The borrowers, a married couple, took out a home equity loan to purchase their house. The loan was secured by a deed of trust on the home. Several years later, the borrowers stopped making payments on the loan. The lender sent an original notice of acceleration and filed a foreclosure application. The foreclosure sale did not take place. The borrowers filed suit in state court to stop the sale, leading to a settlement that included a release waiver and consent to a nonjudicial foreclosure. Two years later, the lender gave the borrowers notice of another default and sent a second notice of acceleration. The borrowers, in violation of the settlement agreement, answered the notice with defenses. The state court issued a foreclosure order allowing the lender to proceed, but the sale did not occur again. The lender instead later filed a third petition for foreclosure over four years after the initial notice of acceleration. The borrowers moved for summary judgment, claiming that the statute of limitations barred the foreclosure action. The state court granted summary judgment and voided the lender’s lien. The lender appealed. While the appeal was pending, the lender’s mortgage servicer sent its preservation contractor to secure and winterize the home. In turn, the borrowers filed numerous counterclaims related to the contractor’s entry onto the property and joined the third-party mortgage servicer and contractor to that suit as well. On remand in the state court, the court reversed its grant of summary judgment in favor of the borrowers and instead granted summary judgment in favor of the lender. The borrower appealed the state court judgment. While the state court matter was ongoing, the lender also filed another lawsuit in federal court, alleging that the borrowers breached the initial settlement by falsely asserting ownership of the property, denying the validity of the lender’s lien by filing a release of lien in the county public records, and proceeding with vexatious litigation. The federal district court granted summary judgment in favor of the lender, holding that the borrowers had breached the settlement agreement by challenging the second foreclosure notice and authorizing judicial foreclosure of the lien. In the state lawsuit, which had abated pending the federal ruling, the lender then moved for summary judgment on res judicata grounds and alternatively on the ground of release. The state court granted the lender’s motion, dismissing all of the borrowers’ claims with prejudice, and the lender then dismissed its remaining claims against the borrowers. The borrowers appealed the final state judgment.
In Riley v. Bank of N.Y. Mellon, No. 09-23-00085-CV, 2025 WL 919925, 2025 Tex. App. LEXIS 2044 (Tex. App.—Beaumont Mar. 27, 2025) (opinion not yet released for publication), the state court of appeals reversed and remanded in part the borrowers’ counterclaims and third-party claims. The court held that the borrowers’ claims for breach of contract and negligent misrepresentation were barred by res judicata and affirmed summary judgment on those claims. The court ruled that the issues on appeal regarding the lender’s claims were moot following the dismissal of the foreclosure claim. The substantive issues in the final summary judgment concerned both the release from the settlement agreement and res judicata defenses, which the lender raised against the borrowers’ counterclaim. The release, as presented, did not explicitly release future claims, requiring the court to resolve the ambiguity. The court ruled that the language “released matters” and “all past and present claims” did not apply to future claims, but only those existing at the time the parties signed the release. Finally, the court addressed whether the counterclaims, which stemmed from the release, could be barred through res judicata—the second defense raised by the lender. The court analyzed the elements of res judicata as set forth by the Fifth Circuit: “(1) the parties are identical or in privity; (2) the judgment in the prior action was rendered by a court of competent jurisdiction; (3) the prior action was concluded by a final judgment on the merits; and (4) the same claim or cause of action was involved in both actions.” Test Masters Educ. Servs. v. Singh, 428 F.3d 559, 571 (5th Cir. 2005). The borrowers challenged the fourth element. Applying the Federal Rules of Civil Procedure, the court determined the fourth element had not been met because the state and federal actions shared no common nucleus of operative fact. That was because the federal court determined that the deed of trust and settlement agreement formed two separate transactions. Therefore, the case in federal court could not preclude the claims in the state proceeding, except for the breach of contract and negligent misrepresentation claims, both of which concerned only the settlement agreement and were therefore compulsory counterclaims that the borrowers had failed to raise in the federal suit. The court reversed and remanded the other counterclaims.
By Andrew Fielden [email protected]
Edited By Taylor O’Brien [email protected]
Edited By Kristin Meurer [email protected]
Edited By Hayden Mariott [email protected]