Sims v. Carrington Mortgage Services, L.L.C.
538 F. App'x 537
5th Cir.2013Background
- Frankie and Patsy Sims obtained a home-equity loan and later entered two "Loan Modification Agreements" (2009 and 2011) that increased principal by capitalizing past-due interest, fees, property taxes, and insurance; after each agreement the loan-to-value (LTV) exceeded 80%.
- The Simses sued Carrington Mortgage Services (CMS), alleging the agreements violated Texas Const. art. XVI, §50 (home‑equity provisions) and sought class relief.
- CMS moved to dismiss under Fed. R. Civ. P. 12(b)(6); the district court granted dismissal with prejudice, finding the agreements were modifications (not refinances), capitalization was not an "advance of additional funds," §50(a)(6)(B)’s 80% LTV applies only at original closing, and no open‑end account was created.
- The Simses sought leave to amend to add theories (e.g., capitalization of escrowed taxes/insurance) and moved for reconsideration; the district court denied relief and the Fifth Circuit affirmed those procedural denials as within the district court’s discretion.
- Because several dispositive legal questions concerning the meaning and scope of §50 and related regulations are unsettled under Texas law, the Fifth Circuit certified four specific questions to the Supreme Court of Texas.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 1. Modification vs. Refinance: whether agreements that increase principal but do not satisfy/replace the original note are modifications or refinances for §50 | Sims: substance over form — increases in principal, new rate/term and greater equity consumption make the agreements a new loan (refinance) | CMS: agreements expressly preserve the original note; parties did not satisfy/replace the note, so they are modifications | Fifth Circuit found the district court treated them as modifications but certified the question to the Texas Supreme Court as an unresolved Texas-law issue |
| 2. Capitalization = "advance of additional funds": does capitalizing past-due interest, fees, taxes, insurance constitute an impermissible advance under the administrative rule | Sims: capitalization effectively extends new credit — an "advance" secured by the homestead | CMS: capitalized amounts were already owed under the pre‑modification loan or contemplated by the security instrument; not an advance of additional funds | Fifth Circuit declined to resolve and certified the question to the Texas Supreme Court |
| 3. Triggering §50(a)(6) requirements (incl. 80% LTV): must a modification that increases principal comply anew with §50(a)(6)(B)'s 80% LTV limit? | Sims: increases to principal should re‑trigger §50(a)(6) protections; LTV must be re‑measured after modifications that raise principal | CMS: §50(b) and related disclosures indicate LTV is measured as of original extension of credit; subsequent modifications need not meet §50(a)(6)(B) anew | Fifth Circuit found the text ambiguous, noted conflicting indicia, and certified the question to the Texas Supreme Court |
| 4. Conversion to open‑end account: do repeated/modifying agreements convert a closed‑end home‑equity loan into an open‑end account requiring §50(t) compliance? | Sims: repeated capitalizations/changes effectively create open‑end features and should trigger §50(t) protections | CMS: modification documents show fixed payment schedule and defined term; no facts alleged to create an open‑end account | Fifth Circuit saw the issue as one of Texas law and certified it to the Texas Supreme Court |
Key Cases Cited
- LaSalle Bank Nat’l Ass’n v. White, 246 S.W.3d 616 (Tex. 2007) (discusses limits on home‑equity lending and §50 constraints)
- Meador v. EMC Mortgage Corp., 236 S.W.3d 451 (Tex. Ct. App.—Amarillo 2007) (interprets "advance of additional funds" in a refinancing context)
- First Nat’l Bank of Kerrville v. O’Dell, 856 S.W.2d 410 (Tex. 1993) (discusses ordinary refinancing and renewal of indebtedness)
- Cerda v. 2004‑EQR1 L.L.C., 612 F.3d 781 (5th Cir. 2010) (framework for deference to Texas administrative interpretations)
- Jones v. Robinson Prop. Grp., 427 F.3d 987 (5th Cir. 2005) (standard of review for denial of leave to amend)