Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—BankCtEDTex: Homeowner Alleging Wrongful Foreclosure Was Not a “Consumer” Under Deceptive Trade Practices Act , (Mar 8, 2013)

By John W. Arden, J.D., LL.M.

An individual debtor in bankruptcy, bringing an action for wrongful foreclosure of her home, was not a “consumer” entitled to assert a Texas Deceptive Trade Practices Act claim against the holder of her mortgage and the mortgage servicer, according to the U.S. Bankruptcy Court in Sherman, Texas (In re: Nevarez, March 6, 2013, Rhoades, B.). Thus, the mortgage holder and servicer were granted summary judgment on the debtor’s Deceptive Trade Practices Act claim—along with her wrongful foreclosure and breach of contract claims.

The debtor did not qualify as a “consumer,” the court held, because she had sought only the extension of credit, rather than purchasing or leasing a good or service as required by the Deceptive Trade Practices Act.

Background. In August 2006, Irma Nevarez and her then-husband obtained a loan for the purchase of a home from First Franklin, which assigned the note and deed of trust to First Franklin Corporation. In June 2010, Nevarez defaulted on her loan by ceasing to make payments as they came due. Residential Credit Solutions, Inc. (RCS) acquired the right to service the loan and took possession of the promissory note in August 2010. RCS, acting as a servicer, mailed Nevarez a notice of default and intent to accelerate on August 23, 2010. After Nevarez failed to cure the default, RCS referred the matter to a law firm for foreclosure proceedings.

Nevarez filed a petition for relief under Chapter 7 of the Bankruptcy Code on February 27, 2011, obtaining an automatic stay of the eviction proceedings pending against her. On March 24, 2011, RCS filed a motion for relief from the automatic stay. When Nevarez filed her bankruptcy schedules, she listed RCS as a secured creditor, but indicated that she disputed her obligations to the company. She expressed the intention to reaffirm the debt she owed on her home, but stated “it is unclear who the creditor of the debt is.”

Nevarez obtained a discharge of her debts on June 4, 2011. Since the discharge terminated the automatic stay, the bankruptcy court dismissed the motion for relief filed by RCS as moot. Nevarez then commenced this proceeding on April 16, 2011. Soon thereafter, First Franklin assigned the deed in trust to RCS, which recorded it.

Despite demands that she vacate the premises, Nevarez continued to reside in the home. She obtained another automatic stay of the eviction proceedings by filing a petition for bankruptcy relief under Chapter 13. The plan of reorganization provided for direct payments to RCS.

Nevarez brought suit for a declaration that the foreclosure was wrongful because RCS had no right to enforce the note and deed of trust without the proper chain of endorsements that would render it the “holder” under Texas law. She also claimed that RCS and Mortgage Electronic Registration System (MERS) breached the terms of the note and deed of trust and violated the Texas Deceptive Trade Practices Act.

RCS and MERS moved for summary judgment, asserting that RCS had been in possession of the promissory note signed by Nevarez at all relevant times and that it was entitled to enforce the note. They further asserted that the foreclosure was valid and not a breach of contract and that Nevarez did not have standing as a consumer under the Deceptive Trade Practices Act.

Wrongful foreclosure. To prevail on a claim for wrongful foreclosure in Texas, a plaintiff must prove (1) a defect in the foreclosure sale proceedings, (2) a grossly inadequate selling price, and (3) a causal connection between the defect and the grossly inadequate selling price. In this case, Nevarez asserted a defect in the foreclosure proceeding, but did not allege that the home sold for a grossly inadequate selling price. A complete failure of proof of an essential element rendered all other facts immaterial, the court held. Since Nevarez failed to provide summary judgment evidence establishing a claim for wrongful foreclosure and since the defendants submitted affirmative evidence negating an essential element of the claim, the defendants were entitled to judgment as a matter of law.

Breach of contract. Navarez alleged that the wrongful foreclosure of her home was a breach of contract. However, summary judgment evidence established that Navarez breached the terms of the note by failing to make payments when due. The defendants showed that they complied with all notice requirements under the note and deed of trust and applicable Texas law. Thus, the defendants were entitled to judgment as a matter of law.

Deceptive Trade Practices Act. To prevail under the Texas Deceptive Trade Practices Act, a plaintiff must prove (1) it is a consumer, (2) the defendant engaged in false, misleading, or deceptive acts, and (3) these acts constituted a producing cause of the consumer’s damages. To qualify as a consumer, a person “must have sought or acquired goods or services by purchase or lease” and “the goods or services leased must form the basis of the complaint.” A person who seeks only the extension of credit—and nothing more—is not a consumer under the statute because the lending of money is not a good or service, the court observed.

Navarez argued that she was a consumer, citing cases in which individuals acquiring a good or service in addition to a mortgage loan were found to be consumers. In this case, however, Navarez failed to present any evidence that she sought or acquired a good or service from the defendants with the loan she received to purchase her home, the court found. Her complaint was not based on any purported good or service incidental to the loan transaction. Rather, it related to her home loan and RCS’s foreclosure following her default. The court concluded that Navarez was not a consumer under the Deceptive Trade Practices Act.

The case is No. 11-40598.

Attorneys: Gregory W. Mitchell (The Mitchell Law Firm, LP) for Irma Nevarez. Johnny W. Taylor (Hughes Watters and Askanase) for Residential Credit Solutions, Inc.

Companies: Residential Credit Solutions, Inc.; Mortgage Electronic Registration Systems, Inc.

Cases: StateUnfairTradePractices TexasNews