Locke Lord QuickStudy: Texas Supreme Court Affirms a Lender’s Equitable Subrogation Rights Following ‎Expiration of the Statute of Limitations on the Lender’s Lien

Earlier today the Texas Supreme Court confirmed that the voiding of a lender’s lien due ‎to the expiration of the statute of limitations does not preclude the lender from foreclosing on a ‎pre-existing lien under the doctrine of equitable subrogation. PNC Mortg. v. Howard, ___ ‎S.W.3d ___, 2021 WL 297579, at *1 (Tex. 2021) (per curiam). This holding throws a lifeline to ‎Texas lenders, especially those holding nonrecourse home-equity or reverse mortgage loans, and ‎provides them with a powerful defense and significant foreclosure alternative in the event that ‎limitations has run on their lien or their lien is unenforceable for some other reason.‎

The borrowers in Howard originally purchased a home with two purchase-money ‎mortgages. Two years later, they refinanced those mortgages into a single loan secured by a lien ‎on the property.  Nearly all of the proceeds from the new loan were used to pay off the two ‎purchase-money mortgages. The new lien was later assigned to PNC Mortgage, which ‎accelerated the loan in June 2009, after the borrowers stopped making their payments and then ‎failed to cure their default.‎

Meanwhile, the original lender initiated foreclosure proceedings. The borrowers ‎challenged that foreclosure on the basis that the original lender no longer held the mortgage, and ‎added PNC as a defendant. PNC counterclaimed seeking a foreclosure of its lien. But ‎concerned that the limitations period had already passed, PNC alternatively sought a judgment ‎declaring its right to foreclose on the purchase-money liens through equitable subrogation. The ‎court of appeals held that, to the extent PNC held equitably subrogated liens, those liens became ‎unenforceable when PNC forfeited its own lien by failing to timely foreclose on it.‎

After the court of appeals’ opinion, the Texas Supreme Court decided Federal Home ‎Loan Mortgage Corporation v. Zepeda, in which it explained that equitable subrogation “allows a ‎lender who discharges a valid lien on the property of another to step into the prior lienholder’s ‎shoes and assume that lienholder’s security interest in the property, even though the lender ‎cannot foreclose on its own lien.”  601 S.W.3d 763, 766 (Tex. 2020). The Court also “observed ‎that equitable-subrogation rights become fixed at the time the proceeds from a later loan are used ‎to discharge an earlier lien[,]” and that “[a] lender’s negligence in preserving its rights under its ‎own lien does not deprive the lender of its rights in equity to assert an earlier lien that was ‎discharged using proceeds from the later loan.” Howard, 2021 WL 297579, at *3 (describing the ‎Court’s holding in Zepeda). The Court noted that a lender’s negligence may only be considered ‎as part of the equitable-subrogation analysis in lien-priority cases. Id. (citing Zepeda, 601 S.W.3d ‎at 767 n.17). Applying Zepeda to the facts of the case before it, the Texas Supreme Court held ‎that PNC’s failure to timely foreclose under its deed of trust did not bar its subrogation rights, ‎and that those rights permit a lender to assert rights under a lien its loan satisfied when the ‎lender’s own lien is infirm, regardless of the reason for such infirmity.‎

Texas lenders should find great comfort in both the holding and reasoning of Howard ‎because it means they may still have an option to enforce a mortgage debt even after the lien ‎securing that debt has been voided due to the running of limitations. Given the large numbers of ‎limitations cases ongoing in Texas, lenders should immediately take stock of such cases and, in ‎consultation with competent counsel, determine where it would be appropriate and advisable to ‎assert their equitable-subrogation rights in the alternative to foreclosure of their own lien. In ‎doing so, lenders should take care to ensure that the statute of limitations has not also run on the ‎pre-existing lien to which they are subrogated by checking the maturity date of the pre-existing ‎lien, and confirming that four years have not elapsed since that date.‎