The remedy of foreclosure is available in the event of a borrower’s monetary default (non-payment) or technical default (e.g., failure to pay taxes or keep the security property insured). In order to determine if there has been a default, the loan documents—the note, the deed of trust, the loan agreement, and so forth—should be carefully examined. Notice and opportunity to cure requirements contained in these documents and applicable statutes must be strictly followed if a foreclosure is to be valid.
Foreclosures may be judicial (ordered by a court following a judgment in a lawsuit) or non-judicial (on the courthouse steps). These two remedies cannot be pursued simultaneously. Kaspar v. Keller, 466 S.W.2d 326, 328 (Tex.App.—Waco 1971, writ ref’d n.r.e.). The effect of foreclosure is to cut off and eliminate junior liens, including mechanic’s liens, but not tax obligations.
Most foreclosures in Texas are non-judicial. These are held on the first Tuesday of each month between 10 a.m. and 4 p.m. at a designated spot, usually at or near the courthouse of the county where the property is located.
This article focuses on residential foreclosures but many comments apply to the commercial context as well.
Law Applicable to Foreclosures
Applicable law is found in Chapter 51 of the Property Code and Chapter 22 of the Business & Commerce Code. Article 16 of the Texas Constitution in tandem with rules 735-736 of the Rules of Civil Procedure apply to foreclosure of home equity loans. The statute of limitations applicable to foreclosures is contained in Civil Practice & Remedies Code Chapter 16.
EVALUATING A FORECLOSURE CASE
Reviewing the Lender’s File
The first step for a lender’s attorney in a foreclosure case is to conduct a thorough review of the loan file. It does no good to proceed with acceleration if there are defects in the note, deed of trust, or some other irregularity—and doing so may actually be harmful to the lender’s interests.
The central question is whether or not a valid and enforceable lien exists, but the inquiry does not stop there. A review would include (at least) the following actions:
(1) list the identity and capacity of all parties involved, including guarantors;
(2) examine the note to see (a) if it is signed by the borrower and otherwise valid, (b) if it is unmodified, (c) if the lender is the owner and holder of the note and there is (preferably) an original note in the lender’s possession, and (d) if there exists an unwaived and uncured monetary or technical default under a specific note provision;
(3) review the course of conduct and communications between the parties to determine (a) if a modification of the loan documents has occurred as a result, (b) if the default has been waived, or (c) if the lender is otherwise estopped from asserting the default as a basis for foreclosure;
(4) read the deed of trust in order to (a) see what specific demand, notice, and opportunity to cure requirements it contains and if these vary from statutory minimums, (b) make sure that the instrument was recorded, and (c) identify the trustee and determine whether or not a substitute trustee will have to be appointed;
(5) identify the security property and determine (a) its status and condition (including whether or not it is occupied), (b) if it is available to be inspected, (c) if action must be taken to protect, secure, or maintain it, and (d) if a new appraisal would be useful;
(6) determine the exact nature of the default (monetary or technical) and list the specific provisions of the loan documents that have been breached;
(7) review any notices that have been given to see if they comply with the deed of trust and applicable law—in other words, has legally-valid notice of default and an opportunity to cure already been given—or must that process now be commenced?
(8) establish whether or not there are tenant leases, a pending bankruptcy, environmental contamination, or other circumstances that affect the lender’s rights and remedies;
(9) as to casualty insurance, determine (a) if insurance is and will remain in effect during the pendency of the foreclosure, and (b) if a loss has occurred and a claim needs to be filed with the insurer;
(10) obtain an updated title report (a) to ensure that ownership has not changed, (b) to confirm the priority of the lender’s lien, and (c) to determine if any new liens (an IRS lien, for instance) have been recorded;
(11) if defects or issues exist (a) in the loan documents or (b) in the prior negotiation, demand, and notice process, establish whether or not these defects and issues can be cured before commencing foreclosure.
Weaknesses or omissions in the foregoing list could mean trouble for the lender. Before moving forward a lender’s attorney should be confident that there is a valid and enforceable lien supported by solid documents contained in a complete loan file.
Statute of Limitations
Part of evaluating a foreclosure case on the lender side is to make sure that action occurs within applicable statutes of limitation.
As to notes, non-negotiable term notes are governed by a four-year statute of limitations (Civ. Prac. & Rem. Code Sec. 16.004(a)(3)) while negotiable term notes allow for a statute of limitations of six years (Bus. & Com. Code Sec. 3.118(a)).
As to foreclosures, Section 16.035(d) of the Civil Practice & Remedies Code states that a foreclosure is void if not commenced within four years of the date the cause of action accrues. “As a general rule, the accrual date is the maturity date of the note, rather than the earlier date of the borrower’s default. . . . But there is an exception to that rule: If the real property lien contains an optional acceleration clause . . . then the cause of action accrues when the lender exercises its option to accelerate the maturity date of the note.” Swoboda v. Ocwen Loan Servicing, LLC, 579 S.W.3d 628 (Tex.App.—Houston [14th Dist.] 2019, no pet.).
What does it mean to say that a cause of action accrues? “A statute of limitations restricts the period within which a party can assert a right, and the limitations period begins to run when the claim accrues. . . . Generally, a claim accrues when facts come into existence that authorize a claimant to seek a judicial remedy, when a wrongful act causes some legal injury, or whenever one person may sue another. . . . One exception to the general rule of accrual is the discovery rule. The discovery rule is limited to those rare circumstances where the nature of the injury incurred is inherently undiscoverable and the evidence of injury is objectively verifiable. . . . An injury is not inherently undiscoverable when it could be discovered through the exercise of reasonable diligence. . . . The discovery rule defers accrual of a claim until the injured party discovered, or in the exercise of reasonable diligence should have discovered, the nature of the party’s injury and the likelihood that the injury was caused by the wrongful acts of another. . . . The rule expressly requires a plaintiff to use reasonable diligence to investigate the nature of the injury and its likely cause once the plaintiff is apprised of facts that would make a reasonably diligent person seek information. . . . It is the discovery of the injury and its general cause, not discovery of the exact cause in fact, that starts the running of the limitations period.” Latouche v. Perry Homes, LLC, 606 S.W.3d 878 (Tex.App.—Houston [14th Dist.] 2020, pet. denied).
The discovery rule can therefore be summarized as follows: the cause of action accrues, and the statute of limitations begins to run, when the claimant knows or reasonably should have known about the condition or breach.
“A secured [mortgage] lender must bring suit to foreclose on a real property lien not later than four years after the day the cause of action accrues (Civil Prac. & Rem. Code Sec. 16.035(a)). As a general rule, the accrual date is the maturity date of the note, rather than the date of a borrower’s default. If, as [in this case], the security instrument contains an optional acceleration clause, the cause of action accrues when the lender exercises its option to accelerate the maturity date of the note.” Citibank N.A., Trustee v. Pechua, 624 S.W.3d 633 (Tex.App.—Houston [14th Dist.] 2021, pet. denied).
Note, however, that a two-year statute of limitations is the minimum upon which the parties may agree in cases involving real property: “A stipulation, contract, or agreement that establishes a limitations period that is shorter than two years is void in this state” (Civ. Prac. & Rem. Code Sec. 16.070).
FORECLOSURE NOTICES BY THE LENDER
Notices to a Residential Borrower
Foreclosure notices must be given to a residential borrower in accordance with Property Code Sections 51.002 et seq. and the deed of trust. Both apply. The deed of trust should be reviewed to make sure that it does not contain special requirements in excess of the statutory minimums.
The content of foreclosure notices must be correct in order to avoid a wrongful foreclosure suit. Clients often protest when their lawyer advises re-noticing the debtor—“But I’ve already sent them an email telling them they are in default!” That is not good enough. Strict statutory compliance is required. “To lawfully exercise an option to accelerate upon default provided by a note or deed of trust, the lender must give the borrower both notice of intent to accelerate and notice of acceleration [by certified mail] and in the proper sequence. . . both notices must be clear and unequivocal.” Karam v. Brown, 407 S.W.3d 464 (Tex.App.—El Paso 2013, no pet.).
Accordingly, two certified-mail notices to the borrower are required, the first being a Notice of Default and Intent to Accelerate which gives notice of the default and affords the borrower an opportunity to cure (at least 20 days for a homestead, although if the deed of trust is on the FNMA form, 30 days must be given). Many lawyers consider it the best practice to routinely give a 30-day notice, in order to be safe, even if the deed of trust or applicable statute allows for a lesser minimum period.
After the cure period has expired, a second notice—a Notice of Acceleration and Posting for Foreclosure—must be sent to a residential borrower at least 21 days prior to the foreclosure date.
A separate Notice of Trustee’s Sale should be enclosed in the same envelope. This is a copy of a notice that must be separately filed with the county clerk and publicly posted, usually in the lobby of the county courthouse.
If there is going to be a change in the trustee who was named in the deed of trust, it is also necessary to prepare an Appointment of Substitute Trustee. A copy of this document should be included in the second notice to the borrower (in the same envelope with the notice of acceleration and posting) and should also be filed with the county clerk.
Address for Notices
Notices should be addressed to the last known address of the borrower contained in the lender’s records (Prop. Code Sec. 51.002(e)) but it is wise for the lender to double-check this to avoid later allegations that notice was defective. If notices are properly mailed according to the statute, it does not matter if the debtor actually receives them. The Property Code notice requirement is a time-bounded mailing requirement not a requirement of actual receipt by the borrower.
Attention should also be paid to electronic communications. In Bauder v. Alegria, 480 S.W.3d 92 (Tex.App.—Houston [14th Dist.] 2015, no pet.), the court found that text messages from the borrower were reasonable notice of the borrower’s change of address. In spite of this ruling, it would be imprudent for an attorney or investor to rely on text messaging for such a legally important purpose.
It is prudent to send legal notices by both first-class and certified mail—and not just in the area of foreclosure. Why? The reason has to do with Texas’ mailbox rule, i.e., that a notice properly deposited in the U.S. mail is presumed to be delivered. “Common sense . . . dictates that regular mail is presumed delivered and certified mail enjoys no [such] presumption unless the receipt is returned bearing an appropriate notation.” McCray v. Hoag, 372 S.W.3d 237, 243 (Tex.App.—Dallas 2012, no pet. h.). The best practice is not to scrimp on notices or the plausible addresses to which they are sent. A careful lender will send notices to all likely addresses where the borrower may be found. Duplicate notices do no legal harm (they consume only paper and postage) and may be useful if the foreclosure is later challenged.
Who is not entitled to statutory notice? Junior lienholders; an owner who is not also a borrower under the note being foreclosed; and guarantors of the debt. Bishop v. National Loan Investors, L.P., 915 S.W.2d 241 (Tex.App.—Fort Worth 1995, writ denied). Having said this, it would seem remiss not to notify a guarantor, especially if the guarantor has the apparent means to pay what is owed (This is worth investigating). When legal notices are required, it is usually the better practice to give extra time and extra notice to all potential parties.
Posting the Property for Foreclosure
Posting the property for foreclosure is an additional required step beyond the initial notice. A Notice of Trustee’s Sale or Notice of Substitute Trustee’s Sale (as the case may be) must be filed with the county clerk and publicly posted at a designated location at least 21 calendar days prior to sale. This notice provides information about the debt, the legal description of the property, and sets a three-hour period during which the sale will be conducted.
Because a trustee’s power to sell the property is derived directly from the deed of trust and the statute (Prop. Code Sec. 51.002), the notice and posting requirements of both must be strictly complied with in order for the foreclosure to be valid. Villa v. Villa, 664 S.W.3d 415, 417 (Tex.App—Eastland 2023, no pet.). This includes the requirement that written notice be served upon the borrower by certified mail at least 21 days before the date of sale. Actual notice in some other form does not substitute for this statutory requirement. Kaldis v. Aurora Loan Servs., 424 S.W.3d 729, 732 (Tex.App.—Houston [14th Dist.] 2014, no pet.).
In larger metropolitan areas there are also foreclosure listing services which publish a monthly list of properties that have been posted for foreclosure. These are not, however, official public notices.
Impact of the Fair Debt Collection Practices Act
Foreclosure notice and demand letters are attempts to collect a consumer debt. Accordingly, the federal Fair Debt Collection Practices Act (FDCPA, 15 U.S.C. 1962, et seq.) and its companion the Texas Debt Collection Act (Finance Code Chapter 392) both apply. A debt is defined by the FDCPA as “any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment” (15 U.S.C. Sec. 1692a(5)).
Failure to disclose details and provide verification of the debt when the borrower requests them in writing has serious penalties under both laws as do threats, coercion, or other heavy-handed collection practices.
Real estate attorneys sending foreclosure notices are acting as debt collectors under the FDCPA. Requirements for collection letters are found in 15 U.S.C. Sec. 1692(g) and are referred to as G notices. A proper G notice must advise the debtor of the amount of the debt; the name of the current creditor; the debtor’s right to dispute the debt, both verbally and in writing; and the debtor’s right to know the address of the original creditor. The person sending the notice must also disclose that he or she is a debt collector attempting to collect a debt and any information obtained may be used for that purpose.
In determining whether or not a collection letter is compliant, the “unsophisticated consumer standard [applies. This standard] protects those who are not exceptionally bright or blessed with intellect, those who are particularly gullible and credulous, and those who are quite naive and trusting.” Youngblood v. GC Servs., Ltd. P’ship, 186 F. Supp. 2d. 695 (W.D. Tex. 2002). Even so, it is unlikely that minor technical or procedural violations of the FDCPA will get one in trouble; some materiality including real injury to the debtor will likely be required to establish liability under the statute. Spokeo, Inc. v. Robins, 578 U.S. 330 (2016).
A core requirement of the FDCPA is that the borrower be given 30 days to make a written request to obtain verification of the debt, a requirement that can impact the foreclosure timeline. While the lender or its attorney may give notice of default, accelerate the debt, and even post for foreclosure in less time, the foreclosure sale itself should not be conducted until the 30-day debt-verification period has expired.
A trustee exercising the power of sale contained in a deed of trust is not considered to be a debt collector (Prop. Code Sec. 51.0075(b)).
IRS Liens: Notice to the IRS
The best practice is to do a title search in order to determine if there is an IRS tax lien (or any other recent lien). If an IRS lien is discovered, notice must be given to the IRS and/or the U.S. Attorney at least 25 days prior to the foreclosure sale not including the sale date (26 U.S.C. Sec. 7425(c)(1)). If this notice is not given, an IRS tax lien against the property will not be extinguished by the sale.
The IRS has 120 days following the sale to redeem the property although this seldom happens. The successful bidder on an IRS-liened property is therefore not entitled to breathe a complete sigh of relief until the 121st day after the foreclosure sale.
Reinstatement of the Note after Acceleration
Acceleration means that the terms of payment contained in the note no longer exist. After the note is accelerated, all that remains is the aggregate debt which is now immediately due. If a borrower is able to cure the default after acceleration but before the foreclosure sale, the best practice is to execute a reinstatement agreement—unless the terms of the debt have been changed (payments have been lowered or the term extended as an accommodation to the borrower) in which case a hybrid reinstatement/modification agreement or even a new note (a replacement note) is advisable.
What happens if a lender resumes accepting payments from the borrower without a formal reinstatement agreement? It may then be said that the lender has waived or abandoned the acceleration. “A noteholder that has accelerated the maturity date of a loan may unilaterally abandon that acceleration and return the note to its original terms.” Pitts v. Bank of New York Mellon Trust Company, 583 S.W.3d 258 (Tex.App.—Dallas 2018, no pet.).
Failing to execute a signed reinstatement agreement can be risky. If nothing else, it likely violates the statute of frauds which provides that modifications of a loan exceeding $50,000 requires a signed writing (Bus. & Com. Code Sec. 26.02(b)).
The lender also loses an opportunity to obtain a written stipulation from the borrower as to the exact amount of the remaining note balance. This can lead to payoff disputes later, especially if the lender’s foreclosure fees and expenses are rolled into the note.
It goes without saying that if debt negotiations result in a material note modification then failure to obtain a signed reinstatement/modification agreement is an engraved invitation to future litigation.
HOME EQUITY LOANS
Home equity loans are a different case. Article 16, Section 50(a)(6) of the Texas Constitution contains the requirements for home equity lending, i.e., the extension of credit secured by a lien on a borrower’s existing homestead. Although an expedited foreclosure process is available in the event of default, a home equity lien may be foreclosed only by means of a court order which provides a specific date for the sale to take place. Wells Fargo Bank, N.A. v. Robinson, 391 S.W.3d 590 (Tex.App.—Dallas 2012, no pet.).
Rules 735 and 736 of the Rules of Civil Procedure govern the process by which a lender may file a verified application in the local district court seeking foreclosure of a home equity loan. The proceeding is limited in scope. “The only issue to be determined in a Rule 736 proceeding is the right of [the lender] to obtain an order to proceed with foreclosure under the applicable law and the terms of the loan agreement, contract or lien sought to be foreclosed. [The borrower] may file a response to the [lender’s] application, but the response may not raise any independent claims for relief, and no discovery is permitted.” In re One West Bank, FSB, 430 S.W.3d 573 (Tex.App.—Corpus Christi 2014, pet. denied).
EXECUTORY CONTRACT FORECLOSURES
An executory transaction (as opposed to a transaction that is fully executed) leaves a material term unfulfilled—usually delivery of a deed granting title to the buyer. The classic executory contract is a contract for deed or land sales contract in which title is not delivered until indebtedness under the contract is paid in full.
Historically in Texas, buyers under contracts for deed were truly at a disadvantage. The property could be lost as a consequence of even a minor default. Since they did not have record title, buyers were evicted in justice court as ordinary tenants and all money previously paid to the seller was forfeited.
After reforms to the Property Code in 2005 this is no longer the case. If a buyer has paid more than 40% of the amount due or made 48 or more monthly payments, the equity-protection provisions of Section 5.066 apply, and the seller must provide the buyer with a 60-day notice of default and opportunity to cure (the 40/48 rule). If the default is not timely cured then a trustee may be appointed who can proceed with a non-judicial foreclosure.
Borrowers sometimes complain that they were engaged in ongoing negotiations with the lender to modify the existing loan in the weeks leading up to a foreclosure sale. While these discussions took place, the borrower held off from curing the default (or paying anything) even though the lender made no agreement to stop or delay the foreclosure process. The borrower is then shocked when the property is sold on schedule. Since such negotiations are usually conducted by phone without anything in writing, this does not form the basis for a wrongful foreclosure suit. A borrower has no right to rely on verbal discussions in order to avoid paying the debt.
Do lenders pursue this strategy intentionally so as to make it appear that they are willing to be reasonable when in fact it is in their interest to foreclose instead? In 2018, Wells Fargo—already in the midst of scandal as result of creating millions of fake accounts, assessing unfair mortgage fees, and charging customers for car insurance they did not request or need—admitted that it had wrongfully foreclosed upon hundreds of borrowers, claiming a “software error.”
If the parties agree to postpone a scheduled foreclosure then a forbearance agreement or stand-still agreement should be executed. Otherwise, there is nothing to prevent the lender from proceeding to a foreclosure sale as scheduled. An email exchange should never be relied upon for this purpose (or any serious legal purpose).
THE FORECLOSURE SALE
Buyer’s Due Diligence Prior to Bidding
An investor’s goal is to acquire instant equity by paying a fire-sale price for foreclosed property. Apparent equity can evaporate, however, if the property is loaded down with liens and unpaid taxes, so it is advisable to check title before bidding. Is the lien being foreclosed a second or third lien? If so, then the first lien (usually a purchase-money lien) will continue in force. First liens are king in Texas. They are not extinguished or affected by foreclosure of an inferior lien. Is there an IRS lien? An HOA lien? Improvement liens? Any of these can consume apparent equity. If an investor is unsure as to which liens will be wiped out in a foreclosure sale then copies of each lien document should be taken to a real estate attorney for review.
If more information is needed about the property itself, one can contact the trustee named in the notice of trustee’s sale. Trustees vary in their level of cooperation but are occasionally willing to provide additional information if they have it. They may possess a copy of an inspection report on the property that they are willing to share. It might even be possible to view the property if it is unoccupied.
The investor should also check the military status of the borrower since Property Code Section 51.015 prohibits non-judicial foreclosure of a dwelling owned by active duty military personnel or within nine months after active duty ends. Knowing violation of this law is a class A misdemeanor.
Buyer Concerns as to Condition and Valuation
When one buys at foreclosure it is entirely “as is” (Prop. Code Sec. 51.009). In residential foreclosures, a prospective buyer should be concerned about the full range of property condition issues including the foundation, if the property is flood-prone, and whether or not the roof and HVAC need work. Also, the past or continuing presence of hazardous substances can impose significant liability since both Texas and federal law provide for joint and several liability with all prior owners for cleanup costs. The Texas Commission on Environmental Quality (TCEQ) maintains a web site where the environmental history of an affected property can be researched.
In attempting to determine value, it can be helpful to obtain a comparative market analysis or broker price opinion (BPO) from a real estate broker.
The Foreclosure Sale
Foreclosure sales in the larger counties can seem chaotic, with many sales going on at once. There are two general types: sales by trustees (usually attorneys) for individual and institutional lenders and sales by the county sheriff for unpaid taxes. Sales are held at the location designated by the commissioners of the county where the property is located—often the courthouse steps or close by.
The sale is conducted by the named trustee unless a substitute trustee has been appointed and notice of the appointment has been filed with the county clerk (Prop. Code Sec. 51.0074(a)). As a practical matter, the foreclosing trustee is usually the attorney for the lender. However, in conducting the sale the trustee “must act with absolute impartiality and with fairness to all concerned.” First Fed. Sav. & Loan Assoc. of Dallas v. Sharp, 359 S.W.2d 902, 904 (Tex. 1962). Unfairness in the sale process can result in chilled bidding which is a defect.
There is no standard or required statutory script for a trustee to follow in auctioning property, although it is a good idea for a trustee to have one prepared. A trustee should request written instructions from the lender clearly directing that the sale be conducted and addressing any special circumstances that may arise.
Before the bidding begins, a trustee may set reasonable conditions for the sale and the bidding (Prop. Code Sec. 51.0075(a)). Sample terms might include: (1) the requirement for immediate payment by cash or cashier’s check with no additional time allowed (or perhaps granting 1 hour but no longer before bidding resumes); (2) cashier’s checks must be drawn on a reputable local institution and otherwise acceptable to the trustee; (3) prospective buyers must be willing to answer trustee questions regarding their legitimacy and ability to deliver payment before the trustee commits to accepting the bid; (4) establishing pre-set bidding increments; (5) identification information on the winning bidder must be supplied pursuant to Chapter 22 of the Business & Commerce Code; and (6) clerical matters such as a timeline for delivery of the foreclosure deed. So long as they are reasonable, any number of other conditions may be set by the trustee.
A trustee will then usually read the notice of sale, reciting that the note went into default, proper notice was given, the note was subsequently accelerated, the property was duly posted for foreclosure, and the property is now for sale to the highest bidder.
Bidding at the Sale
It is important that the bidding process be fair and orderly and any action that could be construed as chilling (discouraging) the bidding be avoided. Powel v. Stacy, 117 S.W.3d 70 (Tex.App.—Fort Worth 2003, no pet.). “Texas law recognizes that a [lender or trustee] is under a duty to avoid affirmatively deterring third-party bidding by acts or statements made before or during the foreclosure sale.” Other than that, a lender or trustee acting on behalf of the lender “is under no duty to take affirmative action beyond that required by statute or deed of trust to ensure a ‘fair’ sale.” For example, the trustee has no special duty to the borrower to obtain the highest possible price. Pentad Joint Venture vs. 1st Nat. Bank, 797 S.W.2d 92 (Tex. App.—Austin, 1990). A trustee does not even have a duty to provide information regarding the payoff amount of the underlying debt before the foreclosure sale. Sanders v. Shelton, 970 S.W.2d 721 (Tex.App.—Austin 1998, pet. denied).
Except for (1) compliance with statutory foreclosure requirements, (2) meeting conditions or requirements contained in the deed of trust, and (3) running a fair and orderly foreclosure sale with no chilled bidding, neither the lender nor the trustee owes any duties to the borrower at all.
As for the final sales price: so long as statutory requirements are met and there are no irregularities in the foreclosure process, the winning bid is presumed to constitute reasonably equivalent value for the property regardless of the amount. BFP v. Resolution Trust Corp., 114 S. Ct. 1757 (1994). The lender often bids the amount of the debt plus accrued fees and costs, so this bid can be anticipated.
If the sale generates proceeds in excess of the debt, the trustee must distribute the excess funds to other lienholders in order of priority and the remaining balance, if any, to the borrower (details below).
Chapter 22 of the Business & Commerce Code requires a winning bidder (other than the foreclosing lender or mortgage servicer) to supply the trustee with certain information pertaining to the buyer’s identity, including name, address, taxpayer number, and photo ID. Failure to supply such information may result in the trustee canceling the sale. Clearly this statute has implications for a purchaser at foreclosure whose goal is to remain anonymous.
The successful bidder should be prepared to make payment without delay or within such time as the trustee may allow. Seasoned bidders carry some cash plus an assortment of cashier’s checks in different amounts made payable to “Trustee.” If the high bidder is unable to complete the purchase according to conditions set by the trustee, the trustee will reopen the bidding and auction the property again. The successful bidder will, within a reasonable time, receive a trustee’s deed or substitute trustee’s deed that conveys the interest that was held by the borrower in the property—no more, no less.
The Trustee’s Deed
A trustee or substitute trustee must deliver a deed to the winning bidder within a reasonable time (Bus. & Com. Code Sec. 22.005(2)).
Property Code Section 51.009 states that the grantee of a trustee’s deed “acquires the foreclosed property ‘as is’ without any expressed or implied warranties, except as to warranties of title, and at the purchaser’s own risk; and is not a consumer.” The consumer part of that statement is meant to prevent any DTPA claims.
Recitals in a trustee’s deed (including recitals made in attached exhibits) “constitute prima facie evidence of the validity of the foreclosure sale, including the prerequisite of timely service of notice of sale on the debtor(s). . . . A foreclosure is to be reviewed with a presumption that all prerequisites to the sale have been performed and that provisions for waiver of notice are valid.” Bridge Bank v. McQueen, 804 S.W.2d 264 (Tex. App.—Houston [1st Dist.] 1991, no writ).
Length of the Foreclosure Process
Compared to other states, Texas has a streamlined non-judicial foreclosure process that is nearly as quick as an eviction. The minimum amount of time from the first notice to the day of foreclosure is 41 days, unless the deed of trust is a FNMA form, in which case the time is 51 days, although it is never wise to cut any legal deadline that close. Why risk a void sale or hand the borrower a potential wrongful foreclosure claim?
The advantage of foreclosure over eviction is that there are no effective defenses to the foreclosure process except for the borrower to block it with a temporary restraining order or file bankruptcy. For either option, the buyer needs money and probably an attorney.
AFTER THE FORECLOSURE SALE
Distribution of Proceeds
The trustee must distribute foreclosure sales proceeds as prescribed by the deed of trust subject to certain statutory minimum actions:
Prop. Code Sec. 51.0075(f). The trustee or substitute trustee shall disburse the proceeds of the [foreclosure] sale as provided by law.
Bus. & Com. Code Sec. 22.006. Sale Proceeds.
(a) The trustee or substitute trustee shall ensure that funds received at the sale are maintained in a separate account until distributed. The trustee or substitute trustee shall cause to be maintained a written record of deposits to and disbursements from the account.
(b) The trustee or substitute trustee shall make reasonable attempts to identify and locate the persons entitled to all or any part of the sale proceeds.
(c) In connection with the sale and related post-sale actions to identify persons with legal claims to sale proceeds, determine the priority of any claims, and distribute proceeds to pay claims, a trustee or substitute trustee may receive: (1) reasonable actual costs incurred, including costs for evidence of title; (2) a reasonable trustee’s or substitute trustee’s fee; and (3) reasonable trustee’s or substitute trustee’s attorney’s fees.
(d) A fee described by Subsection (c): (1) is considered earned at the time of the sale; (2) may be paid from sale proceeds in excess of the payoff of the lien being foreclosed; and (3) is conclusively presumed to be reasonable if the fee: (A) is not more than the lesser of 2.5 percent of the sale proceeds or $5,000, for a trustee’s or substitute trustee’s fee; or (B) is not more than 1.5 percent of the sale proceeds, for trustee’s or substitute trustee’s attorney’s fees incurred to identify persons with legal claims to sale proceeds and determine the priority of the claims.
If there are multiple competing candidates for receiving excess sales proceeds, a trustee has the option of paying the money into the court registry in order to avoid liability for choosing incorrectly (Bus. & Com. Code Sec. 22.006(f)). Any remaining excess goes to the borrower.
Properties with Multiple Liens
Properties may (and often do) have multiple liens against them. “A valid foreclosure on a senior lien (sometimes referred to as a ‘superior’ lien) extinguishes a junior lien (sometimes referred to as ‘inferior’ or ‘subordinate’) if there are not sufficient excess proceeds from the foreclosure sale to satisfy the junior lien. . . . In general, mechanic’s liens whose inception is subsequent to the date of a deed-of-trust lien will be subordinate to the deed-of-trust lien.” Trinity Drywall Systems, LLC v. TOKA General Contractors, Ltd., 416 S.W.3d 201 (Tex.App.—El Paso, 2013, no pet.).
Leases, including ground leases, are terminated by a foreclosure sale as well. Kimzey Wash, LLC v. LG Auto Laundry, LP, 418 S.W.3d 291 (Tex.App.—Dallas 2013, no pet.).
Rescission of a Non-Judicial Foreclosure Sale
Property Code Section 51.016 permits a non-judicial foreclosure sale to be rescinded by a lender, a trustee, or a substitute trustee within 15 days under certain circumstances: if the legal requirements of the sale were not met; if the borrower cured the default before the sale was conducted; if it turns out that a receivership or dependent probate administration was in effect; if a condition of sale set by the trustee was not complied with; or if the borrower filed bankruptcy and there was an automatic stay in effect when the sale took place.
Written notice of the rescission must be given to the buyer (who gets the money back) and each debtor (who must return any excess profits). Anyone interested in challenging the rescission has 30 days to do so.
REDEMPTION BY THE BORROWER
Post-Foreclosure Right of Redemption
There is no general right of redemption by a borrower after a Texas foreclosure. The right of redemption is limited to:
(1) Sale for unpaid taxes. After foreclosure for unpaid taxes, the former owner of homestead or agricultural property has a two-year right of redemption (Tax Code Sec. 34.21a). The investor is entitled to a redemption premium of 25% in the first year and 50% in the second year of the redemption period, plus recovery of certain costs that include property insurance and repairs or improvements required by code, ordinance, or a lease in effect on the date of sale. For other types of property (i.e., non-homestead), the redemption period is 180 days and the redemption premium is limited to 25%.
(2) HOA foreclosure of an assessment lien. Property Code Section 209.011 provides that a homeowner may redeem the property until no “later than the 180th day after the date the association mails written notice of the sale to the owner and the lienholder under Section 209.101.” A lienholder also has a right of redemption in these circumstances “before 90 days after the date the association mails written notice . . . and only if the lot owner has not previously redeemed.” These provisions are part of the Texas Residential Property Owners Protection Act designed to reign in the once arbitrary power of HOAs (Chapter 209 of the Property Code). Note that an HOA is not permitted to foreclose on a homeowner if its lien is solely for fines assessed by the association or attorney fees.
Even though redemption is statistically unlikely, a prudent real estate investor should be prepared to hold a foreclosed property and avoid making either substantial improvements or reselling it until after rights of redemption have expired.
Who may redeem?
The Tax Code states:
Tax Code Sec. 34.22. EVIDENCE OF TITLE TO REDEEM REAL PROPERTY. (a) A person asserting ownership of real property sold for taxes is entitled to redeem the property if he had title to the property or he was in possession of the property in person or by tenant either at the time suit to foreclose the tax lien on the property was instituted or at the time the property was sold. A defect in the chain of title to the property does not defeat an offer to redeem. (b) A person who establishes title to real property that is superior to the title of one who has previously redeemed the property is entitled to redeem the property during the redemption period by paying the amounts provided by law to the person who previously redeemed the property.
Accordingly, a former owner is entitled to redeem if he owned the property either at the time the suit was filed or at the time the tax sale took place.
“It has long been the practice in Texas to liberally construe redemption statutes in favor of redemption. [However, for] redemption under Section. 209.011 the owners . . . bear the burden at trial of proving a right to redemption.” The burden is carried when the homeowner demonstrates substantial compliance with the statute. Laguan v. Lloyd, 493 S.W.3d 720, 723-24 (Tex.App.—Houston [1st Dist.] 2016, no pet.).
FORECLOSURE LITIGATION BY THE BORROWER
Can a foreclosure sale be stopped?
It is a myth that lawyers can wave a wand and stop a foreclosure. Foreclosure can be stopped, but the only sure way to do so (other than filing bankruptcy) is to file a lawsuit against the lender and successfully persuade a judge to issue a temporary restraining order prior to the foreclosure sale.
Clients will sometimes tell their attorneys that they don’t want to sue the lender, they just want to get a restraining order to stop the foreclosure. The reply must be Sorry, it doesn’t work that way, you can’t split the two. A restraining order is an ancillary form of relief, meaning that it arises from an underlying suit. In other words, there must be an actual lawsuit in place to provide a basis for requesting a TRO. Fortunately, the suit and application for the TRO can be filed simultaneously and a hearing obtained usually within a day or two.
Accordingly, a borrower’s lawyer must first file a lawsuit that contains some credible basis for relief and then make a credible argument before a judge in order to get a TRO. Having said that, if such a credible basis exists, then obtaining a TRO should not be difficult, although it will be only short-term in its effect—up to 14 days. It is much more of a challenge to convert the TRO into a temporary injunction after the TRO expires. The posting of a bond is also required.
After the sale occurs, the remedy that remains—a suit for wrongful foreclosure—is different. Relief may be limited to a money judgment if the property was sold at foreclosure to a third party who had no notice of the borrower’s claims (a bona fide purchaser or BFP). If a BFP is in the mix, the possibility that the property itself can be recovered by the borrower is near zero.
Clients will often report that they have been engaged in reinstatement negotiations with the lender, usually consisting of phone calls and messages, and ask if that is sufficient to avoid a scheduled foreclosure. The answer is a resounding no. Unless there is payment of the arrearage and a signed reinstatement agreement, the foreclosure will almost certainly go forward even if the client was talking settlement with the lender hours before. Reinstatement agreements must be in writing and signed by both parties.
Last-Minute Borrower Bankruptcies
Foreclosures can be stopped or rendered void by last-minute bankruptcy filings. Since this happens frequently, it is prudent for a potential buyer to check with the bankruptcy clerk’s office on the morning of the sale to see if the borrower has filed bankruptcy at the last minute. Why do this? To avoid wasted time and effort. Also, it can be cumbersome and inconvenient to get money back from a trustee on a voided sale.
The bankruptcy clerk’s office opens at 9 a.m. and foreclosure bidding commences at 10 a.m. This hour-long gap can be used for a quick check of the bankruptcy records.
Borrower Suits for Wrongful Foreclosure
Wrongful foreclosure is not technically a proper cause of action under Texas law, at least not standing alone without elaboration, so the borrower must allege certain specific facts or defects in order to state a viable cause of action in state court. A suit for wrongful foreclosure may be maintained if there are grounds for alleging that the loan documents (e.g., the note and deed of trust) were defective in some way (e.g., if the foreclosure notices were done or timed incorrectly or if there was some irregularity in the sale itself); the property was sold for a grossly inadequate sales price; and (3) a causal connection can be shown between the defect and the grossly inadequate sales price. Martins v. BAC Home Loans Servicing, L.P., 722 F.3d 249, 253 (5th Cir. 2013), Sauceda v. GMAC Mortg. Corp., 268 S.W.3d 135, 139 (Tex.App.—Corpus Christi 2008, no pet.).
“For a party to recover damages for wrongful foreclosure and breach of the deed of trust, he must show that he has suffered a loss or material injury as the result of an irregularity in the foreclosure sale. In general, this is shown where the actions of the lender or note holder have caused the property to be sold for a grossly inadequate price.” Wells Fargo Bank v. Robinson, 391 S.W.3d 590, 594 (Tex.App.—Dallas 2012, no pet.).
If a wrongful foreclosure suit is being considered, it should be filed quickly so that legal notice of the suit (a notice of lis pendens) can be filed in the real property records. If the lender was the successful bidder, this notice may prevent the lender from transferring the property to a BFP.
Wrongful foreclosure suits based on defective notice nearly always go nowhere. Most large lenders are represented by law firms that know quite well how to write proper foreclosure notice and demand letters. What about the argument that notices were sent to the wrong address? Remember, in Texas the lender’s obligation is to send these notices to the borrower’s last address as shown in the lender’s files. The burden is on the borrower to “show that the mortgage servicer held in its records the most recent address of the debtor and failed to mail a notice by certified mail to that address,” which is a challenging burden to carry. Saravia v. Benson, 433 S.W.3d 658 (Tex.App.—Houston [14th Dist.] 2014, no pet.).
If any doubt remained that clerical defects and discrepancies do not void a foreclosure in Texas, then the door to that argument was nailed shut by Edwards v. Fannie Mae, 545, S.W.3d 169 (Tex.App.—El Paso 2017, pet. denied). In that case, the foreclosure documentation did not even reference the correct note and deed of trust. The court nonetheless dismissed such concerns because the property and the parties were the same and sufficient links existed to establish that the foreclosure should pass master. After all, the court reasoned, certain “inaccuracies in mass-produced loan documents and foreclosure paperwork” are inevitable.
A borrower in a wrongful foreclosure suit can expect that: (1) the lender will not rush to settle, since lenders pay high fees to large litigation firms to fight tooth and nail to avoid doing the right thing; (2) written discovery (interrogatories, requests for production, and requests for admission) from the borrower will be nearly entirely objected to by lender’s counsel, so extensively as to make the responses essentially useless (a deposition will therefore be required); and (3) lender’s counsel will remove the case from state court to federal court where judges are more conservative and lenders can use Federal Rule 12(b)(6) to dismiss the case.
Other grounds for suit may be available to a plaintiff borrower, including breach of contract, common-law fraud, statutory fraud, negligent misrepresentation, and violations of either the federal or state debt collection practices acts. The typical wrongful foreclosure suit may recite such causes of action in addition to allegations of procedural defect and inadequate sales price. These sometimes work if the lender’s misbehavior is egregious.
Allegations of deceptive trade practices under the DTPA will fail since a “person cannot qualify as a consumer if the underlying transaction is a pure loan because money is considered neither a good nor a service.” Fix v. Flagstar Bank, FSB, 242 S.W.3d 147, 159 (Tex.App.—Fort Worth 2007, pet. denied).
Removal by Lender to Federal Court
Removal of a wrongful foreclosure case from state to federal court is allowed if there is a federal question (which there nearly always is) or if diversity exists (if the amount in controversy exceeds $75,000 and the parties are from different states) which is also common. The reality is that most Texas home mortgage litigation of any significance takes place in federal court.
Lenders prefer federal courts since they are often able to utilize federal Rule 12(b)(6) to get the borrower’s case dismissed. The standard applied is whether or not borrower’s complaint fails “to state a claim upon which relief can be granted.” Federal judges routinely agree with lenders that no such claim has been stated. Accordingly, federal district court has become a graveyard for wrongful foreclosure cases initially filed in state court.
Removal to federal court can create complications for the attorney representing the borrower, who may be accustomed to practicing in state rather than federal court. Even if licensed in federal court (not all lawyers are), an attorney may be reluctant to switch venues since federal practice has become a specialty in recent years. Often the plaintiff must go through a change of lawyers as a result of the removal.
The deadline for lender’s counsel to remove a case to federal court is 30 days after the lender is served.
A Pre-Foreclosure TRO is a Better Borrower Remedy
A temporary restraining order is considered an emergency short-term measure necessary to avoid irreparable harm. Its purpose is to preserve the status quo (up to 14 days) until the court can hold a hearing to determine whether a temporary injunction (a TI, a longer interim remedy) should be granted. In re Newton, 146 S.W.3d 648, 651 (Tex. 2004). The TI—the second step in the process—goes beyond the TRO and freezes the state of affairs until a trial on the merits can be held. See Civil Practice & Remedies Code Chapter 65 for applicable rules.
It is far better for a borrower to obtain a TRO to stop a foreclosure than it is to bring a wrongful foreclosure suit after the fact. Texas law favors the finality of foreclosures, making wrongful foreclosure suits an uphill battle at several levels. The judge will likely ask without much sympathy “Why, since you knew about these various alleged defects in the lender’s loan documents, did you not take action to stop the foreclosure?” And the judge will be right.
If the property is sold at foreclosure to a third party who has no knowledge of the borrower’s claims, there is little chance that the property can be regained. Since the third party is a protected BFP any remedy will likely be limited to monetary damages.
So why don’t more people sue to stop foreclosure? Money. A person in financial distress will have difficulty coming up with both legal fees and money for the TRO bond. The blunt and socially inequitable truth is this: if a borrower cannot readily write a substantial retainer check to an attorney to file suit and obtain a TRO then that person is statistically unlikely to regain the property or receive damages.
FORECLOSURE LITIGATION BY THE LENDER
Post-Foreclosure Deficiency Suits
In the event that sale proceeds exceed the amount due on the note (including attorney’s fees and expenses) then surplus funds must be distributed by the trustee. Often, however, the price at which the property is sold at foreclosure is less than the unpaid balance on the loan, resulting in a deficiency. A suit may be brought by the lender to recover this deficiency any time within two years following the date of foreclosure:
Prop. Code Sec. 51.003(a). If the price at which real property is sold at a foreclosure sale . . . is less than the unpaid balance of the indebtedness secured by the real property, resulting in a deficiency, any action brought [by the lender] to recover the deficiency must be brought within two years of the [date of the] foreclosure sale. . . .
Prop. Code Sec. 51.003(c). If the court determines that the fair market value is greater than the sale price of the real property at the foreclosure sale, the persons against whom recovery of the deficiency is sought are entitled to an offset against the deficiency in the amount by which the fair market value, less the amount of any claim, indebtedness, or obligation of any kind that is secured by a lien or encumbrance on the real property that was not extinguished by the foreclosure, exceeds the sale price. If no party requests the determination of fair market value or if such a request is made and no competent evidence of fair market value is introduced, the sale price at the foreclosure sale shall be used to compute the deficiency.
Federally-insured lenders have four years to bring a deficiency suit (28 U.S.C. Sec. 1658).
Borrower Defense to a Deficiency Suit
For borrowers on non-homestead properties, deficiencies can be as significant a loss as the foreclosure itself since the IRS deems the deficiency amount to be taxable ordinary income.
A borrower facing a deficiency may challenge the foreclosure sales price if it is below fair market value and receive appropriate credit if it is not:
Prop. Code Sec. 51.003(b). Any person against whom [a deficiency] recovery is sought by motion may request that the court in which the action is pending determine the fair market value of the real property as of the date of the foreclosure sale. The fair market value shall be determined by the finder of fact after the introduction by the parties of competent evidence of the value. Competent evidence of value may include, but is not limited to, the following: (1) expert opinion testimony; (2) comparable sales; (3) anticipated marketing time and holding costs; (4) cost of sale; and (5) the necessity and amount of any discount to be applied to the future sales price or the cashflow generated by the property to arrive at a current fair market value.
(c) If the court determines that the fair market value is greater than the sale price of the real property at the foreclosure sale, the persons against whom recovery of the deficiency is sought are entitled to an offset against the deficiency in the amount by which the fair market value, less the amount of any claim, indebtedness, or obligation of any kind that is secured by a lien or encumbrance on the real property that was not extinguished by the foreclosure, exceeds the sale price. If no party requests the determination of fair market value or if such a request is made and no competent evidence of fair market value is introduced, the sale price at the foreclosure sale shall be used to compute the deficiency.
Note that fair market value is, according to the statute, determined by reference to the foreclosure sales price—at least if the borrower does not exercise its right to have a court determine this number.
The argument that fair market value should be computed according to the amount for which the lender later sells the property has been rejected. PlainsCapital Bank v. Martin, 459 S.W.3d at 557 (Tex. 2015).
A common borrower tactic in defending a deficiency action is to demand that the plaintiff produce the original note as a prerequisite to getting a judgment. In spite of the popularity of the show-me-the-note theory on the Internet, it is entirely ineffective in Texas, since under Texas law “the note and deed of trust are severable. . . . Although a mortgagee must give notice and follow other specified procedures, there is no requirement that the mortgagee possess or produce the note that the deed of trust secures in order to conduct a non-judicial foreclosure.” Morlock, L.L.C. v. Bank of New York, 448 S.W.3d 514 (Tex.App.—Houston [1st Dist.] 2014, pet. denied); also Martins, 722 f.3d at 255.
In a digital world, there is diminishing sanctity and value to be found in a hard-copy original document with a wet-ink signature. It is only required that the foreclosing party be legally entitled to foreclose (i.e., have the legal right to foreclose by whatever means that right was acquired—for example, by means of an assignment). Morlock, L.L.C. v. Nationstar Mortg., L.L.C., 447 S.W.3d 42, 47 (Tex.App.—Houston [14th Dist.] 2014, pet. denied).
Borrowers occasionally assert that since a note has been sold multiple times and the chain of transfers may be unclear, meaning that the plaintiff was not the lawful owner or holder of the debt at the time the foreclosure took place. Unfortunately for this argument, the Property Code does not require a foreclosing party to first prove that it is either the owner or the holder of the note. EverBank, N.A. v. Seedergy Ventures, Inc., 499 S.W.3d 534 (Tex.App.—Houston [14th Dist.] 2016, no pet.).
Nor does it do any good to claim that the deed of trust lien was not properly assigned. In Texas, the rule is that the mortgage follows the note. Texas courts liberally construe alleged clerical defects in favor of the noteholder.
What happens when multiple sources of collateral secure the same loan? Should a deficiency amount be determined after each individual property sale or after all sales are completed? The answer has serious consequences for the borrower’s aggregate personal liability. The 14th Court of Appeals in Houston affirmed that it was necessary to look at the big picture and consider whether or not a deficiency exists after all properties have been foreclosed upon. Marhaba Partners Limited Partnership v. Kindron Holdings, LLC, 457 S.W.3d 208 (Tex.App.—Houston [14th Dist.] 2015, pet. denied).
In calculating a deficiency, any money received by a lender from private mortgage insurance should be credited to the account of the borrower. Case law states that the purpose of this is to prevent mortgagees from recovering more than their due.
FORECLOSURE LITIGATION BY THE BUYER
Foreclosure gives the new owner title; the next step is to obtain possession. If the property is occupied, it may be necessary to give the usual 3-day notice to vacate and file a forcible detainer petition in justice court. After judgment, the new owner must wait until the constable posts a 48-hour notice on the door and then forcibly removes a former borrower if that person is otherwise unwilling to leave.
A foreclosure buyer should build eviction costs into the budget from the beginning. It is advisable to hire an attorney for the first couple of evictions, after which an investor may be able to handle them solo. Never, however, attempt to conduct an eviction appeal to county court without an attorney.
Servicemembers Civil Relief Act
The Servicemembers Civil Relief Act (SCRA, 50 U.S.C. App. Sec. 501 et seq.) provides protections for those serving in the armed forces. For example, except by court order, a landlord may not evict a servicemember or dependents from the homestead during military service. The SCRA provides criminal sanctions for persons who knowingly violate its provisions.
WHAT A LAWYER NEEDS FROM A
CLIENT SEEKING TO FORECLOSE
First and foremost, a lender’s lawyer will need to see the client’s deed, note, and deed of trust along with the entire loan file. Most foreclosures arrive in law offices with loan documents that the attorney did not personally write. Anyone could have written them including the client himself, so the documents should be carefully evaluated first, followed by a review of the parties’ course of conduct and communications. All of these factors should be scrutinized before determining that there is a sound basis for moving forward with foreclosure.
Information in this article is provided for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. No attorney-client relationship is created by the offering of this article. This firm does not represent you unless and until it is expressly retained in writing to do so. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well.
Copyright © 2023 by David J. Willis. All rights reserved. Mr. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his website, www.LoneStarLandLaw.com.