlawful hindrance having the appearance of better right." Thomson v. Locke, 66 Tex. 383, 389, 1 S.W. 112, 115 (1886). To quiet title in his favor, the plaintiff "must allege right, title, or ownership in himself or herself with sufficient certainty to enable the court to see he or she has a right of ownership that will warrant judicial interference." Wright v. Matthews, 26 S.W.3d 575, 578 (Tex. App.—Beaumont 2000, pet. denied). In other words, the plaintiff must recover on the strength of his or her title, not the weakness of his adversary's. See Fricks, 45 S.W.3d at 327.
In this case, Wells has failed to plead a viable claim to quiet title. The Complaint contains no factual allegations whatsoever regarding the strength of Wells's title to the property. It focuses entirely on the weaknesses of any adversary's title. Therefore, because of the dearth of factual allegations, Wells has failed to state a claim to quiet title. Accord Disanti v. Mortg. Elec. Registration Sys., Inc., No. 4:10-CV-00103, 2010 WL 3338633, at *3 (E.D. Tex. Aug. 24, 2010) ("Because Plaintiff has failed to allege that he owns superior title to the Property, his claim to quiet title should be dismissed.").
IV. Conclusion
Federal Rule of Civil Procedure 8 sets out a liberal pleading standard; the plaintiff need only allege facts that, if true, would support recovery under a valid legal theory. See Erickson v. Pardus, 551 U.S. 89, 93-94 (2007) (per curiam); Neitzke v. Williams, 490 U.S. 319, 327 (1989). Wells's complaint, however, fails to cross this low threshold, because his legal theories are unavailing and his factual allegations are inadequate. Accordingly, it is
ORDERED that the "Motion to Dismiss" is GRANTED and this action is DISMISSED without prejudice. It is further
ORDERED that any pending motions no previously ruled upon by the Court are DENIED.
SIGNED on this 26th day of April, 2011.
/s/_________
WALTER S. SMITH, JR.
UNITED STATES DISTRICT JUDGE