Robyn N. Jones v. Wells Fargo Bank, N.A.

Opinion

ACCEPTED 03-14-00658-CV 3893107 THIRD COURT OF APPEALS AUSTIN, TEXAS 1/26/2015 10:47:09 AM Oral Argument Conditionally Requested JEFFREY D. KYLE CLERK

NO. 03-14-00658-CV FILED IN 3rd COURT OF APPEALS AUSTIN, TEXAS 1/26/2015 10:47:09 AM JEFFREY D. KYLE In The Clerk

Third Court of Appeals ____________________________________________________________________

ROBYN N. JONES, Appellant, v. WELLS FARGO BANK, N.A., Appellee. ____________________________________________________________________

Cause No. 11-0479 On Appeal from the 428th District Court, Hays County, Texas Honorable Bill Henry, Judge Presiding ____________________________________________________________________

APPELLEE’S BRIEF ____________________________________________________________________

B. David L. Foster W. Scott Hastings State Bar No. 24031555 State Bar No. 24002241 LOCKE LORD LLP Robert T. Mowrey 600 Congress Avenue, Suite 2200 State Bar No. 14607500 Austin, Texas 78701 LOCKE LORD LLP Telephone: (512) 305-4715 2200 Ross Avenue, Suite 2200 Facsimile: (512) 391-4722 Dallas, Texas 75201-6776 Telephone: (214) 740-8000 Facsimile: (214) 740-8800

Counsel for Appellee TABLE OF CONTENTS

STATEMENT OF THE CASE .................................................................................. 1

ISSUE PRESENTED .................................................................................................1

STATEMENT REGARDING ORAL ARGUMENT ............................................... 1

STATEMENT OF FACTS ........................................................................................2 SUMMARY OF THE ARGUMENT ........................................................................ 5 ARGUMENT .............................................................................................................6

A. Under Texas Law, Jones Had No Right to Force Wells Fargo to Accept Her as the Principal Obligor on the Loan. ......................................................................................................6

B. The Deed of Trust Does Not Compel Wells Fargo to Approve an Assumption. .....................................................................11

C. Wells Fargo’s Right to Accept or Reject an Assumption of the Debt By Jones Is Not Impaired by the Federal Garn-St. Germain Act. ........................................................................17

CONCLUSION AND PRAYER .............................................................................24

CERTIFICATE OF COMPLIANCE .......................................................................26

CERTIFICATE OF SERVICE ................................................................................26

ii INDEX OF AUTHORITIES CASES

Ashby v. Wells Fargo Bank, N.A., No. 12-803, 2012 WL 1833932 (S.D. Tex. May 18, 2012) ......................................... 16

Brannin v. Richardson, 185 S.W. 562 (Tex. 1916) .................................................................................. 10, 11

In re Cady, 440 B.R. 16 (N.D.N.Y. 2010) .................................................................................. 20

Cain v. Bank United of Tex., No. 14-95-00601-CV, 1997 WL 428054 (Tex. App.—Houston [14th Dist.] July 31, 1997, pet. denied) ............................................................................... 9

Cronin v. Wells Fargo Bank, N.A., No. 03-12-00799-CV, 2014 WL 2918006 (Tex App.—Austin June 19, 2014, no pet.) (mem. op.).......................................................................................... 15

DTND Sierra Invs. LLC v. CitiMortgage, Inc., No. SA-12-CV-80-XR, 2012 WL 1711738 (W.D. Tex. May 15, 2012) ............ 16

In re FH Partners, L.L.C., 335 S.W.3d 752 (Tex. App.—Austin 2011, orig. proceeding) .......... 12, 13, 14, 15

Helge v. Am. Cent. Life Ins. Co., 124 S.W.2d 191 (Tex. Civ. App.—Austin 1938, writ dism’d judgm’t cor.) ................................................................................................................................ 8

In re Henderson, No. 04-B-75636, 2005 Bankr. LEXIS 1474 (Bankr. N.D. Ill. May 17, 2005)............................................................................................................................ 23

Howell v. Murray Mortgage Co., 890 S.W.2d 78 (Tex. App.—Amarillo 1994, writ denied) ............................. 16, 17

In re Jordan, 199 B.R. 68 (Bankr. S.D. Fla. 1996) ............................................... 19, 20, 21, 22, 23

La-Rey, Inc. v. Kowalski, 433 S.W.2d 530 (Tex. Civ. App.—San Antonio 1968, no writ)............................ 7

iii In re Lumpkin, 144 B.R. 240 (Bankr. D. Conn. 1992)..................................................................... 20

Marler v. Parker, 135 So. 400 (Fla. 1931) ....................................................................................... 20, 21

Monroe v. Salter, No. 05-94-01560-CV, 1995 WL 447549 (Tex. App.—Dallas July 27, 1995, no writ) ............................................................................................................... 9

Pinckney v. Wylie, 86 F.2d 541 (5th Cir. 1936) ........................................................................................ 8

Preston v. Seterus, 931 F. Supp. 743 (N.D. Tex. 2013) ......................................................................... 16 Proctor v. Hearne, 131 So. 173 (Fla. 1930) ....................................................................................... 20, 21 Puntarelli v. Peterson, 405 S.W.3d 131 (Tex. App.—Houston [1st Dist.] 2013, no pet.) ............................... 10

Romund v. Ginzel, 259 S.W.2d 619 (Tex. Civ. App.—Waco 1953, no writ) ..................................... 14

Shockey v. Page, 354 S.W.2d 698 (Tex. Civ. App.—Eastland 1962, writ ref’d n.r.e.)................. 8, 9 Siefkas v. Siefkas, 902 S.W.2d 72 (Tex. App.—El Paso 1995, no writ) ................................................... 10

Smith v. Green Tree Servicing, LLC, No. C13-1573RSL, 2014 WL 1319821 (W.D. Wash. Mar. 28, 2014) ............... 18

Spann v. Ewing, 63 Tex. 240 (1885) .............................................................................................. 10, 11

Strauss v. Brooks, 148 S.W.2d 393 (Tex. 1941) ...................................................................................... 8

Thompson v. Tropical Sav. & Loan Ass’n, 430 S.W.2d 426 (Tex. Civ. App.—San Antonio 1968, writ ref’d n.r.e.) ............ 10

iv Wilson v. Bank of Am., N.A., No. 14-2498, 2014 WL 4744555 (E.D. Pa. Sept. 24, 2014)................................. 23

Zale Corp. v. Decorama, Inc., 470 S.W.2d 406 (Tex. Civ. App.—Waco 1971, writ ref’d n.r.e.) ....................... 14 RULES, STATUTES, AND CONSTITUTION

12 U.S.C. § 1701j-3(a)(1)......................................................................................... 18, 22 12 U.S.C. § 1701j-3(d)(7) ........................................................................................ 18, 22

12 U.S.C. § 1701j-3(b)(3) .............................................................................................. 19

TEX. FAM. CODE § 5.001 ............................................................................................... 2, 6

v STATEMENT OF THE CASE This is a declaratory judgment case about the scope of a lender’s rights when

its borrower seeks to assign a mortgage loan without the consent of the lender.

Appellant Robyn Jones (“Jones”) is not the borrower on the mortgage loan from

Wells Fargo Bank, N.A. (“Wells Fargo”). Nevertheless, she sued Wells Fargo

seeking a declaration that she is “the principal debtor, and may enter into any

agreement to modify the amortization terms of the Note without the Note and

without the signature of Brian C. Jones [her now ex-husband who was Wells

Fargo’s borrower].” (CR:11.) The district court granted summary judgment to

Wells Fargo, rejecting Jones’s claims that were seeking to make Wells Fargo an

involuntary lender. (CR:519-20.) Jones voluntarily dismissed her remaining

claims. (CR:525-26.) Accordingly, the district court entered final judgment on

September 11, 2014. (CR:525-26.) Jones appeals. (CR:527.)

ISSUE PRESENTED Did the district court err when it held as a matter of law that Jones could not

force Wells Fargo to accept her as the primary obligor on a loan, with authority to

negotiate changes to the amortization schedule of that loan without the consent of

her now ex-husband who was the original obligor on the loan?

STATEMENT REGARDING ORAL ARGUMENT Wells Fargo believes this case can be resolved efficiently by submission on

the briefs. However, to the extent the Court believes oral argument would be 1 useful to answer questions and conduct a dialogue regarding Jones’s arguments,

Wells Fargo requests the opportunity to participate.

STATEMENT OF FACTS While Jones was married to Brian Christopher Jones (“Brian Christopher”),

Brian Christopher obtained a loan from Wells Fargo 1 to purchase property located

at 467 Dandelion Loop, Kyle, Texas 78640 (the “Property”). The Loan is

evidenced by a promissory note (the “Note”) (CR:303-05), and secured by a deed

of trust (the “Deed of Trust”) (CR:312-23). Brian Christopher signed both the

Note and Deed of Trust (collectively, the “Loan”). (CR:304, 319, 323.) In

contrast, Jones—as non-borrowing spouse and co-owner of the Property—signed

only the Deed of Trust, as required by Texas law. (Id.; see TEX. FAM. CODE

§ 5.001.)

In January 2005, Appellant divorced Brian Christopher. (CR:6.) An Agreed

Final Decree of Divorce was signed by the Hays County district court, under which

terms Jones was awarded the Property as her sole and separate property, Brian

Christopher was to execute a “Special Warranty Deed with assumption clause”

conveying his interest in the Property to Jones, and Jones was to execute a “Deed

of Trust to Secure Assumption” for the benefit of Brian Christopher, to secure

payment of the “promissory note assumed by” Jones. (CR:380, 382.) Wells Fargo

1 The original lender was Universal American Mortgage Company, LLC. However, shortly thereafter, Wells Fargo became mortgagee and lender. (CR:5, 300, 305.) 2 was not a party to the divorce suit or the Agreed Final Decree of Divorce.

(CR:348, 386.)

In accordance with the divorce decree, Brian Christopher executed a Special

Warranty Deed conveying the Property to Jones. (CR:325-27.) Part of the stated

consideration for the conveyance was Jones’s “assumption of the unpaid principal

and earned interest” on the Note. (Id.) Wells Fargo was not a party to the Special

Warranty Deed. (Id.)

Also in accordance with the divorce decree, Jones executed a Deed of Trust

to Secure Assumption, identifying Jones as “Grantor” and identifying Brian

Christopher as “Beneficiary,” and providing that as between such parties Jones was

primarily obligated to make the Loan payments. (CR:144-49.) Wells Fargo was

not a party to the Deed of Trust to Secure Assumption. (Id.)

In 2010, either Jones or Brian Christopher fell behind on Loan payments,

and the Loan went into default. (CR:5, 341.) After receiving a notice of default in

August 2010, Jones contacted Wells Fargo to discuss loss mitigation and the

possibility of a loan modification. (CR:7.) However, after determining that Jones

was not the borrower on the Note, and had not assumed the Loan, Wells Fargo

advised her that in order to modify the Loan, she would need to either have Brian

Christopher’s consent or she would have to qualify to take over and assume all

obligations of the Loan. (CR:301.) When Jones indicated that she was not willing

3 or able to get Brian Christopher’s consent, Wells Fargo attempted to review her for

an assumption of the Loan. (Id.) However, because her debt-to-income ratio was

too high and credit score was too low, Jones did not meet the relevant underwriting

standards and, accordingly, was not eligible to assume the Loan. (Id.)

Jones filed this lawsuit in March 2011. (CR:1-13.) Although other claims

and allegations were at issue before the district court,2 there is only one issue on

appeal. Jones contends that because of the assumption agreement between her and

her ex-husband Brian Christopher, her assumption of the Note is also effective

between her and Wells Fargo. Wells Fargo, on the other hand, contends that an

assumption of debt between a borrower and a third party is not enforceable against

the lender unless and until the lender approves the assumption.

Based on their respective positions, both Jones and Wells Fargo filed

motions for partial summary judgment on Jones’s declaratory judgment claim.

(CR:68-171; CR:286-398.) The trial court granted Wells Fargo’s motion for

partial summary judgment (CR:519), and denied Jones’s motion for partial

summary judgment (CR:520). Jones filed a Notice of Appeal. (CR:527-28.) This

appeal ensued, wherein Jones asks this Court to reverse the district court’s

judgment on her declaratory judgment claim, and Wells Fargo asks the Court to

affirm the judgment.

2 Jones also asserted a claim for damages against Wells Fargo under Texas Finance Code chapter 392. (CR:12-13.) 4 SUMMARY OF THE ARGUMENT Texas law is clear—a debtor cannot obligate a lender to accept the debtor’s

assignment of his debt absent the lender’s agreement thereto. There are many

good reasons for this rule. For example, a lender should have the right to

determine to whom it will extend a loan, including by checking that person’s credit

and history to determine if they are qualified to receive and repay the loan. If a

borrower could take out a loan and then assign away his status to another as the

principal obligor, this would place the lender at risk of issuing a loan to someone

who is not qualified. Moreover, in a case like this one where Jones is seeking to

take over obligations on the loan with the right to make changes without the

consent of the original borrower, the lender would be placed further at risk that its

original borrower could be discharged from his obligations without the lender’s

consent.

Here, Jones and her ex-husband never obtained the lender’s consent to Jones

becoming the principal obligator on the loan. When Jones applied to become the

principal obligor on the loan, she did not qualify. Although the Deed of Trust

allowed for the possibility of an assignment by the borrower, it did not strip Wells

Fargo of its right to determine whether the assignment was appropriate under

applicable investor and lending guidelines. There is nothing in Texas law or in the

5 federal Garn-St. Germain Act that deprives Wells Fargo of its rights to determine

who is qualified to be the borrower and principal obligor on its loans.

ARGUMENT A. Under Texas Law, Jones Had No Right to Force Wells Fargo to Accept Her as the Principal Obligor on the Loan. Jones is not entitled to a declaratory judgment that she assumed the Note,

because Wells Fargo has not agreed to Jones’s assumption of the Note. While an

agreement between a grantor and grantee of property for the grantee’s assumption

of the grantor’s debt may be effective as between the grantor and grantee, this does

not mean that such agreement is effective as against the lender/mortgagee.

Jones did not sign the Note. (CR:304.) Thus, as she pleaded below, Brian

Christopher “was the only party personally obligated to pay the amounts secured

by the Deed of Trust.” (CR:6.) Jones did sign the Deed of Trust (CR:319), but did

so as a non-borrowing spouse, as is required by Texas law. See TEX. FAM. CODE

§ 5.001 (providing that a spouse may not encumber the homestead without joinder

of the other spouse). Indeed, the Deed of Trust expressly provides that Jones’s

signature on the Deed of Trust makes her a “Borrower” under the contract but does

not make her personally liable on the Note:

Any Borrower who co-signs this Security Instrument but does not execute the Note: (a) is co-signing this Security Instrument only to mortgage, grant and convey that Borrower’s interest in the Property under the terms of this Security Instrument; [and] (b) is not personally obligated to pay the sums secured by this Security Instrument….

6 (CR:316.)

It is undisputed that Jones has not entered into any agreement with Wells

Fargo to assume the Loan. (CR:341.) Rather, Jones contends that her assumption

of the Loan became effective via various agreements with her ex-husband Brian

Christopher—the Divorce Decree, the Special Warranty Deed, and the Deed of

Trust to Secure Assumption. (Appellant’s Br. at 8.) While these agreements may

have created a contractual relationship between the parties (i.e. Brian Christopher

and Jones) regarding the Property and the Loan, they do not create a contractual

relationship between Jones and the non-party Wells Fargo, nor do they change the

existing contractual relationship between Brian Christopher and Wells Fargo.3

As a general rule, in the context of a note and lien, a grantee’s assumption of

a note from the original borrower does not bind the lender if “it did not consent to

the assumption of the note or take any action to recognize [the grantee] as the

primary debtor.” La-Rey, Inc. v. Kowalski, 433 S.W.2d 530, 533 (Tex. Civ.

App.—San Antonio 1968, no writ). This is a longstanding rule in Texas law, as

the Texas Supreme Court observed decades ago:

3 In her Appellant’s Brief, Jones periodically references the vicious act of domestic violence perpetrated against her by Brian Christopher, as well as his subsequent behavior regarding the Loan, including his changing mortgage account contact information and online passwords. (Appellant’s Br. at 2-3, 8.) Wells Fargo should not be held responsible for the unsavory acts of Jones’s ex-husband. In fact, Jones sought an injunction from the divorce court for the relief she seeks in this case—and against the proper party, Brian Christopher. (CR:391.) But the district court denied Jones’s application for a permanent injunction. (CR:396.) 7 It is also well settled that contracts by one capable of contracting may be made by assumption, when such assumption is a consideration for the purchase of property. An assumption of this kind, when accepted by the payee of the obligation assumed, or the mortgagee, becomes a contract under which the one making the assumption becomes the principal obligor and the original maker the surety.

Strauss v. Brooks, 148 S.W.2d 393, 396 (Tex. 1941) (emphasis added). The

Austin Court of Civil Appeals earlier reached this same holding.

In the instant case when Augusta Helge reconveyed said lands to E. V. Helge in January, 1928, who assumed the payment of the debt sued upon, as between them, E. V. Helge then became primarily liable thereon. But the holder of said indebtedness was not required to accept the new obligor unless it chose to do so. Helge v. Am. Cent. Life Ins. Co., 124 S.W.2d 191, 193 (Tex. Civ. App.—Austin

1938, writ dism’d judgm’t cor.) (emphasis added). Texas federal courts also

follow this rule.

In Texas, as generally elsewhere, the purchaser of property incumbered by a mortgage who assumes to pay the mortgage as part of the consideration of his purchase, as between himself and his vendor becomes the principal debtor and the vendor his surety; and the mortgagee may recognize and enforce the transaction for his own benefit.

Pinckney v. Wylie, 86 F.2d 541, 542 (5th Cir. 1936) (citations omitted and

emphasis added).

The same conclusion was reached in Shockey v. Page, 354 S.W.2d 698 (Tex.

Civ. App.—Eastland 1962, writ ref’d n.r.e.), in which defendants Rice and

Shockey had executed a note and deed of trust, and two years later Rice and

8 Shockey conveyed the underlying property to Moore, “who assumed payment of

the unpaid balance of the note.” Id. at 699. According to the Court:

It is undisputed that Moore assumed payment of the balance due on the note. Upon the assumption by Moore, however, Rice and Shockey did not thereby become mere sureties and they were not released from liability as principal obligors. There was no unconditional acceptance of Moore as the sole principal obligor by the holder of the indebtedness nor was there any agreement to release the original obligors.

Id. at 700 (emphasis added).

In short, the lender has no obligation to deem the purchaser of the secured

property, who assumes the debt as between himself and the original borrower, to

be the principal obligor on the debt unless and until the lender agrees to the

assumption. See Cain v. Bank United of Tex., No. 14-95-00601-CV, 1997 WL

428054, at *9 (Tex. App.—Houston [14th Dist.] July 31, 1997, pet. denied)

(“Because Bank United [the lender] accepted Nupro’s [the property buyer]

agreement to assume the debt, Nupro became the party primarily liable to pay the

mortgage.”); Monroe v. Salter, No. 05-94-01560-CV, 1995 WL 447549, at *5

(Tex. App.—Dallas July 27, 1995, no writ) (holding that transfer of property did

not cause plaintiffs to become “unwilling lender” to transferees because “an

assumption can only take place if the holder of the note accepts or agrees to such

an assumption”). The fact that an agreement between a grantor and grantee of

property for the grantee’s assumption of the grantor’s debt is effective as between

9 the grantor and grantee does not establish that such agreement is also effective as

against the lender/mortgagee. 4 See Thompson v. Tropical Sav. & Loan Ass’n, 430

S.W.2d 426, 428-29 (Tex. Civ. App.—San Antonio 1968, writ ref’d n.r.e.)

(holding that principal debtor was unchanged when “assumption was never

accepted or agreed to by the holder of the note”).

In her Appellant’s Brief, Jones cites two Texas Supreme Court cases that

discuss a third party’s assumption of a borrower’s debt. (Appellant’s Br. at 8-9.)

However, neither case repudiates or even addresses the lender’s right not to accept

the third party’s assumption of debt. In Spann, while the lender was not a party to

the contract of assumption between the original debtor and the assuming third

party, the lender was entitled to accept such assumption, as such contract “gives to

the creditor a cause of action on which he may sue and recover from the person

who has so contracted to pay him a debt originally due only by the person to whom

the promise is made.” Spann v. Ewing, 63 Tex. 240, 242 (1885). Likewise, in

Brannin, the Court’s consideration of a third party’s assumption of debt arose in

the context of the lender’s assignee suing the third party on the debt. See Brannin

v. Richardson, 185 S.W. 562, 563-64 (Tex. 1916). Neither of these cases

4 For this reason, the cases cited by Jones involving an assignment of debt in the context of divorce are not relevant to the lender’s ability to refuse to accept such assignment. (Appellant’s Br. at 11-12.) In both cases, the lender was not a party to the lawsuit, and whether the assignment was effective against the lender was not at issue. See Puntarelli v. Peterson, 405 S.W.3d 131, 135-37 (Tex. App.—Houston [1st Dist.] 2013, no pet.); Siefkas v. Siefkas, 902 S.W.2d 72, 76 (Tex. App.—El Paso 1995, no writ). 10 contradicts the lender’s right to refuse to accept an assumption of the debt. In both

cases, the lender was seeking to enforce the assumption, and thus there was no

reason for the Court to question whether the lender had, in fact, accepted such

assumption. Accordingly, while Spann and Brannin may be relevant as to whether

Wells Fargo had the right to accept the assumption agreement between Jones and

Brian Christopher (Wells Fargo has such right), neither case is relevant as to

whether Wells Fargo has the obligation to accept such agreement. Texas case law

consistently shows that there is no such obligation.

Wells Fargo does not dispute that, as between Jones and her ex-husband,

Jones assumed the Note pursuant to the Divorce Decree, the Special Warranty

Deed, and the Deed of Trust to Secure Assumption. But unless and until Wells

Fargo approves the assumption, Jones cannot require Wells Fargo to provide her

any rights that belong only to the principal obligor of the debt, Brian Christopher. 5

B. The Deed of Trust Does Not Compel Wells Fargo to Approve an Assumption. Jones argues that the general rule in Texas that the lender is not obligated to

accept a borrower’s assumption agreement is somehow altered in this case by the

language of the Deed of Trust. (Appellant’s Br. at 10-13.) The Deed of Trust in

this case does not support Jones’s argument.

5 This status is not without benefit to Jones. While as the Property owner she may have the option to redeem the lien on the Property, she is also free to walk away from the Note without any personal liability to the lender for it, if she chooses to do so. 11 The provision of the Deed of Trust at issue is in Paragraph 12, which states:

“The covenants and agreements of this Security Instrument shall bind and benefit

the successors and assigns of Lender and Borrower….” (CR:316.) While this

provision contemplates that the Borrower may have a successor or assign, it does

not govern how a successor or assign arises. Wells Fargo does not dispute that the

Deed of Trust is assignable as a general matter; however, Wells Fargo’s consent

remains a prerequisite to an assignment by the Borrower. No provision of the

Deed of Trust provides that Brian Christopher could assign the Deed of Trust

without Wells Fargo’s agreement. By its plain language, the only principle that

arises from the Paragraph 12 provision is that if the Borrower’s rights are assigned,

the Deed of Trust’s covenants and agreements shall bind and benefit the

Borrower’s assignee. There is no express or implied modification of the general

rules regarding how a borrower’s rights can be assigned.

In fact, Jones’s argument has been foreclosed by this Court’s opinion in In

re FH Partners, L.L.C., 335 S.W.3d 752 (Tex. App.—Austin 2011, orig.

proceeding). In that case, the borrowers argued that their consent was required in

order for the lender to assign the loan to the plaintiff. See id. at 761. This Court

disagreed, explaining that the assignment by a lender is subject to the

“longstanding rule in Texas that the right to collect a debt … is generally

assignable.” Id.

12 This Court further observed that there is a “long-recognized exception”

when a contract relies on the credit of the parties. In such a case, the general

policy of free assignment yields to a contracting person’s interest to require

performance only by a specific person. Id. at 762. As the Court explained:

Texas courts have long held that a debtor cannot assign an extension of credit or delegate its duty to pay a creditor without the creditor’s consent. This reflects a view that a creditor’s agreement to extend credit inherently contemplates a specific debtor and that the creditor should not be effectively forced to extend credit to a different debtor without the creditor’s consent.

Id. at 763 (citations omitted). The borrowers in FH Partners then argued that the

same rule applicable to an assignment by a borrower should apply equally to an

assignment by lender. See id. at 763-64. This Court flatly disagreed. According

to this Court, neither the “personal trust or credit” exception nor its rationale

extends to a creditor’s assignment of its right to receive payment from a debtor. Id.

at 764. This distinction does not turn on a particular party’s trust or reliance, but

on the type of rights conveyed. Id. at 765. The right to collect a debt is

“quintessentially among the types of rights that Texas law deems freely

assignable.” Id. at 766. The obligation to pay a debt, on the other hand, clearly

falls within the “personal trust or credit” exception to the rule of free assignability.

Id. at 762-63.

In short, a lender need not obtain the borrower’s consent to assign its rights

and obligations, but the borrower must obtain the lender’s consent to assign his

13 rights and obligations. Therefore, absent language to the contrary in the Deed of

Trust, Brian Christopher could not assign his debt to Jones without Wells Fargo’s

consent. Paragraph 12 of the Deed of Trust contemplates that a borrower’s

assignee may exist, but does not contemplate that Wells Fargo’s consent is

unnecessary in order for such assignment to take place. The Deed of Trust is silent

regarding whether consent is necessary for either party to assign the debt. Thus,

the common law rule is unaltered: Wells Fargo’s consent is necessary.

None of the cases relied on by Jones contradicts this straightforward

application of FH Partners. In Zale Corp. v. Decorama, Inc., 470 S.W.2d 406

(Tex. Civ. App.—Waco 1971, writ ref’d n.r.e.), one contract at issue specified that

“Tenant may without consent of the Landlord assign this lease,” thereby enabling

the Court to hold that the landlord’s consent was not required for the tenant to

assign his rights under the second contract executed contemporaneously. Id. at

408-09. Unlike in Zale Corp., there is no contract provision in this case removing

the requirement of lender consent for the borrower to assign any rights or

obligations.

In Romund v. Ginzel, 259 S.W.2d 619 (Tex. Civ. App.—Waco 1953, no

writ), the Court concluded that under the specific circumstances of the case the

“personal trust or credit” exception did not apply. Id. at 621. Unlike in Romund,

this case involves an existing debt and attempted transfer of that debt by the

14 borrower, and thus it cannot be reasonably contended that the “personal trust or

credit” exception is inapplicable.

In Cronin v. Wells Fargo Bank, N.A., No. 03-12-00799-CV, 2014 WL

2918006 (Tex App.—Austin June 19, 2014, no pet.) (mem. op.), this Court held

that the deed of trust provision that its covenants and agreements “bind and benefit

the successors and assigns” unambiguously expressed the parties’ intent to allow

the original lender to assign the deed of trust. See id. at *7. Jones extrapolates

from Cronin’s holding that the same rule should apply to a borrower, but in doing

so, Jones ignores the clear distinction—explained and applied by this Court in FH

Partners—between a lender’s and a borrower’s authority to assign a loan.

(Appellant’s Br. at 10-11.) Because a lender can assign its rights without borrower

consent, the provision in the deed of trust indicating that assignment may occur,

while confirming that assignment is possible, did nothing to change the status quo

that consent was unnecessary. In the same way, because a borrower cannot assign

its rights without lender consent, a provision in the deed of trust indicating that

assignment may occur, while confirming that assignment is possible, does nothing

to change the status quo that consent is necessary. This Court in Cronin did not

address this latter circumstance, and its analysis in Cronin should not be

interpreted to upset the clear distinction outlined in FH Partners.

15 Appellant lastly cites Howell v. Murray Mortgage Co., 890 S.W.2d 78 (Tex.

App.—Amarillo 1994, writ denied), for the proposition that a successor to the

borrower obtains the benefits of the borrower under the deed of trust. As an initial

matter, Howell deals with the deceased borrower’s estate. Whether a borrower’s

estate qualifies as the borrower’s “successor” has no evident bearing on Jones’s

status. See, e.g., DTND Sierra Invs. LLC v. CitiMortgage, Inc., No. SA-12-CV-80-

XR, 2012 WL 1711738, at *10 (W.D. Tex. May 15, 2012) (“[A] purchaser in a

sale without credit approval would not appear to be a successor bound by or

entitled to the benefits of the Deed of Trust.”). This lawsuit does not involve an

estate or the administrator of an estate, and there is no legal basis for Jones to

qualify as Brian Christopher’s “successor.”

Moreover, even if Jones could be deemed a “successor” of her ex-husband

Brian Christopher, it does not follow that Jones has assumed the Note and become

the principal obligor. See, e.g., Preston v. Seterus, 931 F. Supp. 743, 759 n.8 (N.D.

Tex. 2013) (quoting deed of trust language that party who is successor to borrower

need not have assumed debt). 6 This distinction is evident in the very opinion cited

by Jones. In Howell, where the deed of trust provided that its covenants and

6 See also Ashby v. Wells Fargo Bank, N.A., No. 12-803, 2012 WL 1833932, at *2 (S.D. Tex. May 18, 2012) (“Plaintiff is not the borrower. He is not a party to the Promissory Note or the Deed of Trust. Although Plaintiff alleges that he inherited the property when his parents died, there is no allegation or evidence that he requested or obtained Wells Fargo’s written consent to assume the loan or that he has been substituted in Wells Fargo’s records as a party to the Promissory Note or Deed of Trust.”). 16 agreements inured to the borrower’s successors, even though the Court concluded

that the estate was successor to the borrower, the Court’s conclusion did not impair

the rule “that the debt would not be assumable without the lender’s consent.” See

Howell, 890 S.W.2d at 83-84 (emphasis added). Specifically, the Court noted that

while a probate court could order a sale of property subject to indebtedness, the

probate code “does not empower the court to require a creditor to make a loan,

extend a loan or make a loan assumable.” Id. at 81. In the same way, while the

divorce court could order the transfer of the Property to Jones subject to the Loan,

the divorce court could not—and did not—require Wells Fargo to consent to an

assignment or assumption of the Loan.

Jones is a “Borrower” under the Deed of Trust as a signatory thereof, but her

rights and obligations are limited (as shown in Paragraph 12) because she did not

also sign the Note and thereby become a principal obligor. Under Texas law,

absent contractual language to the contrary, a principal-obligor status cannot be

assigned to or assumed by another “Borrower” without the lender’s consent. The

Deed of Trust contains no contractual language that would modify this rule.

C. Wells Fargo’s Right to Accept or Reject an Assumption of the Debt By Jones Is Not Impaired by the Federal Garn-St. Germain Act. Jones also claims that Wells Fargo’s right to decline to accept Jones’s

assumption of the debt is preempted by the Garn-St. Germain Depository

17 Institutions Act of 1982. (Appellant’s Br. at 13-14.) The plain language of the

Garn-St. Germain Act shows otherwise.

Under the Garn-St. Germain Act, a lender cannot exercise a deed of trust’s

due-on-sale clause (i.e. accelerate the debt) as a result of the transfer by divorce

decree of “any part of the property, or an interest therein, securing the real property

loan.” See 12 U.S.C. § 1701j-3(a)(1), (d)(7). But that undisputedly has not

occurred here. Any attempt to accelerate the Loan by Wells Fargo would be due to

the default on the Loan starting in 2010, not the transfer of the Property back when

Jones got divorced in 2005.7 See Smith v. Green Tree Servicing, LLC, No. C13-

1573RSL, 2014 WL 1319821, at *2 (W.D. Wash. Mar. 28, 2014) (holding that

Garn St. Germain Act did not apply when borrower’s spouse obtained property

through divorce and five years later defaulted by non-payment).

This provision of the Garn-St. Germain Act restricts the lender’s right to

accelerate the debt. But no provision of the Act restricts the lender’s right to reject

an assumption of the debt. In fact, the Garn-St. Germain Act expressly references

assumption, but only to state that “a lender is encouraged to permit an assumption

7 In fact, when the property transfer occurred in 2005, Wells Fargo alerted Jones that the debt would be accelerated as a result of the property transfer with Wells Fargo’s consent. (CR:150.) However, Jones informed Wells Fargo that the property transfer was in accordance with a divorce decree. (CR:151.) Wells Fargo, then, in compliance with the Garn-St. Germain Act, withdrew its intent to accelerate. (CR:300.) Interestingly, Wells Fargo’s 2005 letter also explained to Jones at that time that no assumption had taken place, and any assumption of the debt would require satisfaction of “investor guidelines for a credit qualifying assumption.” (CR:150.) 18 of a real property loan.” See 12 U.S.C. § 1701j-3(b)(3). Encouraging a lender to

agree to an assumption simply does not equate to prohibiting a lender from

rejecting an assumption. Thus, by its plain language, the Garn-St. Germain Act

does not limit in any way the lender’s discretion regarding whether to accept a

third party’s assumption of the debt from the borrower.

In order to equate the rejection of an assumption of debt with the

acceleration of the debt, Jones relies not on the plain language of the statute or any

Texas legal authority, but on a single Florida federal bankruptcy case. In In re

Jordan, 199 B.R. 68 (Bankr. S.D. Fla. 1996), a Florida bankruptcy court judge

compelled a lender to approve a property transferee’s assumption of debt. In that

case, the borrower had defaulted, the lender accelerated the debt and obtained a

final judgment of foreclosure, and the borrower filed for bankruptcy but had her

case dismissed with prejudice. Id. at 69. Undaunted, the borrower transferred a

half interest in her property to her son, and the son filed for chapter 13 bankruptcy.

See id. The Florida bankruptcy judge proceeded to hold not only that the mother’s

mortgage default would be cured by the court’s bankruptcy plan, but also that the

lender was compelled to accept the son’s assumption of the mortgage. See id. at

69-70.

The analysis employed by the judge to reach his conclusion is not

persuasive. First, the judge cited federal bankruptcy case law to the effect that a

19 mortgagee’s lien is a “claim” against the property owner under the bankruptcy

code. Id. at 69. However, these cases do not support the stripping of a lender’s

right to reject an assumption, because the bankruptcy code does not require an

assumption of the underlying debt for a lien on the debtor’s property to be a

“claim.” See In re Cady, 440 B.R. 16, 22 (N.D.N.Y. 2010) (despite the fact that

“the debtor never formally assumed the mortgage,” for purposes of “claim” under

bankruptcy code “it is sufficient that a debtor owns property against which a

creditor holds a lien”); In re Lumpkin, 144 B.R. 240, 241-42 (Bankr. D. Conn.

1992) (finding loan to be “claim” under bankruptcy code despite debtor “not being

the maker of the mortgage note and not having assumed the mortgage”). Whether

the Deed of Trust could be a “claim” under the bankruptcy code is irrelevant to

Wells Fargo’s ability to accept or reject Jones’s attempted assumption of the

underlying debt.

Second, the judge in Jordan cited two Florida Supreme Court cases for the

proposition that a grantee who purchases mortgaged land from the mortgagor and

assumes and agrees to pay the mortgage becomes the principal debtor and the

original mortgagor a surety. Id. at 70 (citing Marler v. Parker, 135 So. 400 (Fla.

1931), and Proctor v. Hearne, 131 So. 173 (Fla. 1930)). Neither case overturns the

lender’s right to reject an assumption of debt. On the contrary, both cases agree

with Texas law that an assumption of debt is not enforceable against the lender

20 until the lender approves the assumption. The Florida Supreme Court stated the

following in the Marler case:

It would seem to be also conceded that the relation of each of said successive persons agreeing with their immediate grantors to assume and pay said mortgage became, by virtue of said agreements, that of principal debtors thereon upon said mortgagee’s acceptance of the benefit derivable to it by their said several agreements. Marler, 135 So. at 401 (emphasis added). The Florida Supreme Court was equally

explicit in the Proctor case:

For one reason or another, the courts are gradually uniting upon the doctrine, which we here adopt, that the relation of principal and surety between the mortgagor and his grantee, created in the manner above stated, does not in and of itself involve the mortgagee in its legal effects. His rights remain unchanged, unless by his voluntary agreement, or by his dealings with the grantee, the mortgagee in effect accepts the grantee alone as the principal debtor or estops himself to further assert a personal liability against the mortgagor. Proctor, 131 So. at 176. Thus, neither the bankruptcy code nor Florida law

supported the bankruptcy judge’s ultimate conclusion that the lender could not

withhold consent to the son’s assumption of his mother’s debt.

To reach such conclusion, then, the judge in Jordan relied solely on the

Garn-St. Germain Act. Certainly such Act prevents a lender from enforcing a

“due-on-sale clause” due to the transfer of property to the borrower’s spouse or

children. However, the judge did not—and could not—cite to any legal authority

for his bare conclusion that a lender’s right to reject an assumption “should be

21 equated with a due on sale clause.” Jordan, 199 B.R. at 70. The judge relied on

neither the plain language of the federal statute nor any state or federal case law.

The Garn-St. Germain Act expressly defines a “due-on-sale clause” as “a

contract provision which authorizes a lender, at its option, to declare due and

payable sums secured by the lender’s security instrument if all or any part of the

property, or an interest therein, securing the real property loan is sold or transferred

without the lender’s prior written consent.” 12 U.S.C. § 1701j-3(a)(1). And yet a

lender’s right to accelerate the debt upon a transfer of the property is hardly

comparable to a lender’s right to choose its borrower. The former involves the

transfer of secured property; the latter involves the transfer of debt. The former

concerns only the lender’s immediate rights; the latter impacts the life of the loan.

The former prohibits action by the lender (acceleration of the debt); the latter

compels action by the lender (acceptance of the assumption). Applying the

statute’s actual language maintains the status quo (the lender cannot accelerate the

debt); applying the bankruptcy judge’s conclusion disrupts the status quo (a new

debtor is forced upon the lender). Accordingly, the fact that, upon the sale of the

property, a secured lender is prohibited from accelerating the debt does not—and

should not—also mean the lender is required to accept the purchaser’s assumption

of the debt. See 12 U.S.C. § 1701j-3(a)(1), (d)(7).

22 This Court should not follow the unprecedented, unsupported conclusion of

the Florida bankruptcy judge in Jordan. No other court has made the same

extension of law. See, e.g., Wilson v. Bank of Am., N.A., No. 14-2498, 2014 WL

4744555, at *8 (E.D. Pa. Sept. 24, 2014) (deeming the Garn-St. Germain Act to be

“irrelevant” as to whether the transferee of real property has assumed the mortgage

pursuant to the lender’s credit standards); In re Henderson, No. 04-B-75636, 2005

Bankr. LEXIS 1474, at *10 (Bankr. N.D. Ill. May 17, 2005) (holding that Garn St.

Germain Act did not modify creditor’s rights with respect to debtor who was not

party to mortgage). Certainly no Texas federal or state court has ever reached the

same conclusion. At best, the Florida bankruptcy judge’s discussion of the Garn-

St. Germain Act was dicta, since the judge could have confirmed the bankruptcy

plan based on the lien being a “claim” and no assumption being a requirement for

such purpose. 8 This Court, therefore, should follow the plain language of the Act,

which prohibits acceleration in certain circumstances not applicable here and,

regarding assumption of debt, states only that the lender’s agreement thereto is

“encouraged.”

8 It is also possible that the judge in Jordan simply misunderstood what was at issue. A deed of trust often states, as in this case, that “approval of the Secretary” is required for acceleration of debt upon a transfer of the property when the transferee’s credit has not been approved pursuant to “the requirements of the Secretary.” (CR:316.) The bankruptcy judge appeared to equate—and unnecessarily so—the Secretary’s involvement with acceleration of debt upon property transfer (which can implicate the Garn-St. Germain Act) with the Secretary’s involvement with credit review for purposes of assumption of debt (which does not implicate the Garn-St. Germain Act). See Jordan, 199 B.R. at 70. 23 The Garn St. Germain Act does not require Wells Fargo to agree to Jones’s

assumption of the Loan. Absent any legal authority that would require Wells

Fargo to agree to Jones’s assumption of the debt, then, Jones cannot obtain a

declaration from the Court compelling Wells Fargo to accept or agree to Jones’s

assumption of the debt.

CONCLUSION AND PRAYER As demonstrated, Texas law is clear that an assumption of debt is not valid

as against the lender until the lender accepts or agrees to the assumption. Neither

the language of the deed of trust in this case nor the provisions of the Garn St.

Germain Act create an exception to this rule. Thus, Wells Fargo is not bound by—

nor compelled to accept or consent to—Jones’s agreement with Brian Christopher

for the assignment or assumption of the debt owed to Wells Fargo. The district

court correctly found that Jones is not entitled to a declaration against Wells Fargo

that she assumed the Note, she is the principal debtor, and/or she may enter into an

agreement to modify the amortization terms of the Note without Brian

Christopher’s signature. The district court’s judgment in favor of Wells Fargo

should be affirmed.

24 Respectfully submitted,

LOCKE LORD LLP

By: /s/ W. Scott Hastings B. David L. Foster dfoster@lockelord.com State Bar No. 24031555 600 Congress Avenue, Suite 2200 Austin, Texas 78701 Telephone: (512) 305-4700 Facsimile: (512) 305-4800

W. Scott Hastings shastings@lockelord.com State Bar No. 24002241 Robert T. Mowrey rmowrey@lockelord.com State Bar No. 14607500 2200 Ross Avenue, Suite 2200 Dallas, Texas 75201 Telephone: (214) 740-8000 Facsimile: (214) 740-8800

Counsel for Appellee Wells Fargo Bank, N.A.

25 CERTIFICATE OF COMPLIANCE Pursuant to Texas Rule of Appellate Procedure 9.4(i)(3), the undersigned certifies that this Brief complies with the length limitations of Rule 9.4(i) and the typeface requirements of Rule 9.4(e).

1. Exclusive of the contents excluded by Rule 9.4(i)(1), this Brief contains 6,311 words as counted by the Word Count function (including textboxes, footnotes, and endnotes) of Microsoft Office Word 2010.

2. This Brief has been prepared in proportionally spaced typeface using:

Software Name and Version: Microsoft Office Word 2010 Typeface Name: Times New Roman

Font Size: 14 point /s/ W. Scott Hastings W. Scott Hastings

CERTIFICATE OF SERVICE I hereby certify that on January 26, 2015, a true and correct copy of this Brief is served by e-service through efile.txcourts.gov on Appellant through her counsel of record listed below:

Doug W. Ray Ray & Wood 2700 Bee Caves Road Austin, Texas 78746

/s/ W. Scott Hastings W. Scott Hastings