throbber
Case 4:16-cv-00256-ALM-CAN Document 69 Filed 08/03/17 Page 1 of 15 PageID #: 1295
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`United States District Court
`EASTERN DISTRICT OF TEXAS
`SHERMAN DIVISION
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`SIMON CHO, HAE CHO
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`v.
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`WELLS FARGO BANK, N.A.
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`Civil Action No. 4:16-CV-256
`(Judge Mazzant/Judge Nowak)
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`MEMORANDUM ADOPTING REPORT AND
`RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE
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`Came on for consideration the report of the United States Magistrate Judge in this action,
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`this matter having been heretofore referred to the Magistrate Judge pursuant to 28 U.S.C. § 636.
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`On June 14, 2017, the report of the Magistrate Judge (Dkt. #66) was entered containing proposed
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`findings of fact and recommendations that Defendant’s Motion for Summary Judgment (Dkt. #46)
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`be granted in part and denied in part and Defendant’s Motion for Partial Summary Judgment
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`(Dkt. #47) be denied. The Magistrate Judge recommended that Plaintiffs’ claims for reformation
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`and declaratory judgment be dismissed. Having received the report of the Magistrate Judge
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`(Dkt. #66), having considered each of Defendant’s timely filed objections (Dkt. #67), Plaintiffs’
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`response thereto (Dkt. #68), and having conducted a de novo review, the Court is of the opinion
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`that the findings and conclusions of the Magistrate Judge are correct, and the Court hereby adopts
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`the Magistrate Judge’s report (Dkt. #66) as the findings and conclusions of the Court.
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`BACKGROUND
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`The underlying facts and legal claims are set out in further detail by the Magistrate Judge
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`and need not be repeated here in their entirety (see Dkt. #66). Accordingly, the Court sets forth
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`herein only those facts pertinent to Defendant’s objections.
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`In September 2011, Plaintiffs applied for a home equity loan. Hae Cho signed a “Special
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`Durable Power of Attorney for Real Estate Transactions” appointing her husband, Simon Cho, as
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`Case 4:16-cv-00256-ALM-CAN Document 69 Filed 08/03/17 Page 2 of 15 PageID #: 1296
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`her Power of Attorney (“POA”). The POA strictly limited Simon Cho’s authority to acting “on
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`behalf of Hae Cho to sell the [P]roperty and perform acts associated with the sale of the
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`[P]roperty.” The POA authorized Simon Cho to “[c]ontract to sell the Property for any price on
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`any terms,” “[c]onvey the Property,” “[e]xecute and deliver any legal instruments relating to the
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`sale and conveyance of the Property,” and “[a]ccept notes, deeds of trust, and other legal
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`instruments” on Hae Cho’s behalf. The POA does not reference refinancing or encumbering the
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`Property, or using it as security for a loan. On November 1, 2011, Simon Cho, solely on behalf of
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`Hae Cho through the POA, executed a Texas Home Equity Note in the principal amount of
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`$197,600.00 payable to Wells Fargo (“Note”). Simon Cho did not sign the Note on his own behalf.
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`As security for the Note, Simon Cho, individually and on behalf of Hae Cho as her power of
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`attorney, executed a Texas Home Equity Security Instrument dated November 1, 2011 (“Security
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`Instrument” or “Deed of Trust”), which granted a security interest in the Property.
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`Of the loan proceeds, $138,392.24 were used to pay off debts against the Property,
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`including the first loan secured by the Property and serviced by IndyMac Federal Bank, FSB in
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`the amount of $113,560.75; the home equity loan held and serviced by Capital One in the amount
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`of $19,422.61; and real estate taxes owed to Collin County for 2011 in the amount of $5,408.88.
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`The remainder was paid to Plaintiffs. Hae Cho was not present at the real estate closing.
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`On April 16, 2015, Plaintiffs brought suit in the 429th Judicial District Court of Collin
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`County, Texas seeking a declaration that the Loan violated the Texas Constitution. Specifically,
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`Plaintiffs’ state court pleading alleged causes of action for quiet title, statutory and common law
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`fraud, and reformation of the Deed of Trust and sought: (1) a judgment declaring that the Note
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`violated Article XVI Section 50(a)(6)(A) of the Texas Constitution, declaring all principle and
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`interest of the loan forfeited as provided by Article XVI Section 50(a)(6)(Q)(xi) of the Texas
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`Constitution, and ordering Defendant to disgorge any amount already paid under the Note; (2) an
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`order requiring Defendant to remove its lien on the Property and refrain from attempting any
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`further legal action to collect on the Note; (3) a damage award for common law fraud; (4) a damage
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`award for statutory fraud under Section 27.01 of the Texas Business and Commerce Code; and
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`(5) an order reforming the Deed of Trust to remove Simon Cho as a party and signatory to
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`appropriately reflect the underlying Note. In support of their fraud and reformation claims,
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`Plaintiffs allege Charles Park, while acting in the course of his employment for Defendant Wells
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`Fargo, represented to Plaintiff Simon Cho that Simon Cho was not an owner of the Property, and
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`the Property was owned solely by Hae Cho.
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`Defendant’s original answer, in response to the state court petition, raised affirmative
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`defenses, including the statute of limitations and the doctrine of unclean hands. Moreover, while
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`the case was still pending in state court, Defendant filed a counterclaim on March 3, 2016,
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`requesting a judgment of judicial foreclosure, an order of equitable subrogation, and a judgment
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`on its alleged equitable lien. Defendant removed the case to federal court on April 14, 2016 on
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`the grounds of diversity jurisdiction. Subsequent to removal, on September 27, 2016, Plaintiffs
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`filed an Amended Complaint. Plaintiffs’ Amended Complaint seeks an order removing any cloud
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`on the title to their residential property, damages for fraudulent misrepresentations allegedly made
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`by Defendant during loan discussions, damages for breach of a note provided by Defendant and
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`secured by a deed of trust on the Property, and reformation of the deed of trust to remove Simon
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`Cho as a party and signatory. In support of Plaintiffs’ fraud claim, the Amended Complaint asserts
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`additional allegations related to Charles Park, including that approximately a month before the
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`loan closing, Charles Park represented to Plaintiff Simon Cho that Simon Cho was not required to
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`be a borrower on the Loan, Hae Cho could be the only borrower, and the Home Equity Loan could
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`Case 4:16-cv-00256-ALM-CAN Document 69 Filed 08/03/17 Page 4 of 15 PageID #: 1298
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`be closed without Hae Cho’s knowledge. Plaintiffs further claim Charles Park failed to inform
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`Hae Cho that the loan was a home equity loan and intentionally concealed that fact from her.
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`
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`Defendant moved for summary judgment and/or partial summary judgment on each of
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`Plaintiffs’ claims. The Magistrate Judge entered a report and recommendation on June 14, 2017,
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`recommending Defendant’s Motion for Summary Judgment be granted in part and denied in part
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`(dismissing Plaintiff’s claims for reformation and declaratory judgment) and Defendant’s Motion
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`for Partial Summary Judgment be denied. Subsequently, on June 22, 2017, Defendant filed its
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`objections to the Magistrate Judge’s report and recommendation. Plaintiffs filed their Response
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`on July 6, 2017.
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`ANALYSIS
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`A party who files timely written objections to a magistrate judge’s report and
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`recommendation is entitled to a de novo review of those findings or recommendations to which
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`the party specifically objects. 28 U.S.C. § 636(b)(1)(C); Fed. R. Civ. P. 72(b)(2)-(3). The
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`Magistrate Judge made the following findings and conclusions in the report and recommendation:
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`(1) the POA signed by Hae Cho did not authorize Simon Cho to sign the Note and/or Deed of Trust
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`to the Property in favor of Defendant on Hae Cho’s behalf; (2) Plaintiffs’ additional fraud
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`allegations were not barred by limitation when they related back to the original allegations (and a
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`fact issue exists as to Plaintiffs’ fraud claims); (3) Plaintiffs’ reformation claim should be
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`dismissed because Simon Cho signed the Deed of Trust consistent with his intent that such would
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`encumber the Property as security for the home equity loan; (4) Plaintiffs’ declaratory judgment
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`claim should be dismissed because Plaintiffs could not obtain a judgment that Defendant violated
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`section 50(a)(6) of the Texas Constitution or that Plaintiffs are entitled to forfeiture remedies under
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`section 50(a)(6)(Q)(xi) for any such violation; (5) summary judgment is inappropriate for
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`Defendant’s equitable subrogation counterclaim because Defendant may have perpetrated fraud
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`and the balance of the equities is unclear; and (6) summary judgment is inappropriate for
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`Defendant’s judicial foreclosure counterclaim (after concluding Defendant is not entitled to entry
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`of an equitable subrogation lien on the current record). Defendant objects to the Magistrate Judge’s
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`findings that (1) Simon Cho lacked authority through the POA to sign the Loan documents;
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`(2) Plaintiffs’ fraud claim was not barred by limitation or that Plaintiffs can demonstrate reliance
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`despite their conduct and the Loan documents; (3) Defendant’s counterclaim for an equitable
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`subrogation lien be denied when this conclusion “would allow Plaintiffs to profit from their
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`misconduct”; and (4) Defendant’s counterclaim for judicial foreclosure “for the same reasons
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`[Defendant] should have been granted dispositive relief on its equitable subrogation claim.” The
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`Court notes neither party objects to the Magistrate Judge’s finding that Plaintiff’s claims for
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`reformation and declaratory judgment should be dismissed. As such, the Court adopts these
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`findings and proceeds to evaluate those objections related to the POA’s authority, Plaintiffs’ fraud
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`claim, and Defendant’s equitable subrogation and judicial foreclosure counterclaims.
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`Objection 1: Authority Given to Simon Cho in POA
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`
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`Defendant first objects to the Magistrate Judge’s finding that the POA authorized Simon
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`Cho to sell the Property but not to encumber it as security for a loan on the grounds that if Simon
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`Cho had the authority under the POA to sell or convey the Property and to accept notes and security
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`instruments, then a necessary corollary to those powers is to mortgage the Property. Plaintiffs
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`argue to the contrary that the plain language of the POA does not permit Simon Cho to encumber
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`the Property.
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`Texas courts construe a power of attorney as a whole in order to ascertain the parties’
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`intentions and rights. In re Estate of Miller, 446 S.W.3d 445, 455 (Tex. App.—Tyler 2014, no
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`Case 4:16-cv-00256-ALM-CAN Document 69 Filed 08/03/17 Page 6 of 15 PageID #: 1300
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`pet.). In determining the limits of an agent’s authority, the meaning of general words in the power
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`of attorney are restricted by the context in which they are used. Gouldy v. Metcalf, 12 S.W. 830,
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`831 (1889); In re Estate of Miller, 446 S.W.3d at 455. Further, the authority granted by a power
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`of attorney is strictly construed, so as to exclude the exercise of any power that is not warranted
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`either by the actual terms used or as a necessary means of executing the authority with effect.
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`Gouldy, 12 S.W. at 831; In re Estate of Miller, 446 S.W.3d at 455; Wise v. Mitchell, No. 05-15-
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`00610-CV, 2016 WL 3398447, at *8 (Tex. App.—Dallas June 20, 2016), reh’g overruled (Aug.
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`1, 2016), review denied (Dec. 9, 2016).
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`The language in the POA at issue authorized Simon Cho to sign a contract to “sell the
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`Property for any price on any terms,” sign and deliver legal documents for “the sale and
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`conveyance of the Property,” and “convey” the Property. While the POA authorized Simon Cho
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`to “[a]ccept notes, deeds of trust, and other legal instruments” on Hae Cho’s behalf, Defendant
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`cites no authority in support of its assertion that such language necessitates a finding that the POA
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`authorized Simon Cho to mortgage the Property. Further, Defendant offers no argument and/or
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`authority in conflict with the Magistrate Judge’s analysis of Gray v. Powell, wherein a Texas
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`appellate court found that the power “to sell and convey” in a power of attorney did not authorize
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`the attorney-in-fact to mortgage the property. 282 S.W. 631, 632 (Tex. Civ. App.—El Paso 1926,
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`writ ref’d). Considering context and applying a strict interpretation of the POA, as the Court must,
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`the Court finds the phrase “[a]ccept notes, deeds of trust, and other legal instruments” must be read
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`in conjunction with the term “sale” and references completing any real estate sale by accepting
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`payment obligations from the buyer, such that the POA does not contemplate the power to
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`mortgage. Defendant’s first objection is overruled.
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`Objection 2: Fraud Claim
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`
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`Defendant next objects to the Magistrate Judge’s finding that Plaintiffs’ fraud claim is not
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`barred by limitations and that Plaintiffs can show reliance and damages. Specifically, Defendant
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`argues (A) the alleged misrepresentations on which Plaintiffs’ fraud claims are based in their
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`Amended Complaint are “nowhere close to the one that formed the basis of Plaintiffs’ original
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`claims; and (B) any alleged statement to Simon Cho that he could obtain a home equity loan
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`without his wife’s knowledge or consent constitutes a “red flag” indicating that reliance on such
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`representation is not justified and unwarranted.
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`A. Statute of Limitations
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`Defendant argues Defendant did not receive fair notice from Plaintiff’s Original Petition—
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`which alleged Charles Park made false representations to Simon Cho that the Property was owned
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`entirely by Hae Cho—that Plaintiffs would base their fraud cause of action on alleged statements
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`made by Charles Park a month prior to the closing of the Loan that (a) Simon Cho was not required
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`to be a borrower on the loan, (b) Hae Cho could be the only borrower, and (c) the loan could be
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`closed without Hae Cho’s knowing about it. While Plaintiffs’ fraud claims in their Original
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`Petition were timely raised, Defendants contend that the fraud claim in Plaintiffs’ Amended
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`Complaint cannot relate back. Plaintiffs argue the allegations in the Amended Complaint all relate
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`to a single transaction—the home equity loan that Defendant obtained without the written consent
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`of Hae Cho and because of misrepresentations made by Charles Park.
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`As applicable to this case, Rule 15(c)(1) of the Federal Rules of Civil Procedure states that
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`a pleading amendment relates back to the date of the original pleading if:
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`(A) the law that provides the applicable statute of limitations allows relation back;
`[or]
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`(B) the amendment asserts a claim or defense that arose out of the conduct,
`transaction, or occurrence set out—or attempted to be set out—in the original
`pleading.
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`Fed. R. Civ. P. 15(c)(1). Rule 15(c)(1)(A) requires this Court to look to Texas law, which provides
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`the statute of limitations for Plaintiffs’ fraud claim, when determining if new allegations relate
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`back to a former pleading. Under Texas law:
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`[i]f a filed pleading relates to a cause of action, cross action, counterclaim, or
`defense that is not subject to a plea of limitation when the pleading is filed, a
`subsequent amendment or supplement to the pleading that changes the facts or
`grounds of liability or defense is not subject to a plea of limitation unless the
`amendment or supplement is wholly based on a new, distinct, or different
`transaction or occurrence.
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`Tex. Civ. Prac. & Rem. Code § 16.068. Rule 15(c)(1)(B) of the federal rules essentially states the
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`same principle: If the newly alleged facts arise “out of the conduct, transaction, or occurrence set
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`out--or attempted to be set out--in the original pleading,” those new allegations relate back to the
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`original pleading for statute of limitations purposes. “The doctrine of relation back under Rule
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`15(c) is liberally applied, . . . especially if no disadvantage will accrue to the opposing party.”
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`Woods Expl. & Producing Co. v. Aluminum Co. of Am., 438 F.2d 1286, 1299 (5th Cir. 1971).
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`Whether the Court applies the federal rule or § 16.068, the Court finds that the relation-
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`back doctrine applies. As an initial matter, the Court notes that it previously found that the relation-
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`back doctrine applies to the instant case at the motion to dismiss stage. Cho v. Wells Fargo Bank,
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`N.A., No. 4:16-CV-256, 2017 WL 989303, at *5 (E.D. Tex. Feb. 17, 2017), report and
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`recommendation adopted. Simon Cho v. Wells Fargo Bank, N.A., 2017 WL 978851 (E.D. Tex.
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`Mar. 14, 2017).1 To reiterate, Plaintiffs’ allegation in the state court Complaint—that Charles
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`1 The Magistrate Judge entered a report and recommendation finding that the relation-back doctrine applied to
`Plaintiffs’ common law fraud claim, such that it should not be dismissed as barred by limitation (Dkt. #63 at 10).
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`Park misrepresented to Simon Cho both that he (Simon Cho) was not an owner of the Property and
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`that Hae Cho owned the Property in an effort to induce Simon to enter into the Loan—put
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`Defendant on notice that Plaintiffs were alleging fraud in relation to the Loan and the statements
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`of Charles Park. Plaintiffs’ Amended Complaint further expounds on this allegation of fraud by
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`alleging additional fraudulent statements at the time he made the statements contained within the
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`state court Complaint; additional allegations detailing how Defendant perpetrated fraud related to
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`inducing Simon to enter into the Loan do not necessarily bar Plaintiffs’ fraud claim. See Baker v.
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`Carter, No. 4:12-CV-478, 2013 WL 1196106, at *10 (E.D. Tex. Mar. 22, 2013) (finding new
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`factual allegations related to original complaint’s suggestion of fraud); Gray v. Upchurch, No.
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`5:05-CV-210, 2006 WL 3694604, at *3 (S.D. Miss. Dec. 13, 2006) (finding amendment of
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`pleading related back when the second amended complaint included additional allegations to
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`specifically explain how the fraud was allegedly perpetrated against the plaintiffs). To the extent
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`Defendant argues the relation-back doctrine applies only if the additional misrepresentations
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`alleged in Plaintiffs’ Amended Complaint relate to representations regarding the ownership of the
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`Property at closing, Defendant mistates the standard. Instead, both the federal and Texas rules
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`merely require the allegations in the Amended Complaint arise from the same transaction or
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`occurrence. Here, the factual bases for Plaintiffs’ fraud claim in Plaintiffs’ Original Complaint
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`and Amended Complaint each arise out of the same transaction—the home equity financing
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`extended by Wells Fargo on November 1, 2011. Accordingly, the Court finds Defendant was
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`sufficiently on notice of the claim.
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`Defendant did not object to the Magistrate Judge’s finding that the relation-back doctrine should apply; after a de novo
`review despite Defendant’s failure to object, the Court adopted the Magistrate Judge’s finding that the relation-back
`doctrine should apply (Dkt. #65).
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`B. Disposition on the Merits
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`Defendant argues Plaintiffs cannot show they actually and justifiably relied on the
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`representations to their detriment or that they suffered any fraud damages. Plaintiffs argue a fact
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`issue exists on these points in the summary judgment record.
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`An element of a fraud claim is the plaintiff’s actual and justifiable reliance on a
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`misrepresentation to his/her detriment. See, e.g., FDIC v. Patel, 46 F.3d 482, 486-87 (5th Cir.
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`1995); Wuertz v. Nationwide Life Ins. Co., No. 01-07-00272-CV, 2009 WL 1331860, at *4 (Tex.
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`App.—Houston [1st Dist.] May 14, 2009, no pet.); DRC Parts & Accessories, L.L.C. v. VM Motori,
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`S.P.A., 112 S.W.3d 854, 858 (Tex. App.—Houston [14th Dist.] 2003, pet. denied). A “party to an
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`arm’s length transaction must exercise ordinary care and reasonable diligence for the protection of
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`his own interests, and a failure to do so is not excused by mere confidence in the honesty and
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`integrity of the other party.” DRC Parts, 112 S.W.3d at 858; Wuertz, 2009 WL 1331860, at *4.
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`A person may not justifiably rely on a misrepresentation if there are “red flags” indicating such
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`reliance is unwarranted. Lewis v. Bank of Am. NA, 343 F.3d 540, 546 (5th Cir. 2003) (quoting In
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`re Mercer, 246 F.3d 391, 418 (5th Cir. 2001)). “It is well-established that ‘[t]he recipient of a
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`fraudulent misrepresentation is not justified in relying upon its truth if he knows that it is false or
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`its falsity is obvious to him.’” Bartolowits v. Wells Fargo Bank, N.A., No. 3:13-CV-4666-D, 2016
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`WL 1436430, at *6 (N.D. Tex. Apr. 11, 2016) (citing Nat’l Prop. Holdings, L.P. v. Westergren,
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`453 S.W.3d 419, 424 (Tex. 2015)).
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`Defendant cites Lewis as authority in support of its argument that the instant
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`misrepresentations are “red flags.” In Lewis, the Fifth Circuit found a loan officer’s alleged
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`statement that the bank could shelter Lewis from taxes and early withdrawal penalties when
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`moving money from a benefits plan to non-tax deferred CDs constituted a “red flag.” Lewis, 343
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`F.3d at 545-47. The Fifth Circuit found that Lewis could not have justifiably relied on the loan
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`officer’s statements because the record was devoid of evidence that Lewis perceived the loan
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`officer to be an expert in tax law or investment planning, subsequent communications sent to Lewis
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`by the bank made no reference of sheltering Lewis from the tax consequences of the transaction,
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`Lewis had a background in business and familiarity with retirement accounts, and Lewis had
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`access to professional accountants. Id. at 547. Lewis is factually inapposite; here, Defendant
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`points to no evidence in the summary judgment record that Charles Park made a statement outside
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`of his expertise or that Simon Cho had relevant experience sufficient to view Park’s alleged
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`statements as a “red flag” warranting further investigation. Rather, Defendant cites that Simon
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`Cho needed a POA to sign the Loan documents in support of its position that Plaintiffs cannot
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`prove reliance on any representation that the home equity loan could be closed without Hae Cho’s
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`knowledge. This evidence merely challenges the veracity of Plaintiffs’ evidence that they relied
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`on Defendant’s alleged misrepresentations, which creates a fact issue. Choosing to credit only the
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`evidence cited by Defendant and discarding the evidence cited by Plaintiff would require the Court
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`to improperly weigh the evidence and resolve disputed issues in favor of the moving party.
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`Heinsohn v. Carabin & Shaw, P.C., No. 15-50300, 2016 WL 4011160, at *13 (5th Cir. July 26,
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`2016). Doing so would be tantamount to making a credibility determination, and—at the summary
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`judgment stage—a court “may make no credibility determinations.” Id. at *13.
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`Defendant also argues that Plaintiffs failed to show they suffered any damages as a result
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`of any alleged misrepresentations. Defendants argue, without any support, that Plaintiffs cannot
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`establish damages because Plaintiffs received $197,600 from Defendant when Plaintiffs acquired
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`the Loan, and whether Plaintiffs are at risk of losing their home because it is encumbered by a debt
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`they cannot afford to pay is irrelevant. Plaintiffs’ argue Defendant’s objection does not challenge
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`whether Plaintiffs suffered damage in the form of lost equity in their home, but rather Defendants
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`should receive a set-off for any amount of the Loan disbursed to Plaintiffs. The Court was not
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`directed to any authority, and found none, in support of Defendant’s argument. Without support,
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`the Court finds this argument unavailing. Defendant’s second objection is overruled.
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`Objection 3: Equitable Subrogation Counterclaim
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`Defendant objects to the Magistrate Judge’s finding that Defendant is not entitled to
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`summary judgment on its counterclaim for equitable subrogation. Specifically, Defendant argues
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`the Magistrate Judge erred when the finding was primarily grounded on the “Report’s erroneous
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`findings as to the authority of Simon Cho under the POA and as to Plaintiffs’ fraud claim.”
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`“Equitable subrogation ‘is a legal fiction’ whereby an obligation, extinguished by a
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`payment made by a third person, is treated as still subsisting for the benefit of this third person, so
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`that by means of it one creditor is substituted to the rights, remedies, and securities of another.”
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`Bank of Am. v. Babu, 340 S.W.3d 917, 925 (Tex. App.—Dallas 2011, no pet.); Premium Plastics
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`v. Seattle Specialty Ins. Servs., Inc., No. CIV.A. H-10-3960, 2012 WL 1029528, at *4 (S.D. Tex.
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`Mar. 26, 2012), aff’d, 544 F. App’x 287 (5th Cir. 2013). The general purpose of equitable
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`subrogation is to prevent unjust enrichment of the debtor. First Nat’l Bank of Kerrville v. O’Dell,
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`856 S.W.2d 410, 415 (Tex. 1993). There are two key elements to equitable subrogation: (1) the
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`person whose debt was paid was primarily liable on the debt, and (2) the claimant paid the debt
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`involuntarily. Murray v. Cadle Co., 257 S.W.3d 291, 299 (Tex. App.—Dallas 2008, pet. denied).
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`The burden is on the party claiming equitable subrogation to establish he is entitled to it. Id. The
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`trial court must balance the equities in view of the totality of the circumstances to determine
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`whether a party is entitled to equitable subrogation. Babu, 340 S.W.3d at 926.
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`Defendant’s argument rests on the notion that Texas courts liberally apply equitable
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`subrogation, and that the invalidation of a contractual lien does not preclude equitable subrogation.
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`See Murray, 257 S.W.3d at 299; LaSalle Bank Nat’l Ass’n v. White, 246 S.W.3d 616, 620 (Tex.
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`2007). While this is true, equitable subrogation—like all equitable remedies—is sometimes denied
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`to litigants who come to court with unclean hands. See Lazy M Ranch, Ltd. v. TXI Operations, LP,
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`978 S.W.2d 678, 683 (Tex. App.—Austin 1998, pet. denied) (“Under the doctrine of unclean
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`hands, a court may refuse to grant equitable relief to a plaintiff who has been guilty of unlawful or
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`inequitable conduct regarding the issue in dispute.”); Schenck v. Halliday Real Estate, Inc., 803
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`S.W.2d 361, 366 (Tex. App.—Tyler 1990, no writ) (“It is well settled that a party seeking equity
`
`cannot come into a court with unclean hands.”). To defeat Defendant’s claim, Plaintiffs would
`
`have to prove Defendant engaged in fraudulent conduct—exactly the type of conduct that has led
`
`Texas courts to deny a remedy lying in equity, including legal subrogation. In re Canion, 196 F.3d
`
`579, 586 nn.25-26 (5th Cir. 1999); see Rotge v. Dunlap, 91 S.W.2d 905, 908 (Tex. Civ. App.—El
`
`Paso 1936, writ dis’d by agr.) (“The findings show fraud on [the part of the party seeking legal
`
`subrogation]. He does not come into court with clean hands, and is therefore not in a position to
`
`invoke the equitable principles upon which legal subrogation rests.”); Christian v. Manning, 59
`
`S.W.2d 234, 237 (Tex. App.—Fort Worth 1933), modified, 124 Tex. 517, 81 S.W.2d 54 (1935)
`
`(applying to legal subrogation the maxim that “one who seeks equity must come into court with
`
`clean hands”); Bell v. Franklin, 230 S.W. 181, 185 (Tex. Civ. App.—San Antonio 1921, no writ)
`
`(same). Plaintiff’s fraud claim will proceed to trial; should a jury find that Defendant’s employee
`
`engaged in fraudulent conduct and thus has unclean hands, equitable subrogation—a remedy lying
`
`in equity—might be unavailable. Accordingly, Defendant’s counterclaim for equitable
`
`
`
`13
`
`

`

`Case 4:16-cv-00256-ALM-CAN Document 69 Filed 08/03/17 Page 14 of 15 PageID #: 1308
`
`subrogation is inappropriate for summary judgment. Defendant’s third objection is overruled. See
`
`Rotge, 91 S.W.2d at 908.
`
`Objection 4: Judicial Foreclosure Counterclaim
`
`Defendant objects to the Magistrate Judge’s finding that summary judgment is
`
`inappropriate as to Defendant’s counterclaim for judicial foreclosure on the basis that the
`
`Magistrate Judge erroneously found that Defendant was not entitled to entry of an equitable
`
`subrogation lien on the current record. Because the Court adopted the Magistrate Judge’s finding
`
`as to Defendant’s equitable subrogation counterclaim, the Court likewise finds that Defendant is
`
`not entitled to an order permitting a judicial foreclosure at this time. Defendant’s fourth objection
`
`is overruled. The Court adopts each of the findings of the Magistrate Judge.
`
`CONCLUSION
`
`Having received the report of the United States Magistrate Judge, having considered each
`
`of Defendant’s timely filed objections (Dkt. #67), Plaintiffs’ response thereto (Dkt. #68), and
`
`having conducted a de novo review, the Court is of the opinion that the findings and conclusions
`
`of the Magistrate Judge are correct and adopts the Magistrate Judge’s report (Dkt. #66) as the
`
`findings and conclusions of the Court.
`
`It is, therefore, ORDERED that Defendant’s Motion for Summary Judgment (Dkt. #46) is
`
`GRANTED IN PART AND DENIED IN PART, and Plaintiffs’ claims for reformation and
`
`declaratory judgment against Defendant Wells Fargo Bank, N.A. are DISMISSED with prejudice.
`
`The other claims shall proceed to trial.
`
`14
`
`

`

`Case 4:16-cv-00256-ALM-CAN Document 69 Filed 08/03/17 Page 15 of 15 PageID #: 1309
`
`It is further ORDERED that Defendant’s Motion for Partial Summary Judgment is
`
`DENIED.
`
`IT IS SO ORDERED.
`
`15
`
`

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