STEPHEN Wm SMITH, Magistrate Judge.
Judge Learned Hand believed that above the portals of every courthouse should be inscribed the famous admonition of Oliver Cromwell: "I beseech ye in the bowels of Christ, think that ye may be mistaken."1 This opinion is written in that spirit.
I. Procedural Background
Deutsche Bank brought this suit to foreclose on a home equity lien. After a bench trial in 2015, this court ruled in favor of the homeowners, holding that Deutsche Bank based its foreclosure claim entirely upon a deed of trust assignment which was void and invalid. Dkt. 94. Among other deficiencies, the purported assignment was executed by an entity (MERS) acting solely as agent for a principal (IndyMac Bank) that no longer existed. After entry of judgment, Deutsche Bank filed a motion to alter or amend the judgment, which was denied in a written opinion.2 One of the arguments considered and rejected was that MERS had executed the assignment as a principal on its own behalf, rather than merely as agent on behalf of a disclosed principal. Id. at 960.
On appeal the Fifth Circuit disagreed, concluding in an unpublished opinion that MERS had validly assigned its right to foreclose under the deed of trust to Deutsche Bank. The final judgment was vacated and the case remanded to this court "to determine whether Deutsche Bank met the remaining requirements to foreclose under Texas law and, if so, grant a final judgment for Deutsche Bank and rule on any outstanding request for attorneys' fees." Deutsche Bank Nat'l Trust Co. v. Burke, No. 15-20201, slip op. at 7 (5th Cir. July 19, 2016).
Upon remand, this court directed the parties to submit additional briefing on whether Deutsche Bank had satisfied the requirements of the Texas Constitution for a valid and enforceable home equity lien. Dkt. 119. The parties were also directed to consider the impact of a recent decision by a Texas appellate court upon the panel's ruling.
For reasons explained below, the court finds that the Burkes' constitutional challenges to the lien have no merit. However, binding Texas Supreme Court precedent,3 as well as at least three Fifth Circuit decisions adhering to that precedent,4 compel the conclusion that the panel's Erie guess about the validity of the assignment is clearly erroneous and, if followed, would work a manifest injustice.
II. Validity of Lien under the Texas Constitution
When the Burkes initially applied to IndyMac Bank for a home equity loan in 2007, they were turned down. Both were then retired, and neither had employment income. Sometime later, another representative of IndyMac Bank called to advise that the loan would be approved, and that the Burkes' previous contact at the bank had been fired. On May 21, 2007, Joanna Burke signed a note promising to repay a loan from Indymac Bank in the amount of $615,000 plus interest, secured by a deed of trust placing a lien on the Burkes' homestead in Kingwood, Texas. Four days after closing, the Burkes received loan documents from IndyMac, including an unsigned loan application falsely claiming that the Burkes had employment income of $10,416.67 per month. Because the Burkes had never claimed any employment income during the loan process, they promptly notified the bank of the error. The bank took no steps to cure that defect.
Article XVI Section 50 of the Texas Constitution imposes exacting requirements for a homestead lien in Texas. A constitutionally noncompliant lien is invalid unless and until the noncompliance is cured. Wood v. HSBC Bank USA, N.A., 505 S.W.3d 542, 543 (Tex. 2016). The Burkes maintain that the home equity lien failed to satisfy the requirements of Section 50 in several respects:
1.The application for the extension of credit was not voluntary, written, and consented to by the homeowners, in violation of Tex. Const. art. XVI, § 50(a)(6)(A), (Q)(v); 2.The lender failed to cure the defect in the loan application after notice from the homeowners, violating § 50(a)(6)(Q)(x); 3.The value of the total indebtedness exceeded 80% of the home's total value, violating § 50(a)(6)(B); 4.The loan closed sooner than 12 days after the borrower applied for it, violating § 50(a)(6)(M)(i); 5.The loan closed sooner than one day after the homeowner received a copy of the loan application, violating § 50(a)(6)(M)(ii); and 6.The lender failed to provide a copy of the loan application documents at closing, as required by § 50(a)(6)(Q)(v).Dkt. Nos. 121, 131. For reasons explained below, none of these challenges have merit.
The first two challenges center on the bank's falsification of the Burkes' employment income on the unsigned loan application. While this may well be evidence of the bank's intent to defraud underwriters and subsequent investors, it does not signify a violation of the cited constitutional provisions.5 Subsection 50(a)(6)(A) requires "a voluntary lien on the homestead created under a written agreement with the consent of each owner." It says nothing about the loan application, which may be given orally or electronically and need not be submitted in writing. Cerda v. 2004-EQR1 L.L.C., 612 F.3d 781, 788-89 (5th Cir. 2010) (citing 7 Tex. Admin. Code § 153.12(2)). The other cited provision, Subsection 50(a)(6)(Q)(v), requires only that the owner receive a copy of the final loan application as well as all documents signed by the owner at closing. Those requirements were met here. While the final loan application may have contained incorrect (and even fraudulent) information, it was the final loan application, and it was provided to the borrowers as required.
The third challenge — excessive loan to home value ratio — is unsupported by evidence at trial. At closing the Burkes signed an affidavit in which they expressly represented that the amount of the loan "does not exceed eighty percent (80%) of the fair market value of the Property on the date the Extension of Credit is made." See Texas Home Equity Affidavit and Agreement § I.E. (attached as Ex. A to D.Ex. 11). The amount of the loan was $615,000, and no evidence was introduced at trial suggesting that this loan amount exceeded 80% of fair market value. Nor did the Burkes offer evidence to justify disregarding the representation of value made in their affidavit at closing.
The closing date challenges (items 4 and 5) are similarly without merit, but for different reasons. The alleged violation of Subsection 50(a)(6)(M)(i) — that the loan must close no earlier than 12 days after the loan application — hinges on the assertion that the Burkes never applied for the loan they received. They contend that their initial loan application was turned down, and they never reapplied. However, the most natural interpretation of the events here is that they constituted a single loan transaction — after the initial rejection, the Burkes' loan application was simply reactivated by the bank, and the Burkes ratified that process by going forward with the loan transaction. See Cerda, 612 F.3d at 789 (holding that a final loan amount higher than originally applied for did not trigger another 12-day waiting period, since it was all "part of the same loan transaction."). As for the alleged violation of Subsection 50(a)(6)(M)(ii) — that the loan must close no less than one business day after the date the homeowner receives a copy of the loan application — the bank correctly observes that this provision of the Texas Constitution did not take effect until December 4, 2007, more than six months after the Burkes' loan was closed. See TEX. CONST. art. 16, § 50, historical notes (citing Acts 2007, 80th Leg., H.J.R. No. 72). Thus the closing date challenges are not well taken.
The sixth and final challenge is the failure to provide a copy of the final loan application "at closing." This contention misreads Subsection 50(a)(6)(Q)(v), which provides as follows:
(v) at the time the extension of credit is made, the owner of the homestead shall receive a copy of the final loan application and all executed documents signed by the owner at closing related to the extension of credit[.](emphasis added). The final loan application is thus not due at closing, but "at the time the extension of credit is made." This wording makes clear that these two dates are not necessarily synonymous. This makes sense, because the borrower's mandatory three-day revocation period renders it unlikely that the actual extension of credit will occur the same day as the closing. The record in this case does not disclose exactly when the extension of credit was made. It is undisputed the Burkes received the loan application four days after closing. Transcript (Dkt. 74) at 79. Absent proof that credit was actually extended before that date, there is no basis to invalidate the lien on this ground.
For all these reasons, the Burkes' contention that the home equity lien was constitutionally deficient must be rejected.
III. Validity of Assignment under Texas Common Law
Nevertheless, this court remains convinced that Deutsche Bank is not entitled to foreclose on the Burkes' property, because the assignment underlying its claim is void. Acutely aware that the panel reached the opposite conclusion, this court accepts that the basis for its earlier judgment was misunderstood. The balance of this opinion aims to correct that misunderstanding, and show how starkly the panel's conclusion deviates from binding precedent of both the Texas Supreme Court and the Fifth Circuit. See Seagraves v. Wallace, 69 F.2d 163, 164-65 (5th Cir. 1934) ("An appellate court . . . ought to have power to do justice according to law, and should be more ready to correct its own previous error, if such clearly appears, than to correct the errors of the District Court. Justice is better than consistency.").
As a preliminary matter, this court will address the very limited circumstances under which a lower court may properly disregard an appellate court's instructions on remand.
A. Law of the Case
Under the law of the case doctrine, an issue of law or fact decided on appeal may generally not be re-examined either by the district court on remand or by the appellate court on a subsequent appeal. Illinois Central Gulf R.R. v. International Paper Co., 889 F.2d 536, 539 (5th Cir. 1989). The doctrine follows from the sound public policy that litigation should have an end. White v. Murtha, 377 F.2d 428, 431 (5th Cir. 1967) (citing Roberts v. Cooper, 61 U.S. 467, 481 (1857)). It is an exercise of judicial discretion, not a limit on judicial power. See Messinger v. Anderson, 225 U.S. 436, 444 (1912).
The law of the case doctrine is not absolute, and has several recognized (if narrow) exceptions. The Fifth Circuit has explained that "a prior decision of this court will be followed without re-examination . . . unless (i) the evidence on a subsequent trial was substantially different, (ii) controlling authority has since made a contrary decision of the law applicable to such issues, or (iii) the decision was clearly erroneous and would work a manifest injustice." North Mississippi Communications, Inc. v. Jones, 951 F.2d 652, 656 (5th Cir. 1992).
A corollary of the law of the case doctrine, known as the mandate rule, provides that a lower court on remand must implement both the letter and the spirit of the appellate court's mandate. See Johnson v. Uncle Ben's, Inc., 965 F.2d 1363, 1370 (5th Cir. 1992). Again, this rule is not absolute, even upon lower courts. See United States v. Becerra, 155 F.3d 740, 753 (5th Cir. 1998) ("Consequently, unless one of the exceptions to the law of the case doctrine applies, the district court [is] bound to follow our mandate . . .").
For reasons explained below, this case falls squarely within the third exception. The unpublished panel opinion contradicts not only long-settled Texas law, but also several published decisions of the Fifth Circuit. Unless the decision is reversed, it will work a manifest injustice upon the Burkes, as well as other Texas residents who might be turned out of their homes in similar circumstances.
B. The 2011 Assignment
Deutsche Bank's right to foreclose hinges entirely6 upon a 2011 assignment from the original lender, IndyMac Bank. This document, a one-page standard form prepared by Deutsche Bank's attorneys, contained the following signature block:
MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC., AS NOMINEE FOR, INDYMAC BANK, F.S.B., ITS SUCCESSORS AND ASSIGNS By: /s/ Brian Burnett Assistant SecretaryP.Ex. 2. Below that, in equally prominent lettering, was a corporate acknowledgment that Mr. Burnett was acting in his capacity as "Assistant Secretary of MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC., AS NOMINEE FOR, INDYMAC BANK, F.S.B., ITS SUCCESSORS AND ASSIGNS." Id. Via this signature and corporate acknowledgment, IndyMac Bank is plainly identified as the principal, with MERS signing merely in the capacity as "nominee," or agent7 for IndyMac.
The body of the assignment8 further confirms this understanding of MERS' agency relationship to the transaction. Rather than beneficiary or assignor, it refers to MERS merely "as nominee for the lender, its successor and assigns." Moreover, the assignment purports to transfer "all rights accrued under said Loan Agreement," defined as both the promissory note and the deed of trust. MERS has never claimed to have any rights under the promissory note. It follows that MERS was not the intended assignor, because only IndyMac Bank possessed "all rights" under both the note and the deed of trust.
This absence of ambiguity regarding MERS' role as agent in this transaction was tacitly conceded at trial. Deutsche Bank never contended in its pleadings or proposed pretrial order that the assignment (drafted by its own lawyers) was ambiguous on this point. No witnesses were called to offer parol testimony that, despite the wording used, MERS had intended to sign as principal on its own behalf. At the close of the bench trial, this court candidly explained its concerns:
THE COURT: MERS is not doing it in its own name here. MERS is acting as nominee for IndyMac Bank. They're an agent for an entity that no longer exists; right?
Mr. JACOCKS: Under the terms of the Deed of Trust and the Property Code, Texas Property Code, MERS is a beneficiary and nominee for both the originating lenders and its successors and assigns under the expressed language of this particular Deed of Trust and Texas law, and it does allow the holder or the assignee of the Deed of Trust to initiate foreclosure proceedings.
THE COURT: The nominee. That they were acting as nominee. They were not acting as beneficiary.
MR. JACOCKS: Okay.
THE COURT: That's what the Assignment says. The Assignment doesn't say: MERS, in our capacity as beneficiary, is transferring the interest in this document or instrument. They're saying: We're acting on behalf of IndyMac Bank, an entity which no longer exists. So that's what troubles me about this.
Tr. at 93-94. Counsel for the bank acknowledged the point, but offered no rebuttal or counter-argument. Id. at 95.
Consistent with its comments at trial, this court issued findings and conclusions that MERS had acted solely in its limited capacity as nominee, and thus had not assigned its own rights under the deed of trust to Deutsche Bank.9 Whether MERS possessed the authority to assign its rights as beneficiary under the deed of trust was never doubted;10 the critical issue was whether MERS exercised that authority — and on that score the assignment left no room for doubt.
C. The Panel Opinion
On appeal, Deutsche Bank did not directly confront the problematic wording of the assignment, and instead pursued a strategy of misdirection. The bank shifted attention to the deed of trust, falsely implying that this court had ruled that under that document MERS lacked authority either to foreclose or to assign that right to another. The bank's brief viciously assaulted this straw man,11 tearing it limb from limb. But at the end of the day the actual language of the assignment was left standing, unscathed except for the occasional misquotation.12
Even so, aided perhaps by the Burkes' pro se status, the strategy appears to have worked. Declaring that this court's reasons for invalidating the assignment "all misunderstand our precedent and Texas law," the panel resurrected the bank's scarecrow:
The first three reasons [given by the magistrate judge] are all based on the incorrect premise that when MERS assigned the deed of trust to Deutsche Bank, acting per the assignment as nominee for IndyMac Bank, it as beneficiary did not have authority to assign the deed of trust.Deutsche Bank, No. 15-20201, slip op. at 5 (emphasis added). The panel opinion continued in the same vein:
However, the original deed of trust named MERS as a beneficiary, and Texas law and our precedent make clear that MERS, acting on its own behalf as a book entry system and the beneficiary of the Burkes' deed of trust, can transfer its right to bring a foreclosure action to a new mortgagee by a valid assignment of the deed of trust.Id. (emphasis added). Once again, a correct statement of Texas law. See also Harris County v. MERSCORP Inc., 791 F.3d 545, 558-59 (5th Cir. 2015) ("In other words, because of the duality of the note and lien, it is possible that MERS could simultaneously be the principal of the lien and the agent of the lender who holds the note."). Of course, the fact that MERS could wear the hat of principal or agent under the 2007 deed of trust says nothing about which hat MERS did wear when it executed the 2011 assignment.
The panel answered the hat question in conclusory fashion:
Here, MERS assigned its right to foreclose under the deed of trust to Deutsche Bank. That the assignment did not state that MERS was acting in its capacity as beneficiary does not change our analysis.Deutsche Bank, No. 15-20201, slip op. at 5-6 (emphasis added). In other words, the actual wording of the assignment made no difference.
Disregarding unambiguous language is not a normal tenet of contract construction, yet the panel offered no Texas case law or doctrinal justification for doing so here. In a footnote, the panel cited an unpublished Fifth Circuit decision involving a similarly worded assignment by MERS as nominee. Casterline v. OneWest Bank, F.S.B., 537 F.App'x 314 (5th Cir. 2013). But Casterline never contested the validity of that assignment, so the issue of MERS' capacity as principal or agent was never considered (much less decided) by that court. Id. at 317 ("Casterline has not challenged the assignment of the Security Instrument [by MERS] to OneWest.").
More important, even if Casterline had held that words of capacity in signing a contract could be ignored, such a ruling would have contradicted a long line of Texas and Fifth Circuit precedent, as the next section will demonstrate.
D. Principles of Agency Law and Contracting Parties
More precisely stated, the question is a simple one: was MERS a party to this contract? If it signed as principal, MERS was a party and its rights were assigned; if it signed merely as agent for IndyMac, then MERS was not a party and only IndyMac's rights (or those of its "successors and assigns") could have been transferred.
This opinion unavoidably assumes a posture of defiance that is profoundly uncomfortable for the author. After nearly forty years of working within this circuit at the bar or on the bench, every natural instinct is to salute and obey. Nevertheless, in view of the long common law tradition and precedents just described, it is difficult to imagine that jurists of reason could debate whether MERS was a party to the 2011 assignment.19
Respectfully, this court concludes that the panel decision regarding the validity of the 2011 assignment is clearly erroneous. It contradicts binding authority from the Texas Supreme Court in violation of Erie, and disregards previous Fifth Circuit decisions, in violation of the circuit's rule of orderliness. The court further concludes that the panel opinion would work a manifest injustice to the Burkes and other Texas homeowners.
Final judgment will be rendered in favor of the Burkes, together with amended findings of fact and conclusions of law consistent with this opinion.
Full Opinion here...