Gutowsky v. Deutsche Bank National Trust Company, as Trustee for New Century Home Equity Loan Trust, Series 2005-C, Asset Backed Pass-Through Certificates

Filing 22

MEMORANDUM OPINION AND ORDER Granting 5 MOTION to Dismiss (Signed by Judge Gray H. Miller) Parties notified.(cfelchak, 4)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION

CHET GUTOWSKY,

v.

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DEUTSCHE BANK NATIONAL TRUST
COMPANY, AS TRUSTEE FOR NEW
CENTURY HOME EQUITY LOAN
TRUST, SERIES 2005-C, ASSET BACKED
PAss-THROUGH CERTIFICATES,

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Plaintiff,

CIVIL ACTION No. H-14-00839

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Defendant.

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MEMORANDUM OPINION & ORDER

Pending before the court is a motion to dismiss certain claims asserted by plaintiff Chet
Gutowsky ("Gutowsky"), which was filed by defendant Deutsche Bank National Trust Company,
as Trustee for New Century Home Equity Loan Trust, Series 2005-C, Asset Backed Pass-Through
Certificates ("Deutsche Bank" or the "defendant"). Dkt. 5. After considering the live complaint and
exhibits, l motion, responses, and applicable law, the defendant's motion for partial dismissal (Okt. 5)
is GRANTED.
I.

BACKGROUND

Gutowsky is the owner of the home (the "property") in dispute located in Harris County,
Texas. Dkt. 1, Ex. A-4 (first amended petition) at 3 ~ 11. On or about August 16,2005, Gutowsky

I In considering a motion to dismiss under Rule 12(b )(6), the district court primarily considers the allegations
of the live complaint, but there are other documents the court may consider. Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
551 U.S. 308, 322, 127 S. Ct. 2499 (2007). These documents include items subject to judicial notice, matters of public
record, and exhibits attached to the complaint whose authenticity is not in issue. Ferrer v. Chevron Corp., 484 F.3d 776,
780 & n.13 (5th Cir. 2007); FED. R. CIY. P. 10(c) ("A copy ofa written instrument that is an exhibit to a pleading is a
part of the pleading for all purposes.").

obtained a home equity loan (the "note") from Home123 Corporation ("Home 123"). Id. at 3 ~ 12;

id., Ex. 1 (note) to Ex. A-4. The parties concurrently executed a security instrument for this loan,
and it was recorded in the Harris County deed records on August 31, 2005. Dkt. 1, Ex. 2 (home
equity lien) to Ex. A-4. Deutsche Bank asserts that it is the current holder of the note and security
instrument. Dkt. 1, Ex. A-4 at 3 ~ 13.
The defendant accelerated the maturity of the note when Gutowsky fell behind on his
payments in 2006, and on December 14, 2006, it filed an application for a non-judicial home equity
foreclosure. Id. at 3 ~~ 14-15. On March 5, 2007, the 61st Judicial District Court of Harris County,
Texas granted Deutsche Bank's request for a foreclosure order. Dkt. 1, Ex. 3 (foreclosure order) to
Ex. A-4. The defendant apparently elected not to foreclose at that time, and on September 20,2013,
it filed a second home equity foreclosure application. Dkt. 1, Ex. A-4 at 3 ~ 17.
On November 1, 2013, Gutowsky sent a request to cure letter to Deutsche Bank, claiming
that the note violated the home equity loan requirements of the Texas Constitution. Dkt. 1, Ex. 4
(notice letter) to Ex. A-4; see TEX. CONST. art. XVI, § 50(a)(6). The letter states that (1) the
principal amount of the loan exceeds 80 percent of the fair market value of the home when added
to the principal balances of all other liens against the property, in violation of § 50(a)(6)(B);
(2) Gutowsky never received notice that the loan was governed by the Texas Constitution, in
violation of § 50(a)(6)(M)(i); (3) Gutowsky never received a copy of the final loan document, as
required by § 50(a)(6)(Q)(v); (4) no appraisal report was prepared in accordance with the state or
federal requirement applicable to the extension of credit, in violation of § 50(a)(6)(h)(1);
(5) Gutowsky was not given an acknowledgment of the three-day right to rescind the extension of
credit without penalty, as required by § 50(a)(6)(Q)(vii); and (6) Gutowsky and Homel23 did not

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execute an acknowledgment as to the fair market value of the property on the date the loan was
made, in violation of § 50(a)(6)(Q)(ix). Id.
Deutsche Bank did not respond to the notice within 60 days. Dkt. 1, Ex. A-4 at 3

~

19.

Gutowsky then filed the instant suit in the 80th Judicial District Court of Harris County, Texas on
February 20,2014. Dkt. 1, Ex. A-3 (original petition) at l. On February 21,2014, Gutowsky filed
an amended complaint, and on February 24,2014, the case was transferred to the 61st Judicial
District Court. Dkt. 1, Ex. A-4 (amended petition); Dkt. 1, Ex. A-5 (transfer order). The defendant
removed the case to this court on April 1, 2014. Dkt. 1 (notice of removal) at 1-2 ~ 1. On April 8,
2014, Deutsche Bank answered Gutowsky's amended complaint. Dkt. 6. On the same day, the
defendant moved for partial dismissal based on the applicable statute oflimitations. Dkt. 5 at 3.
II.

A.

LEGAL STANDARD

Motion to Dismiss

For most causes of action, Rule 8(a)(2) ofthe Federal Rules of Civil Procedure requires that
the pleading contain "a short and plain statement ofthe claim showing that the pleader is entitled to
relief." FED. R. Clv. P. 8(a)(2). A party against whom claims are asserted may move to dismiss
those claims when the nonmovant has failed "to state a claim upon which relief can be granted."
FED. R. Clv. P. 12(b)(6).2 To survive a Rule 12(b)(6) motion to dismiss, a plaintiff must plead
'" enough facts to state a claim to reliefthat is plausible on its face. '" In re Katrina Canal Breaches
Litig., 495 F.3d 191,205 (5th Cir. 2007) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570,

2 The court pauses to note that Deutsche Bank styled its motion as a motion to dismiss under Rule 12(b)( 6) of
the Federal Rules of Civil Procedure. However, the motion is properly evaluated as a motion for judgment on the
pleadings under Rule 12( c) because Deutsche Bank answered the petition in state court before removal. At any rate, this
distinction does not affect the court's legal analysis because the standards for motions under Rules 12(b)(6) and 12(c)
are identical. Jones v. Greninger, 188 F .3d 322, 324 (5th Cir. 1999).

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127 S. Ct. 1955 (2007)). "Factual allegations must be enough to raise a right to relief above the
speculative level, ... on the assumption that all the allegations in the complaint are true (even if
doubtful in fact)." Twombly, 550 U.S. at 555 (citations omitted). While the allegations need not be
overly detailed, a plaintiff s pleading must still provide the grounds of his entitlement to relief, which
"requires more than labels and conclusions," and "a formulaic recitation of the elements of a cause
of action will not do." Id.; see also Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937 (2009)
("[NJaked assertions devoid of further factual enhancement," along with "legal conclusions" and
"[t]hreadbare recitals ofthe elements of a cause of action, supported by mere conclusory statements,"
are not entitled to the presumption of truth) (internal quotation marks omitted). "[C]onclusory
allegations or legal conclusions masquerading as factual conclusions will not suffice to prevent a
motion to dismiss." Blackburn v. City ofMarshall, 42 F.3d 925,931 (5th Cir. 1995). Instead, "[a]
claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw
the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at
678. Evaluating a motion to dismiss is a "context-specific task that requires the reviewing court to
draw on its judicial experience and common sense." Id. at 679. Additionally, a claim may be
dismissed if an affirmative defense appears clearly on the face of the pleadings. Clark v. Amoco
Prod. Co., 794 F.2d 967,970 (5th Cir. 1986).

B.

Home Equity Loans Under the Texas Constitution

The Texas Constitution has traditionally protected the homestead against forced sale, with
exceptions for purchase money liens, taxes, and construction liens on the property. Fin. Comm 'n
of Tex. v. Norwood, 418 S.W.3d 566, 570-71 & n.9 (Tex. 2013). Since the ratification ofthe current
Texas Constitution in 1876, other carefully drawn exceptions have been added by amendment. See

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id. at 570-71. In 1997, voters approved an amendment to permit home equity loans and reverse
mortgages. Id. at 571; see TEXAS CONST. art. XVI, § 50(a)(6)-(7). In so doing, Texas became the
fiftieth state in the Union to permit home equity lending. Norwood, 418 S.W.3d at 571.
To pacify concerns that home equity loans would lead to unfair practices by lenders and to
ensure the amendment "would withstand future political pressures on the Legislature," extensive
requirements for these loans were included under Article XVI § 50(a)( 6) of the Texas Constitution.
Id. Under that provision, a lien on a homestead must be voluntarily agreed upon and have the
consent of each owner in writing; must not exceed 80 percent of the fair market value of the home
when added to all outstanding debt secured by the homestead; and may be foreclosed upon only by
a court order. TEX. CONST. art. XVI, § 50(a)(6)(A), 50(a)(6)(B), 50(a)(6)(D). Further, an extension
of credit may not be finalized less than 12 days after the date the loan application is submitted to the
lender or after the homestead owner receives notice in writing that payment on the loan in advance
is permissible without penalty, whichever occurs later; one business day after the lender provides
a copy of the loan application and "a final itemized disclosure of the actual fees, points, interest,
costs, and charges that will be charged at closing" to the homestead owner; and the first anniversary
of the closing date of any other loan secured by the same property. Id. § 50(a)(6)(M)(i)-(iii). The
lender must also provide the owner with a copy of the final loan application and all related
documents signed at the closing of the loan, and notice that the loan is governed by § 50(a)(6) of
Article XVI of the Texas Constitution through a disclosure in the security instrument.

Id.

§ 50( a)( 6)(Q)(v)-( vi). Lastly, the owner may cancel the loan within three days without penalty, and
the lender and owner must acknowledge the fair market value of the house in writing when the loan
is made. Id. § 50(a)(6)(Q)(viii)-(ix).

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Although the Texas Constitution states that a lien secured by a homestead will never be valid
unless it is in compliance with Article XVI § SO(a)(6), it also provides that a lender or holder of a
note has 60 days to cure a deficiency in a loan from the time the lender is notified by the borrower
ofthe defect. Id. §§ SO( c), SO(a)(6)(Q)(x). If the lender does not cure the constitutional deficiency,
it must forfeit all principal and interest of the loan. Id. § (SO)(a)(6)(Q)(x).
The constitution's home equity provisions do not include an explicit statute of limitations,
but the Fifth Circuit recently held that Texas's residual four-year limitations period applies to

§ SO(a)(6) causes of action. Priester v. iP Morgan Chase Bank, N.A., 708 F.3d 667, 674 (Sth Cir.
2013). In Priester, the plaintiffs sought to invalidate a home equity loan five years after the closing
date on grounds that the loan was in violation of two § SO(a)(6) provisions. Priester, 708 F.3d at
672-73 (acknowledging the claim that the loan was signed at the plaintiffs' house and the plaintiffs
did not receive notice of their rights 12 days before closing in violation of the Texas Constitution).
Recognizing that the Texas Supreme Court had not yet addressed whether the residual limitations
period applies to claims arising under § SO(a)(6) ofthe Texas Constitution, the Priester court made
an Erie guess that it does apply to these claims. See id. at 674; Beavers v. Metro. Life Ins. Co., S66
F.3d 436, 439 (Sth Cir. 2009) (explaining that the court must make an "Erie guess" when no state
court decision controls).
While the residual four-year limitations period contains an exception for the "recovery of real
property," the Priester court found that the limitations period applies to defects in homestead liens

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by relying on prior case law. 3 Priester, 708 F.3d at 673; TEX. CIV. PRAC. & REM. CODE § 16.051
(stating that a four-year residual limitations period applies to all actions without an express statute
of limitations, except for the recovery of real property). The Priester court further distinguished
district court cases stating that the residual statute of limitations does not apply, and reasoned that
a lien created in violation of § 50(a)(6) was voidable rather than void ab initio. See Priester, 708
F.3d at 674 (suggesting that the Texas Supreme Court considers a lien created in violation of
§ 50(a)(6) to be voidable instead of void); see also Doody v. Ameriquest Mortg. Co., 49 S.W.3d 342,
346-47 9(Tex. 2001) (explaining that a lien that is cured under § 50(a)(6)(Q) becomes valid, but if
the loan is voided, the lender loses all rights to recovery). If a lien is void ab initio, a statute of
limitations need not apply because the lien is always void and constitutes a title cloud, the removal
of which is an equitable action without a limitations period. See Ditta v. Conte, 298 S.W.3d 187,
192 (Tex. 2009) ("[A]s long as an injury clouding title remains, so too does an equitable action to
remove the cloud; therefore, a suit to remove the cloud is not time-barred"). However, if a lien is
merely voidable, the defect can be cured and is not a cloud on title. See Doody, 49 S.W.3d at 346
(stating that a lien that may be invalidated at the outset may not support a remedy at a later date).
Therefore, as the court concluded in Priester, a statute oflimitations period should be applied to all
claims under § 50(a)(6) because it is contrary to the constitutional scheme that a person can
indefinitely seek a remedy for a curable title defect. See Priester, 708 F.3d at 674 n.4. Once the
limitations period has passed, a voidable lien becomes valid. See id. at 675.

3 The Priester court relied on Rivera v. Countrywide Home Loans. Inc., 262 S.W.3d 834, 839 (Tex. App.
- Dallas 2008, no pet.) (holding that the four-year statute of limitations applies to defective homestead liens under the
Texas Constitution); Schanzle v. JPMC Specialty Mortg. LLC, No. 03-09-00639-CV, 2011 WL 832170, at *4 (Tex.
App.-Austin Mar. 11,20 II, no writ) (noting that "the four-year statute of limitations has been applied to violations of
the constitutional requirements for home equity loans, calculated from the date of closing on the loan"); and Boutari v.
JP Morgan Chase Bank. N.A., 429 F. App'x 407 (5th Cir. 20 II) (holding that the four-year statute oflimitations applies
to claims under § 50(a)(6)).

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III.

ANALYSIS

Gutowsky asserts the following claims: (1) the four-year statute oflimitations bars Deutsche
Bank from foreclosing on the property; (2) the contract is void; (3) the notice offoreclosure is invalid
and interferes with Gutowsky's title; (4) Gutowsky is entitled to declaratory judgment; and
(5) Gutowsky is entitled to a permanent injunction against Deutsche Bank. Dkt. 1, Ex. A-4. The
defendant moves to dismiss all of Gutowsky' s claims except that the four-year statute oflimitations
bars it from foreclosing on the property. Dkt. 5. The court will consider the defendant's dismissal
arguments as to each claim in tum.
In evaluating claims arising under state law, federal courts apply the corresponding state
statute oflimitations and any relevant exceptions. See Guaranty Trust Co. v. York, 326 U.S. 99, 112,
65 S. Ct. 1464 (1945); Huss v. Gayden, 571 F.3d 442,450 (5th Cir. 2009).

A.

Suit to Enforce Contract

Deutsche Bank moves to dismiss Gutowsky's claim that the home equity loan is voided by
the defendant's failure to cure the alleged irregularities on two grounds: (1) the statute oflimitations
bars the claim and (2) Gutowsky fails to allege the elements of a breach of contract. Dkt. 5 at 3-4.
The court will restrict its analysis to the statute oflimitations defense because it is dispositive here.
As the Texas Supreme Court has not ruled on which limitations period, if any, applies to
§ 50(a)(6) claims, this court is bound by the Fifth Circuit's interpretation ofthe Texas Constitution
under the Erie doctrine. Hughes v. Tobacco Inst., Inc., 278 F.3d 417, 421(5th Cir. 2001) (citing

Batts v. Tow-Motor Forklift Co., 66 F. 3d 743, 747, 749 (5th Cir. 1995)). Therefore, under
controlling precedent, the four-year statute of limitations began running on the date of closing.

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Priester, 708 F.3d at 674-75. 4 Even when viewed in the light most favorable to Gutowsky, as
required by a 12(b)(6) motion, the loan was voidable for violating various provisions in § 50( a)( 6)
until August 2009, four years after the loan was executed. Dkt. 1, Ex. A-4 at 3 ~ 12. Gutowsky did
not notify Deutsche Bank that the loan violated the Texas Constitution within that four-year period,
and after August 2009, the loan could not be invalidated under § 50( a)( 6). Priester, 708 F .3d at 675.
Thus, Gutowsky's notice to the defendant in 2013 did not require a response as there were no longer
any § 50(a)(6) defects to cure, and Gutowsky is not entitled to the return of all principal and interest
for alleged violations of § 50(a)(6).5 Gutowsky's claim for a suit to enforce the contract will
therefore be DISMISSED.

4 Gutowsky claims that Priester is flawed because it fails to address the real property exclusion to the four-year
residual statute of limitations, contradicts the language of § 50, interferes with the constitutional right of the borrower
to defend himself against foreclosure, and leads to absurd consequences. Dkt. 14 at 10-12 ~~ 24-29. First, Priester
clearly states that the real property exclusion does not include defects in homestead liens. Priester, 708 F.3d at 673.
Second, in the absence of a ruling by the Texas Supreme Court, the Fifth Circuit can make an Erie guess as to how a
provision in the Texas Constitution should be interpreted, and that interpretation is binding on lower federal courts until
the provision is amended or the Texas Supreme Court holds otherwise. !d. at 674; Hughes, 278 F.3d at421 (citing Batts,
66 F.3d at 747, 749). Third, Priester's application of the four-year limitations period limits the constitutional remedy
of the borrower, not the right. Ho v. Univ. of Tex. at Arlington, 984 S.W.2d 672, 686 (Tex. App.-Amarillo 1998, pet.
denied). Lastly, holding that a lien is void ab initio would also have absurd consequences, such as a borrower being able
to collect all principal and interest on a home equity loan after 20 years due to a technicality in the contract. Four years
is sufficient time for a borrower to realize that a potential constitutional defect exists and pursue any applicable remedies.

5 Gutowsky asserts that his claims are exempt from the four-year statute oflimitations because they present a
defense to foreclosure. Dkt. 14 at 12 ~ 29. Although defenses generally are not subject to limitations periods,
Gutowsky's claims, to the extent they depend on § 50(a)(6), seek affirmative relief and, thus, are subject to the four-year
residual limitations period. See Hennigan v. Heights Sav. Ass 'n, 576 S. W .2d 126, 130 (Tex. Civ. App.-Houston 1978,
reh'g denied); Sigaran v. U.S., N.A., No. 13-20367,2014 WL 1688345, at *4 (5th Cir. Apr. 30, 2014).

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B.

Suit to Quiet Title

Deutsche Bank moves to dismiss Gutowsky's claim for quiet title on the grounds that the
loan contract and lien are valid under § 50(a)(6).6 A suit to quiet title "relies on the invalidity ofthe
defendant's claim to the property." Essex Crane Rental Corp. v. Carter, 371 S.W.3d 366,388 (Tex.
App. 2012) (citing Longoria v. Lasater, 292 S.W.3d 156, 165 n.7 (Tex. App.-San Antonio 2009,
pet. denied)). To succeed, "the plaintiff must prove, as a matter of law, that he has a right of
ownership and that the adverse claim is a cloud on the title that equity will remove." Essex Crane

Rental Corp., 371 S.W.3d at 388 (citing Hahn v. Love, 321 S.W.3d 517,531 (Tex. App.-Houston
2009, pet. denied)). Gutowsky claims Deutsche Bank's interest in the property is invalid because
the note and security lien were voided by the defendant's failure to cure the constitutional defects
in the note within 60 days ofthe notice to cure. However, as discussed above, the note and security
lien are not void under § 50(a)(6). Thus, Deutsche Bank's motion to dismiss Gutowsky's suit to
quiet title under § 50(a)(6) will be GRANTED.
C.

Declaratory Judgment

N ext, Deutsche Bank moves to dismiss Gutowsky's claim for declaratory judgment because
the loan was not voided by Deutsche Bank's failure to respond to Gutowsky's notice. Gutowsky
asks the court to issue a declaratory judgment that (1) the defendant failed to cure the loan, (2) the
loan, and therefore the lien, are void for violating § 50(a)(6), and (3) the defendant must forfeit all
principal and interest. The Federal Declaratory Judgment Act ("FDJA") allows federal courts to

6 The defendant's motion does not address Gutowsky's claim that Deutsche Bank is barred from foreclosing
on the property by the four-year statute of limitations. Dkt. I at 6 ~~ 21-24; TEX. ClY. PRAC. & REM. CODE § 16.051.
Accordingly, the court will only evaluate Deutsche Bank's dismissal arguments insofar as they relate to § 50(a)(6) and
the Priester decision. The court expresses no position as to the merits of Gutowsky's first cause of action to prevent
foreclosure.

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"declare the rights and other legal relations of any interested party seeking such declaration, whether
or not further relief is or could be sought.,,7 28 U .S.C. § 2201. The FDJA is a procedural vehicle
to assert and defend substantive rights, and thus, the claim depends on viable, substantive causes of
action. See Morlock L.L.c. v. JP Morgan Chase Bank, NA., No. H-12-1448, 2012 WL 3187918,
at *7 (S.D. Tex. Aug. 2, 2002), aff'd, No. 12-20623,2013 WL 2422778 (5th Cir. June 4,2013).
Here, Gutowsky's request is based on his argument that the loan is void because Deutsche
Bank did not comply with the Texas Constitution's requirement that a lenderrespond within 60 days
to a request to cure a non-compliant loan. Based on the findings of this order, Deutsche Bank was
not bound by this requirement because Gutowsky waived any potential right to void the loan by not
sending the notice within four years after closing. Because his claim that the loan is void under

§ 50(a)(6) is time-barred and fails as a matter of law, Gutowsky's request for declaratory judgment
likewise fails as a matter oflaw and is DISMISSED.

D.

Permanent Injunction

Lastly, Deutsche Bank moves to dismiss Gutowsky's request for a permanent injunction
preventing Deutsche Bank from (1) interfering with Gutowsky's quiet title to the property,
(2) foreclosing on the property, and (3) purchasing, transferring, assigning, or collecting on the loan.
Dkt. 1, Ex. A-4 at 9 ~ 37. Injunctive relief depends on viable underlying causes of action. Butnaru
v. Ford Motor Co., 84 S.W.3d 198,204 (Tex. 2002). As discussed above, the loan and security lien
were not invalidated by the alleged § 50(a)(6) violations that are time-barred. Thus, Gutowsky is

7 Although Gutowsky pled a Texas Declaratory Judgment Act claim at the state level, it was converted to a claim
under the FDJA upon removal because federal courts apply federal procedural law in diversity cases pursuant to the Erie
doctrine. See Utica Lloyd's v. Mitchell, 138 F .3d 208, 210 (5th CiT. 1998) (holding that the Texas Declaratory Judgment
Act is not substantive law); Bell v. Bank of Am. Home Loan Servicing LP, No.4: II-cv-02085, 2012 WL 568755, at *22
(S.D. Tex. Feb. 21,2012) (stating that a state-law declaratory judgment claim that is filed in state court and then removed
to federal court is converted to a claim arising under the FDJA).

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not entitled to a pennanent injunction under § 50(a)(6) to prevent the defendant from foreclosing or
collecting on the loan. Deutsche Bank's motion to dismiss Gutowsky's request for an injunction
pursuant to alleged violations of § 50(a)(6) is GRANTED.
IV.

CONCLUSION

For the foregoing reasons, Deutsche Bank's motion for partial dismissal (Dkt. 5)
GRANTED.
It is so ORDERED.

Signed at Houston, Texas on June 11,2014.

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IS