Court Opinion

ID: 2788300
Source: CourtListenerOpinion
Date Created: 2015-03-23 07:07:35.314556+00
Date Added: 2024-06-11T09:25:12.761650
License: Public Domain

Opinion issued March 19, 2015

                                     In The

                              Court of Appeals
                                    For The

                         First District of Texas
                            ————————————
                              NO. 01-14-00813-CV
                           ———————————
       STEVEN STEPTOE AND PATRICIA CARBALLO, Appellants
                                       V.
                 JPMORGAN CHASE BANK, N.A., Appellee

                    On Appeal from the 61st District Court
                            Harris County, Texas
                      Trial Court Case No. 2013-32035

                                 OPINION

      JPMorgan Chase Bank, N.A. (JPMC) filed suit against Steven Steptoe and

Patricia Carballo, seeking non-judicial foreclosure on a home-equity loan. Steptoe

and Carballo moved for summary judgment on the ground that JPMC’s claim was

a compulsory counterclaim that should have been brought by JPMC in an earlier
suit. JPMC responded that its claim fell within an exception to the compulsory

counterclaim rule. It filed a cross motion for summary judgment, asserting that it

was entitled to judgment permitting non-judicial foreclosure, as a matter of law.

      The trial court granted JPMC’s motion for summary judgment and denied

that of Steptoe and Carballo. On appeal, Steptoe and Carballo raise one issue in

which they assert that the trial court erred in its ruling on the motions for summary

judgment.

      We affirm.

                                   Background

      On August 29, 2007, Steven Steptoe entered into a home-equity loan

transaction with Chase Bank USA, as permitted by article XVI, section 50(a)(6) of

the Texas Constitution. Steptoe signed a home-equity note, borrowing $184,000

from Chase Bank, and agreeing to make monthly payments. The note was secured

by a lien on real property located at 1908 Taft Street, Houston, Texas. The lien

was evidenced by a home-equity security instrument signed by Steptoe and Patricia

Carballo (collectively “Appellants”).        Significant in this case, the security

instrument contained a power-of-sale provision.

      On October 5, 2010, JPMC, as successor to Chase Bank, filed suit in state

district court, seeking an order to allow it to proceed against Appellants with an

expedited, non-judicial foreclosure of the home-equity loan under Texas Rule of

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Civil Procedure 736 (suit referred to hereinafter as “JPMC I”). JPMC alleged that

Steptoe had failed to make the monthly payments as required under the home-

equity loan agreement. JPMC later dismissed the suit when it was determined that

notice of default was deficient. JPMC later mailed new notices of default and

notices of acceleration to Appellants.

      On August 26, 2011, Steptoe filed suit in state district court against JPMC,

alleging that the home-equity lien violated Texas Constitution, article XVI, section

50(a)(6) (suit referred to hereinafter as “Steptoe I”). JPMC removed the action to

federal court. Soon after, JPMC filed a motion for summary judgment. The

federal court granted JPMC’s motion and signed a take-nothing judgment against

Steptoe.

      On May 29, 2013, JPMC filed the instant suit against Appellants in state

district court, requesting a declaratory judgment (referred to hereinafter as “JPMC

II”). JPMC sought to establish that it had “a valid and subsisting first lien” on the

Taft property securing the loan agreement.       JPMC also sought a declaratory

judgment, authorizing non-judicial foreclosure of its lien. JPMC asserted that it

was entitled to non-judicial foreclosure “pursuant to” (1) article XVI, section

50(a)(6) of the Texas Constitution, (2) section 51.002 of the Texas Property Code,

and (3) “the terms of the Loan Agreement.” In addition, JPMC requested a writ of

possession and attorney’s fees.

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      Appellants answered the suit, asserting a number of affirmative defenses.

Among these, Appellants claimed that JPMC had “waived its right to foreclose by

failing to file a compulsory counterclaim for judicial and/or non-judicial

foreclosure in a prior lawsuit (“Steptoe I”) involving these same issues.”

      The parties filed cross-motions for summary judgment. JPMC moved for

summary judgment on its claims for non-judicial foreclosure and for attorneys’

fees under the terms of the home-equity loan.

      In their motion, Appellants asserted that the compulsory counterclaim rule

barred JPMC’s claims in this suit because the claims should have been brought as a

counterclaim in Steptoe I. JPMC responded, asserting that an exception to the

compulsory counterclaim rule, known as the Kaspar rule, applies in secured

transaction cases such as this. See Kaspar v. Keller, 466 S.W.2d 326, 329 (Tex.

Civ. App.—Waco 1971, writ ref’d n.r.e.).

      The trial court signed two orders. One order granted JPMC’s motion for

summary judgment, and the other denied Appellants’ motion.              This appeal

followed in which Appellants raise one issue, asserting that the trial court erred by

denying their motion for summary judgment and by granting that of JPMC.

                               Standard of Review

      This court reviews an order granting or denying a motion for summary

judgment de novo. Tex. Mun. Power Agency v. Pub. Util. Comm’n of Tex., 253

                                          4
S.W.3d 184, 192 (Tex. 2008). Under the traditional summary judgment standard,

the movant has the burden of showing that no genuine issue of material fact exists

and that he is entitled to summary judgment as a matter of law. See Am. Tobacco

Co. v. Grinell, 951 S.W.2d 420, 425 (Tex. 1997).

      When both sides move for summary judgment and the trial court grants one

motion and denies the other, reviewing courts consider both sides’ summary

judgment evidence, determine all questions presented, and “render the judgment

the trial court should have rendered.” Gilbert Tex. Constr., L.P. v. Underwriters at

Lloyd’s London, 327 S.W.3d 118, 124 (Tex. 2010). Each party must carry its own

burden to establish entitlement to summary judgment by conclusively proving all

the elements of the claim or defense as a matter of law. See TEX. R. CIV. P.

166a(c); Frost Nat’l Bank v. Fernandez, 315 S.W.3d 494, 508 (Tex. 2010).

                                     Analysis

      On appeal, Appellants continue to assert that the compulsory counterclaim

rule bars JPMC’s foreclosure claim in this suit because JPMC failed to pursue

foreclosure as a counterclaim in Steptoe I. Appellants acknowledge the exception

to the compulsory counterclaim established by the Kaspar rule; however, they

assert that the rule does not apply to foreclosure claims based on home-equity

liens. See Kaspar, 466 S.W.2d at 329.

                                         5
      In Kaspar, Henry Kasper purchased real property from Keller. Id. at 327.

He signed a note that was secured by a deed of trust lien on the property. Id.

Kasper later sued Keller to rescind the purchase contract and to cancel the note,

asserting that the sale had been induced by fraud. Id. Keller did not file a

counterclaim; however, he indicated his intention to foreclose under the power of

sale provision in the deed of trust. Id. In response, Kasper obtained a temporary

injunction, prohibiting foreclosure while the fraud suit was pending. Id.

      Keller prevailed at trial, obtaining a take-nothing judgment against Kaspar.

Id. Keller then completed the foreclosure under the power of sale provision in the

deed of trust.   Id.   After the non-judicial foreclosure sale of the property, a

deficiency remained on the note, and Keller sued Kaspar to recover it. Id. The

trial court rendered summary judgment in Keller’s favor, awarding him

$236,712.85 against Kaspar. Id. at 327–28.

      Kasper appealed, urging that Keller’s deficiency claim should have been

brought in his earlier fraud suit as a compulsory counterclaim, pursuant to Texas

Rules of Civil Procedure Rule 97(a). Id. at 328. The court acknowledged that

Keller’s deficiency claim satisfied “the literal requirements of the Rule so as to

constitute it, by its terms, a compulsory counterclaim.” Id. The court concluded,

however, that under the circumstances, an exception to compulsory counter claim

rule was justified. See id. The court held:

                                         6
        [T]he mortgagor [Kasper] should not be permitted to destroy or impair
        the mortgagee’s [Keller’s] contractual right to foreclosure under the
        power of sale by the simple expedient of instituting a suit, whether
        groundless or meritorious, thereby compelling the mortgagee to
        abandon the extra-judicial foreclosure which he had a right to elect,
        nullifying his election, and permitting the mortgagor to control the
        option as to remedies.

Id. at 329.

        In their brief, Appellants assert, “Kaspar and its progeny hold that the lender

cannot be forced to choose judicial remedies only if it has contracted for non-

judicial remedies.” According to Appellants, the Kaspar rule has no application to

foreclosure of home-equity liens because lenders have no right to a non-judicial

remedy even when the lender has contracted for such as remedy. Appellants point

to article XVI, section 50(a)(6)(D) of the Texas Constitution, which requires that a

home-equity loan be “secured by a lien that may be foreclosed upon only by a

court order.” TEX. CONST., art. XVI, § 50(a)(6)(D). From this, Appellants posit

that, because a home-equity lien may only be foreclosed by “court order,” the only

remedy that a lender has to foreclose such a lien is “a judicial remedy.” Thus, the

distinctions found in Kaspar have no application in a foreclosure of a home-equity

lien.

        Appellants, however, read Kaspar too narrowly. As the Fifth Circuit Court

of Appeals has pointed out, the underlying purpose of the Kaspar rule is to

“prevent a borrower from depriving its lender of a choice of remedies.” Douglas v.

                                           7
NCNB Tex. Nat’l Bank, 979 F.2d 1128, 1130 (5th Cir. 1992). When, as in this

case, the security instrument in a home-equity loan contains a power of sale

provision, the lender has a choice of remedies. See TEX. R. CIV. P. 735.3.     Under

these circumstances, the lender may choose to file a claim for judicial foreclosure.

See id.; see also In re Erickson, 566 FED. APP’X 281, 284 (5th Cir. 2014) (holding

that, under Texas law, a mortgagor with a home-equity lien, which includes a

power of sale provision, may pursue judicial foreclosure). As Appellants point out,

a claim for judicial foreclosure could be filed as a counterclaim in a suit initiated

by the borrower, which, as in Steptoe I, challenges the propriety of the loan

agreement.

      Rule of Civil Procedure 736 furnishes another remedy to the lender. “Rule

736 provides the procedure for obtaining a court order . . . to allow foreclosure of a

lien containing a power of sale in the security instrument, . . . including a lien

securing . . . a home equity loan . . . .” TEX. R. CIV. P. 735.1(a). Thus, a home-

equity lender, who has contracted for the right of non-judicial foreclosure under a

power of sale provision, may choose to pursue the special procedure found in Rule

736 to obtain an order allowing it to proceed with a non-judicial foreclosure under

the Texas Property Code. See TEX. R. CIV. P. 735.1(a); see also TEX. R. CIV. P.

736.9 (“After an order [under Rule 736] is obtained, a person may proceed with the

foreclosure process under applicable law and the terms of the lien sought to be

                                          8
foreclosed.”); TEX. PROP. CODE ANN. § 51.002(a) (Vernon 2014) (describing

procedures for non-judicial foreclosure under power of sale conferred by deed of

trust).

          We have previously provided the following analysis of Rule 736:

          When read as a whole, rule 736—titled “Expedited Foreclosure
          Proceeding”—does not contemplate an ordinary lawsuit. As its name
          suggests, Rule 736 provides a faster, more streamlined alternative to
          judicial foreclosure. A lender initiates the “proceeding” by filing an
          “application,” not an original petition, and the borrower may file a
          “response,” not an original answer. Compare TEX. R. CIV. P. 736(1)
          (describing proceeding and contents of application), with TEX. R. CIV.
          P. 45(a) (requiring a petition and answer in each lawsuit), and TEX. R.
          CIV. P. 47 (describing contents of a petition or counterclaim).

          Only one issue may be decided under rule 736: “the right of the
          applicant to obtain an order to proceed with foreclosure under the
          security instrument and Tex. Prop. ANN. § 51.002.” TEX. R. CIV. P.
          736(7); see TEX. PROP. CODE ANN. § 51.002. The rule contemplates a
          single hearing at which the district court must determine whether the
          applicant has satisfied its burden to prove “the grounds for the
          granting of the order sought in the application”; there is no provision
          for any other determination to be made by a factfinder. See TEX. R.
          CIV. P. 736(6). The application must be denied if the respondent
          establishes that the applicant has not satisfied any element under the
          rule. See id. The district court’s determination of whether to grant or
          deny the application is not intended to be a binding adjudication of the
          merits of any disputes between a lender and a borrower. Indeed, the
          rule expressly states that the district court’s determination is without
          any preclusive effect. TEX. R. CIV. P. 736(9) (“No order or
          determination of fact or law under Rule 736 shall be res judicata or
          constitute collateral stopped or estoppel by judgment in any other
          proceeding or suit.”). The limited nature of a rule 736 foreclosure
          proceeding is further underscored by the rule’s prohibition against
          discovery. TEX. R. CIV. P. 736(6) (“No discovery of any kind shall be
          permitted in a proceeding under Rule 736”).

                                             9
Huston v. U.S. Bank Nat’l Ass’n, 359 S.W.3d 679, 682 (Tex. App.—

Houston [1st Dist.] 2011, no pet.).

      Although not expressly addressed by Rule 736, it is evident from the above

discussion that a Rule 736 proceeding cannot be brought as a counterclaim in a

borrower’s suit against the lender. See id. Rather, it is a special, expedited

proceeding with a unique procedural mechanism that is not compatible with the

administration of a suit brought by a borrower to challenge the propriety of a loan

agreement.    Cf. id. at 682–83 (holding that borrower could not assert a

counterclaim in a Rule 736 proceeding).

      Were we to hold that the Kaspar rule does not apply to a home-equity lien,

which includes a bargained-for power-of-sale provision, we would necessarily be

requiring such a lender to assert a counterclaim to preserve its foreclosure rights.

This would result in the impairment of the lender’s right to pursue one its

remedies, namely a Rule 736 proceeding.           To abridge a creditor’s remedy,

particularly one specifically crafted to provide a remedy under a special set of

circumstances, would be antithetical to the underlying purpose of the Kaspar rule,

which is to preserve the lender’s remedy choice and to curtail a debtor’s ability to

control what remedy a creditor may pursue. See Kaspar, 466 S.W.2d at 329.

Requiring a lender to assert a counterclaim to preserve its foreclosure rights has the

potential to encourage the filing of meritless suits by borrowers for the purpose of

                                          10
interfering with a creditor’s choice of remedy. In keeping with the purpose of the

Kaspar rule, a mortgagor, who has the bargained-for right of non-judicial

foreclosure should not be limited only to those remedies that may be brought as a

counter-claim. When, as here, a home-equity lien allows for alternate remedies on

the mortgagor’s default, the Kaspar rule applies. See id.

      Thus, we hold that JPMC was not required to assert a compulsory

counterclaim in Steptoe I to preserve the foreclosure claim that it has asserted,

here, in JPMC II. See Huston v. U.S. Bank Nat’l Ass’n, 988 F. Supp. 2d 732, 740

(S.D. Tex. 2013) (holding that mortgagor, which had a home-equity lien permitting

alternate foreclosure remedies, had not been required to assert a counterclaim in

earlier suit in order to preserve its foreclosure rights); see also In re Erickson, 566

Fed. App’x. at 284 (recognizing, in a home-equity case, that “judicial foreclosure

and the ability of a trustee to foreclose under the power of sale in a deed of trust

are separate and distinct remedies, either of which the trustee may elect to

pursue”); Soin v. JPMorgan Chase Bank, N.A., No. H–14–1861, 2014 WL
4386003, at *3 (S.D. Tex. Sept. 14, 2104) (applying holdings in Erickson and

Huston to determine that the bank “had both judicial and nonjudicial avenues

available for enforcement of the Security Agreement and, therefore, were not

required to seek enforcement of the Security Agreement as a compulsory

                                          11
counterclaim”). ∗   We further hold that the trial court did not err by denying

Appellants’ motion for summary judgment and granting that of JPMC.

      We overrule Appellants’ sole issue.

                                     Conclusion

      We affirm the judgment of the trial court.

                                               Laura Carter Higley
                                               Justice

Panel consists of Justices Jennings, Higley, and Huddle.

∗
      Appellants rely on the following language found in a footnote from an
      unpublished federal case from the Northern District of Texas: “Under Texas law,
      if the loan is a home-equity loan, the purported contractual right to non-judicial
      foreclosure is a nullity and therefore cannot be waived, and the compulsory
      counterclaim rule applies.” Witt v. Countrywide Home Loans, Inc., No. 3:06-CV-
      1384-D, 2007 WL 2296538, at *4 n.8 (Tex. N.D. Aug. 10, 2007). We, however,
      find the holdings by the federal courts in Erickson, Huston, and Soin to be more in
      keeping with the Kaspar rule, as discussed supra.

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