In re Eric Benjamin Erickson

Filing 8

Order on Bankruptcy Appeal AFFIRMING Bankruptcy court's Amended Judgment (Bankr. Clerk's Doe. No. 76); REVERSING AND REMANDING for further proceedings consistent with this opinion, Bankruptcy court's Memorandum Opinion on Defendant's Post-Trial Motion for Award of Attorneys' Fees (Bankr. Clerk's Doc. No. 105). Signed by Judge Lee Yeakel. (jk, )

FiLED
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
AUSTIN DIVISION

SEP 2 4 ZO1Z
CLERK, U.S. DSTRCT COUR1
WESTERN rNSTRCT OF TEXAS
BY

IN RE:

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ERIC BENJAMIN ERICKSON,
DEBTOR.

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ERIC ERICKSON,

CAUSE NO. A-i 1-CV-722-LY%.CASE NO. 09-1 1933
CHAPTER 7
ADV. PROC. NO. 09-1135

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APPELLANT,

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V.

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WELLS FARGO BANK NA AS
TRUSTEE FOR STRUCTURED ASSETS
SECURITIES CORP. AMORTIZING
RESIDENTIAL COLLATERAL
MORTGAGE PASS-THROUGH
CERTIFICATES, SERIES 2002-BC8,
APPELLEE,

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SIMONS FAMILY TRUST, JORENA
BENNETT, GREG HEWITT LAHR AS
EXECUTOR OF THE ESTATE OF
JORENA BENNETT, AND BROOKS
BENNETT NORDENBERG,
APPELLEES,
THIRD-PARTY DEFENDANTS

INRE:

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ERIC BENJAMIN ERICKSON,
DEBTOR.

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WELLS FARGO BANK NATIONAL
ASSOCIATION AS TRUSTEE FOR
STRUCTURED ASSETS SECURITIES
CORPORATION AMORTIZING
RESIDENTIAL COLLATERAL TRUST,
MORTGAGE PASS-THROUGH

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CAUSE NO. A-i i-CV-780-LY
CASE NO. 09-11933
CHAPTER 7
ADV. PROC. NO. 09-1135

DEPUTY CLE K

CERTIFICATES, SERIES 2002-BC8,
SIMONS FAMILY TRUST, JORENA
BENNETT, BROOKS BENNETT
NORDENBERG,
APPELLANTS,

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V.

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ERIC ERICKSON,

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APPELLEE.

INRE:

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ERIC BENJAMIN ERICKSON,
DEBTOR.

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WELLS FARGO BANK NATIONAL
ASSOCIATION, AS TRUSTEE FOR
STRUCTURED ASSETS SECURITIES
CORPORATION, AMORTIZING
RESIDENTIAL COLLATERAL TRUST,
MORTGAGE PASS-THROUGH
CERTIFICATES, SERIES 2002-BC8,
APPELLANT,

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CAUSE NO. A-i 1-CV-78i-LY'
CASE NO. 09-ii933
CHAPTER 7
ADV. PROC. NO. 09-1 i35

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V.

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ERIC ERICKSON, SIMONS FAMILY
TRUST, GREG HEWITT LAHR AS
EXECUTOR OF THE ESTATE OF
JORENA BENNETT, DECEASED, AND
BROOKS BENNETT NORDENBERG,
APPELLEES.

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MEMORANDUM OPINION AND ORDER
Before the court are the above styled and numbered related bankruptcy appeals. Appellant
Eric Erickson, a Chapter 7 debtor, appeals from the bankruptcy court's May i9, 201i Amended

Judgment ordering that Erickson take nothing in his adversary proceeding against Wells Fargo Bank,
N.A., as Trustee for Structured Assets Securities Corporation, Amortizing Residential Collateral

Trust, Mortgage Pass-Through Certificates, Series 2002-BC8 ("Wells Fargo") (Bankr. Clerk's Doc.
No. 76). Wells Fargo appeals the bankruptcy court's July 13, 2011 Order Granting Plaintiff's

Motion for Extension of Time to File Notice of Appeal (Bankr. Clerk's Doc. No. 100) and July 22,
2011 Memorandum Opinion on Defendant's Post-Trial Motion for Award of Attorneys' Fees

(Bankr. Clerk's Doc. No. 105).

This court ordered the parties to file combined briefing and set one oral argument for the
three separately docketed appeals (Clerk's Doc. No. 12). The parties submitted briefing, and on

January 13, 2012, the court held oral argument on the appeals. Having considered the parties'
briefing and arguments, the bankruptcy court's orders, the record before the bankruptcy court, and
the applicable law, the court is of the opinion that the bankruptcy court did not abuse its discretion

in extending time for Erickson to file a notice of appeal. With respect to the merits of Erickson's
appeal, the bankruptcy court did not err in finding the home-equity lien held by Wells Fargo valid

and enforceable, in granting Wells Fargo an order of sale for judicial foreclosure, or in finding in
favor of Simons Family Trust, Jorena Bennett, and Brooks Bennett Nordenberg on their claim of
fraud. Finally, the court concludes that the bankruptcy court abused its discretion in denying Wells

Fargo's motion for attorney's fees.
I. BACKGROUND
This adversary proceeding arises from a home-equity note Erickson executed on February
3, 2000, in favor of Option One Mortgage Corporation ("Option One") in the amount

of $320,000,

secured by a deed of trust on property at 1406 Circle Ridge Drive, Westlake Hills, Texas, 78746
("the Circle Ridge Property"). To obtain the loan, Erickson signed an affidavit attesting that the

acreage used to secure the loan was his homestead. Erickson later subdivided the property into

3

several lots. He then obtained additional loans secured by the property based on affidavits swearing

the property was not his homestead: a second loan in February 2000 in the amount of $400,000 from
the Margaret Piper Herman Trust and CA Holdings LLC, and a third loan in the amount of $200,000
from Oliver Pierson and the Simons Family Trust in May 2001.
On August 9, 2002, Erickson obtained a second home-equity loan from Option One, in the

amount of $931,000, to refinance the then existing three loans secured by the property. The new
loan was secured by a deed of trust encumbering a portion of the new subdivided property,

designated Lot

1.

To obtain the loan, Erickson swore the lot was his homestead. The proceeds of

the loan were used to discharge the existing liens against the property.

Erickson later obtained three more loans secured by deeds of trust on Lot

1:

(1) on

September 1, 2003, Erickson borrowed $203,000 from the Simons Family Trust; (2) on November
1, 2003, he

borrowed $20,000 from Jorena Bennett; and (3) on January 15, 2004, he borrowed an

additional $40,000 from Jorena Bennett. To obtain each of these loans, Erickson swore that Lot

1

was not his homestead and asserted that he resided at 2002 Arthur Lane, Austin, Texas 78704, his

mother's address.
Erickson defaulted on the $931,000 home-equity loan in 2005, and Wells Fargothe current
holder of the note and beneficiary of the deed of trust securing the notecommenced foreclosure
proceedings. Erickson filed suit in the 25 0th District Court in Travis County against Wells Fargo,
seeking a declaratory judgment that the 2002 home-equity loan was invalid under the Texas

Constitution and that Wells Fargo lacked authority to foreclose. On December 11, 2007, the state
court disposed of some of Erickson's claims by summary judgment. While Erickson's remaining

claims were still pending, he filed a petition in bankruptcy under Chapter 7 of the Bankruptcy Code.

Erickson then removed the state-court action to the bankruptcy court as an adversary proceeding.
After removal, Erickson filed an amended complaint before the bankruptcy court, reiterating his
challenges to the constitutionality of the 2002 home-equity loan and Wells Fargo's authority to
foreclose and alleging that the 2003 and 2004 liens on his homestead were unconstitutional.

Wells Fargo counterclaimed against Erickson, requesting judicial foreclosure of its lien or,
in the alternative, a judgment that the principal and interest of its loan should be forfeited. Wells
Fargo also filed a claim against the Simons Family Trust, Jorena Bennett, and Brooks Bennett

Nordenberg, seeking judgment that their liens were subordinate and inferior to its own. The Trust,
Bennett, and Nordenberg counterclaimed against Erickson, asserting claims for breach of contract

and fraud, due to Erickson's default on their notes and his misrepresentations regarding the

property's homestead status.
Erickson moved for summary judgment. The bankruptcy court denied the motion, and the
parties proceeded to trial. The bankruptcy court rendered a memorandum opinion on the merits of

the parties' claims on April 27, 2011, and a final judgment on April 28, 2011. The court's amended

judgment of May 19, 2011, from which Erickson appeals, (1) ordered that Erickson take nothing on
his complaint for declaratory judgment; (2) affirmed Wells Fargo's status as beneficiary of the deed

of trust securing the 2002 home-equity loan; (3) decreed the 2002 home-equity lien valid and
enforceable; (4) granted judgment for Wells Fargo in the amount of $1,618,263.87 plus interest; (5)
lifted the automatic stay imposed by the bankruptcy code; (6) granted Wells Fargo "an order of sale
for judicial foreclosure"; (7) decreed that all claims of the Simons Family Trust, Bennett, and

Nordenberg are subordinate and inferior to Wells Fargo's lien; (8) granted a judgment in favor of
the Simons Family Trust, Bennett, and Nordenberg on their claim of fraud; and (9) denied the

Simons Family Trust, Bennett, and Nordenberg' s claim for breach of contract.

After the bankruptcy court extended Erickson's time to file a notice of appeal, Erickson
appealed to this court. Wells Fargo's two separately docketed appeals challenge the bankruptcy

court's orders extending Erickson's time to file a notice of appeal and denying Wells Fargo's PostTrial Motion for Award of Attorneys' Fees.

II. LEGAL STANDARD
The district court has jurisdiction over a bankruptcy appeal. 28 U.S.C.

§

158. In reviewing

the findings of the bankruptcy court, the district court acts in an appellate capacity. In re Perry, 345

F.3d 303, 308-09 (5th Cir. 2003). The bankruptcy court's conclusions of law are reviewed de novo.
Id. at 309. However, a finding

see also FED.

R.

of fact may only be disregarded upon a showing of clear error. Id;

BANKR. P. 8013. A finding of fact is clearly erroneous when, even in the presence

of evidence to support it, the district court is left with a "definite and firm conviction" that the
bankruptcy court has made an error. In re Quinhivan, 434 F.3d 314, 318 (5th Cir. 2005). "As long
as there are two permissible views of the evidence, [a court] will not find the factfinder' s choice

between competing views to be clearly erroneous." In re Acosta, 406 F.3d 367, 373 (5th Cir. 2005)
(internal citation omitted).

III. ANALYSIS
A.

Extension of Time to File Notice ofAppeal
The bankruptcy court's decision to grant or deny a motion for extension of time within which

to file a notice of appeal is reviewed for abuse of discretion. See Baker v. Raulie, 879 F.2d 1396,
1399 (6th Cir. 1989). The bankruptcy court abuses its discretion when its ruling is based on an

erroneous review of the law or on a clearly erroneous assessment of the evidence. See In re

Yorkshire,

LLC, 540

F.3d 328, 331 (5th Cir. 2008).

Wells Fargo argues that the bankruptcy court did not have discretion to grant Erickson an

extension of time to file a notice of appeal, because the bankruptcy rules expressly prohibit such an
extension where the order or judgment being appealed grants relief from an automatic stay under
section 362.1

See FED. R. BANK. P.

8002(c)(1)(A) ("The bankruptcy judge may extend the time for

filing the notice of appeal by any party, unless the judgment, order, or decree appealed from grants

relief from an automatic stay under

§

362

. .

.

."). Erickson responds that the May 19, 2011

Amended Judgment could not have granted relief from an automatic stay because the stay
automatically terminated when he was discharged in bankruptcy on February 9,2010.
§

See 11 U.s.c.

362(c)(2).
The bankruptcy court's amended judgment states that "the automatic stay in Plaintiff's

Chapter 7 case shall be lifted and Defendant Wells Fargo is granted an order of sale for judicial

foreclosure," and the bankruptcy court's statements at the hearing on Erickson's motion for
extension of time to file an appeal further demonstrate that the bankruptcy court believed the stay
to be in effect at the time it rendered its amended final judgment. The bankruptcy court explained

that it intended the automatic stay to remain in effect after Erickson's bankruptcy discharge to allow
"Erickson his ability to contest the validity of the lender's deed of trust and its ability to foreclose
on the property."

However, the stay had automatically terminated at the time of Erickson's discharge.
U.S.C.

§

11

362(c)(2) ("[T]he stay of any other act under subsection (a) of this section continues until

1Under the Bankruptcy Code, a bankruptcy filing gives rise to an automatic stay of a broad
range of enumerated acts against the debtor or the debtor's property. 11 U.S.C. § 362.
7

the earliest

of(A) the time the case is closed; (B) the time the case is dismissed; or (C) if the case

is a case under chapter 7 of this title concerning an individual.

. .

,

the time a discharge is granted

or denied."). The stay provided in section 362 is "dependent upon the operation of the bankruptcy
law, and that law [is] pertinent only because of the existence of the proceeding in bankruptcy." In

re Income Prop. Builders, Inc., 699 F.2d 963, 964 (9th Cir. 1982). Accordingly, once the debtor is
discharged, the bankruptcy court no longer has power orjurisdiction to order the continuation of the
automatic stay. Cf id.; In re Solar Equip. Corp., 19 B.R. 1010 (D.C. La. 1982). See also 3 COLLIER
ON BANKRUPTCY ¶ 362.06, at 362-96 (16th ed. 2011) ("Once the case is closed or dismissed, there

is no reason to continue the protection fo the stay. Indeed, the court retains no further jurisdiction

to reinstate or continue the stay.").

The court rejects Wells Fargo's argument that the bankruptcy court's January 8, 2010 denial

of Wells Fargo's motion for relief from the automatic stay somehow continued the stay beyond
Erickson's discharge. The two-paragraph January 8, 2010 order merely states that the bankruptcy
court "is of the opinion that the automatic stay of 11 U.S.C.

§

362 shall remain in effect." The

bankruptcy court rendered the order before Erickson's discharge in bankruptcy, and the order does

not state a date until which the stay shall remain in effect. Nothing in the order suggests that the
bankruptcy court intended to continue the stay past Erickson's discharge. Moreover, even if the

bankruptcy court had expressly stated in the order that the stay was to remain in effect until the
adversary proceeding was completed, such an order would have been without effect once Erickson
received his discharge and the stay automatically terminated under the Bankruptcy Code. The
bankruptcy court discharged Erickson on February 9,2010, and closed the bankruptcy on February
10, 2010. Thus, the court holds that the automatic stay, which arose from the filing

['I
[4]

of Erickson's

petition, terminated on February 9, 2010.

See 11

U.S.C.

§

362(c)(2)(C).

Because the court holds that the automatic stay terminated at Erickson's discharge on
February 9, 2010, the bankruptcy court's amended judgment did not lift the stay.

Rule

8002(c)( 1 )(A), therefore, does not bar Erickson's seeking an extension of time to file a notice of
appeal, and the general provisions governing extensions of time to file a notice of appeal apply to

Erickson's request.2

See FED.

R. BANK.

P.

8002(c)(2) (party must move no later than 21 days after

expiration of time for filing a notice of appeal). Erickson timely moved for an extension of time to
appeal the bankruptcy court's May 19, 2011 Amended Judgment on June 10, 201l.
The bankruptcy court had discretion to extend the time for Erickson to file his appeal upon
a showing by Erickson of excusable neglect. Id. Erickson's motion for extension of time to file a

notice of appeal represented that the wife of Erickson's attorney suffered serious injuries and had
surgery in May 2011 and that, as a result, the attorneya solo practitionerwas absent from his law
office and his staff miscalendared the deadline for filing the notice of appeal. The bankruptcy court

accepted the explanation and found excusable neglect. Wells Fargo does not challenge the
substantive basis of the bankruptcy court's finding. Accordingly, because Rule 8002(c)(1)(A) does

2This conclusion renders moot Wells Fargo's second argument in this appeal: that the

bankruptcy court erred in relying on its general statutory power to "issue any order, process, or
judgment" to override Rule 8002(c)(1)(A) and grant Erickson an extension of time. See 11 U.S.C.
§ 105 ("The court may issue any order, process, orjudgment that is necessary or appropriate to carry
out the provisions of this title.").
his brief to this court, Erickson raises the argument that the June 7, 2011 notice of appeal
was in fact timely, because the May 19, 2011 order was not mailed until May 21, 2011, and was not
received until May 25, 2011. Erickson further argues that because his attorney was not an e-filer on
May 21, 2011, his notice of appeal was not due until June 8, 2011. See FED. R. Civ. P. 6(d); FED.
R. BANKR. P. 9006(f). This argument is without merit, as the time for filing a notice of appeal from
a bankruptcy-court judgment runs not from the date of service but from the date of entry of the
judgment, order, or decree appealed from. FED. R. BANKR. P. 8002(a).
31n

not govern this case, the bankruptcy court did not abuse its discretion in extending the time for

Erickson to file a notice of appeal. Because Erickson timely filed an amended notice of appeal, this
court has jurisdiction over Erickson's appeal.
B.

Erickson 's Appeal
Erickson appeals the bankruptcy court's May 19, 2011 Amended Judgment. Erickson raises

three primary arguments: (1) the bankruptcy court erred in finding the 2002 home-equity lien valid

and enforceable; (2) the bankruptcy court erred in concluding that Wells Fargo was entitled to
equitable subrogation in the event the home-equity loan was invalid; and (3) the bankruptcy court

erred in finding Erickson defrauded the Simons Family Trust, Bennett, and Nordenberg.4
1.

Validity of 2002 Home-Equity Loan

This proceeding began as a prepetition state-court action seeking a declaratory judgment that

Erickson's 2002 home-equity loan is invalid under the Texas Constitution's home-equity-loan rules.
See TEx. C0NsT., art. XVI, § 50 (effective Nov. 6, 2001 to Sept. 12, 2003).

If a lien that is not

constitutionally permitted is placed on property that has not lost its homestead character, the lien on

the property is void. Laster v. First Huntsville Props. Co., 826 S.W.2d 125, 129-30 (Tex. 1991).
Erickson raises four constitutional challenges to the 2002 loan, each of which, he argues, invalidates

the loan and prevents Wells Fargo from foreclosing.

4Although in his Amended Notice of Appeal, Erickson identifies the issues on appeal to
include whether the bankruptcy court erred in denying his motion for leave to file a fifth-amended
complaint, Erickson does not include the issue in his statement of issues presented in his Appellant's
Brief Nor does he address this argument substantively therein. Accordingly, this court deems this
issue waived. See Procter & Gamble Co. v. Amway Corp., 376 F.3d 496, 499 n.1 (5th Cir. 2004)
("Failure adequately to brief an issue on appeal constitutes waiver of that argument.").
5The parties agree that the pre-2003 provisions of the Texas Constitution govern Erickson's

2002 home-equity loan.
10

Authority of Wells Fargo to Foreclose

a.

The Texas Constitution requires that a home-equity loan be "secured by a lien that may be

foreclosed upon only by a court order."

TEx. CoNsI., art.

XVI, § 50(a)(6)(D). Erickson argues that

the deed oftrust securing his loan violates this constitutional provision because it does not expressly
grant the beneficiary a right ofjudicial foreclosure, and paragraph 24 of the deed of trust "prohibits

foreclosing by suit." This argument is without merit.
Under Texas law, a mortgagee may either sell property by nonjudicial foreclosure pursuant
to express powers granted in a deed of trust or bring a judicial-foreclosure action. See TEX. PROP.
CODE

§

51.002(a) (describing procedures for nonjudicial foreclosure under power of sale conferred

by deed oftrust); TEx. Bus. & COM. CODE § 9.601 (providing that secured party may "reduce a claim
to judgment, foreclose, or otherwise enforce the claim [or] security interest.

judicial procedure");
may file.

. .

TEX. R.

. .

by any available

Civ. P. 735 ("A party seeking to foreclose a.. . home equity loan..

a suit seeking judicial foreclosure."); see also Thurman

v.

F. D. I. C., 889 F.2d 1441,

1445 (5th Cir. 1989) ("Judicial foreclosure and foreclosure under the power of sale in a deed of trust

are remedies which cannot be concurrently prosecuted.") (citing Kaspar v. Keller, 466 S.W.2d 326,
329 (Tex. Civ.

App.Waco

1971, writ ref d n.r.e.)).

Although the right to pursue nonjudicial foreclosure arises from the parties' contract, judicial
foreclosure is a judicial remedy independent of that contract. Compare Mountain Townsite Co.

v.

Cooper, 73 S.W.2d 90, 91 (Tex. 1934) ("The right of sale under trust deed is a valuable one, given
by contract, and cannot be impaired by any subsequent act of the mortgagor.") with Garza v. Allied
Fin. Co., 566 S.W.2d 57, 62 (Tex. Civ. App.Corpus Christi 1978, no writ) ("Judicial foreclosure,

however, is an additional remedy to that of seeking a personal judgment against the debtor."). The

11

deed of trust need not contain an express provision granting a right to judicial foreclosure for Wells
Fargo to have the authority to pursue the remedy.

Nor does the deed of trust prohibit judicial foreclosure, as argued by Erickson. Paragraph
24 is entitled "Substitute Trustee," and provides, inter alia: "Nothing within this Security Instrument

shall be deemed to authorize the Trustee or substitute trustee herein to act on behalf of the Borrower

in any judicial proceeding.

. .

." This provision places limitations on the trustee, not the lender.

Accordingly, nothing in the deed of trust violates the constitutional requirement that a home-equity

loan be "secured by a lien that may be foreclosed upon only by a court order."
XVI,

§

See TEx. CONST. art.

50(a)(6)(D).
b.

Personal Liability of Erickson

The Texas Constitution requires that a home-equity loan be "without recourse for personal

liability against each owner and the spouse of each owner, unless the owner or spouse obtained the
extension of credit by actual fraud."

TEX. CONST. art.

XVI,

§

50(a)(6)(C). Erickson argues that the

deed of trust violates this provision by making him personally liable for amounts accruing under the
loan. Again, Erickson first raised this challenge in his motion for summary judgment before the

bankruptcy court. The bankruptcy court did not reach the merits of this challenge, because it was
not raised in Erickson's fourth-amended complaint, his last live pleading. Therefore, the bankruptcy
court ruled that the challenge had been waived, was procedurally untimely, and was barred by the

four-year statute of limitations.
On appeal, Erickson argues only that this court should rule on the merits of his challenge.
A district court generally will not reach the merits of an issue not considered by the bankruptcy court,
and this court declines to rule on the merits of this challenge for the first time on appeal. Cf Baker

12

v.

Bell, 630 F.2d 1046, 1055 (5th Cir. 1980) ("Generally, this court will not reach the merits of an

issue not considered by the district court."). This court notes, however, that even if there were merit
to Erickson's claim, Wells Fargo provided Erickson with timely written notice that it was waiving

and renouncing any right or claim to pursue personal recourse against him with respect to any

obligations arising under the deed of trust. See TEX. CONST. art. XVI,

§

50(a)(6)(Q)(x) (providing

lenders with right to cure noncompliance with constitutional requirements, thereby validating lien);
see also Doody v. AmeriquestMortg. Co., 49 S.W.3d 342, 346 (Tex. 2001).

Prior Liens
Erickson raises two constitutional challenges with respect to the prior liens on his property
that were paid off from the proceeds of the 2002 home-equity loan. The Texas Constitution requires

that a home-equity loan be "the only debt secured by the homestead at the time the extension of
credit is made unless the other debt was made for a purpose described by Subsections (a)(1)-(a)(5)
or Subsection (a)(8) of this

section."6

TEX. CONST. art. XVI, § 50(A)(6)(K). Erickson argues that at

the time of the 2002 extension of credit, there were liens on his property that were not given for any
purposes authorized by the specified subsections and that these liens had to be paid off before a new
lien on his homestead could be executed.
The purpose of section 50(a)(6)(K) is to prevent multiple home-equity loans at the same time

on the same property. REGULATORY COMMENTARY ON EQUITY LENDING PROCEDURES, at 7 (Oct.
7, 1998). This commentary is advisory on issues regarding Texas home-equity loans. Stringer v.

Cendant Mortg. Corp., 23 S.W.3d 353, 357 (Tex. 2000). The proceeds of the 2002 home-equity

6Subsections (a)( 1 )(a)(5) describe traditionally permitted liens on a Texas homestead:
purchase money, taxes, owelty, refinance, and improvements.
13

loan were used to pay off the first home-equity loan on the property in the amount of $316,308.88,
as well as the second and third loans from various lenders in the amount of $714,587.38. Therefore,

all existing debt secured by the property were extinguished by the proceeds of the 2002 home-equity
loan. Accordingly, the 2002 loan was "the only debt secured by the homestead at the time the

extension of credit [was] made," and there was no violation of section 50(a)(6)(K).

Moreover, if the court were to adopt Erickson's reading of section 50(a)(6)(K), it would
render other parts of the home-equity rules void.

See TEX. CONST.

art. XVI,

§

50(a)(6)(Q)(i)

(requiring that home-equity loan be made on condition that "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") (emphasis added). Section 50(a)(6)(Q)(i) plainly

authorizes what Erickson argues section 50(a)(6)(K) forbids.

Erickson's second constitutional challenge with respect to the prior liens is predicated on a
finding that these liens are void, because they constitute additional and therefore unlawful liens on
his homestead. Because the liens are invalid, Erickson argues, the use of the proceeds of the 2002

home-equity loan to satisfy the debt the liens secured violates the Texas Constitution.

The

constitution requires the owner to apply proceeds to repay any debt "except debt secured by the
homestead or debt to another lender."

TEX. CONST. art.

XVI, § 50(a)(6)(Q)(i). The bankruptcy court

rejected this argument, holding that Erickson was estopped from challenging the validity of the
second and third liens, because of the multiple nonhomestead affidavits he gave to the lenders

making the loans. On appeal, Erickson argues the bankruptcy court erred in applying estoppel to his

constitutional challenge.
To invoke equitable estoppel, a party must prove: (1) a false representation or concealment

14

of material fact; (2) made with knowledge, actual or constructive, of the facts; (3) to a party without
knowledge or the means of knowledge of the real facts; (4) with the intention that it should be acted
upon; and (5) the party to whom it was made must have relied upon or acted upon it to his prejudice.

Gulbenkian v. Penn, 252 S.W.2d 929, 932 (1952). Erickson does not dispute the bankruptcy court's
finding that he made a knowingly false representation of fact with the intent that it should be acted

upon when he signed false affidavits concerning the property's nonhomestead status. He disputes
only the fifth element of reliance, arguing that the lenders behind the second and third liens, Option
One, and Wells Fargo knew or had reason to know that the nonhomestead affidavits were false and

that there was no evidence that they relied upon the affidavits when making or purchasing their

respective loans.
Because Erickson's appeal contests the validity of the 2002 home-equity loan currently held
by Wells Fargo, it is Wells Fargo's affirmative defense of equitable estoppel that is at issue here.

Accordingly, Wells Fargo need only demonstrate that it relied upon Erickson's misrepresentations
to its detriment. The reliance of the lenders behind the second and third liens is not at issue.

With respect to Wells Fargo, the bankruptcy court concluded that Wells Fargo was a bona

fide purchaser of the 2002 note without knowledge of the affidavits' inaccuracy. Article XVI,
section 50(d) of the note provides that:
A purchaser or lender for value without actual knowledge may conclusively
rely on an affidavit that designates other property as the homestead of the
affiant and that states that the property to be conveyed or encumbered is not
the homestead of the affiant.

Additionally, the deed of trust now held by Wells Fargo contains the following contractual
subrogation provision in paragraph 25:
Any of the proceeds of the Note used to take up outstanding liens against all
15

or any part of the Property have been advanced by Lender at Borrower's
request and upon Borrower's representation that such amounts are due and
are secured by valid liens against the Property.
The deed of trust itself provides evidence of reliance by the original lender, Option One, and the

subsequent bonajIde purchaser of the note, Wells Fargo. The court rejects Erickson's argument that

there is no evidence that Wells Fargo actually relied upon the affidavits in purchasing the note from
Option One. Accordingly, the bankruptcy court did not err in applying equitable estoppel to

Erickson's challenge of the validity of the 2002 home-equity lien based on the defects of the second
and third prior liens.
d.

Copies of Home-Equity Loan Documents

Erickson's final constitutional challenge to the 2002 home-equity lien is that he did not
receive a copy of all documents signed at closing. The Texas Constitution requires that "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." TEx. CONST. art. XVI,

§

50(a)(6)(Q)(v). Erickson argues that closing occurred over two

days, August 8 and August 9, 2002. Although Erickson admits he received all documents signed on

August 8 and signed an affidavit to that effect, he contends he did not receive any documents signed
on August 9.
The bankruptcy court concluded that Erickson's testimony that the copy machine at the title

company was broken on August 9 was not credible, because of the amount of time that had passed
and the fact that Erickson did not come forward with this story during his deposition prior to trial.
The bankruptcy court also rejected Erickson's testimony that the affidavit he signed at closing,

swearing to his receipt of all documents, was altered without his knowledge to reflect a date of

16

August 9 instead of August 8. The bankruptcy court instead found that the evidence supported the

conclusion that the closing likely occurred on one day, August 9, and that the affidavit was amended
to correspond to the correct date.

The bankruptcy court's finding that Erickson received all closing documents is a factual
finding that will be disturbed on appeal only by this court's finding of clear error. See FED. R. Civ.
P. 25(a)(6); In re Morrison, 555 F.3d 473, 480 (5th Cir. 2009). "Under a clear error standard, this

court will reverse only if, on the entire evidence, we are left with the definite and firm conviction that
a mistake has been made." Id. (internal quotation omitted). Because the factual finding Erickson

challenges rests upon a credibility determination, this court's review is even more circumscribed.
See In re Dennis, 330 F.3d 696, 701 (5th Cir. 2003) (reviewing courts must give "due regard to

opportunity of bankruptcy court to judge the credibility of the witnesses") (internal quotation
omitted).
Having considered the transcript ofthe January 28,2011 trial and record on appeal, the court
finds no clear error. The only witness at trial who testified that the closing occurred over two days
was Erickson. The closing agent for the 2002 home-equity loan could not recall any details about

the closing to corroborate Erickson's testimony. Erickson himself also struggled to recollect

significant facts to support his claim, such as which documents he executed on August

8

versus

August 9 so as to identify the documents he alleges were not provided to him. The burden is on
Erickson, as appellant, to show that a finding of fact made by the bankruptcy court is clearly in error.
See Matter ofFairchildA ircrafi Corp., 6 F.3d 1119, 1128 (5th Cir. 1993). Erickson has not directed

the court to any evidence that calls into question the bankruptcy court's finding. In light of

Erickson's and the closing agent's difficulty remembering the details of the closing and in deference

17

to the bankruptcy court's credibility determinations, this court finds no clear error.

Because this court concludes that none of Erickson's constitutional challenges to the validity

of the 2002 home-equity lien have merit, this court will affirm the bankruptcy court's May 19, 2011
Amended Judgment finding the 2002 Option One home-equity lien and related loan documents valid
and enforceable and granting Wells Fargo judicial foreclosure. Accordingly, this court need not

reach Erickson's second argument on appeal: that the bankruptcy court erred in granting Wells
Fargo equitable subrogation rights during summary-judgment proceedings.

Wells Fargo only

requested subrogation as an alternative means of relief in the event that the bankruptcy court were
to determine that the 2002 home-equity loan violated the Texas Constitution. See LaSalle Bank

Nat 'lAss 'n

v.

White, 246 S.W.3d 616 (Tex. 2007) (recognizing lienholder's common-law right to

equitable subrogation to preserve lien rights on homestead property).
2.

Fraud Judgment for Appellees the Simons Family Trust, Bennett, and
Nordenberg

Erickson's final argument on appeal is that the bankruptcy court erred in finding in favor of
the Simons Family Trust, Bennett, and Nordenberg on their claim of fraud. Fraud requires a showing

that (1) a material misrepresentation was made; (2) the representation was false; (3) when the
representation was made, the speaker knew it was false and made it recklessly without any
knowledge of the truth and as a positive assertion; (4) the representation was made with the intent
that the other party should act upon it; (5) the party acted in reliance on the representation; and (6)
the party thereby suffered injury. Italian Cowboy Partners, Ltd.

v.

Prudential Ins. Co. ofAm., 341

S.W.3d 323, 337 (Tex. 2011). The bankruptcy court found that Erickson made false representations

regarding the nonhomestead status of his property with knowledge that he would not have been able
to obtain the additional 2003 and 2004 liens on his homestead if he had given truthful answers about
18

the property's nature. The bankruptcy court further found that these misrepresentations induced the

Trust, Bennett, and Nordenberg to loan Erickson money.
Erickson argues that the Simons Family Trust, Bennett, and Nordenberg could not have relied
on his false affidavits, because Greg Lahr served as their agent and had knowledge of the affidavits'
falsity. The bankruptcy court considered and rejected this argument, finding that Erickson failed to

meet his burden to show that Lahr knew the property was Erickson's homestead and there was an
agency relationship between Lahr and the lenders.
The bankruptcy court's finding that there was insufficient evidence that Lahr knew the true

nature of Erickson's property is a factual finding that may only be overturned with a finding of clear
error. See In re Morrison, 555 F.3d at 480. Having considered the trial record, this court is not left

with the "firm and definite conviction" that Lahr knew the property was Erickson's homestead. See
Id.

The only person to testify that Lahr knew the Circle Ridge property was Erickson's homestead

at the time Erickson signed the nonhomestead affidavits was Erickson. And even this testimony was
ambiguous, as Erickson's statement at trial was that Lahr believed the property not to be Erickson's
homestead on the basis that Erickson was temporarily living elsewhere while he completed home
renovations. The bankruptcy court concluded that Erickson was not a credible witnesses, as he
admitted to making false statements under oath about his property.
The only other witness was Allen Craig, the closing agent for the loans. Craig testified that

he told Lahr that Erickson believed the property to be his homestead. However, Craig could not

recall the details of this conversation or whether this conversation took place in 2001, 2002, 2003,
or 2004. The bankruptcy court concluded that Craig was not a credible witness, because Craig was
a convicted felon who had been disbarred from the practice of law. The bankruptcy court also noted

that Craig's recollection of details during his testimony were often "confused and fading." Lahr did

not testify at trial.
Again, Erickson, as appellant, bears the burden to demonstrate that a factual finding was
made in clear error. See In re Dennis, 330 F.3d at 701; In re Musslewhite, 270 B.R. at 77. Erickson
has presented the court with no basis for overturning the bankruptcy court's factual finding other

than reiterating the testimony of Erickson and Craig that the bankruptcy court found incredible. In
light of Craig's difficulty recollecting the details of his conversation with Lahr and the self-serving
nature of Erickson's testimony, this court finds no clear error. See In re Morrison, 555 F.3d at 480.

Finally, the bankruptcy court did not err in holding that Erickson failed to adduce sufficient
evidence of an agency relationship between Lahr and the Simons Family Trust, Bennett, and

Nordenberg. Erickson argues that the "undisputed evidence is that Greg Lahr served as agent for
[these lenders]," because the evidence showed that Lahr negotiated and approved the loans without

seeking permission or approval from the lenders or their attorneys. Erickson further argues that the

Trust, Bennett, or Nordenberg "could have testified [Lahr] was not their agent but did not." Erickson

misstates the burden of proof on this issue. Because Erickson raises agency as an affirmative defense
to the lenders' claim of fraud, Erickson, not the lenders, bore the burden of proof on the issue. See
IRA Res., Inc. v. Griego, 221 S.W.3d 592, 597 (Tex. 2007) (law does not presume agency, and party

asserting agency has burden to prove it).

"An agent is one authorized by another to transact some business for the principal; the
relationship is a consensual one between two parties, by which one party acts on behalf of the other,
subject to the other's control." Jamison

v.

Nat'! Loan Investors, L.P., 4 S.W.3d 465, 468 (Tex.

App.Houston [1st Dist.] 1999, pet. denied). "An agent's authority to act on behalf of a principal
20

depends on some communication by the principal either to the agent (actual or express authority) or
to the third party (apparent or implied authority)." Gaines

v.

Kelly, 235 S.W.3d 179, 182 (Tex.

2007). The establishment of an agency relationship, whether based on actual or apparent authority,

focuses on the words and conduct of the principal, not the agent. See Id.; Expro Ams., LLC

Sanguine Gas Exploration, LLC, 351 S.W.3d 915, 921 (Tex.

v.

App.Houston [14th Dist.] 2011, no

pet.).

The purported principals, the Simons Family Trust, Bennett, and Nordenberg, did not testify
at trial, and Erickson's and Craig's testimony focused entirely on the conduct of Lahr. The entirety

of Erickson's testimony about Lahr' s relationship to these lenders was that Lahr "pooled various
investors together" in order to provide loans. Craig testified that he was not sure whether he spoke
to Lahr's client-investors directly and that Lahr was "in control

of' and responsible for getting the

documents needed for closing from the Trust, Bennett, and Nordenberg. The court agrees with the
bankruptcy court that this testimony is insufficient as a matter of law to demonstrate an agency
relationship between Lahr and the Trust, Bennett, and Nordenberg. Lahr' s mere involvement in the
real-estate closing did not make him an agent of the lenders absent some evidence that the lenders,
by their words or conduct, authorized him to act on their behalf. See Gaines, 235 S.W.3d at 182.

"It is common knowledge and practice that acting as a closing agent in a loan transaction does not
create an agency or employer-employee relationship between the closing agent and the lending

institution[,]" where there is "no evidence of any agreement, express or implied" between principal
and agent. United States v. Musgrave, 444 F.2d 755, 760 (5th Cir. 1971).

Because Erickson has not established that the bankruptcy court erred in finding Erickson
failed to prove the Simons Family Trust, Bennett, and Nordenberg had knowledge of the falsity of

21

Erickson's affidavits, it did not err in finding that the lenders established the requisite elements of
fraud. Accordingly, the court will affirm the bankruptcy court's judgment of fraud in favor of the

Trust, Bennett, and Nordenberg.
Attorney's Fees

C.

After the bankruptcy court rendered its amended judgment that Erickson take nothing in his
adversary proceeding against Wells Fargo, Wells Fargo sought attorney's fees pursuant to section
6(D) of the 2002 home-equity note, which permits the note holder to recover reasonable attorney's

fees incurred in enforcing the note.7 Wells Fargo's motion for attorney's fees requested fees in two
allocations: (1) fees incurred before Erickson's filing of his Chapter 7 petition on July 9, 2009,

limited to an in rem judgment, an additional amount to be secured by the home-equity lien against
the property, and (2) fees incurred postpetition, awarded as a personal judgment against Erickson.
The Texas Constitution prohibits personal recourse against the borrower of a home-equity

loan absent a showing that the borrower obtained the extension of credit by fraud.
XVI,

§

TEX. CONST. art.

50(a)(6)(C) (requiring that home-equity note be "without recourse for personal liability

against each owner and the spouse of each owner, unless the owner or spouse obtained the extension

of credit by actual fraud"). Wells Fargo argued before the bankruptcy court that, although Erickson
did not obtain the 2002 home-equity loan through fraud, Erickson demonstrated a lack of intention

7Section 6(D) ofthe home-equity note executed between Option One and Erickson provides:

If the Note Holder has required me to pay immediately in full as described
above, the Note Holder will have the right to be paid back by me for all of its
costs and expenses in enforcing the Note to the extent not prohibited by
applicable law. Those expenses include, for example, reasonable attorney's
fees.

22

to fulfill the terms of the loan he secured from Option One and this conduct constituted fraud for

purposes of section 50(a)(6)(C). The bankruptcy court rejected the argument, holding that lack of

intention to perform on a contract does not constitute fraud for purposes of section 50(a)(6)(C).
Thus, the bankruptcy court held that section 50(a)(6)(C) prohibited awarding legal fees as a personal

judgment against Erickson and denied Wells Fargo's motion.
Wells Fargo does not challenge the bankruptcy court's finding that Erickson did not engage
in fraud for purposes of section 50(a)(6)(C). Rather, Wells Fargo argues that even without a finding

of fraud, Wells Fargo is entitled to reasonable attorney's fees against Erickson as a prevailing party
on a written contract and as a prevailing defendant in Erickson's adversary proceeding under the
Texas Declaratory Judgment Act.

See TEx. CIV. PRAC.

& REM. CODE § 38.001(8) ("A person may

recover reasonable attorney's fees from an individual or corporation.
or written contract."); Id.

§ 3 7.009

. .

if the claim is for. . . an oral

(In declaratory-judgment proceeding, "the court may award costs

and reasonable and necessary attorney's fees as are equitable and just."). Wells Fargo concedes that
fees incurred prior to Erickson's filing of his bankruptcy petition are discharged as prepetition debts,

but argues that there is no restriction against adding these fees to the debt owed on the home-equity
loan. Wells Fargo also reiterates its request for an award ofpostpetition attorney's fees as a personal

judgment against Erickson.
This court reviews the bankruptcy court's denial ofattorney's fees for an abuse of discretion.
See In re Babcock & Wilcox Co.,

526 F.3d 824, 826 (5th Cir. 2008). A bankruptcy court abuses its

discretion when (1) it applies an improper legal standard or follows improper procedures in
calculating the fee award or (2) it rests its decision on findings of fact that are clearly erroneous. Id.
Having considered the record in this cause, this court is of the opinion that the bankruptcy court

23

should have considered whether Wells Fargo is entitled to reasonable attorney's fees as an

in

rem

judgment to be recovered through judicial foreclosure on the Circle Ridge property.
The bankruptcy court was correct that section 50(a)(6)(C)'s prohibition on personal

judgments against home-equity borrowers bars the recovery legal fees as a personaljudgment against
Erickson.

See In re Mullins, 433

B.R. 1, 18 (S.D. Tex.

2010).

Therefore, regardless of whether

Wells Fargo has a right to attorney's fees by the loan contract or by statute, this right cannot trump
the Texas Constitution. Accordingly, Wells Fargo may only recover its attorney's fees and costs
against the property, not Erickson personally.

See

id.

at 17. The bankruptcy court denied Wells

Fargo's motion in its entirety based on the unavailability of a personal judgment against Erickson,
without consideration of an in rem judgment. "[E]ven though Wells Fargo may not seek to recover
its attorneys' fees and costs from [Erickson] in [his] individual capacit[y], Wells Fargo may
nevertheless add the fees and costs to the balance owed under the [2002 home-equity note], and then

recover the entire balance through foreclosure on the Property." Id. at 18.

Accordingly, this court will reverse the bankruptcy court's July

22, 2011

order denying

attorney's fees to Wells Fargo and remand with instructions that the bankruptcy court consider
whether Wells Fargo should recover reasonable attorney's fees as an

in

rem

judgment to be

recovered through judicial foreclosure on the Circle Ridge property.

IV. CONCLUSION
In summary, this court holds that the bankruptcy court did not abuse its discretion in

extending the time for Erickson to file a notice of appeal. After reviewing the merits of Erickson's
appeal, this courts finds no error in the bankruptcy court's factual findings and legal conclusions with

respect to the validity of Erickson's 2002 home-equity note, the right of Wells Fargo to pursue

24

judicial foreclosure, and the Simons Family Trust, Bennett, and Nordenberg's judgment against
Erickson for fraud. Finally, this court holds that the bankruptcy court should have considered
whether Wells Fargo is entitled to recover reasonable attorney's fees as an

in

rem judgment.

Therefore, the court will reverse the bankruptcy court's order denying attorney's fees and remand

with instructions to consider whether Wells Fargo may recover attorney's fees from the proceeds of

judicial foreclosure on the Circle Ridge property.

IT IS THEREFORE ORDERED that the bankruptcy court's Order Granting Plaintiffs
Motion for Extension of Time to File Notice of Appeal, signed July 13, 2011 (Bankr. Clerk's Doe.
No. 100) is AFFIRMED.

IT IS FURTHER ORDERED that the bankruptcy court's Amended Judgment, signed May
19, 2011 (Bankr.

Clerk's Doe. No. 76) is AFFIRMED.

IT IS FURTHER ORDERED that the bankruptcy court's Memorandum Opinion on
Defendant's Post-Trial Motion for Award of Attorneys' Fees, signed July 22, 2011 (Bankr. Clerk's
Doc. No. 105) is REVERSED AND REMANDED to the bankruptcy court for further proceedings

consistent with this opinion.
SIGNED this

#Z'day of September, 2012.

UNI ED STATE DIST

25

CT JUDGE