Teresa Garofolo v. Ocwen Loan Servicing, L.L.C.

Filing

NON DISPOSITIVE UNPUBLISHED OPINION FILED (Questions Certified). Judge: PEH , Judge: JLD , Judge: CH. Stay Follow-up Due on 09/08/2015. Case 14-51156 placed in abeyance for certified questions in 1:14-CV-745 from Supreme Court of Texas [14-51156]

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IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit

No. 14-51156

FILED
June 9, 2015
Lyle W. Cayce
Clerk

TERESA GAROFOLO,
Plaintiff - Appellant
v.
OCWEN LOAN SERVICING, L.L.C.,
Defendant - Appellee
Appeal from the United States District Court
for the Western District of Texas
USDC No. 1:14-CV-745

Before HIGGINBOTHAM, DENNIS, and HAYNES, Circuit Judges.
PER CURIAM:*
Teresa Garofolo (“Garofolo”) appeals the district court’s dismissal of her
claims against Ocwen Loan Servicing, L.L.C., (“Ocwen”) for violating Article
XVI, § 50(a)(6)(Q)(vii), of the Texas Constitution and for breach of contract.
Because the constitutional cause of action raises an important issue of Texas
constitutional law as to which there is no controlling Texas Supreme Court
authority, and the authority from the intermediate state appellate courts
provides insufficient guidance, we certify the relevant question to the Texas

Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
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Supreme Court. See TEX. CONST. art. V, § 3-c(a); TEX. R. APP. P. 58.1. Because
the only other claim on appeal—the breach of contract claim—is intertwined
with the constitutional claim, we certify that question as well.
I.
Taking Garofolo’s factual allegations as true, as we must in reviewing a
granted motion to dismiss under Rule 12(b)(6), we briefly recite the facts. See
Randall D. Wolcott, M.D., P.A. v. Sebelius, 635 F.3d 757, 763 (5th Cir. 2011).
In September 2010, Garofolo procured a home equity note in the amount of
$159,700 from Ally Bank, secured by a lien on her homestead. In accord with
Article XVI, § 50(a)(6)(Q)(vii) of the Texas Constitution, the Security
Instrument provided that “[w]ithin a reasonable time after termination and
full payment of the Extension of Credit, Lender shall cancel and return the
Note to the owner of the Property and give the owner . . . a release of the lien.”
Garofolo timely remunerated every monthly payment to the entity identifying
itself as the owner of the note until the note was paid in full on April 1, 2014.
At the time of full payment, Ocwen was the holder of the note. Mortgage
Electronic Registration Systems, Inc. (“MERS”), 1 acting as the nominee for
Ally Bank and its successors or assigns, recorded a release of lien on April 28,
2014, in Travis County, Texas. However, Garofolo did not receive the cancelled
promissory note or the release of lien, and she informed Ocwen of this
deficiency.

As one Texas court has described:
MERS was created for the purpose of tracking ownership interests in
residential mortgages. Entities such as mortgage lenders subscribe to MERS
and pay annual fees for the electronic processing and tracking of ownership
and transfers of mortgages. These members contractually agree to appoint
MERS to act as their common agent on all mortgages they register in MERS.
Robeson v. Mortg. Elec. Registration Sys., Inc., No. 02-10-00227-CV, 2012 WL 42965, at *5
(Tex. App.—Fort Worth Jan. 5, 2012, pet. denied) (memo op.) (citations omitted).
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When Ocwen did not cure this defect within 60 days of receiving notice
from Garofolo, she filed suit alleging that Ocwen violated Article XVI,
§ 50(a)(6)(Q)(vii), of the Texas Constitution and for breach of contract. On both
claims, Garofolo sought forfeiture of all principal and interest paid pursuant to
the note. Ocwen filed a motion to dismiss, arguing that the Texas Constitution
does not obligate a lender or holder to cancel and return a note upon full
payment by the owner of the property. Instead, Ocwen contended that the
Texas Constitution is satisfied by merely including such a requirement in the
terms of the Security Instrument.

Because the Security Instrument here

included that requirement, Ocwen asserted that Garofolo did not suffer a
constitutional injury. Ocwen’s motion to dismiss also argued that Garofolo did
not allege actual damages, a predicate to recovering money damages for breach
of contract. The district court agreed with both arguments and dismissed
Garofolo’s complaint with leave to amend. Garofolo declined to amend her
complaint, and appealed the district court’s order. 2 The district court then
dismissed Garofolo’s suit without prejudice.

Garofolo filed an appeal from the district court’s order dismissing her complaint
without prejudice and granting her leave to amend, but she did not subsequently file an
appeal from the district court’s final judgment dismissing her action. While the first order
did not constitute a final, appealable judgment under 28 U.S.C. § 1291, see, e.g., Russell v.
Watkins Ludlam Winter & Stennis, P.A., 181 F. App’x 441, 444 (5th Cir. 2006) (unpublished),
we conclude that her appeal is nonetheless timely. Federal Rule of Appellate Procedure
4(a)(2) provides that “[a] notice of appeal filed after the court announces a decision or order—
but before the entry of the judgment or order—is treated as filed on the date of and after the
entry.” In FirsTier Mortgage Co. v. Investors Mortgage Insurance Co., the Supreme Court
held that “Rule 4(a)(2) permits a notice of appeal from certain nonfinal decisions to serve as
an effective notice from a subsequently entered final judgment.” 498 U.S. 269, 274 (1991).
As an example, it noted that an appeal is timely under this rule if an appellant files a notice
of appeal from a district court’s order dismissing his complaint with leave to amend but not
from the court’s subsequent final dismissal of the action. Id. at 275; see also Covey v. Ocwen
Loan Servicing, Inc., 574 F. App’x 421, 422 n.1 (5th Cir. 2014) (unpublished).
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II.
A. Constitutional Claim
Prior to 1997, Texas prohibited home equity loans. Stringer v. Cendant
Mortg. Corp., 23 S.W.3d 353, 354 (Tex. 2000). Voters amended the Texas
Constitution in 1997 to “expand the types of liens for loans that a lender . . .
could place against a homestead. The amendment allows homeowners who
have either entirely repaid their home loans or who have accumulated equity
in their homestead over and above existing liens to apply for a loan . . . .” Id.
In passing the amendment, Texas became the last state in the country to allow
home equity loans and, unlike most other states, such loans are regulated not
by statute, “but by the elaborate, detailed provisions” of the Texas
Constitution. Sims v. Carrington Mortg. Servs., L.L.C., 440 S.W.3d 10, 13 (Tex.
2014) (citation and internal quotation marks omitted).

This “elaborate”

framework reflects Texas’s “strong, historic protection of the homestead.” Id.
The constitutional provision at issue in this action reads:
(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: . . .
(vii) within a reasonable time after termination
and full payment of the extension of credit, the
lender cancel and return the promissory note to
the owner of the homestead and give the owner,
in recordable form, a release of the lien securing
the extension of credit or a copy of an
endorsement and assignment of the lien to a
lender that is refinancing the extension of
credit; . . .
(x) except as provided by Subparagraph (xi) of
this paragraph, the lender or any holder of the
note for the extension of credit shall forfeit all
principal and interest of the extension of credit
if the lender or holder fails to comply with the
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lender’s or holder’s obligations under the
extension of credit and fails to correct the failure
to comply not later than the 60th day after the
date the lender or holder is notified by the
borrower of the lender’s failure to comply
by: . . . .
TEX. CONST. art. XVI, § 50(a)(6)(Q)(vii), (x).
Although the Texas Supreme Court has interpreted Section 50(a)(6)(Q)
on several occasions—frequently on certification from this court—it has yet to
address the provisions at issue in this case. See, e.g., Stringer, 23 S.W.3d at
354 (construing TEX. CONST. art. XVI, § 50(a)(6)(Q)(i) on certification from this
court).
Garofolo contends that the import of the provisions above is that if a
lender fails to return the original note as “paid” and provide a release of lien
form within sixty days of demand, it must forfeit all principal and interest.
Ocwen, on the other hand, argues that the language “made on the condition
that” means simply that the security instrument itself must contain that
language (failing which forfeiture is a remedy), but that the Texas Constitution
otherwise offers no remedy if the lender includes the language in the security
instrument but fails to return the note and release of lien.

Garofolo’s

construction appears to give rise to a drastic remedy, but Ocwen’s construction
appears to render the requirement a virtual nullity except in the (hopefully
rare) circumstance where a lender unscrupulously attempts to enforce a paid
note resulting in recoverable damages.
No Texas Supreme Court case directly addresses this question. Garofolo
points to language from the Texas Supreme Court, construing a different part
of the home equity provisions, that Section 50(a)(6)(Q) articulates the
“substantive rights and obligations of the lenders and borrowers.” Stringer, 23
S.W.3d at 357. To enforce these terms and conditions, Stringer noted that
Section 50(a)(6)(Q)(x) “provides that the lender forfeits all principal and
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interest of the loan if it fails to comply with the obligations set out in [S]ection
50(a)(6).”

Id. at 356–57.

However, Stringer did not confront the precise

question presented here: whether inclusion of the return obligations in the note
is all that is required or whether compliance with the return obligations is
mandated.
The parties cite to various intermediate state appellate court decisions
to support their conflicting interpretations. In Vincent v. Bank of America,
N.A., 109 S.W.3d 856, 861 (Tex. App.—Dallas 2003, pet. denied), the borrower
alleged that the lender violated the loan agreement, which required payments
to be allocated to principal and interest according to a specific formula. The
borrower sought to recover under Section 50(a)(6)(Q)(x), which entitles a
borrower to forfeiture of principal and interest for uncured violations of Section
50(a)(6). See Vincent, 109 S.W.3d at 861–62. First, the court held that the
borrower failed to state a constitutional claim because Section 50 does not
govern the allocation of payments between principal and interest. Id. at 862.
It reasoned that “forfeiture is only available for violations of constitutionally
mandated provisions of the loan documents.” Id. Second, the borrower argued
that the lender’s impermissible allocation of payments violated Section
50(a)(6)(L), which requires a loan be “scheduled to be repaid in equal successive
monthly installments.” TEX. CONST. art. XVI, § 50(a)(6)(L). The court also
rejected this argument, stating that “[a]s long as the Loan Agreement, as
originally entered into by the parties, complies with the provisions of the
constitution, forfeiture is not an appropriate remedy.” Vincent, 109 S.W.3d at
862.
Garofolo argues that Vincent’s instruction that “forfeiture is only
available for violations of constitutionally mandated provisions of the loan
documents” supports her claim because she alleges a violation of a
constitutionally

mandated

provision.
6

See

TEX.

CONST.

art.

XVI,

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§ 50(a)(6)(Q)(vii).

On the other hand, Vincent also undermines Garofolo’s

argument by noting that a constitutional violation only occurs if the loan
agreement, “as originally entered into by the parties,” does not comply with the
Constitution.

As Ocwen points out, the Security Instrument in this case

incorporated Section 50(a)(6)(Q)(vii)’s requirements.
Ocwen’s argument is bolstered by Wells Fargo Bank, N.A. v. Robinson,
391 S.W.3d 590 (Tex. App.—Dallas 2012, no pet.). In Robinson, the borrower
alleged that Wells Fargo violated Section 50(a)(6)(D), which mandates that a
lien may only be foreclosed by court order. Id. at 593. The loan agreement, or
deed of trust, incorporated this requirement, and Wells Fargo ultimately
sought to foreclose on the property. Id. Although the court authorized Wells
Fargo to foreclose on May 6, 2008, the foreclosure sale was conducted on a
different date—meaning it was not authorized by court order. Id. Because the
sale was not authorized by court order, the borrower argued that it violated
the Texas Constitution and entitled the borrower to principal and interest
under Section 50(a)(6)(Q)(x). Id. at 595. The court disagreed. Relying on
Vincent, it held that as long as the deed of trust complied with the Texas
Constitution, any subsequent breach by Wells Fargo should be pursued in
traditional tort and breach of contract causes of action. Id. Thus, the borrower
was not entitled to forfeiture because the deed of trust incorporated Section
50(a)(6)(D)’s requirement. 3 Id.
In contrast, Garofolo cites to Box v. First State Bank, which considered
an alleged violation of Section 50(a)(6)(Q)(i). 340 B.R. 782, 784 (S.D. Tex.
2006). That provision “prohibits a lender from requiring the homestead owner
to apply loan proceeds to pay another debt owed to the same lender.” See id.
Galvan v. Centex Home Equity Co., L.L.C., 2008 WL 441773 at *4–5 (Tex. App.—San
Antonio 2008, no pet.), is not helpful here because it involved review of an arbitration decision
and, therefore, applied a highly deferential standard of review.
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(describing TEX. CONST. art. XVI, § 50(a)(6)(Q)(i)). In Box, the loan agreement
stated, in accordance with Section 50(a)(6)(Q)(i), that the lender did not require
the borrower to apply the loan proceeds to pay another debt. 340 B.R. at 784–
85.

However, evidence suggested that the lender did in fact require the

borrower to use the proceeds for this purpose as a prerequisite for making the
loan. Id. at 785. Because the lender never intended to abide by the loan
agreement, the extension of credit was not “made on the condition” that the
lender would comply with Section 50(a)(6)(Q)(i). Accordingly, the court held
that the loan was invalid as it violated the Texas Constitution. Id. at 789. This
case is distinguishable, however, as it does not involve a contention that the
original lender never intended to satisfy the conditions in the loan origination
agreement.
We find these cases inconclusive. We note that Texas has ardently
protected the homestead. This is manifest by the Texas Supreme Court’s
statements about Section 50, which imposes “[d]raconian consequence[s for]
noncompliance, whether intentional or inadvertent: not merely the loss of the
right of forced sale of the homestead, but forfeiture of all principal and
interest.” Fin. Comm’n of Tex. v. Norwood, 418 S.W.3d 566, 571 (Tex. 2013).
While the courts are to interpret the Texas Constitution by “rely[ing] heavily
on its literal text,” id. at 586 (citation and internal quotation marks omitted),
Ocwen’s reading of the statute may significantly diminish the “[d]raconian
consequence of noncompliance” by allowing lenders to simply ignore the actual
import of these constitutional provisions.

Id. at 571.

This problem is

highlighted by Ocwen’s argument that the breach of contract claim was
properly dismissed for want of damages. As such, we cannot conclude that
Ocwen’s interpretation is correct. On the other hand, given the fact that a
release of lien was promptly filed, it seems somewhat extreme to order a
forfeiture of all principal and interest here.
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We turn, then, to the question of whether we should certify this issue to
the Texas Supreme Court. Under the Texas Constitution, “[t]he supreme court
and the court of criminal appeals have jurisdiction to answer questions of state
law certified from a federal appellate court.” TEX. CONST. art. V, § 3-c(a). It
“may answer questions of law certified to it . . . if the certifying court is
presented with determinative questions of Texas law having no controlling
Supreme Court precedent. The Supreme Court may decline to answer the
questions certified to it.” TEX. R. APP. P. 58.1.
“The decision of whether to certify a question lies within our sound
discretion.” Patterson v. Mobil Oil Corp., 335 F.3d 476, 487 (5th Cir. 2003)
(citation omitted). 4 We do not “lightly abdicate our mandate to decide issues
of state law when sitting in diversity.” Jefferson v. Lead Indus. Ass’n, Inc., 106
F.3d 1245, 1248 (5th Cir. 1997). While “certification is not a panacea for
resolution of those complex or difficult state law questions which have not been
answered by the highest court of the state, . . . [it] may be advisable where
important state interests are at stake and the state courts have not provided
clear guidance on how to proceed.” In re Katrina Canal Breaches Litig., 613
F.3d 504, 509 (5th Cir. 2010) (citation and internal quotation marks omitted).
Thus, while we recognize that certification is to be used sparingly, it is
warranted here because: (1) this case involves the construction of the Texas
Constitution, (2) it is a matter of particular importance to the State of Texas,
and (3) there are no Texas Supreme Court cases dealing with the issue at hand.
See Sims v. Carrington Mortg. Servs., L.L.C., 538 F. App’x 537, 543 (5th Cir.
2013) (unpublished) (listing these factors as a basis for certifying a case
involving Section 50 to the Texas Supreme Court). We note that we have

Of course, the decision whether to accept the certified question is solely within the
province of the Texas Supreme Court. See TEX. R. APP. P. 58.1.
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previously certified thorny questions under Section 50. See, e.g., id. at 543;
Doody v. Ameriquest Mortg. Co., 242 F.3d 286 (5th Cir. 2001); Stringer v.
Cendant Mortg. Corp., 199 F.3d 190 (5th Cir. 1999). Both our court and the
Texas Supreme Court have acknowledged that Section 50 implicates important
Texas interests. See Doody, 242 F.3d at 290 (“For that reason and for the
reason that these questions affect important interests of Texas, we are
reluctant to undertake in the first instance to decide whether an exception is
appropriate here.”); Sims, 440 S.W.3d at 13 (opining on Texas’s “historic
protection of the homestead”). 5
B. Breach of Contract
Garofolo also alleged that Ocwen breached the Security Instrument by
failing to return the cancelled note and provide a release of lien. 6 Pursuant to

We note, too, that this may become a recurring issue. This identical issue was
presented in Estes v. JP Morgan Chase Bank, N.A., No. 14-51103, ___ F. App’x ___, 2015 WL
2386053 (5th Cir. May 20, 2015). Although that case was decided on other grounds, it
demonstrates that the issue is not limited to this one case, a fact that supports certifying the
question. See Barnes v. Atl. & Pac. Life Ins. Co. of Am., 514 F.2d 704, 706 (5th Cir. 1975).
5

Section 19 of the Security Instrument states:
All agreements between Lender and Borrower are hereby expressly
limited so that in no event shall any agreement between Lender and Borrower
or between either of them and any third party, be construed not to allow Lender
60 days after receipt of notice to comply as provided in this Section 19, with
Lender’s obligations under the Extension of Credit to the full extent permitted
by Section 50(a)(6), Article XVI of the Texas Constitution. Borrower
understands that the Extension of Credit is being made on the condition that
Lender shall have 60 days after receipt of notice to comply with the provisions
of Section 50(a)(6), Article XVI of the Texas Constitution. As a precondition to
taking any action premised on failure of lender to comply, Borrower will advise
Lender of the noncompliance by a notice given as required by Section 14, and
will give Lender 60 days after such notice has been received by Lender to
comply. Except as otherwise required by Applicable law, only after lender has
failed to comply, shall all principal and interest be forfeited by Lender, as
required by Section 50(a)(6)(Q)(x), Article XVI of the Texas Constitution in
connection with failure by Lender to comply with its obligations under the
Extension of Credit . . . .”
The Security Instrument defines “Lender” to include “any holder of the Note who is
entitled to receive payments under the Note.” Section 23 of the Security Instrument
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Section 19 of the Security Instrument, Garofolo sought forfeiture of all interest
and principal for this breach of contract.
Ocwen argues, and the district court held, that Garofolo cannot recover
principal and interest because forfeiture is solely a constitutional remedy. See
Vincent, 109 S.W.3d at 862 (“As long as the Loan Agreement, as originally
entered into by the parties, complies with the provisions of the constitution,
forfeiture is not an appropriate remedy.”). Instead, Garofolo’s “recourse for
[Ocwen’s] failure to abide by the terms of [her] loan agreement is to assert
traditional tort and breach of contract causes of action, not constitutionally
mandated forfeiture.” Wells Fargo, 391 S.W.3d at 595.
“In Texas, the elements of a claim for breach of contract are: (1) a valid
contract between the plaintiff and the defendant, (2) performance or tender of
performance by the plaintiff, (3) breach by the defendant, and (4) damage to
the plaintiff as a result of the breach.” Lawyers Title Ins. Corp. v. Doubletree
Partners, L.P., 739 F.3d 848, 858 (5th Cir. 2014) (citation and internal
quotation marks omitted). The district court observed, and Garofolo concedes,
that she does not allege any actual damages such that she cannot satisfy one
of the elements of the breach of contract claim. See Intercontinental Grp. P’ship
v. KB Home Lone Star L.P., 295 S.W.3d 650, 655 n.26 (Tex. 2009) (“[M]oney
damages are essential in contract claims seeking money damages (though not
for contract claims seeking something else).”).
On its face, this question does not seem to present the complexities and
policy considerations inherent in the constitutional claim. However, in light of
the potential intertwining of the two issues and the possibility that the Texas
Supreme Court could conclude that the breach of contract claim presents the

expressly incorporates the requirement that the Lender shall return the cancelled Note and
release of lien to the homestead owner upon full payment.

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right approach to accessing a forfeiture remedy, we determine that it is
prudent to certify both questions for consideration by that court.
C. Certified Questions
Accordingly, we certify the following questions to the Texas Supreme
Court:
1. Does a lender or holder violate Article XVI, Section 50(a)(6)(Q)(vii) of
the Texas Constitution, becoming liable for forfeiture of principal and
interest, when the loan agreement incorporates the protections of
Section 50(a)(6)(Q)(vii), but the lender or holder fails to return the
cancelled note and release of lien upon full payment of the note and
within 60 days after the borrower informs the lender or holder of the
failure to comply?
2. If the answer to Question 1 is “no,” then, in the absence of actual
damages, does a lender or holder become liable for forfeiture of
principal and interest under a breach of contract theory when the loan
agreement incorporates the protections of Section 50(a)(6)(Q)(vii), but
the lender or holder, although filing a release of lien in the deed
records, fails to return the cancelled note and release of lien upon full
payment of the note and within 60 days after the borrower informs
the lender or holder of the failure to comply?
We disclaim any intention or desire that the Supreme Court of Texas
confine its reply to the precise form or scope of the questions certified.
QUESTIONS CERTIFIED.

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