Lozano v. Ocwen Federal Bank, FSB

United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT June 14, 2007

Charles R. Fulbruge III
Clerk
No. 05-20960

JOHN R. LOZANO AND SUSIE LOZANO,

Plaintiffs-Appellants,

VERSUS

OCWEN FEDERAL BANK, FSB,

Defendant-Appellee.

Appeal from the United States District Court
For the Southern District of Texas

Before REAVLEY, DeMOSS, and BENAVIDES, Circuit Judges.

DeMOSS, Circuit Judge:

John and Susie Lozano appeal the district court’s order

granting summary judgment in favor of Ocwen Federal Bank on the

Lozanos’ claims related to Ocwen’s foreclosure of their home in

Houston, Texas.1 The Lozanos sought a declaratory judgment to void

the foreclosure and remove the cloud of title on the property. They

1
In 2005 Ocwen Federal Bank transferred its mortgage servicing
business to Ocwen Loan Servicing, LLC, which has succeeded to the
rights and obligations of the former entity. This opinion will refer to the
Defendant-Appellee simply as “Ocwen.”
1
also sought damages for alleged violations of Texas and federal law

governing foreclosures. The district court granted Ocwen’s motion

for summary judgment and purported to dismiss the entire case. For

the reasons stated below, we affirm in part and reverse in part.

I.

On April 15, 1980, the Lozanos executed a promissory note for

$76,500, payable to University Savings over a thirty year term at

12% interest, for the purchase of a home. They also executed a deed

of trust granting University Savings a lien on their homestead. The

Lozanos submitted cancelled checks showing that they thereafter

made two unscheduled payments to University Savings on the note: a

$12,000 payment on September 30, 1980, and an $11,000 payment on

June 1, 1981. The parties agree that University Savings never

credited these payments to the balance owed on the note.

University Savings subsequently transferred the note and deed

of trust to Federal Home Loan Bank of Dallas in 1989. Between 1989

and 1997, when Ocwen purchased the note and deed of trust, they

changed hands several times. According to the district court, the

note and deed of trust were subject to the following transfers:

first, on May 9, 1990 the note was assigned from Federal Home Loan

Bank of Dallas to the Resolution Trust Company (“RTC”) as receiver

for University Federal Savings Association; second, on November 15,

1990 the note was assigned from RTC as receiver for University

Savings Association to RTC as receiver for University Federal

Savings Association; and third, in an undated assignment, the note

2
was assigned from RTC as receiver for University Federal Savings

Association to Ryland Mortgage Company. Following the transfer to

Ryland there is a gap in the chain of title. Ocwen purchased the

note, by that time apparently in default, from Credit Suisse First

Boston Mortgage Capital LLC on May 31, 1997. On December 17, 1997,

the deed of trust was also transferred to Ocwen. Thereafter, Ocwen

sold the note to LaSalle National Bank in 1998, but has remained

the servicer of the note.2

The Lozanos filed for bankruptcy in 1996, 1998, and 2000.

During these bankruptcies the Lozanos asserted, and the bankruptcy

court accepted, that the Lozanos owed a substantial sum on the note

at issue. Additionally, the Lozanos entered into two forbearance

2
It is undisputed that Ocwen sold the note to LaSalle Bank in
1998, but remains the “servicer” of the note. The Texas Property Code
defines a mortgage servicer as “the last person to whom a mortgagor
has been instructed by the current mortgagee to send payments for the
debt secured by a security instrument.” TEX. PROP. CODE § 51.0001(3).
To the extent the Lozanos argue that Ocwen lacked the power to
foreclose because it was only the servicer, and not the owner of the
note, we find that argument unpersuasive. Courts have recognized that
loan servicers, via agreement with the note’s owner, can obtain the
ability to foreclose. See, e.g., Pilcher v. Direct Equity Lending, 189 F.
Supp. 2d 1198, 1205 (D. Kan. 2002). And the language of the Texas
Property Code itself indicates that mortgage servicers can have the
power to foreclose. See TEX. PROP. CODE § 51.002(d) (requiring the
mortgage servicer to give notice before foreclosing). Although Ocwen
does not own the note, the Lozanos have presented no evidence that
Ocwen did not retain the power to foreclose via agreement with
LaSalle.
3
agreements with Ocwen, one in 1999 and one in 2001, where they

acknowledged default on the note and agreed to modify the note’s

terms in exchange for Ocwen’s promise not to foreclose at that

time. As part of the 2001 forbearance agreement, the Lozanos also

represented that they had no defenses or setoffs with respect to

their obligation to pay the note.

In 2002, the Lozanos again defaulted on the note and Ocwen

foreclosed and purchased the property at a foreclosure sale on

March 3, 2003. The Lozanos responded by bringing suit in Texas

state court seeking declaratory relief and damages based on their

1980 and 1981 prepayments and Ocwen’s alleged violations of notice

and verification requirements under state and federal law. Ocwen

removed to federal court on the basis of diversity jurisdiction.

After fairly extensive discovery, the parties filed cross

motions for summary judgment. The main thrust of the Lozanos’

argument was that the foreclosure was void because, considering the

prepayments they made in 1980 and 1981, they had paid the note in

full by 1990. Ocwen argued it was entitled to summary judgment

based on, inter alia, the affirmative defenses of judicial estoppel

(based on assertions made in the prior bankruptcy proceedings) and

“estoppel” (based on the forbearance agreements). The district

court granted Ocwen’s motion3 and denied the Lozanos’ motions for

3
The district court found Ocwen was entitled to summary
judgment on several independent grounds: judicial estoppel,
promissory estoppel, and statute of limitations.
4
summary judgment and for leave to amend their complaint, and it

entered a take nothing judgment against the Lozanos. The Lozanos

timely appealed.

II.

We review the district court’s grant of summary judgment de

novo, applying the same standard as the district court. Ingalls

Shipbuilding v. Fed. Ins. Co., 410 F.3d 214, 219 (5th Cir. 2005).

Summary judgment is appropriate if “the pleadings, depositions,

answers to interrogatories, and admissions on file, together with

the affidavits, if any, show that there is no genuine issue of

material fact and the moving party is entitled to judgment as a

matter of law.” FED. R. CIV. P. 56(c). Applying this standard, we

view the evidence in the light most favorable to the non-movant.

Abarca v. Metro. Transit Auth., 404 F.3d 938, 940 (5th Cir. 2005).

The Lozanos brought claims for (A) a declaratory judgment to

set aside the deed executed on the foreclosure sale, and (B)

damages for alleged violations of the Texas Deceptive Trade

Practices Act (DTPA), TEX. BUS. & COM. CODE § 17.46(b)(12) (Vernon

2006), and the Fair Debt Collection Practices Act (FDCPA), 15

U.S.C. § 1692.4 The district court purported to dispose of each

claim in its Opinion and Order on Summary Judgment.

4
The Lozanos also alleged a violation of the FDCPA in support of
their declaratory judgment claim, and we discuss both of the FDCPA
claims in part-two of our declaratory judgment discussion.
5
A. Declaratory Judgment

The Lozanos sought a declaratory judgment to set aside the

foreclosure on three grounds: (1) they had previously paid the

entire the balance of the note, (2) Ocwen allegedly failed to

comply with the Texas Property Code’s foreclosure notice

provisions, and (3) Ocwen allegedly violated the FDCPA.

1. Pre-payment of the note

The district court held that judicial estoppel, promissory

estoppel, and the statute of limitations barred the Lozanos from

asserting that, by virtue of their prepayments to University

Savings in 1980 and 1981, they had fully paid the note by 1990.

Because we affirm on quasi estoppel grounds, we need not decide

whether judicial estoppel or the statute of limitations also bar

this claim.

In the 1999 and 2001 forbearance agreements, the Lozanos made

several promises in exchange for Ocwen’s promise not to foreclose

based on the pending delinquencies. The 1999 agreement provided

that Ocwen would modify the note to reflect an unpaid balance of

$90,148, and the Lozanos promised to pay that balance at 12%

interest over twenty-seven years by monthly payments of $938.85. In

the 2001 agreement, the Lozanos acknowledged another default and

affirmed their obligation to pay the balance of the note, which

they stated was $85,295.40. In that agreement, the Lozanos further

conceded that “by their execution and delivery hereof, that they

have no defense, setoff or counterclaim with respect to the default

6
or their obligation under the Note and Mortgage.”

Citing the Lozanos’ representations and promises in the

forbearance agreements, the district court held the doctrine of

promissory estoppel prevented the Lozanos from asserting that they

fully paid the mortgage in 1990. The court agreed with Ocwen that

(1) the Lozanos made representations, (2) the Lozanos could foresee

that those representations would be relied upon by Ocwen, and (3)

Ocwen substantially relied upon the representations to its

detriment by not foreclosing on the property. See “Moore” Burger,

Inc. v. Phillips Petroleum Co., 492 S.W.2d 934, 937 (Tex. 1972)

(discussing the elements of promissory estoppel).

The Lozanos argue on appeal that promissory estoppel is

inapplicable here because the forbearance agreements constitute

valid contracts, and Texas courts have held that promissory

estoppel may only be applied when no valid contract exists. See

Doctors Hosp. 1997, L.P. v. Sambuca Houston, L.P., 154 S.W.3d 634,

636-37 (Tex. App.--Houston [14th Dist.] 2004, pet. abated)

(collecting cases). We agree the district court may have erred in

styling this ground for relief as promissory estoppel. Nonetheless,

the Lozanos made representations in a binding contract, and now

seek to take a position inconsistent with those representations.

Prudence and caselaw dictate that this cannot be allowed.

Estoppel by contract, also known as “quasi estoppel,” forbids

a party to a contract from taking a position inconsistent with the

7
terms of the contract when that position prejudices another.

Johnson v. Structured Asset Servs., LLC, 148 S.W.3d 711, 721-22

(Tex. App.--Dallas 2004, no pet.). “The doctrine applies when it

would be unconscionable to allow a person to maintain a position

inconsistent with one to which . . . he accepted a benefit.” Lopez

v. Munoz, Hockema & Reed, L.L.P., 22 S.W.3d 857, 864 (Tex. 2000).

In other words, the doctrine forbids a party from accepting the

benefits of a transaction and then subsequently taking an

inconsistent position to avoid corresponding obligations or

effects. Atkinson Gas Co. v. Albrecht, 878 S.W.2d 236, 240 (Tex.

App.--Corpus Christi 1994, writ denied).

In the 1999 forbearance agreement, the Lozanos agreed to pay

more than $90,000 over the following twenty-seven years. In the

2001 forbearance agreement, they reaffirmed their obligations under

the note and acknowledged that they had no defenses to their

obligation to pay. But now they claim they do have a defense: that

they have previously paid the note in full in 1990. That claim is

patently inconsistent with the representations the Lozanos made in

the forbearance agreements. Further, Ocwen, who agreed not to

foreclose in 1999 and 2001 despite the Lozanos’ default, would be

prejudiced by the Lozanos’ new position.5 In sum, it would be

5
The facts required for a finding of quasi estoppel, namely the
promises contained in the forbearance agreements, are present in the
record and are beyond dispute.
8
unconscionable to allow the Lozanos to accept the benefit of the

forbearance agreements and then allow them to take an inconsistent

position to avoid its obligations. See id.

The Lozanos argue that Ocwen did not raise the quasi estoppel

argument until appeal and thus waived it. However, Ocwen pleaded

“estoppel” generally as an affirmative defense and moved for

summary judgment on “estoppel” grounds. This Court has referred to

quasi estoppel as simply “estoppel.” See, e.g., Bott v. J.F. Shea

Co., 299 F.3d 508, 512 (5th Cir. 2002) (“[W]e [have] noted that a

precise description of the core basis of estoppel is that one who

retains benefits under a transaction cannot avoid its obligations

and is estopped to take an inconsistent position.” (internal

quotation marks omitted) (emphasis added)). This position is in

accord with the view of Texas courts, whose interpretation of the

law of “estoppel” we apply. See Eckland Consultants, Inc. v. Ryder,

Stilwell Inc., 176 S.W.3d 80, 88 n.5 (Tex. App.--Houston [1st

Dist.] 2004, no pet.) (“A general plea of estoppel is sufficient to

raise the affirmative defense of quasi-estoppel.”).

Under the facts of this case, and given the similarity of the

doctrines of promissory estoppel and quasi estoppel, we find that

Ocwen’s styling of its argument as “estoppel” instead of “quasi

estoppel” does not prohibit our consideration of that argument

here. In reaching that conclusion we are influenced by the fact

that Ocwen pled and consistently argued that the Lozanos were

9
estopped from asserting that the note was fully paid in 1990 when

they acknowledged and affirmed the debt in the forbearance

agreements in 1999 and 2001. Further, Ocwen submitted the

forbearance agreements into evidence in support of this argument.

As a result, the Lozanos have been on notice of this argument since

Ocwen first raised it in their answer as an affirmative defense.6

Lastly, we acknowledge that the district court, after

discussion of the applicable facts, found the elements for

promissory estoppel satisfied. “We may affirm a summary judgment on

any ground supported by the record, even if it is different from

that relied on by the district court.” Holtzclaw v. DSC Commc’ns

Corp., 255 F.3d 254, 258 (5th Cir. 2001). The record indicates the

Lozanos took a position in the forbearance agreements and accepted

the benefits of that position and now seek to take an inconsistent

position that would prejudice Ocwen. Thus, the record fully

supports the application of quasi estoppel, see Lopez, 22 S.W.3d at

864, and we may affirm on that basis. See Holtzclaw, 255 F.3d at

258.

Because we agree with the district court that the Lozanos are

6
We note that the Texas Supreme Court has gone even further
and applied estoppel principles even when not argued at all. See
“Moore” Burger, Inc. v. Phillips Petroleum, Co., 492 S.W.2d 934, 936
(Tex. 1972) (considering whether estoppel applied when a party did not
mention the doctrine but pleaded facts that gave rise to that legal
concept).
10
estopped from taking a position contrary to the position they took

in the forbearance agreements, we affirm the dismissal of the

prepayment claim.

2. Alleged violations of the Texas Property Code

In addition to arguing the foreclosure was void because they

had already paid the mortgage in full, the Lozanos also sought to

void the foreclosure on the basis that Ocwen violated the notice

requirements in the Texas Property Code. See TEX. PROP. CODE ANN. §

51.002(d) (Vernon 2006) (requiring mortgage servicers to serve

debtors in default with written notice of default and give the

debtor at least twenty days to cure the default before

foreclosing); see also Mitchell v. Texas Commerce Bank-Irving, 680

S.W.2d 681, 682 (Tex. App.--Fort Worth 1984, writ ref’d n.r.e.)

(holding that failure to comply with section 51.002 invalidates the

foreclosure).

Ocwen did not move for summary judgment on this claim, and

although the district court granted summary judgment and

purportedly dismissed the entire case, it did not address this

claim in its Opinion and Order on Summary Judgment. Generally, “a

district court may not grant summary judgment sua sponte on grounds

not requested by the moving party.” Baker v. Metro. Life Ins. Co.,

364 F.3d 624, 632 (5th Cir. 2004) (quoting John Deere Co., v. Am.

Nat’l Bank, 809 F.2d 1190, 1192 (5th Cir. 1987)). An exception

exists when the district court gives a party ten days notice; in

11
those situations a court may grant summary judgment sua sponte on

grounds not urged in a pending motion. See Judwin Properties, Inc.,

v. U.S. Fire Ins. Co., 973 F.2d 432, 436-37 (5th Cir. 1992).

Here the record does not indicate the district court gave any

notice to the Lozanos before dismissing this claim sua sponte.

Consequently, the Lozanos were not on notice to present arguments

on this claim in their response to Ocwen’s summary judgment motion,

and the court did not have the benefit of the parties’ arguments.

Ocwen argues that this claim is dependent on the Lozanos’

prepayments claim; that is, if we do not recognize the prepayments

this claim must fail as a matter of law. This argument is

unpersuasive. Section 51.002(d) contains a notice requirement that

may be violated even if the debt is valid. See TEX. PROP. CODE ANN.

§ 51.002(d). Further, the statute of limitations does not bar this

claim. It is undisputed the foreclosure occurred in March 2003 and

the Lozanos filed this suit two-months later in May 2003, well

within the allowed period. Consequently, we reverse and remand for

consideration of the Lozanos’ Texas Property Code claim.

3. Alleged violation of the Fair Debt Collection Practices Act

The third ground for a declaratory judgment was a claim under

the FDCPA, and the Lozanos also sought damages for the alleged

violation this statute. The FDCPA provides in pertinent part:

If the consumer notifies the debt collector in writing
within . . . [thirty days] that the debt, or any portion
thereof, is disputed, or that the consumer requests the
name and address of the original creditor, the debt

12
 collector shall cease collection of the debt, or any
disputed portion thereof, until the debt collector
obtains verification of the debt or a copy of a judgment,
or the name and address of the original creditor, and a
copy of such verification or judgment, or name and
address of the original creditor, is mailed to the
consumer by the debt collector.

15 U.S.C. § 1692g(b).

The Lozanos alleged that they timely requested proof of the

validity of the debt from Ocwen and that Ocwen failed to provide

that information before foreclosing. However, Ocwen did not mention

the FDCPA claim in its motion for summary judgment. The district

court dismissed the claim sua sponte finding that, to the extent

the Lozanos based this claim on their prepayments, it was barred.

Alternatively, the court found this claim was not accurately pled

to allow the court to analyze it.7 In particular, the court noted

the Lozanos did not allege that Ocwen was a “debt collector” as

required by § 1692g(b).

The Lozanos argue that the court erred in dismissing this

claim sua sponte because the court did not give prior notice. See

Baker, 364 F.3d at 632; see also Washington v. Resolution Trust

Corp., 68 F.3d 935, 939 (5th Cir. 1995) (allowing a district court

to grant summary judgment sua sponte, but only after giving ten

days notice). For the same reasons we reversed the sua sponte

7
The court also dismissed this claim on statute of limitations
grounds. However, this claim is not barred by the applicable one-year
statute of limitations because it was filed within several months of the
alleged violation. See 15 U.S.C. § 1692k(d).
13
dismissal of the Texas Property Code claim, see supra Part

II(A)(2), we reverse the dismissal of the FDCPA claim.

Even if we characterized this action as a sua sponte dismissal

for failure to state a claim under Rule 12(b)(6), as Ocwen argues,

we would reach the same result. We have held that a district court

is “authorized to consider the sufficiency of the complaint on its

own initiative.” Guthrie v. Tifco Indus., 941 F.2d 374, 379 (5th

Cir. 1991). And if the court finds the complaint fails to state a

claim, it may dismiss “‘as long as the procedure employed is

fair.’” Bazrowx v. Scott, 136 F.3d 1053, 1054 (5th Cir. 1998)

(quoting 5A WRIGHT & MILLER, FEDERAL PRACTICE AND PROCEDURE § 1357, at 301

(2d ed. 1990)). We have recently held that a district court’s

failure to give notice prior to sua sponte dismissal for failure to

state a claim was unfair under the circumstances. See Carroll v.

Fort James Corp., 470 F.3d 1171, 1177 (5th Cir. 2006). In Carroll,

we observed that other circuits have held “district courts should

not dismiss claims sua sponte without prior notice and opportunity

to respond.” Id. (citing Fredyma v. AT&T Network Sys., Inc., 935

F.2d 368 (1st Cir. 1991); Thomas v. Scully, 943 F.2d 259 (2d Cir.

1991); Smith v. Boyd, 945 F.2d 1041 (8th Cir. 1991)). While

stopping short of adopting a bright line rule, Carroll noted that

our prior case law has “suggested that fairness in this context

requires both notice of the court’s intention and an opportunity to

respond.” Id. (internal quotation marks omitted).

14
 We do not always require notice prior to sua sponte dismissal

for failure to state a claim, as long as the plaintiff has alleged

his “best case.” See Bazrowx, 136 F.3d at 1054 (citing Jacquez v.

Procunier, 801 F.2d 789, 792-93 (5th Cir. 1986)). In Jacquez we

held, in the context of a § 1983 action, that “[a]t some point a

court must decide that a plaintiff has had fair opportunity to make

his case; if, after that time, a cause of action has not been

established, the court should finally dismiss the suit.” Jacquez,

801 F.2d at 792. The Court in Jacquez dismissed a claim after the

plaintiff filed a deficient complaint and repeatedly declared the

adequacy of that complaint in a lengthy response to defendant’s

motion to dismiss. Id. Thus, Jacquez is readily distinguishable

because there the plaintiff repeatedly represented that his

complaint adequately stated the cause of action and refused to file

a supplemental complaint even in the face of a motion to dismiss.

See id.

In the case at bar, the Lozanos had no notice that their

complaint was deficient. Notice would have allowed the Lozanos an

opportunity to seek leave to amend their complaint to allege that

cause of action properly. Based on our de novo review, we hold that

the district court erred in dismissing the FDCPA claim sua sponte

without notice. See Carroll, 470 F.3d at 1177.

B. Texas Deceptive Trade Practices Act

In addition to seeking a declaratory judgment on the three

15
grounds discussed above, the Lozanos sought damages based on an

alleged violation of the DTPA, TEX. BUS. & COM. CODE § 17.46. That

section prohibits “[f]alse, misleading, or deceptive acts or

practices in the conduct of trade or commerce.” Id. The Lozanos

argue that Ocwen violated section 17.46(b)(12), which defines

false, misleading, or deceptive acts or practices as including:

“represent[ations] that an agreement confers or involves rights,

remedies, or obligations which it does not have or involve, or

which are prohibited by law.” Id. § 17.46(b)(12).

The district court’s Opinion and Order on Summary Judgment

dismissed this claim because the court found it barred by the

statute of limitations. See id. § 17.565. The court did not mention

the claim again in the opinion and it appears the statute of

limitations was the only ground relied upon by the district court

to dismiss.

The Lozanos argue they filed the lawsuit, which included the

DTPA claim, less than three months after the foreclosure.8 They

argue the DTPA claim is based on Owcen’s alleged misrepresentations

during the foreclosure proceedings in March 2003. The Lozanos filed

suit in May 2003, within the two-year statute of limitations

applicable to a DTPA claim. See id. Thus, dismissing the DTPA claim

8
We note that the Lozanos DTPA claim was not mentioned as a
ground for summary judgment in Ocwen’s motion. However, the
Lozanos have not argued on appeal that the district court erred by
considering this claim sua sponte.
16
on statute of limitations grounds was error and we remand.

C. Denial of Lozanos’ motion for leave to amend complaint.

Lastly, the Lozanos appeal the district court’s denial of

their motion to amend their complaint to allege fraud. The Lozanos’

original complaint did not allege fraud, but the district court

allowed the Lozanos to supplement it to allege a fraud claim. On

September 6, 2004, the court again permitted the Lozanos to amend

their complaint, this time to add the FDCPA claim. However, absent

from this amended complaint was any mention of the fraud claim.

On January 21, 2005, the Lozanos sought leave to amend their

complaint to re-allege the fraud claim. The district court denied

the motion, finding, among other things, that the Lozanos had been

aware of the factual underpinnings of the fraud claim for some

time, and that they had not been diligent in pursuing the claim.

“Whether leave to amend should be granted is entrusted to the

sound discretion of the district court, and that court's ruling is

reversible only for an abuse of discretion.” Wimm v. Jack Eckerd

Corp., 3 F.3d 137, 139 (5th Cir. 1993). Although Rule 15(a) states

that leave to amend “shall be freely given when justice so

requires,” the district court may consider that the moving party

failed to take advantage of earlier opportunities to amend. FED. R.

CIV. P. 15(a); Quintanilla v. Texas Television Inc., 139 F.3d 494,

499 (5th Cir. 1998); see also Smith v. EMC Corp., 393 F.3d 590, 595

(5th Cir. 2004) (citing “undue delay” as a factor in determining

17
whether leave to amend should be granted).

Given the procedural background discussed above, and based on

our deferential review, we cannot say the district court abused its

discretion in denying the Lozanos’ motion for leave to amend.

III.

For the foregoing reasons we affirm the district court’s order

denying the Lozanos leave to amend their complaint. Further, we

affirm the court’s order of September 29, 2005, to the extent it

dismisses the Lozanos’ prepayment claim, and we vacate that order

to the extent it dismisses the Lozanos’ Texas Property Code claim,

their FDCPA claim, and their DTPA claim. We remand for

consideration of the Texas Property Code Claim, the FDCPA claim,

and the DTPA claim.

AFFIRMED IN PART, VACATED IN PART, AND REMANDED.

18