Home Equity Loan Made In Violation Of Texas Homestead Law Declared Void; Lender's Assignee & Post-F'closure Sale Mortgage Lender Left Holding The Bag

The following facts are taken from a recent ruling from a U.S. Bankruptcy Court in Fort Worth, Texas:

• A certain Mrs. Kimberly Arnold, together with her late husband Mr. Arnold, purchased a home in Haslet, Texas in 2004, paying all cash for the property.

• Approximately a year and a half later, Mr. Arnold passed away.

• Following the death of Mr. Arnold, Mrs. Arnold experienced financial difficulties.

• At some point thereafter, Arnold sought the assistance of Sam Taylor (" attorney Taylor"), an attorney, on a criminal matter unrelated to this case. Taylor unwisely suggested Arnold contact Neal Matthew Quigley ("Quigley") for help with her financial situation.

• Quigley, an apparent lowlife, is described by the judge in his ruling as "a crook, a scoundrel, a rapscallion, a chiseler."

• Quigley agreed to give Arnold a home equity loan in the amount of $50,000, secured by the then-mortgage free Property, with the understanding that Arnold would sell the Property to repay her obligation. Arnold signed a promissory note (the "Arnold Note") for $50,000 and executed a deed of trust (the "Arnold Deed of Trust") with respect to the Property in favor of Quigley on or about November 26, 2007. The Arnold Deed of Trust appointed Mark A. Rodriguez as trustee.

• The Arnold Note called for a maturation date of May 26, 2008, and called for a one lump sum payment due on that date. The Arnold Note also specified that non-judicial foreclosure would occur in the event of default. Arnold never received a copy of the final loan application (or even filled one out), nor did the Arnold Note state that the loan was an extension of credit under section 50(a)(6) of article XVI of the Texas Constitution.

• A loan modification agreement was subsequently executed extending the due date on the Arnold Note to January 10, 2009.

• On July 14, 2008, and unbeknownst to Mrs. Arnold, Quigley substituted attorney Taylor in place of Rodriguez as substitute trustee for the Arnold Deed of Trust. Quigley then assigned the Arnold Note to Moon Shadow Investments ("Moon Shadow") on September 15, 2008, and Moon Shadow recorded the assignment on September 22, 2008. Mrs. Arnold had no knowledge of the Assignment at that time.

• On October 7, 2008 (a full three months before the due date on the loan, as extended by the aforementioned loan modification agreement), after Mrs. Arnold had entered into a contract for the sale of the home with third party, Jon Ireland, Quigley foreclosed on the Property and took title to the premises.

• Though attorney Taylor was now listed as substitute trustee of the Arnold Deed of Trust, Quigley executed the substitute trustee's deed (the "Substitute Trustee's Deed") conveying the Property to himself.

• Ireland (Mrs. Arnold's would-be buyer) discovered the Foreclosure only after he checked the real property records and found that the Property was now listed under Quigley's name instead of Mrs. Arnold's. Mrs. Arnold never received any notice of default or foreclosure from Quigley and knew nothing of the Foreclosure.

• In December of 2008, Quigley contacted DLB, a company owned and operated by Safir with operations based in Arizona, to obtain a loan. Quigley told Safir that he had free and clear property and was seeking a large loan. Quigley sent Safir pictures of the Property, as well as documents suggesting that a tenant named "Melissa Poornich" lived there and paid monthly rent.

• In January of 2009, Safir came to Texas to see the Property. When Quigley and Safir visited the Property, Arnold answered the door and Quigley introduced her to Safir as "Kimberly Arnold." Quigley then falsely introduced Safir as his insurance agent, something Safir did not deny. Mrs. Arnold became uncomfortable when Quigley and Safir started taking pictures of the Property, and told them they had to leave.

• Safir loaned Quigley approximately $124,000 secured by the Property. Quigley executed a deed of trust and a promissory note in favor of DLB. The DLB Deed of Trust was recorded in the Tarrant County Deed Records.

• DLB also purchased a title insurance policy issued by Lawyers Title Insurance Corporation in the amount of $120,000. The policy was dated February 5, 2009, and listed Quigley as holding title to the Property.

• When neither Moon Shadow nor DLB received payment on their respective promissory notes, they began foreclosure proceedings against the Property, though neither actually foreclosed. Meanwhile, on March 16, 2009, Plaintiffs instituted a state court action against Quigley seeking a declaration that, as to Quigley, Mrs. Arnold held superior title to the Property.

• Quigley filed for bankruptcy on June 2, 2009. On June 23, 2009, Plaintiffs filed their Motion to Lift Stay to Conclude a Pending Civil Action, or Alternatively, Request for Adequate Protection in Quigley's bankruptcy case, in which they asked the court to, among other things, permit them to proceed with the state court action. The court held a hearing on the Lift Stay Motion on July 23, 2009, at which the parties agreed to remove the state court action to the bankruptcy court.

An adversary proceeding in the bankruptcy court followed in which the judge was compelled to sort out the following claims and defenses of the parties:

1. Mrs. Arnold and Jon Ireland took the position that the Arnold Note and the Arnold Deed of Trust were executed in violation of article XVI of the Texas Constitution, and are therefore void.
2. Moon Shadow seeks to enforce Quigley's assignment of the Arnold Note and the Arnold Deed of Trust, arguing that Moon Shadow is a good faith purchaser for value and therefore owns the obligation under the Arnold Note.
3. DLB argues that it stands as a bona fide purchaser for value with a superior interest in the Property as a result of the DLB Note and the DLB Deed of Trust.
4. Quigley asserts a counterclaim against DLB, arguing that the DLB Note and the DLB Deed of Trust were usurious under the TEXAS BUSINESS AND COMMERCE CODE and the TEXAS FINANCE CODE, in that DLB attempted to collect money from Quigley in excess of the allowable statutory interest rate.
5. Quigley also asserts a counterclaim against Arnold, arguing that he is entitled to repayment of the $50,000 he lent Arnold plus interest, costs, and attorney's fees, or in the alternative, a minimum $50,000 claim against Arnold and/or the Property.

Mrs. Arnold's Texas Homestead Claim:

For the reasons set forth in specific detail in the ruling, the court found that Mrs. Arnold met the burden of proving that the property qualified as her homestead, and therefore the Texas homestead law applied to her $50,000 loan transaction with Quigley.

The court then found (for the reasons set forth in specific detail in the ruling) that the loan made to her by Quigley was made in violation of a slew of provisions of the Texas homestead law (article XVI, section 50(a)(6) of the Texas Constitution). Among the consequences of these violations is the forfeiture of all principal and interest owing under the promissory note.

Moon Shadow's Claim:

Moon Shadow asserted that it is a good faith purchaser for value with respect to the Arnold Note, and therefore owns any obligations due under it. The court found that because Quigley was not authorized to make home equity loans pursuant to Paragraph P of article XVI, section 50(a)(6), Moon Shadow, as assignee of the Arnold Note likewise forfeits all principal and interest due that may have been due.

The court also pointed out that because the Arnold Note was void as to Quigley anyway, Moon Shadow, as assignee, could not have greater rights under the Arnold Note than did Quigley. The court added that this would be the case even if Moon Shadow could otherwise satisfy the requirements for bona fide purchaser status.

DLB's Claim:

The court found that, because attorney Taylor (the substitute Trustee) did not himself sign the Substitute Trustee's Deed by which Quigley purportedly took title after the foreclosure sale of Mrs. Arnold's home, said deed was found to be a forgery. There was no evidence indicating that Quigley had any authorization to sign said deed. Consequently, said Substitute Trustee's Deed, as well as DLB's subsequently-acquired interest as mortgagee in the property were void, and DLB was precluded from acquiring the status of bona fide purchaser. The court pointed out that a person cannot obtain bona fide purchaser status under Texas law when one of the links in the chain of title is a forgery.

The court then added that even if there was no forgery, the foreclosure by Quigley was nevertheless void because the Texas Constitution does not allow foreclosure of a deed of trust securing a home equity loan other than by court order. See TEX. CONST., art. XVI, § 50(a)(6)(D). Quigley improperly foreclosed on Mrs. Arnold through the non-judicial foreclosure process.

As if that wasn't enough, the judge then went on to say that, even if it was okay to use a non-judicial foreclosure in this case, the foreclosure of Mrs. Arnold's home failed to satisfy the requirements for a valid non-judicial foreclosure. Quigley provided no notice to Mrs. Arnold as required by section 51.002 of the TEXAS PROPERTY CODE, and foreclosed three months before the Arnold Note became due.

Quigley also assigned the Arnold Note and the Arnold Deed of Trust to Moon Shadow prior to the Foreclosure (an assignment of record, and thus of which DLB — and Lawyers Title — had constructive notice), and therefore, according to the court, had no right to foreclose on the Property under any circumstances anyway.

Quigley's Claims:

As for Quigley's claim that DLB violated Texas usury laws, Quigley was incarcerated on the date of the Hearing, and did not testify. The record contains no evidence that the DLB Note and the DLB Deed of Trust violated any such laws. Quigley's usury counterclaim therefore fails.

Conclusion:

Based on the full discussion and analysis set forth in the ruling, the court concluded:

1. Quigley and Moon Shadow forfeited all principal and interest due under the Arnold Note;
2. the Arnold Note and the Arnold Deed of Trust are void;
3. DLB is not a bona fide purchaser for value with a superior interest in the Property; and
4. Quigley's counterclaims are without merit.

For the ruling, see In re Quigley, Case No. 09-43357-DML, Adversary No. 09-04317-DML (Bankr. N.D. Tex., Fort Worth Div., March 16, 2011).