The Texas Supreme Court recently held that a lender could still foreclose on a mortgage under the doctrine of equitable subrogation, even if it brought the foreclosure after the limitations periods had passed. See PNC Mortg. v. Howard, 2021 WL 297579 (Tex. Jan. 29, 2021). In 2003, defendants purchased a home with loans secured by two mortgages. In 2005, they refinanced these mortgages with a new loan secured by a new mortgage, and this 2005 mortgage was assigned to a new lender. Defendants defaulted on the loan in 2008. The assignor of the 2005 mortgage then brought a foreclosure action, and defendants opposed on the basis that the assignor was no longer the owner of the mortgage. Defendants also added the assignee lender as a party. The assignee lender counterclaimed seeking both foreclosure and, alternatively, sought to foreclose through equitable subrogation. The trial court dismissed the assignor lender because it no longer held the mortgage, and allowed the claims between the assignee lender and defendants to proceed. The trial court later granted defendants summary judgment, holding that the note and mortgage were unenforceable because the statute of limitations had run and that any equitable claim was barred by the assignee lender’s negligence in not bringing a foreclosure action immediately upon being named by defendants in the lawsuit. The appellate court affirmed, because “to the extent PNC held any equitable lien, it became unenforceable when PNC forfeited its own lien by failing to timely foreclose on it.”

On appeal, the Texas Supreme Court reversed and remanded. Citing a 2020 decision in which it had held that a mortgage was enforceable through equitable subrogation despite “a constitutional defect,” the Court held here that a lender’s alleged negligence in bringing an action does not affect its right to foreclose under equitable subrogation. See Fed. Home Loan Mortg. Corp. v. Zepeda, 601 S.W.3d 763 (Tex. 2020). Applying that holding here, it found that “equitable-subrogation rights become fixed at the time the proceeds from a later loan are used to discharge an earlier lien. A lender’s negligence in preserving its rights under its own lien thus does not deprive the lender of its rights in equity to assert an earlier lien that was discharged using proceeds from the later loan.”



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