Jillian Johnson v. World Alliance Financial Corp.
2016 U.S. App. LEXIS 13125
| 5th Cir. | 2016Background
- In April 2009 Jay Johnson obtained a HECM reverse mortgage from WAF; the loan was later assigned to RMS. The HECM was secured by Jay’s 1.7-acre Del Rio property.
- At origination two liens existed: a 2001 Washington Mutual lien (paid off at closing) and a $50,000 owelty lien held by Barbara Baker (not paid at closing and payable on sale).
- In 2011 Baker initiated a foreclosure on the property; RMS sued to challenge Baker’s right to foreclose and later obtained summary judgment in state court finding Baker’s foreclosure wrongfully conveyed no title; Baker’s appeal settled for $15,000, restoring title.
- Mrs. Jillian Johnson (Jay’s wife) sued WAF and RMS in federal court asserting breach of the HECM, fraudulent inducement, and other claims, arguing the HECM should not have been issued without clearing Baker’s lien and that HUD rules were violated.
- The district court granted summary judgment to defendants; the Fifth Circuit reviewed de novo and affirmed, holding HUD regulations were not incorporated into the loan agreement, no contract breach occurred, and no viable fraudulent inducement claim was shown.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether HUD regulations give plaintiff a breach-of-contract claim | Johnson: HUD mortgagee guidance required lender to ensure HECM lien priority; lender violated HUD rules so breached the contract | WAF/RMS: HUD regulations govern lender–HUD relationship and were not expressly incorporated into the borrower agreement, so no private breach claim | Held: HUD regs not incorporated; no HUD-based contract claim allowed |
| Whether lender breached HECM by failing to ensure first-lien priority (implied term) | Johnson: Lender should have assured HECM priority or settled Baker’s lien; failure caused foreclosure risk and damages | WAF/RMS: HECM assigns borrower the duty to discharge senior liens (Paragraph 12(c)); HECM equitably subrogated to prior 2001 mortgage at origination; any harm came from Baker’s wrongful foreclosure and borrower’s inaction | Held: No implied contractual promise by lender; HECM was effectively first lien at origination; no breach by defendants |
| Whether fraudulent inducement claim survives summary judgment | Johnson: Lender misrepresented (or failed to disclose) that Baker’s lien was not a problem and thus induced the loan; internal testimony later admitted the lien should have been cleared | WAF/RMS: Alleged statements were immaterial because Baker had no right to foreclose; retrospective employee opinion is irrelevant; no false material representation shown | Held: No genuine fact issue as to a material false representation or fraudulent intent; fraudulent-inducement claim fails |
Key Cases Cited
- Smith v. JPMorgan Chase Bank, N.A., [citation="519 F. App'x 861"] (5th Cir. 2013) (federal regulations form basis of contract claim only if expressly incorporated)
- LaSalle Bank Nat’l Ass’n v. White, 246 S.W.3d 616 (Tex. 2007) (equitable subrogation allows party who pays a lien to step into lienholder’s rights)
- Lawrence v. Fed. Home Loan Mortg. Corp., 808 F.3d 670 (5th Cir. 2015) (elements of fraud under Texas law recited)
- Zorrilla v. Aypco Constr. II, LLC, 469 S.W.3d 143 (Tex. 2015) (fraudulent inducement involves promise of future performance made with no intent to perform)
- Celotex Corp. v. Catrett, 477 U.S. 317 (1986) (summary judgment standard for movant’s initial showing)