IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

 

No. 99-11404

 

JAMES S. DOODY; PAUL D. CARRINGTON,

Plaintiffs-Appellants,

versus

AMERIQUEST MORTGAGE COMPANY,

Defendant-Appellee.

 

Appeal from the United States District Court

for the Northern District of Texas

 

February 13, 2001

Before HIGGINBOTHAM, WIENER, and DENNIS, Circuit Judges.

PER CURIAM:

CERTIFICATE FROM THE UNITED STATES COURT OF APPEALS FOR THE FIFTH

CIRCUIT TO THE SUPREME COURT OF TEXAS, PURSUANT TO THE TEXAS

CONSTITUTION, ART. 5, § 3-C AND RULE 58 OF THE TEXAS RULES OF

APPELLATE PROCEDURE
2

TO THE SUPREME COURT OF TEXAS AND THE HONORABLE JUSTICES THEREOF:

I. STYLE OF THE CASE

The style of the case in which certification is made is James

S. Doody, Paul D. Carrington, Plaintiffs-Appellants versus

Ameriquest Mortgage Company, Defendant-Appellee, Case No. 99-11404,

in the United States Court of Appeals for the Fifth Circuit, on

appeal from the United States District Court for the Northern

District of Texas. This case involves a determinative question of

state law, and jurisdiction of the case in the federal courts is

based solely on diversity of citizenship.

II. STATEMENT OF THE CASE

James S. Doody and Paul D. Carrington secured a loan from

Ameriquest Mortgage Company in January of 1998. The loan was for

$45,500 and was secured by their homestead. 

Home equity lending was recently authorized in Texas by

section 50 of Article XVI of the Texas Constitution. Section 50

imposes a number of requirements that home equity loans must

satisfy. Those that appear principally relevant to this case are:

1. The fee cap provision, section 50(a)(6)(E), which mandates

that “fees . . . necessary to originate, evaluate, maintain,
1 Texas Const., art. XVI, § 50(a)(6)(E) (2000).

2 Id. § 50(a)(6)(Q)(x).

3 Id. § 50(c).

3

record, insure, or service the extension of credit” may not

exceed three percent of the principal.1

2. The forfeiture provision, section 50(a)(6)(Q)(x), which

mandates that “[t]he lender . . . shall forfeit all principal

and interest of the extension of credit if the lender . . .

fails to comply with the lender’s . . . obligations under the

extension of credit within a reasonable time after the lender

. . . is notified by the borrower of the lender’s failure to

comply.”2

3. The voiding provision, section 50(c), which mandates that

“[n]o mortgage, trust deed, or other lien on the homestead

shall ever be valid unless it secures a debt described by this

section. . . .”3

The loan taken out by Doody and Carrington had closing costs

of $2,006.88, which was approximately 4.4 percent of the loan

amount. In April of 1998, Ameriquest realized that such closing

costs violated section 50(a)(6)(E), and refunded $641.88 to Doody
4 See, e.g., Rowan Companies, Inc. v. Griffin, 876 F.2d 26, 28

(5th Cir. 1989)(“The declaratory judgment vehicle also is intended

to provide a means of settling an actual controversy before it

ripens into a . . . breach of a contractual duty.”).

5 See United States v. Real Prop., 123 F.3d 312, 313 (5th Cir.

1997) (“It is well-settled, however, that we will not reverse a

judgment of the district court if it can be affirmed on any ground,

4

and Carrington, reducing the fees to $1,365.00. That amount is

three percent of the principal. 

The contract Doody and Carrington signed with Ameriquest

contained a waiver provision. That provision stated that if

Ameriquest discovered that it had overcharged the borrowers, it

would refund that overcharge and “Borrower’s acceptance of any such

refund will constitute a waiver of any right of action Borrower

might have arising out of such overcharge.” Doody and Carrington

accepted their refunds in this case.

Doody and Carrington have sued in the United States District

Court for the Northern District of Texas, seeking declaratory

relief. The district court dismissed, holding that the controversy

was not ripe because plaintiffs had not failed to pay on their

mortgage, and Ameriquest had not yet begun foreclosure proceedings.

In this respect, the district court erred. The Declaratory

Judgment Act exists to allow litigants to determine an actual

controversy such as this one before the dispute grows into a

contract violation or a foreclosure proceeding.4 

We are required, however, to affirm the district court’s

judgment if it was correct, even if for a reason not articulated.5
regardless of whether the district court articulated the ground.”).

6 Stringer v. Cendant Mortgage Corp., 23 S.W.3d 353, 355 (Tex.

2000).

7 Texas Const. art. XVI, § 50(a)(6)(E).

5

Ameriquest advances two reasons why dismissal might be appropriate.

Both raise issues of Texas law that are of first impression and

therefore most properly addressed to the Supreme Court of Texas and

the Honorable Justices thereof. 

I

Before turning to these issues, we first reject plaintiff’s

contention regarding hazard insurance. Ameriquest required Doody

and Carrington to take out hazard insurance on the mortgaged

property. No hazard insurance premiums were refunded. If the

premiums paid for that insurance count towards the three percent

cap, the cap was amply exceeded and the loan and lien are both

therefore invalid. We hold, however, that hazard insurance does

not constitute “fees . . . necessary to originate . . . the

extension of credit.” This is clear from the language of section

50. The Supreme Court of Texas has held, in interpreting section

50, that “[w]e avoid a construction that renders any provision

meaningless or inoperative.”6 Section 50 states that the lender

may not “require the owner” to pay fees “to any person that are

necessary to originate” the loan.7 Hazard insurance is only

“necessary to originate” this loan in the sense that the lender
6

required it. Plaintiff’s construction would render “necessary to

originate” redundant and therefore meaningless and inoperative.

II

Having dispensed with the hazard insurance question, the case

then turns on two questions about the interaction between the

invalidity provision and the forfeiture provision of section 50.

The forfeiture provision allows a lender to cure noncompliance with

the terms of the loan, thereby avoiding forfeiture. Ameriquest

argues that such a cure also allows the lender to avoid invalidity

of the loan under section 50(c). Thus, Ameriquest argues, since it

refunded the overcharged amount, neither section 50(a)(6)(Q)(x) nor

section 50(c) invalidate its lien. Doody counters that the two

provisions address conceptually distinct violations and provide

conceptually distinct remedies, such that importing the cure

portion from one into the other is inappropriate. The forfeiture

provision addresses violations of the terms of the loan, which

include, but are not limited to, the requirements imposed by the

Texas Constitution. The voiding provision addresses violations of

the Texas Constitution. The forfeiture provision contains a harsh

remedy: invalidating the underlying debt itself and giving a

complete windfall to the debtor. To moderate that, the cure

provision was inserted. The voiding provision, by contrast,

invalidates the lien, leaving the debtor obliged to pay the

underlying debt.
8 747 S.W.2d 783 (Tex. 1998).

9 Id. at 785.

10 See, e.g., Texas Land & Loan Co. v. Blalock, 76 Tex. 85, 13

S.W. 12 (1890).

11 See, e.g., Lincoln v. Bennett, 138 Tex. 56, 156 S.W.2d 504,

505 (1941).

7

If Ameriquest prevails on this argument, and the lien is

therefore valid, the remaining issue need not be reached. In the

event, however, that Plaintiffs prevail, Ameriquest asserts a

second reason why its lien is not invalid. Ameriquest argues that

by accepting a refund of the overcharged amount, Doody and

Carrington waived their right to bring this case. Plaintiff

counters by citing Hruska v. First State Bank of Deanville,

8 in

which the Supreme Court of Texas held that “[a] lien cannot be

‘estopped’ into existence. . . . Waiver and estoppel are defensive

in nature and operate to prevent the loss of existing rights. They

do not operate to create liability where it does not otherwise

exist.”9 If the voiding provision applies here, Plaintiff argues,

the lien was never valid and therefore cannot be waived into

existence. Plaintiff also cites other Texas cases indicating a

general aversion to permitting homesteaders to waive their

constitutional protections.10 The Supreme Court of Texas has also,

however, articulated narrow exceptions to the general rule that

homestead protections are unwaivable.11 The amendment to section

50 is new, and has not been extensively considered by the Texas
8

courts. 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.

The final resolution of this case requires an answer to the

question of whether Ameriquest’s lien is invalid because Ameriquest

charged fees amounting to 4.4 percent, even though it later

refunded the overcharged amount. As this issue raises two

questions of first impression interpreting a new provision of the

Texas Constitution, we certify those questions to the Supreme Court

of Texas.

III. QUESTIONS CERTIFIED

1. Under the Texas Constitution, if a lender charges closing costs

in excess of three percent, but later refunds the overcharge,

bringing the charged costs within the range allowed by section

50(a)(6)(E), is the lien held by the lender invalid under section

50(c)?

2. If this question is reached, may the protections of section 50

of the Texas Constitution be waived by a buyer who accepts a refund

of any overcharged amounts when the loan contract provides that

accepting such refund waives any claims under section 50?
9

IV. CONCLUSION

We disclaim any intention or desire that the Supreme Court of

Texas confine its reply to the precise form or scope of the

question certified. The answers provided by the Supreme Court of

Texas will determine the remaining issues in this case.

QUESTIONS CERTIFIED.