### I N THE UNI TED STATES COURT OF APPEALS FOR THE FI F TH CI RCUI T

No. 12-10978

FRANKIE SIMS, on behalf of himself and all others similarly situated; PATSY SIMS, on behalf of herself and all others similarly situated, Plaintiffs–Appellants,
v. CARRINGTON MORTGAGE SERVICES, L.L.C., Defendant–Appellee.

A ppeal from the United States District Court f or the Northern District of Texas USDC No. 4:12-CV-87

Before OWEN and HAYNES, Circuit Judges, and LEMELLE, * District Judge. PER CURIAM: ** Frankie a nd Patsy Sims (the S imses) appeal the dismissal of their complaint against Carrington Mortgage Services, L.L.C. ( CMS), as well as the district court’s refusal to allow the Simses to amend thei r c omplaint to add additional legal theories and its d enial of their motion for reconsideration. We affirm the district court’s denial of leave to amend and its denial of the motion U n i t e d S t a te s C o u r t o f A p p e al s

F i f t h C i rc u i t 

### F I L E D Aug ust 14, 2013 Ly l e W . Cay ce Clerk

* D is trict Jud ge of

the Eas tern D is trict of Louis iana, s itting by d es ignation.

* * Purs uant to 5 T H C I R

. R

. 47. 5, the court has d eterm ined that this op inion should not be p ublis hed and is not p reced ent excep t und er the lim ited circum s tances s et forth in 5 T H C I R

. R. 47. 5. 4. Case: 12-10978 Document: 00512341802 Page: 1 Date Filed: 08/14/2013No. 12-10978

for reconsideration. Because the remaining issues in this case raise important and determinative questions of Texas law a s to which the r e a r e n o controlling Supreme Court of Texas p recedents, we c ertify those unresolved questions to the Supreme Court of Texas. We first address the S i mses’ motion for l e ave to amend and their motion for reconsideration. T he relevant f acts are as follows. The Simses filed a class action lawsuit against CMS i n federal district court, alleging that d uring the

course of modifying their home equity loan, CMS violated several provisions of section 50 of Article XV I of the Texas Constitution. CMS f iled a motion to dismiss under Federal Rule of Civil P rocedure 12(b)(6), arguing that the Simses had not stated a claim. A fter CMS filed its motion to dismiss, the Simses filed

a response that included a request f or leave to amend their complaint; they did not file a proposed amended complaint as required under the local rules. 1 The Simses l ater filed a motion for leave to f i l e a sur-reply t o argue new legal theories or, in the alternative, for leave to amend their complaint; that motion set forth t h e Simses’ new theory—namely, that CMS had capitalized not only past-due interest but also p ast-due property t axes and insurance premiums. In its response, C MS pointed out that the Simses’ complaint already contemplated that property taxes and insurance premiums w ere capitalized along with pastdue interest and that CMS’s motion to dismiss addressed those c laims. Noting that it had “considered all of the parties’ filings, as well as the applicable legal

a u t horities,” the district court granted the motion and dismissed the Simses ’ claims with p rejudice. The Simses m oved f or r econsideration, arguing that the district c o u r t h a d not considered their new legal arguments; the district court denied that motion.

1 N

. D I ST

. T E X

. C I V

. R

. 15. 1. 2 Case: 12-10978 Document: 00512341802 Page: 2 Date Filed: 08/14/2013No. 12-10978

The Simses c ontend that the district court erred in (1) dismissing the case

w ithout allowing them to amend their complaint to a dd additional theories o f liability, and ( 2) refusing t o reconsider the dismissal. We hold that the district court did not abuse its discretion in denying the Simses l e ave t o a mend or in refusing to reconsider the dismissal. “We review the d istri c t c o u r t ’s denial of a leave to amend for a buse of discret i o n . ” 2 The district court never expressly ruled o n the Simses’ motion to amend; however, we have held that “[t]he denial of a motion by the district court, although not formally expressed, may be implied by the entry of a final judgment

or of an order inconsistent with the granting of the relief sought by the motion.” 3 Here, the district court’s d ismissal of the Simses’ claims with p rejudice was sufficiently inconsistent with the Simses’ m otion to amend that it c o nstituted an implicit denial of that motion. Although Federal Rule of Civil P rocedure 15(a) “ r e q uires a trial court to grant leave to amend freely, and the language of this rule evinces a bias in favor of g ranting leave to amend,” w e h ave e mphasized that w hether to grant or deny

a motion to amend is “e n t r u s t e d to the sound discretion of the d istrict court.” 4 Because the district court did not formally deny t he m otion to amend, i t did not provide any reasoning. 5 A district court, however, may properly deny a motion

2 Jones v . Ro b i n s o n P r op . G rp . , 427 F. 3d 987, 992 (5th Cir. 2005) ( citing Schi l l er v . Physi ci a ns Res. G rp . Inc. , 342 F. 3d 563, 566 ( 5th Cir. 2003) ).

3 N orm a n v . A

p a c h e C o r

p. , 19 F. 3d 1017, 1021 ( 5th Cir. 1994) ( citing A ddi ngton v . Fa rm er’s El ev a tor M

ut. Ins. Co. , 650 F. 2d 663, 666 ( 5th Cir. 1981) )

.
4 Jones , 427 F. 3d at 994 ( quoting Lyn–Lea Tra v el C orp . v . A m . A i rl i nes , 283 F. 3d 282, 286 ( 5 t h C i r . 2 0 0 2 ) ; Q ui nta ni l l a v. Tex. Tel ev i si on, Inc. , 139 F. 3d 494, 499 ( 5th Cir. 1998) ) ( internal quotation m ark s om itted )

.

5 See Cent. La borers’ Pensi on Fund v . Integra ted El ec. Serv s. Inc. , 497 F

. 3d 546, 556 ( 5th Cir. 2007) ( “When the reas on f or the denial i s r e a d ily ap p arent, how ever, a d is trict court’s f ailure to exp lain ad equately the bas is f or its d enial is unf

ortunate but not f

atal to af

f irm ance if the record ref

lects am p le and obvious ground s f or denying leave to am end

. ” ( quoting 3 Case: 12-10978 Document: 00512341802 Page: 3 Date Filed: 08/14/2013No. 12-10978

to amend when the amendment would be futile. 6 A s CMS p o ints out, the Simses’ first amended complaint expressly contemplated t hat other fees and c osts m ay have been c a p i t a l i zed in addition to past-due interest. Additionally, CMS discussed these fees and costs in its brief supporting its m o t i on to dismiss. Therefore, the Simses’ alleg e dly “new” legal theory was a lready b efore the district court. The Simses have failed to e stablish that the district court abused its discretion in denying their motion for leave to amend. Similarly, we review a district court’s d e nial of a motion to r econsider for abuse of discretion. 7 T h e S i m s es argue t hat the district c ourt should have granted their motion to reconsider for essentially the same reas o ns that they argue that the c ourt s h o u l d h a ve granted their m otion to amend. For the

reasons w e h av e a lready stated, the district court d id not abuse its discretion. The remaining issues in this case implicate i mportant and d eterminative, but unresolved, questions of T exas law; we therefore certify those questions to the Supreme Court of Texas. CERTIFICATION F ROM THE UNITED STATES COURT O F APPEALS F O R T H E F I F T H C I R C U I T T O T H E S U P R EME COURT OF TEXAS, PURSUANT TO ARTICLE 5, SECTION 3- C OF THE TEXAS CONSTITUTION A ND RULE 58 OF T HE T EXAS RULES OF APPELLATE PROCEDURE. TO THE S UPREME C OURT O F TEXAS AND THE HONORABLE JUSTICES THEREOF:

I . STYLE OF THE CASE The style of the case is Frankie Sims, on behalf of himself and all others similarly situated, Patsy Sim s , on b ehalf of herself and all others similarly

M a yea ux v . La

. H

ea l th S erv . & I

ndem

. Co. , 376 F. 3d 420, 426 ( 5 th Cir. 2004) ) ( internal quotation m ark s om itted ) ).

6 A v a ta r Exp lora ti on, Inc. v. Chev ron, U

. S. A

. , Inc. , 933 F. 2d 314, 321 ( 5th Cir. 1991)

.
7 Fl etcher v. A

p f el , 210 F. 3d 510, 512 (5th Cir. 2000)

.

4 Case: 12-10978 Document: 00512341802 Page: 4 Date Filed: 08/14/2013No. 12-10978

situated, Plaintiffs–Appellants v. Carrington M ortgage Services, L.L.C., Defendant–Appellee , Case No. 12-10978, i n the United States Court o f Appeals for the Fifth Circuit, on appeal from t he judgment of the United States District Court for the Northern District of Texas, Fort Worth Division. F e d e r a l jurisdiction is based on diversity of citizenship. 8

I I. STATEMENT OF THE CASE As we have already n oted, this case involves a c lass action filed by the Simses against CMS, in which the Simses c o ntend that CM S v i o l ated various provisions of section 50 of A rticle XVI of the Texas Constitution. T he facts alleged by the S i mses are a s follows

. I n 2 003, the Simses obtained a home equity loan from CMS for $76,000. In 2 0 09, the Simses were behind on their payments and entered into an agreement (the 2009 Agre e m e n t) with CMS which add e d a pproximately $2,200 of past-due interest a nd o ther charges, including fees and unpaid p roperty taxes and insurance premiums, t o the principal of the loan, leading to a new balance of $74,345.50. At that time, the Simses’ property

was ap p r a i s e d for $72,300. The 2 009 Agreement w as entitled “Loan Modification Agreement,” purported to be a m odification, an d contained the following condition: A l l covenants, agreements, stipulations, a nd conditi o n s i n y o u r N o t e and M ortgage will r emain in full force and effect, except as modified herein, an d n o n e o f your obligations or liabilities under y our Note

8 The Sim s es ’ com p laint alleged f e d e r a l d ivers ity juris d iction und er the C las s Action Fairnes s A ct ( CAFA)

. 28 U

. S. C. § 1332( d )

. The Sim s es p lead ed the neces s ary juris d ictional f acts f or CAFA j uris d iction and filed a m otion f or clas s certif

i c a t i o n , but the dis trict court granted CM S’s m ot ion to d is m is s bef ore ruling on the motion to certif y. O ur s is ter circuits have held that “f

ed eral juris d iction und er the Clas s Action Fairnes s Act d oes not d ep end on certif ication. ” Cunni ngha m Cha rter Corp

. v . Lea rjet, Inc. , 592 F. 3d 805, 806 ( 7th C ir. 2010) ; see a l so Buetow v . A .L. S. E nters. , Inc. , 650 F. 3d 1178, 1182 n. 2 ( 8th Cir. 2011) ; M etz v . U ni z a n Ba nk , 649 F. 3d 492, 500 ( 6th Cir. 2011) ; U ni ted S t eel , Pa

p er & F orestry, Rubber, M

f g
. , Energy, A l l i ed Indus. & Serv

. Wo r k e r s Int’l U ni on v . Shel l O i l Co. , 602 F. 3d 1087, 1091- 92 ( 9th Cir. 20 1 0) ; Vega v . T- M

obi l e U SA , Inc. , 564 F. 3d 1256, 1268 n. 12 ( 11th Cir. 2009)

. We need not d ecid e whether w e have juris d iction und er C AFA, how ever, becaus e t h e S i m s es ’ ind ivid ual claim s agains t CM S s atis f y the requirem ents f

or d ivers ity juris d iction. 28 U

. S. C. § 1332( a)

. 5 Case: 12-10978 Document: 00512341802 Page: 5 Date Filed: 08/14/2013No. 12-10978

and Mortgage will be diminished or r e lea s e d b y any provisions hereof, nor w ill this Agreement in any way impair, dim i n i s h , or affect [the] rights under or remedies on your Note and Mortgage. In 2011, the S i mses again fell behind in their payments, and CMS filed an expedited foreclosure proce e d i n g i n state court. The Simses filed for a continuance of the foreclosure proceeding, claiming that the 200 9 Agreement violated section 50. The Simses and C MS subsequently entered in t o another agreement (the 2011 Agreement and, collectively with the 2009 Agreement, the Agreements), which again added approximately $7,368.44 of past-due i nterest, fees, property taxes, and insurance p remiums to the p r i n cipal o f the loan, resulting in a n e w p r incipal balance o f $80,023.95. At t he time of t he 2011 Agreement, CMS estimated that the v alue of the Simses’ property was $ 76,100, and the property was appraised at $73,000. Similar to the 2009 Agreement, the 2011 Agreement was entitled “ Loan Modification Agreement,” purported to modify the existing loan, and contained the following condition: [A]ll terms and provisions o f t h e Loan Documents, except as ex p r e ssly modified by this Agreement, remain in full force and effect; nothing in this Agreement shall be u nderstood or construed to be a satisfaction o r r elease in whole or in part of the obligations contained in the L o a n Documents; and [] except as o therwise specifically provided in, and expressly modified by, this Agreement, the Lender and you will be bound by, and will c omply with, all of t h e terms and conditions of the Loan Documents. In 2012, the Simses filed th i s l a w s u it against CMS alleging t hat the Agreements violated s ection 50 and that CMS had committed similar v iolations with r espect to other debtors. C M S f i led a Federal R u le o f Civil Procedure 12(b)(6) m o tion to dismiss for failure to state a claim. T he district court granted the motion to dismiss, holding that (1) the Agreem e n t s w e r e m o d i f ications rather than refinances of the loan; (2) capitalizing past-due interest and adding it to the principal does not constitute a n “advance of additional funds”under Texas law; (3) section 50(a)(6)(B)’s requirement that a home e quity loan not exceed 80% of

6 Case: 12-10978 Document: 00512341802 Page: 6 Date Filed: 08/14/2013No. 12-10978

the v alue of the h ome applies only as of the date the original e xtension of credit

was made and not to any subsequent modifications; and (4) t he Agreements did

n o t c reate an open-end a ccount. Accordingly, the district court held that t h e Simses had not stated a claim and dismissed t heir claims with prejudice. This appeal followed. III. LEGAL ISSUES This case involves issues of first impression regarding restrictions placed

on home equity lending under article XVI, section 50 of the Texas Constitution. In 1997, Texas became the last state in the nation to permit home equity loans when it passed a n amendment to section 50 allowing home equity l oans secured by a m ortgage on the h omestead. 9 “The amendment’s p urpose w as to expand the types of liens for loans t hat a lender, with the homeowner’s consent, could place against a homestead. The amendment allows homeowners who ha v e either entirely repaid t heir hom e loans or w ho have accumulated e quity in their hom e s t e a d over and above existing liens to apply for a loan a gainst that equity.” 1 0 “Although home-equity lending is now c onstitutionally permissible, [section 5 0(a)(6)] still places a number of limitations on s uch lending.” 1 1 “[F]or lenders, section 50 prescribe[s] a Draconian consequence of n oncompliance, whether intentional or inadvertent: not merely the loss of t he right of f orced sale of the homestead, b ut forfeiture of all principal and interest.” 1 2 The constitution, however, does allow lenders to cure violations w i t hin 60 days of notice of the

9 T E X

. C ON ST

. art. X VI, § 50( a) ( 6) ; La Sa l l e B a nk N a t’l A ss’n v . Whi te , 246 S. W. 3d 616, 618 ( Tex. 2007) ( p er curiam )

.

1 0 Stri nger v . Cenda nt Mortg. Corp

. , 23 S. W. 3d 353, 354 ( T ex. 2000)

.
1 1 La S a l l e Ba nk , 246 S. W. 3d at 618; see a l so T E X

. C ON S T

. art. X VI, § 50( a) ( 6) ( A)

- ( Q )

.
1 2 F i na nce Com m ’n of Tex. v . N orw ood , N o. 10- 0121, 2013 WL 3119481, at *2 ( Tex. June 21, 2013) ; see a l so T E X

. C ON ST

. art. X VI, § 50( a) ( 6) ( Q) (x) , ( c)

. 7 Case: 12-10978 Document: 00512341802 Page: 7 Date Filed: 08/14/2013No. 12-10978

violation. 1 3 It also contains a safe harbor provision, which provides that “[a]n act

or omission d oes not violate” section 50 if it “ conforms to an interpretation of the provision” that was “in effect at the time of t he act or omission” and was “made by a state agency t o which t he power of interpretation is delegated

. . . or by an appellate court of this state or the United States.” 1 4 Two Texas agencies, the Finance Commission o f Tex a s a n d the Credit Union Commission of T exas (the C ommissions), have interpretative authority

over t he home eq u i t y p r o v i sions in the constitution and have p romulgated regulations (the Regulations) pursuant to that authority. 1 5 Recently, in Finance Commission of Texas v. Norwood , 1 6 th e S u p r e m e Court of Texas held that the Regulations are owed the same a mount of deference as decisions of Texas courts of appeals. 1 7 That is, the Supreme Court of Texas reviews t he Regula t i o n s d e
nov o , 18 while this court would defer to the Regulations “unless convinced by other persuasive data that the [Supr e m e C o u rt of T exas] w ould decide otherwise.” 1 9 Given the Supreme Court of Texas’s de novo review of the Regulations at issue, the novel questions of Texas constitutional law presented, the importance

1 3 T E X

. C ON ST

. art. X VI, § 50( a) ( 6) ( Q ) ( x)

.
1 4 Id. art. X VI, § 50( u)

.
1 5 See i d. ; T E X

. F I N

. C ODE A N N

. §§ 11. 308, 15. 413 ( Wes t 2013) ; 7 T E X

. A DM I N

. C ODE §§ 153. 1- .96 ( Thom son Reuters 2013)

.

1 6 N o. 10- 0121, 2013 WL 3119481 ( Tex. June 21, 2013)

.
1 7 N orw ood , 2013 WL 3119481, at *10.

1 8 Id. at *10- 11.

1 9 C erda v . 2004- EQ R1 L. L. C. , 612 F. 3d 781, 794 ( 5th Cir. 2010) ( citing Mem ’l H erm a nn H ea l thca re Sys. Inc. v. Eurocop t er D eutschl and, G m bH , 524 F. 3d 676, 678 ( 5th Cir. 2008) ) ( internal quotation m ark s om itted )

. 8 Case: 12-10978 Document: 00512341802 Page: 8 Date Filed: 08/14/2013No. 12-10978

traditionally pla c e d o n t h e homestead i n Texas law, 2 0 and the harsh penalties imposed for violations of section 50, we c onclude t hat the remaining questions in this case are best addressed by the Supreme Court of Texas. A The first issue is w hether the Agreements constituted modifications or refinances of the Simses’ loan. The district court h e ld that t h e plain language

o f the Agreements “show[ed] no intention by the p a rties to satisfy an d r e p l a c e the note,” and therefore that the Agreements were modif i cations rather than refinances. The Simses arg u e that this interpretation elevates form o ver substance because “the modification [was] in substance a new not e e v e n i f the parties tried t o agree it was not.” They point out that both agreements r ecite “a

new increased principa l , a t e r m o f years, and an i n t erest rate,” and that they “consume[] more home equity as collateral.” Section 5 0 r e q u i res a r efinance to independently comply with all of the provisions of subsection (a)(6). 2 1 M odifications, on the other hand, a re a creation of the Regulations, and the R egulations p r ovide t hat “[t]he home equity requirements of Section 50(a)(6) w i l l b e applied t o the original loan and the subsequent modification as a single transaction.” 2 2 Despite the important implications of classifying a transaction as a modification o r a refinan c e, the distinction between the two is not clear under Texas law. T he Regulations define a modification as a t ransaction in which “one

or more terms of an e x i sting equity loan is modified, b ut the note is n ot satisfied

2 0 See, e. g. , La Sa l l e Ba nk , 246 S. W. 3d at 618 ( “For over 175 years , Texas has caref ully p rotected the f

am ily hom es tead f

rom f oreclos ure by l i m i t i n g t h e typ es of liens that can be p laced up on hom es tead p rop erty. ”)

.

2 1 T E X

. C ON ST

. art. X VI, § 50( f )

.
2 2 7 T E X

. A D M I N

. C ODE § 153. 14( 2) ( T hom s on Reuters 2013)

. 9 Case: 12-10978 Document: 00512341802 Page: 9 Date Filed: 08/14/2013No. 12-10978

and replaced.” 2 3 Neither the constitution nor the Regulations clearly define “refinance.” In commentary to proposed rules, the Commissions have opined that “[a] refinance creates a new loan w hereas a modifica t i o n a m e nds the original l oan” and that “in a r efinance, the lien relates b ack to the original loan, [but] [i]n a modification, t he original lien remains.” 2 4 T he Supreme Co u rt of Te x a s h a s not defined “refinance” in the context of section 50, although it has noted, albeit in a different context, that an “ ordinary refinance transaction[]” is

one “in which a n indebtedness is t ruly being renewed, modified, and extended.” 2 5 Thes e s o u rces s uggest that when the original n o te is not satisfied and replaced, as i n this case, the t ransaction is a modification rather than a refinance. B ut they do not a ddress t he limits of s uch modifica t i o n s , that is, whether a modification can change the principal am o u nt of the loan without being required to comp l y w i t h the provisions applicable to refinances. We therefore certify this question to the Supreme Court of Texas. B If the Agreements were in fact refinances, the inqui r y e n d s : there is no d i s p u t e t h a t t h e A g r e e m ents did not independently comply w ith subsection (a)( 6 )

as is required for refinanc e s . However, assuming that the Agreements were modifications rather than refinances, additional questions arise. The first of these questions is w h e t h e r t he capitalization of p ast due interest, fee s , property taxes, or insurance premiums is an “ advance of additional funds” under the Regulations. The Regulations provide t hat “[t]he advance of additional funds to a borrower is not permitted by m odification of an

2 3 Id.

2 4 29 Tex. Reg. 10257 ( 2004) ( to be cod if ied at 7 T E X

. A DM I N

. C ODE §§ 153. 91- 92,

. 94

- . 96)

.
2 5 Fi rst N

a t’l Ba nk of Ke r r v i l l e v . O ’D el l , 856 S. W. 2d 410, 413 n. 3 ( Tex. 1993) ( d is cus s ing the equitable s ubrogation d octrine)

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equity loan.” 2 6 The d istrict c ourt held t hat “a common-sense reading o f the term ‘additional funds’ would a ppear to contemplate money provided by the lender to the borrower

. . . t hat the borrower could use for o th e r p u r p o s e s at his or her discretion.” T h e S i m ses argue that the district court erred because the capitalized interest was n ot an “amount already l o aned” to t he Simses. Under t h is view, when CMS capitalized the past-due interest, it effectively l o aned the Simses an additional sum t o pay that interest. According to the Simses, t his was an extension of c redit not contemplated by the original loan—an “adva n ce of additional funds.” CMS c ounters that c apitalization of the past

- d u e i n terest cannot constitute an a dvance of additional funds b ecause it was money already owed to CMS under the “existing, pre-modification home equity loan.” The only c a s e that CMS cites in support o f its position, Meador v. EMC Mortgage Corp , 2 7 is not o n point. In Meador , debtors who wanted to obtain an unsecured loan f

r om a lender were required to refinance their h o m e m o rtgage

as a condition of obtaining the unsecured l oan; however, it was “ u ndisputed that the t wo loans were independent of one another” a nd that the homestead lien on the mortgage l oan did not c over repayment of the unsecured loan. 2 8 T he debtors later b rought suit, contending that the l oan violated section 50(e), which provides that the advance o f additional f unds cannot be secured b y a lien against the homestead unles s c e r tain conditions are met. 2 9 The court rejected the debtors’ position, holding t hat “‘additional f unds’ are monies obtained in excess

2 6 7 T E X

. A D M I N

. C ODE § 153. 14( 2) ( A) ( Thom s on Reuters 2013)

.
2 7 236 S. W. 3d 451 ( T ex. C t. Ap p . —Am arillo 2007, p et. d enied )

.
2 8 M ea dor , 236 S. W. 3d at 452.

2 9 Id. ; see a l so T E X

. C O N ST

. art. X VI, § 50( e)

. 11 Case: 12-10978 Document: 00512341802 Page: 11 Date Filed: 08/14/2013No. 12-10978

of the pre-existi n g d e b t being refinanced” 3 0 and that “the phrase ‘ advance of additional f

unds’ contemplates additional funds the repayme n t o f which is secured through a [section 50] lien.” 3 1 Even assuming that “advance of additional funds” has the same m eaning in s ection 50(e) and in the R egulations, it appe a r s t hat the present case is dis t i n g u i s h a b l e f

rom Meador

. The alleged “additional funds” i n Meador w ere the proceeds of an unsecured loan. In this case, the payment o f t h e “ a d ditional funds” at issue—tha t is the capitalized past-due interest—was s ecured by a section 50 lien. Whether pa s t

- due p roperty t axes or insurance premiums can be capitalized into loan p rincipal presents an additional issue under Texas law. As the Simses point out, such sums were not part of the “undifferentiate d ‘debt’ owed to CMS.” Instead, the property taxes and insurance p remiums were owed to third-parties by the Simses. CMS argues that t h e S i m ses’ Security Instrument expressly c ontemplated capitalization o f property taxes and insurance and that if s uch capitalization were prohibited under section 50, there would be “a monumental change in lending practices.” T h e Security Instrument provided that in addition to principal a n d interest payments each month, the Simses would pay a sum f or “Escrow Items,” including property taxes a nd insurance pr e m i u m s . The Security Instrument allowed, but did not obligate, CMS to pay past-due escrow items and to charge the Simses interest on such payments. These sums were thus not actually owed to CMS until C MS paid the past-due property taxes and insurance premiums to third parties. This p otentially distinguishes both past-due property taxes and insurance premiums from past-due interest. Whether the Security Instrument

3 0 M ea dor , 236 S. W. 3d at 453.

3 1 Id. 12 Case: 12-10978 Document: 00512341802 Page: 12 Date Filed: 08/14/2013No. 12-10978

expressly provides for the capitalization that t he S imses allege o ccurred in this

case is disputed. T he Simses maintain that c a pitalization o f these costs is not permitted under section 50. The parties have not cited, no r have we found, additional precedent interpreting the p hrase “ advance of additional f unds”; we therefore certify this unresolved issue of Texas law to the Supreme Court of Texas. C The next issue is w hether all of t he requirements i n section 50(a)(6)(A)-(Q)

are t riggered by a loan modification i n which the p rincipal o f t h e l o an is increased. The Simses contend th a t t h e y a re and primarily allege that the Agreements violated s ection 50(a)(6)(B). That subsection req u i r e s a h o m e e quity loan to be “of a principal amount that when added to the aggregate total of the

o u t standing principal balances of all other indebtedness secured by val i d encumbrances of record against the homestead does not exceed 8 0 percent of the fair market value of the homestead on the date the extension of credit i s made.” 3 2 In other w ords, it provides that the loan-to-value ratio (LTV ratio) cannot exceed 80%. CMS does not dispute that t he LTV ratio o f t he Simses’ loan exceeded 80% after each agreement but contends that the subsection ( B) does not apply to the Agreements in the first instance. The district court held that bec a u se t he Agreements were m odifications rather t han refinances, CMS was not required to comply with section 50(a)(6)(B) each time it offered the Simses a modification. The court f o c u s e d o n the language “on the date the e xtension of credit is made , ” w h i c h is defined in the

3 2 T E X

. C O N ST

. art. X V I, § 50( a) ( 6) ( B) ; see a l so 7 T E X

. A DM I N

. C ODE § 153. 3 (Thom s on Reuters 2013) ( “An equity loan m us t be of a p rincip al am o u n t t h a t w hen ad ded to the aggregate total of the outs tand ing princip al balances of all other ind ebted nes s s ecured by valid encum brances of record agains t the hom es tead d oes not exceed 80 p ercent of the fair m ark et value of the hom es tead on the d ate the extens ion of cred it is m ad e. ”)

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Regulations as the date on which the home equity loan closes, 3 3 and concluded t h at t his language i ndicated that the LTV ratio need only be measured at t h e closing of the initial home equity l oan and n ot after any subsequent modi f i c a t ion. However, t h e d i s t r i ct court’s reading of subsection (B) is not compelled by its plain text because it is unclear from that text whether the phrase “on the date the extension o f c r e dit is made” modifies the entire provision including the “principal amount” of t h e l o a n or whether it simply modifies the “fair market value o f the homestead.” U nder the latter interpretation, the fair market value of the h ome would always b e measured as of the c losing date o f the original home e quity l oan f

or purposes of the L TV ratio but t he principal amount of the loan would not. Thus, a loan that initially complied with subsection (B) might

no longer comply after a modification in which the principal amount of the l oan increased. Neither section 50 nor the Regulations r e solves this ambiguity. On one hand, as the district court noted, other provisions of the c onstitution, including t h e disclosures mandated by § 50(g), 3 4 s uggest that the LTV ratio i s o n l y measured at the inception of t he o riginal loan. On the other hand, there are also indications that the LTV ratio should be r e-measured if the principal of the l oan increases. For example, u nder the Regulations, “[a ] modification o f an equity loan may not provide for new terms t h at would not have been permitted by applicable law at the date of closing of the e xtension o f credit,” 3 5 which suggests that a m odification that causes t he LTV ratio to exceed 80% i s n ot permissible.

3 3 7 T E X

. A D M I N

. C ODE § 153. 1( 3) , ( 6)

- (7)

.
3 4 T E X

. C ON ST

. art. X VI, § 50( g) (requiring, in relevant p art, that the lend er d is clos e to the borrow er that “TH E PRIN CIPAL LO AN AM O U N T A T TH E TIM E TH E LO A N IS M A D E M U ST N O T EX CEED AN AM OU N T TH AT, WH EN AD DED TO T H E P R I N CIPAL BALAN CES O F ALL O TH ER LIEN S AG AIN ST [TH E] H OM E, IS M O RE T H AN 80 PERCEN T O F TH E FAIR M ARK ET VALU E O F [ TH E] H O M E” ( em p has is ad d ed ) )

.

3 5 7 T E X

. A D M I N

. C ODE § 153. 14( 2) ( C)

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A d d i t i o n ally, as t he Simses point out, the d i strict court’s reading undermines subsection (B), a t least in some cases, b ecause so long as a lender and borrower satisfy it at t he inception of th e l o a n , t h e y may subsequently enter into a l oan modifi c a t i o n that renders the LTV ratio w ell over 80%. Accordingly, we also certify this question. D The f i n a l q uestion presented in this appeal is whether the Agreements converted the Simses’ loan into an open-end a ccount that was r equired to comply with section 5 0(t). The district court rejected this argument, holding th a t the Simses had not alleged “a n y f a c t s that could possibly b e c onstrued as alleging that the modifications of plaintiffs’ home equity loan created any form of openend account” and that “the loan modification d ocuments clearly contemplate[d]

a fixed schedule of payments, for a defined period of time, w ith a decreasing principal balance following each month’s payment.” Sec t ion 50(a)(6)(F) prohibits a home equity loan from taking the form of

an open-end account unless it qualifies as a home equity line o f credit (HELOC). 3 6 S e ction 50(t) sets forth requi r e m e n t s for HELOCs, 3 7 and it is undisputed that the transactions in this case did not m eet those requirements. Thus, the only question is w hether the transactions created an o pen-end account t h a t w as required to comply with s ection 50(t). A s “open-end account” is n o t defined by section 50 or by the Regulations, we certify this issue to the S upreme Court of Texas as well. IV. QUESTIONS CERTIFIED We accordingly c e r tify the following four determinative questions of law to the Supreme Court of Texas:

3 6 T E X

. C ON ST

. art. X VI, § 50( a) ( 6) ( F) , ( t)

.
3 7 Id. art. X VI, § 50( t)

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1. After a n initial extension of credit, if a home equity l ender enters into

a new agreement with the b orrower t hat capitalizes past-due interest, fees, property taxes, or insurance premiums into the p rincipal of the loan but neither satisfies nor replaces t he original note, is the transaction a mod i f ication or a refinance for purposes of section 50 of Article XVI of the Texas Constitution? If t he transaction is a modification r ather than a refinance, the following questions also arise: 2. Does the cap i t a l ization of p a st-due interest, fees, property taxes, or insurance premiums constitute an impermissible “advance of additional funds” under section 153.14(2)(B) of the Texas Administrative Code? 3

. Must such a modification comply with the requirements of sect i o n 50(a)(6), including subsection (B), which mandates that a h ome equity l oan have a maximum loan-to-value ratio of 80%? 4. Do repeated modifications like those in this case convert a home equity loan into an open-end account that must comply with section 50(t)? We disclaim any i ntention or desire that the Supreme Court of Texas confine its reply to the precise form or scope of the questions certified. * * * AFFIRMED IN PART and QUESTIONS CERTIFIED.

16 Case: 12-10978 Document: 00512341802 Page: 16 Date Filed: 08/14/2013