Equitable Subrogation Not Barred by Foreclosure Statute of Limitation

The Supreme Court of Texas, in PNC Mortgage v. Howard, recently held that the holder of a deed of trust was entitled to foreclose through equitable subrogation, even after the four-year foreclosure statute of limitations had lapsed. Click here to read the opinion. 

In 2003, the borrowers purchased a home with loans secured by two purchase-money liens on their property. Two years later, the borrowers refinanced the mortgages with a new loan and paid off the purchase-money mortgages. The note and deed of trust securing the loan were subsequently assigned to and acquired by a new lending entity (“mortgagee”).

In January 2009, the mortgagee notified the borrowers of their default and intent to accelerate the loan, and five months later, accelerated the note. Concurrently, the original lender initiated foreclosure proceedings against the borrowers despite having assigned the loan to the mortgagee, which resulted in a sale of the property.

The borrowers filed suit against the original lender seeking to set aside the foreclosure sale on this basis, while adding the mortgagee as an interested party defendant. After the trial court declared the foreclosure void as to the original lender, in 2015 the mortgagee asserted counterclaims against the borrowers seeking to foreclose the deed of trust lien, or alternatively, judgment declaring its right to foreclose through equitable subrogation should the trial court determine that the four years statute of limitations to foreclose after acceleration had lapsed. The trial court entered judgment against the mortgagee, declaring the loan’s note and deed of trust lien unenforceable. The mortgagee subsequently appealed.
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Ultimately the mortgagee argued that because the borrowers had used the loan’s proceeds to discharge the two pre-existing purchase-money mortgages, it held an equitable lien on the borrowers’ property. The Supreme Court of Texas agreed that the mortgagee’s failure to timely foreclose under the deed of trust lien did not bar its subrogation rights, reasoning that subrogation operates as a hedge against the risk of refinancing the outstanding amount of an existing loan, permitting a lender to assert rights under a lien its loan has satisfied when the lender’s own lien is infirm.