Daily Development for Tuesday, August 20, 2002

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

Although the editor's usual practice is to cover only one issue per DD, even if a case recites two, he is here departing from the policy because the second issue, while worth noting, is not a big enough deal for it's own DD. Consequently, the second issue in the opinion is discussed below.

HOMESTEAD; IDENTIFICATION OF HOMESTEAD PROPERTY: Where a borrower owns two parcels of real property, either of which could be classified as the borrower's homestead under Texas law at the time the borrower mortgages one of the parcels, the borrower is not estopped from claiming the homestead exemption as to the mortgaged property despite a disclaimer in the loan documents to the contrary unless "physical facts open to observation lead to a conclusion that the property in question is not the homestead, the use of the property is not inconsistent with the claimant's representations that the property is disclaimed as the homestead, and the representations were intended to be and were actually relied upon by the lender."

Montague v. National Loan Investors, L.P., 70 S.W.3d 242 (Tex. Ct. App. 2002).

In this case, the borrowers owned two parcels, either of which were residences that could be classified as the borrowers' homestead. One was a ranch on which he lived with his wife and family while he served as president and later chairman of the board of the local bank. A second was a lake property that apparently had served as a vacation residence prior to the end of the borrower's tenure as board chairman. In 1984, around the time he ceased being board chairman, he completed a refinancing of his family's debt with the same local bank. A sampling of the language of the "homestead designation: executed by the borrower, who obviously was a sophisticated individual who used this language purposefully, is useful. The court recites:

"The Homestead Designation designates the [Lake Property] as the homestead of Frank and Virginia. The Homestead Designation further states that Frank and Virguinia have abandoned their homestead [at the ranch property] and . . .

disclaim any homestead rights in that land. The Homestead Designation concludes:

"Affiants further say that they now live on the [Lake Property] and that said property has been their homestead ever since they moved on to same in the year 2982, at which time they abandoned the [Ranch Property] as their homestead."

Under Texas law, apparently, homestead cannot be waived, even in a mortgage. if a borrower only owns one piece of property that could be possibly be claimed as a homestead, the borrower is never estopped to claim the homestead exemption as to that piece of property regardless of a disclaimer in the loan documents to the contrary.

The Texas Court of Appeals upheld the jury's determination that the borrowers were not estopped from claiming the mortgaged property as the borrowers' homestead, because of the "physical facts open to observation." The borrowers lived on the mortgaged property, never left the homestead property except to return, and one of the borrower's sons stayed on the mortgaged property during the summer the loan documents were executed.

Note that the husband had since deceased, and the bank's quarrel was with the surviving spouse, who also executed the declaration, and her children.

Comment 1: Of course, in some jurisdictions a homestead must be claimed and identified. In many others, however, it's just one's home. In Texas, of course, homestead protection is extremely broad, although the concept of variable state homestead protection is under challenge in current bankruptcy amendments still under hot consideration.

Comment 2: In the editor's view, the opinion is, in a word, an outrage. This question was not a jury question at all. If the parties to this loan did not in fact live on the Lake Property, then they clearly committed outright fraud in their representations to the contrary, and should be estopped by that fraud.

The court talks about "evidence" that the bank failed to discover that the Ranch Property was not vacated. Of course, it is quite common for persons who own two homes to occupy each from time to time, so the fact that the Ranch Property did not appear abandoned would not have meant that the borrowers lived elsewhere. Further, it was logical to assume that the parties were in the process of relocating from the Ranch Property to the Lake Property to enjoy their retirement. In fact, the best evidence of the location of the parties' homestead at the time they executed the loan documents was the expressed intent of the parties - and the court bent over backwards to obtain a specifically worded affidavit spelling out that intent.

It is one thing to discredit an affidavit of this nature when it has clearly been forced upon the parties to bully them into waiving protection that the state desires to extend to them. It is quite another to permit borrowers to defraud lenders by signing false affidavits as to their intentions and actions under circumstances in which their intent is in fact the most compelling evidence of homestead. It is true that here the likely more sophisticated party - the husband - is now deceased, but to forgive his spouse from the fraud that she also committed in executing this document, which states in no uncertain terms where the residence is located, is to deprive her and others similarly situated of their contractual dignity.

Comment 3: As the Congressional hounds are now baying at the heels of broad state homestead exemptions, it may be that we'll see less of this kind of case in the future. The Editor in fact is of the view that state variety in consumer protection generally and homestead protection specifically is a good thing - Boston and Amarillo really are very different places - but if decisions like this are part of the way that state courts will enforce homestead protections, the editor will be happy to see them go.

ATTORNEY'S FEES; PERCENTAGE OF DEBT: Texas court rules that fee provision by which borrower agrees to pay percentage of principal and interest then owing does not set a cap on fees.

Montague v. National Loan Investors, L.P., 70 S.W.3d 242 (Tex. Ct. App. 2002).

In upholding the trial court's award of attorney's fees, the Court of Appeals also held that a clause in the note that, upon default, the maker would "pay ten percent (10%) additional on the amount of principal and interest then owing, as attorney's fees" did not cap the attorney's fees that could be recovered by the lender. The Court first cited to a Texas Supreme Court case for the proposition that "Texas courts do not regard agreements to pay attorney's fees based on a percentage of the unpaid balance and interest of a promissory note as absolute promises to pay the contractual amount, but as contracts to indemnify the holder of the note for attorney's fees actually incurred in collecting the principal and interest on the note." The Court went on to hold that the lender is entitled to recover additional amounts if the lender can show "that a reasonable attorney's fee exceeds the contractual percentage."

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.

Parties posting messages to DIRT are posting to a source that is readily accessible by members of the general public, and should take that fact into account in evaluating confidentiality issues.

ABOUT DIRT:

DIRT is an Internet discussion group for serious real estate professionals. Message volume varies, but commonly runs 5 ‑ 10 messages per workday.

Daily Developments are posted every workday.

To subscribe to Dirt, send an e-mail to:

To:	ListServ@listserv.umkc.edu
Subject:	[Does not matter]
Text in body of message	Subscribe Dirt [your name]

To cancel your subscription to Dirt, send an e-mail to:

To:	ListServ@listserv.umkc.edu
Subject:	[Does not matter]
Text in body of message	Signoff Dirt

For information on other commands, send the message Help to the listserv address.

DIRT has an alternate, more extensive coverage that includes not only commercial and general real estate matters but also focuses specifically upon residential real estate matters. Because real estate brokers generally find this service more valuable, it is named "Brokerdirt." But residential specialist attorneys, title insurers, lenders and others interested in the residential market will want to subscribe to this alternative list. If you subscribe to Brokerdirt, it is not necessary also to subscribe to DIRT, as Brokerdirt carries all DIRT traffic in addition to the residential discussions.

To subscribe to Brokerdirt, send an e-mail to:

To:	ListServ@listserv.umkc.edu
Subject:	[Does not matter]
Text in body of message	Subscribe Brokerdirt [your name]

To cancel your subscription to Brokerdirt, send an e-mail to:

To:	ListServ@listserv.umkc.edu
Subject:	[Does not matter]
Text in body of message	Signoff Brokerdirt

DIRT is a service of the American Bar Association Section on Real Property, Probate & Trust Law and the University of Missouri, Kansas City, School of Law. Daily Developments are copyrighted by Patrick A. Randolph, Jr., Professor of Law, UMKC School of Law, but Professor Randolph grants permission for copying or distribution of Daily Developments for educational purposes, including professional continuing education, provided that no charge is imposed for such distribution and that appropriate credit is given to Professor Randolph, DIRT, and its sponsors.

DIRT has a WebPage at: http://www.umkc.edu/dirt/