Commercial Foreclosure (TX)

Praccal Guidance

A Practical Guidance

Practice Note by Ian D. Ghrist, Ghrist Law Firm PLLC

Ian D. Ghrist

Ghrist Law Firm PLLC

This practice note explains the process for the foreclosure

of commercial real property in Texas, focusing on nonjudicial

foreclosure under a deed of trust. The practice note

also includes an overview of a property tax loans and

condominium association liens with a matrix setting forth

the statutes governing these foreclosures. This practice

note focuses on commercial rather than residential loans

and does not cover foreclosure procedures for Texas home

equity loans, reverse mortgages, or the Texas Residential

Property Owners Protection Act (Chapter 209 of the Texas

Property Code).

For more information on foreclosure in Texas, see

Residential Foreclosure (TX), Commercial Real Estate Loan

Defaults and Remedies (TX), and Commercial Foreclosure

Resource Kit (TX).

Overview

A deed of trust is the preferred security instrument in Texas

and most foreclosures are conducted by a trustee under a

deed of trust without the involvement of a court. However,

some loans require the use of special procedures involving

the Texas court system.

The three types of foreclosure sales used in Texas are:

• Nonjudicial sales

• Quasi-judicial sales –and–

• Judicial sales

Terminology and Timing

A nonjudicial foreclosure is accomplished through an

auction that occurs without any court involvement. Quasi-

judicial foreclosure auctions occur with limited court

involvement by use of the court procedures in Rules 735

and 736 of the Texas Rules of Civil Procedure. Judicial sales

generally require the filing of a lawsuit, usually in a district

court, where the plaintiff/mortgagee asks the court to

authorize and supervise a foreclosure auction.

Nonjudicial sales are the easiest and fastest. Not

surprisingly, they are the most commonly used. Quasi-

judicial sales are slower and involve a court order, however,

the procedures for obtaining the court order are relatively

simple and fast. In a quasi-judicial foreclosure, the issues

that the court can determine are strictly limited and the

court must follow strict timelines in making the court’s

decision. As noted, judicial sales involve a regular lawsuit,

which means that, unless the defendants default by failing

to file a written answer, the lawsuit must be set for trial,

which will likely take several months or even years.

A typical nonjudicial foreclosure consists of at least a

20- or 30-day default notice and cure period followed by

posting of the Notice of Trustee’s Sale at least 21 days

prior to the foreclosure auction, which is a total period of

approximately 60 or so days. In reality, 75 to 90 days may

be a better estimate when delays and cure or payment plan

negotiations are factored in.

Lender’s Frequently Asked

Questions

Not all lenders are familiar with the foreclosure process,

especially if the loan involves seller- financing. Below are

some basic questions you may encounter if your client is

considering foreclosure for the first time.

What Is a Foreclosure?

Many clients will know the term foreclosure, but they do

not know what it means. A foreclosure is a public auction.

Your client may even say, “I do not want do an auction,

I just want to foreclose.” A foreclosure and an auction,

however, are the same thing. A foreclosure auction is a

type of auction. Every foreclosure is an auction, but not all

auctions are foreclosure auctions.

Inexperienced mortgage lenders sometimes ask questions

like “If I start a foreclosure on this property, then when do

I get my property back?” However, the lender can never

be assured that they will receive title to the property.

The purpose of the auction is to sell the property to the

highest bidder so that the proceeds from the auction can

go toward paying down the balance owed on the mortgage

loan. The lender makes the opening bid at the foreclosure

auction (referred to as the credit bid) and if no one outbids

the opening credit bid, the lender will be the winning

bidder. Although many lender’s opening bids are winning

bids (i.e., resulting in the lender getting the property back),

this does not mean that all lender’s opening credit bids are

winning bids. To understand why many lender’s opening

credit bids are winning bids, you must understand the

concept of real estate equity.

The equity in a piece of real estate is the difference

between the value of the real estate and the amount owed

on mortgage liens. So, if the real estate is worth $200,000

and the real estate is encumbered by a $100,000 mortgage

lien, then the owner of the real estate, who is also the

borrower on the mortgage loan, has $100,000 in equity in

the real estate. Most landowners can do basic math. If their

property is being foreclosed upon because they cannot pay

a $100,000 mortgage, but the collateral is worth $200,000,

the owner will just sell the collateral. The mortgage will be

paid off when the collateral sells. The landowner will pocket

$100,000. Thus, the real estate owner can convert their

equity into cash.

Many foreclosures are initiated, but not consummated.

The foreclosures that are consummated tend to be the

foreclosures on the properties with very little equity. When

there is equity, the landowner is motivated to capture the

equity by one of the following methods:

• Selling the real estate

• Filing a bankruptcy case or a series of bankruptcy cases

• Refinancing the mortgage –or–

• Working out a bankruptcy-prevention payment plan and

foreclosure deferral plan with the mortgage lender

All of the foregoing would result in the cancellation of

the initiated foreclosure prior to the consummation of

the foreclosure. The pool of purchasers that haunt the

monthly foreclosure auction sites know that the high

equity properties are the best to purchase because they

present the least risk to the foreclosure sale purchaser. The

foreclosure sale purchaser often cannot see the inside of

the real estate, which makes determining an appropriate bid

very difficult, unless the property consists of unimproved

land. The credit bids may often prevail for the following

reasons:

• The mortgage lender opens the foreclosure auction

bidding with a credit bid.

• The consummated foreclosures tend to be the

foreclosures on low equity collateral. –and–

• The foreclosure sale purchaser pool tends to have very

little information on the condition of the inside of the

real estate that is being auctioned.

However, on high equity foreclosures, the credit bid goes

from being likely to prevail to being unlikely to prevail—

except, possibly, for unique and difficult-to-use property

such as expensive property, vacant land, or unique

commercial property. Some counties in Texas also have

a much more active foreclosure sale purchaser pool than

others.

Sometimes mortgage lenders will say things like “Can I bid

more than my loan amount so that no one else gets my

property?” The answer is yes, of course you can. All the

lender needs to do is bring cash or certified funds to the

foreclosure auction. The lender can bid the full amount

owed on the mortgage loan without paying anything out-

of-pocket. This is referred to as a credit bid because in a

credit bid, no money changes hands. The balance owed to

the mortgage lender must be paid to the mortgage lender

from the foreclosure auction proceeds. Accordingly, the

mortgage lender can bid up to that balance without paying

anything in cash-out-of-pocket because the funds would

simply go to the lender anyways. The law does not require

the doing of a useless thing and the lender does not need

to pay itself. If, however, the mortgage lender bids more

than the balance owed on the mortgage, the mortgage

lender must pay the overage in cash or certified funds.

The lender needs to raise some cash and bring the cash or

certified funds to the foreclosure.

What about a Deed in Lieu of Foreclosure?

Lenders often ask this question as well. When it comes

to taking a deed in lieu of foreclosure in Texas, the most

important statute that the lender mortgagee needs to be

aware of is Tex. Prop. Code § 51.006. Before reviewing this

section, the lender must understand some basic lien priority

concepts. “We recognize the well-established rule that

following the valid foreclosure of a senior lien, junior liens,

if not satisfied from the proceeds of sale, are extinguished.”

AMC Mortg. Services, Inc. v. Watts, 260 S.W.3d 582, 585

(Tex. App.—Dallas 2008, no pet.). “In a contest over rights

or interests in property, the party that is first in time is first

in right.” Watts, 260 S.W.3d at 582, 585.

When a seller-financed mortgage lien forecloses, the

foreclosure will extinguish junior liens such as mechanic’s

liens, judgment liens, or any other liens (subject to some

notable exceptions) that arise after the date that the

property was seller-financed. Notable exceptions include

property tax liens—typically held by school districts,

hospitals, and cities—and, to an extent, federal tax liens.

Based on the foregoing, the answer to the question “Should

I take a deed in lieu of foreclosure?” is that you should

probably do the following:

• Run a title search –and–

• If the title search reveals junior liens that would

be extinguished by a foreclosure yet would not be

extinguished by a deed-in-lieu, you should probably

foreclose rather than take a deed-in-lieu so as to

avoid paying junior liens that the mortgagor should be

responsible for

Under Tex. Prop. Code § 51.006, a lender who qualifies

and follows the proper procedures may get a mulligan. If

the rules in Section 51.006 apply, then the lender can go

ahead and foreclose so as to extinguish junior liens even

after the deed-in-lieu has been taken. Section 51.006 does

not give every mortgagee this right in every situation. You

must read that law, evaluate whether it applies, and follow

the required procedures.

Initial Steps in the

Nonjudicial Foreclosure

Process

Before proceeding to foreclosure, the lender should

complete the steps discussed below.

Loan Default

The first step is to review the loan documents and confirm

that a default exists. Most foreclosures occur because

the borrower has failed to pay interest, principal, or

other amounts that it owes to the lender under the loan

documents. However, nonmonetary defaults can also lead

to foreclosure. Common nonmonetary defaults include

failing to maintain adequate insurance on the property,

failing to maintain the property condition, violating zoning

laws or municipal ordinances, and allowing additional liens

to be placed on the property.

Borrower’s Right to Cure

The minimum 20-day cure notice of Section 51.002 of

the Texas Property Code does not apply to commercial

property. Instead, any required default notice and

opportunity to cure the default are whatever the loan

documents state. Commercial loan documents in Texas

commonly waive all default notice requirements, saying

something like this:

Grantor and each surety, endorser, and guarantor of

the note waive, to the extent permitted by law, all (a)

demand for payment, (b) presentation for payment, (c)

notice of intention to accelerate maturity, (d) notice of

acceleration of maturity, (e) protest, and (f) notice of

protest.

For the most part, Texas law provides that this notice

waiver is valid and enforceable. Lenders should, however,

remain wary of arguments that the lender has waived

the notice waivers by the lender’s conduct. Regardless of

whether these waiver-of-the-waiver arguments have merit,

the arguments can result in temporary restraining orders

and injunctions that prevent the lender from foreclosing. As

a result, it is typically best practice to serve some notices

even if all notices have been waived. Also, bear in mind

that even if the lender can legally avoid providing various

default or acceleration-related notices, the borrower can

always file a bankruptcy.

With some limited exceptions, for the most part, borrowers

cannot waive their right to file a bankruptcy case or to

use the automatic stay of collections in bankruptcy to

delay foreclosure. “[T]he Bankruptcy Code extinguishes the

private right of freedom to contract around its essential

provisions.” Matter of Pease, 195 B.R. 431, 434 (Bankr. D.

Neb. 1996).

In addition, the court in In re Madison stated:

[S]everal sections of the [Bankruptcy] Code expressly

provide that certain types of waivers of bankruptcy

protections must be deemed unenforceable. See 11

U.S.C. § 365(b)(2) (invalidating defaults in executory

contracts arising from ipso facto clauses); 11 U.S.C. §

522(e) (making of no effect waivers of exemptions and

avoiding powers); 11 U.S.C. § 524(c), (d) (establishing

an exclusive set of requirements, including a rescission

period, when borrowers may elect to waive their

dischargeability rights by reaffirming debts); 11 U.S.C. §

541(c) (nullifying any effect of an ipso facto clause on

the concept of “property of the estate”); and 11 U.S.C.

§ 1307(b) (making unenforceable waivers of the right

to dismiss or convert a bankruptcy case to another

Chapter).

184 B.R. 686, 691 (Bankr. E.D. Pa. 1995).

Given that even a lender with the most aggressive default

waiver language in their loan documentation and who

employs the most aggressive foreclosure strategy can be

delayed by bankruptcy, the lender’s best course of action

often consists of providing some reasonable default and

cure options to the borrower. Any scenario where the

borrower cures a default is usually better for the lender

than the hassle that a bankruptcy case would cause in

terms of legal fees, paperwork, and administrative burden,

together with the delays that occur when borrowers use

bankruptcy as a dilatory tactic rather than in good faith to

effectuate a successful reorganization.

Acceleration of the Underlying Debt

Some lenders do not fully understand the importance of

the acceleration clause in the note and deed of trust. A

typical promissory note provides for installment payments

over time. Those payments are not due until the payment

obligation matures by the passing of the payment due

date. When a promissory note is accelerated, all of the

remaining payments mature immediately. Unless a note has

accelerated or matured, the lender cannot demand payment

for the full remaining principal balance due on the note.

They can only demand payment for the installments that

have matured.

The statute of limitations on the debt begins to run upon

each installment as the installment matures. Tex. Civ. Prac.

& Rem. Code § 16.035(a), (b). The statute of limitations

does not run on the remaining balance of the note until the

note matures or is accelerated. Hammann v. H.J. McMullen

& Co., 122 Tex. 476, 62 S.W.2d 59, 61 (1933); Burney v.

Citigroup Global Markets Realty Corp., 244 S.W.3d 900,

903–04 (Tex. App.—Dallas 2007, no pet.); Tex. Civ. Prac. &

Rem. Code § 16.035(e) (limitations, in Texas, do not start

running until acceleration or final maturity of the note). The

lender can, however, abandon or rescind acceleration any

time, unilaterally, by notice. Tex. Civ. Prac. & Rem. Code §

16.038. Until Tex. Civ. Prac. & Rem. Code § 16.038 was

enacted in 2015, there was some confusion about whether

the statute of limitations could be reset by unilateral action

of the lender. Leonard v. Ocwen Loan Servicing, L.L.C., 616

F. App’x 677, 678 (5th Cir. 2015); Callan v. Deutsche Bank,

93 F. Supp. 3d 725, 727 (S.D. Tex. 2015).

Acceleration is eminently important because every lender

wants to credit bid at the foreclosure auction. If the loan

is not matured or accelerated, then the lender is, at least

arguably (depending on the terms of the note and deed

of trust, conduct of the parties, and other circumstances),

barred from credit bidding the full remaining balance due

on the note at the foreclosure auction. Best practice for

lenders is to always treat the acceleration process as a very

important prerequisite to foreclosure.

Accepting the Arrearage to Cure Default before

Foreclosure

Some lenders will accept the arrearage rather than the

accelerated balance, plus attorney’s fees, before the

foreclosure sale and then reinstate the loan. While the

lender, upon acceleration, may foreclose unless the

entire note is paid off in full, the lender can also waive

acceleration and reinstate the loan. Lots of case law exists

regarding waiver of acceleration or loan workouts and

other negotiations with the borrowers. Ensure that the

lender puts any agreements with or offers to the borrower

in writing and that the written agreement is drafted as

clearly as possible. If, for example, the borrower raises

half of the funds necessary to cure the arrearage and

promises to raise the remaining funds within 30 days, and

the lender agrees to accept the arrearage in lieu of the

accelerated balance, but is willing to delay the foreclosure

sale by only one month, then an agreement to delay the

sale by one month in exchange for half of the arrearage

now and the remaining arrearage within 30 days, without

waiving acceleration, should be put into writing to avoid

any confusion. In a wrongful foreclosure lawsuit, clarity and

simplicity tend to help the lender. Confusion and complexity

open the door for the borrower to make equitable

arguments regarding waiver or estoppel or other legal

theories for avoiding the terms of the promissory note,

deed of trust, and acceleration notices. When negotiating,

the lender should make clear to the borrower that the

negotiations do not result in waiver of acceleration. Still, the

lender should work with the borrower. The lender should

not ignore the borrower or refuse to negotiate solely

because the lender is worried about miscommunications or

equitable arguments subsequently raised by the borrower. A

lender who refuses to negotiate a default cure option with

the borrower may put itself at greater risk of lawsuits than

the lender who negotiates default cure in good faith.

Accelerating the Right Way

Notice of intent to accelerate must be unequivocal, and

even stating that failure to cure breach “may result in

acceleration” is insufficient. Ogden v. Gibraltar Sav. Ass’n,

640 S.W.2d 232, 234 (Tex. 1982). The notices must not

only state that the account is in default, but also demand

payment for the delinquent installments. Tamplen v.

Bryeans, 640 S.W.2d 421, 422 (Tex. App.—Waco 1982, writ

ref’d n.r.e.).

A proper acceleration notice should contain language

tantamount to advising the borrower that the “entire debt

[is] immediately due and payable.” EMC Mortg. Corp. v.

Window Box Ass’n, 264 S.W.3d 331, 337 (Tex. App.—Waco

2008). While the lender’s best practice is always to give

written notices, oral notice can still be effective. Dillard v.

Freeland, 714 S.W.2d 378, 380 (Tex. App.—Corpus Christi

1986). Acceleration can also be accomplished without

written notice of acceleration if the lender takes “some

unequivocal action, such as filing suit, which indicates the

entire debt is due.” Burney v. Citigroup Global Mkts. Realty

Corp., 244 S.W.3d 900, 903 (Tex. App.—Dallas 2008). Even

a notice of a trustee’s sale may be sufficient to constitute

notice of acceleration if preceded by the required notice of

intent to accelerate. Burney, 244 S.W.3d at 900, 904.

Waiver of Acceleration Notice Clauses Not Always

Effective

“The exercise of the power of acceleration is a harsh

remedy and deserves close scrutiny.” Vaughan v. Crown

Plumbing & Sewer Serv., Inc., 523 S.W.2d 72, 75 (Tex.

Civ. App.—Houston [1st Dist.] 1975). In a case where the

deed of trust provided that the entire indebtedness may,

upon default, “be immediately matured and become due

and payable without demand or notice of any character,”

the court held that the lender still needed to give notice

of intent to accelerate. Bodiford v. Parker, 651 S.W.2d 338,

339 (Tex. App.—Fort Worth 1983). In Shumway v. Horizon

Credit Corp., 801 S.W.2d 890 (Tex. 1991), the Texas

Supreme Court reached a similar result, holding that when

indebtedness could be accelerated “without prior notice or

demand,” notice of acceleration was waived, but notice of

intent to accelerate was not waived. “Where the holder of

a promissory note has the option to accelerate maturity of

the note upon the maker’s default, equity demands notice

be given of the intent to exercise the option.” Ogden v.

Gibraltar Sav. Asso., 640 S.W.2d 232, 233 (Tex. 1982).

Best practice for lenders is to always give notice of intent

to accelerate and notice of acceleration regardless of what

the deed of trust or other instruments say. Giving the

borrower an opportunity to cure default before acceleration

is particularly important. Abraham v. Ryland Mortg. Co., 995

S.W.2d 890, 894 (Tex. App.—El Paso 1999); Allen Sales &

Servicenter, Inc. v. Ryan, 525 S.W.2d 863, 866 (Tex. 1975).

Foreclosure Sale

The initial trustee named in the deed of trust is often

the attorney who drafted the deed of trust for the title

company or the lender. This initial trustee is often just a

“placeholder” trustee, usually someone who regularly drafts

deeds of trusts for lenders. This person may or may not

have ever conducted a foreclosure auction, which is the

essential function of the trustee. Furthermore, the initial

trustee may reside on the other side of the state of Texas

and may have no interest in driving all the way to the

courthouse for the county that the property is located in

so as to post the notice of trustee’s sale or conduct the

foreclosure auction on the courthouse steps. As a result, it

is common, once a mortgage account is in default, for the

lender, or the lender’s loan servicer, to appoint a substitute

trustee.

The appointment of the substitute trustee is typically filed

in the county real property records so that there is no

gap in the chain of title. In other words, the title would

pass from the Grantor on the Deed of Trust (who is the

borrower on the loan and the owner of the property) to

the initial trustee, then to the substitute trustee, and finally

to the foreclosure sale buyer (which may be the lender if

the credit bid prevails). The lender is also typically the

beneficiary of the deed of trust. Note that, despite the

trustee being nominally vested with title to the property,

the trustee is not treated, under Texas law, like the owner

of the property. “[U]pon executing a deed of trust, the

mortgagor retains legal title to the property, while the

mortgagee acquires equitable title.” In re Nguyen, No. 10-

42499-DML13, 2011 Bankr. LEXIS 115 (Bankr. N.D. Tex.

Jan. 13, 2011)). Instead, the trustee is treated as only

having the right to conduct the foreclosure auction and

sign a foreclosure sale deed (i.e., a “trustee’s deed” at the

conclusion of the auction). Please note that a mortgage

loan servicer may usually appoint the substitute trustee for

the lender:

mortgagee may appoint or may authorize a mortgage

servicer to appoint a substitute trustee or substitute

trustees to succeed to all title, powers, and duties of

the original trustee. A mortgagee or mortgage servicer

may make an appointment or authorization under this

subsection by power of attorney, corporate resolution,

or other written instrument.

(d) A mortgage servicer may authorize an attorney to

appoint a substitute trustee or substitute trustees on

behalf of a mortgagee under Subsection (c).

Tex. Prop. Code Ann. § 51.0075

As a result of Section 51.0075 of the Texas Property Code,

the mortgage servicer or the mortgage servicer’s attorney

can typically appoint substitute trustees without needing to

track down a corporate officer of the mortgage company to

sign the appointment form.

Notice of Foreclosure Sale

Foreclosures always occur on the first Tuesday of the

month unless that date would fall on a specified holiday. “If

the first Tuesday of a month occurs on January 1 or July 4,

a public sale under Subsection (a) must be held between 10

a.m. and 4 p.m. on the first Wednesday of the month.” Tex.

Prop. Code Ann. § 51.002(a-1). To foreclose on a property

on the first Tuesday of the month, the mortgage lender

must have a notice of foreclosure sale (commonly referred

to as a Notice of Trustee’s Sale) posted and served at least

21 days before the date of sale. Tex. Prop. Code Ann. §

51.002(b). (The foreclosure notices must be sent to the

borrower’s last known address. Tex. Prop. Code § 51.002(e);

Tex. Prop. Code § 51.0001(2) (defining last known address).

) Look at a calendar for the first Tuesday of the month, and

then count back three Tuesdays from that Tuesday. That

date is the posting deadline if you want the collateral to be

in the next monthly foreclosure auction.

Notice of Sale to the Internal Revenue Service

(IRS)

Notice of sale to the IRS is potentially the most important

component of a nonjudicial foreclosure sale in Texas, while

also being the most easily overlooked. IRS tax liens arise

under federal law, which means that these federal liens

can supersede state lien laws. For example, “Under the

Supremacy Clause of the United States Constitution, the

IRS may obtain a valid federal tax lien and enforce its lien

against a Texas homestead.” Benchmark Bank v. Crowder,

919 S.W.2d 657, 660 (Tex. 1996); U.S. Const. Art. VI, cl. 2.

IRS liens can be discharged by foreclosure if proper notice

of the foreclosure sale is given to the IRS. 26 U.S.C. § 7425

(April 2017); 26 C.F.R. § 301.7425-3 (April 2017); 26 C.F.R.

§ 400.4-1(a) (April 2017); IRS Publication 786, with IRS

Form 14497. The notice should be in writing, to the correct

place, and not less than 25 calendar days prior to the sale.

The lien notice is generally required when the Notice of

Federal Tax Lien has been filed more than 30 days prior

to the sale. If the property is sold with the IRS lien, then

the seller may consider rescinding the sale, if possible (see

Tex. Prop. Code § 51.016), and redoing it, or looking at IRS

Publication 783, which is an application to discharge the

IRS lien.

Bidding at the Sale; Distribution of Proceeds

The trustee conducting the sale typically opens the bidding

with a credit bid on behalf of the noteholder. While the

trustee may credit bid for the mortgagee, the “trustee

is only responsible to the mortgagee in the mortgagee’s

capacity as a lender interested in satisfying the debt

out of the proceeds of the sale; he is not responsible to

the mortgagee in the capacity as a purchaser seeking

to purchase the property for less than its fair value in

opposition to the mortgagor’s interest.” Bonilla v. Roberson,

918 S.W.2d 17, 22 (Tex. App.—Corpus Christi 1996). The

noteholder’s bid is referred to as a credit bid because

the noteholder does not actually need to pay for the bid.

The noteholder can bid up to the amount owed to the

noteholder without needing to pay out-of-pocket since the

funds would go to itself. If the credit bid wins the auction,

the lender becomes the owner of the property. The

purchaser at the sale should be prepared to pay in cash or

certified funds on the spot. If a bidder wins the foreclosure

auction, but does not immediately pay in cash or certified

funds, the trustee will typically verbally void the auction

and immediately reauction the property to a bidder that is

prepared to pay on the spot. The trustee will usually do this

up until the deadline specified in the Notice of Trustee’s

Sale, until a winning bidder makes good on a winning bid.

The purchaser at the sale acquires the property as is,

without warranties, and at the purchaser’s own risk. Tex.

Prop. Code § 51.009. The purchaser is not considered a

consumer for purposes of consumer-protection laws like

the Texas Deceptive Trade Practices Act. Tex. Prop. Code §

51.009.

After the deadline, the trustee disburses the foreclosure

sale proceeds in the following order:

• First, the trustee will pay off the mortgage lender.

• If the mortgage lender has been paid in full and there

are funds left over, the trustee will search for junior

lienholders, seek to confirm whether they have valid

liens, and pay them using the foreclosure sale proceeds.

–and–

• Finally, if there are no junior lienholders to pay, the

trustee will disburse the overage funds to the borrowers

on the mortgage loan (i.e., the former owners of the

subject real estate).

The lender will never be paid more than what the lender is

owed at a foreclosure auction. The equity in the property

does not belong to the lienholder. If the lender bids more

than the credit bid, then the lender must pay in cash or

certified funds and those funds, above and beyond the

credit bid, will be disbursed to the junior lienholders and/or

the former owners of the property (i.e., the borrowers on

the mortgage loan).

If there is a dispute over who the foreclosure proceeds

should be disbursed to, the trustee might file an

interpleader. In an interpleader, the trustee deposits

the disputed funds into the registry of the court, serves

citations upon all interested parties, and lets those parties

argue their case to the judge as to why they should receive

the funds.

When foreclosing a wraparound note, there is an implied

covenant obligating the trustee to apply the proceeds to

the underlying note. Summers v. Consol. Capital Special

Trust, 783 S.W.2d 580, 583 (Tex. 1989).

Deficiency Judgments

If there is a deficiency on the note after the foreclosure

sale, the lender can bring a deficiency suit and the

borrower has a statutory right to a fair market value

determination and an offset against the deficiency. Tex.

Prop. Code §§ 51.003, 51.004, 51.005. Section 51.003

of the Texas Property Code is, however, waivable in the

loan documents. Moayedi v. Interstate 35/Chisam Rd.,

L.P., 438 S.W.3d 1, 8 (Tex. 2014). Deficiency suits have a

two-year statute of limitations, starting on the date of the

foreclosure. Tex. Prop. Code § 51.003(a).

Wrongful Foreclosure Suit

In a wrongful foreclosure suit, the borrower can elect one

or the other, but not both, of the following remedies: “(1)

set aside the void trustee’s deed; or (2) recover damages in

the amount of the value of the property less indebtedness.”

Diversified, Inc. v. Gibraltar Sav. Asso., 762 S.W.2d 620,

623 (Tex. App.—Houston [14th Dist.] 1988). If the borrower

elects to recover monetary damages, the borrower can

only do so if “(1) title to the property has passed to a

third party; or (2) the property has been appropriated to

the use and benefit of the mortgagee.” Peterson v. Black,

980 S.W.2d 818, 823 (Tex. App.—San Antonio 1998); John

Hancock Mut. Life Ins. Co. v. Howard, 85 S.W.2d 986,

988 (Tex. Civ. App.—Waco 1935). If the borrower does

not leave the premises, the borrower has not suffered any

compensable damages. If a foreclosure sale is void, the

purchaser bid at their peril and may not recover damages

for lost profits. Howard, 85 S.W.2d at 986, 988.

Grounds for Bringing Wrongful Foreclosure Suit

There are several grounds on which a borrower can bring a

wrongful foreclosure suit.

Failure to Send Notice of Trustee’s Sale

Failure to send notice of sale as per Tex. Prop. Code §

51.002 is sufficient reason for a trial court to set aside a

foreclosure sale and hold the sale to be void. Shearer v.

Allied Live Oak Bank, 758 S.W.2d 940, 942 (Tex. App.—

Corpus Christi 1988); Houston First American Sav. v.

Musick, 650 S.W.2d 764, 768 (Tex. 1983); WTFO, Inc. v.

Braithwaite, 899 S.W.2d 709, 720–21 (Tex. App.—Dallas

1995, no writ). Junior lienholders are generally not entitled

to receive notice of nonjudicial foreclosure sale in Texas.

Elbar Invs., Inc. v. Wilkinson, No. 14-99-00297-CV, 2003

Tex. App. LEXIS 8182, at *6 (App.—Houston [14th Dist.]

Sept. 23, 2003).

Some mistakes, like sending foreclosure notices to the

wrong address, can be grounds for setting aside the

foreclosure sale. Mills v. Haggard, 58 S.W.3d 164, 166 (Tex.

App.—Waco 2001) (foreclosure sale set aside because loan

servicing company had borrower’s new address, yet notices

went to borrower’s old address and borrower did not

receive them). The foreclosure notices must be sent to the

borrower’s last known address. Tex. Prop. Code § 51.002(e);

Tex. Prop. Code § 51.0001(2) (defining last known address).

Incorrect Calculations

Calculating the amounts due incorrectly, may be insufficient

grounds for rescinding the foreclosure sale. Powell v. Stacy,

117 S.W.3d 70, 75–76 (Tex. App.—Fort Worth 2003, no

pet.).

Not Following the Deed of Trust

The terms of the deed of trust must be strictly followed in

the conduct of the sale and notices in connection with the

sale. Univ. Sav. Asso. v. Springwoods Shopping Ctr., 644

S.W.2d 705, 706 (Tex. 1982).

Failure to Send Required Notice to Cure in

Conjunction with a Grossly Inadequate Price

Failure to send required notice to cure can invalidate a

subsequent notice of sale, particularly when the property

is sold for a grossly inadequate price. Mills v. Haggard, 58

S.W.3d 164, 167 (Tex. App.—Waco 2001).

[T]he rule is well established that mere inadequacy

of consideration is not grounds for setting aside a

trustee’s sale if the sale was legally and fairly made.

Tarrant Savings Association v. Lucky Homes, Inc., 390

S.W.2d 473 (Tex. 1965). There must be evidence of

irregularity, though slight, which irregularity must have

caused or contributed to cause the property to be sold

for a grossly inadequate price. Sparkman v. McWhirter,

263 S.W.2d 832, 837 (Tex. Civ. App.—Dallas 1953, writ

ref’d).

Am. Sav. & Loan Ass’n v. Musick, 531 S.W.2d 581, 587

(Tex. 1975); see also Diversified Developers, Inc. v. Tex.

First Mortg. REIT, 592 S.W.2d 43, 45 (Tex. Civ. App.—

Beaumont 1979).

For example, when properties were sold in bulk instead

of individually and the individual sale may have resulted

in repayment of the debt, the bulk sale constituted an

irregularity that could have caused a grossly inadequate

price and the foreclosure sale was void. Stanglin v. Keda

Dev. Corp., 713 S.W.2d 94, 95 (Tex. 1986).

Requirement That Borrower Tender Amounts

Due and Owing

When a borrower files a wrongful foreclosure lawsuit

seeking rescission of the sale, the borrower must tender all

amounts due and owing into the court’s registry, and not

merely plead that they will make a tender. Lambert v. First

Nat’l Bank of Bowie, 993 S.W.2d 833, 835 (Tex. App.—

Fort Worth 1999); French v. May, 484 S.W.2d 420, 426

(Tex. Civ. App.—Corpus Christi 1972) (“A mere offer to pay

does not constitute a valid tender; it is required that the

tenderer have the money present and ready, and produce

and actually offer it to the other party. The tenderer

must relinquish control over the funds for sufficient time

and under such circumstances as to enable the tenderee

without special effort on his part to acquire possession.”).

“Tender of whatever sum is owed on the mortgage debt is

a condition precedent to the mortgagor’s recovery of title

from a mortgagee who is in possession and claims title

under a void foreclosure sale.” Fillion v. David Silvers Co.,

709 S.W.2d 240, 246 (Tex. App.—Houston [14th Dist.]

1986).

Purchaser’s Liability and Remedies in Wrongful

Foreclosure Suit

The foreclosed-upon borrower, as a prerequisite to

obtaining relief, may need to tender the winning bid to the

purchaser at the sale. “A foreclosure sale to a good faith

purchaser . . . will only be set aside if the one claiming

equitable title tenders the amount of the bid.” Goswami

v. Metropolitan Sav. & Loan Ass’n, 713 S.W.2d 127, 130

(Tex. App.—Dallas 1986), rev’d on other grounds, 751

S.W.2d 487 (Tex. 1988); Bracken v. Haid & Kyle, Inc., 589

S.W.2d 501, 502 (Tex. Civ. App.—Dallas 1979). But see

Tex. Prop. Code § 51.009(1) (enacted in 2003, effective in

2004); Henke v. First S. Properties, Inc., 586 S.W.2d 617,

620 (Tex. Civ. App.—Waco 1979) (“the doctrine of good

faith purchaser for value without notice does not apply to

a purchaser at a void foreclosure sale”); Diversified, Inc.

v. Walker, 702 S.W.2d 717, 723 (Tex. App.—Houston [1st

Dist.] 1985) (“Purchasers of land from a substitute trustee’s

sale are not relieved from the necessity of inquiring

whether the trustee had been empowered to sell.”).

If the foreclosure sale is later deemed void by a court, the

purchaser does not generally have the benefits of being a

good faith purchaser for value because the purchaser bids

at their peril. Henke, 586 S.W.2d 617, 620–621; Tex. Prop.

Code § 51.009(1). If the sale is declared void, the purchaser

may be subrogated to the debt and lien of the foreclosing

mortgagee. In re Niland, 825 F.2d 801, 813 (5th Cir. 1987).

Rescission of Nonjudicial

Foreclosure Sales

Tex. Prop. Code § 51.016 (Texas House Bill 2066 (84th

Leg. (R) effective Sept. 1, 2015)) created procedures for a

foreclosure trustee to rescind foreclosure sales in certain

situations. The rules generally allow the trustee to rescind

the sale up to 60 days after the date of sale if the statutory

requirements of sale were not met, the default leading to

the sale was cured before the sale, or for various other

reasons. Before the 2015 law, the foreclosure trustee’s

authority ended with the sale and the trustee could not

rescind the sale without the mortgagor’s agreement. Bonilla

v. Roberson, 918 S.W.2d 17, 22 (Tex. App.—Corpus Christi

1996).

Lawsuit Protections for

Foreclosure Trustees

Under Section 51.007 of the Texas Property Code, a

foreclosure trustee can be dismissed as a party from a

wrongful foreclosure suit if “the trustee was named as a

party solely in the capacity as a trustee under a deed of

trust.” The trustee must file a verified denial. Tex. Prop.

Code § 51.007. The other parties must file a verified

response within 30 days of the trustee’s verified denial.

However, if a trustee is dismissed pursuant to this section

of the property code, the dismissal is without prejudice.

Tex. Prop. Code § 51.007(c). A foreclosure trustee may

also not be “held to the obligations of a fiduciary of the

mortgagor or mortgagee” and may not be “assigned a duty

. . . other than to exercise the power of sale in accordance

with the terms of the security instrument.” Tex. Prop. Code

§ 51.0074. Issues arising under Tex. Prop. Code § 51.007

tend to be litigated in context of disputes regarding federal

diversity jurisdiction because the trustee is often a resident

of the same state as the plaintiff in a wrongful foreclosure

suit.

Property Tax Loans

Under Tex. Tax Code § 32.065(c), private property tax

lenders are “prohibited from exercising a remedy of

foreclosure or judicial sale where the transferring taxing

unit would be prohibited from foreclosure or judicial sale.”

Accordingly, private property tax lenders must follow the

same judicial procedures that the taxing municipalities must

follow to foreclose on a private property tax loan.

The Type of Foreclosure for a Property Tax Lien

Changes Depending on the Date That the Loan

Was Originated

Property tax loans originated after May 29, 2013, can no

longer be foreclosed by quasi-judicial procedures under

Rules 735 and 736 of the Texas Rules of Civil Procedure

because Senate Bill 247 (SB 247) of the 83rd Regular

Legislative Session amended Section 32.06(c) of the Texas

Tax Code to remove the provisions authorizing quasi-judicial

sales, which has the effect of limiting private property tax

lenders to the same judicial foreclosure procedures that the

taxing municipalities must follow. A copy of SB 247 can be

accessed here.

Before September 1, 2007, Tex. Tax Code § 32.06(c)

provided that property tax lenders were “entitled to

foreclose the lien . . . in the manner specified in Section

51.002, Property Code, and Section 32.065 of [the

Tax Code].” Tex. Prop. Code § 51.002 governs regular

nonjudicial trustee’s sales. Tex. Tax Code § 32.065 contains

various provisions related to tax lien foreclosures. Private

tax loans that originated before September 1, 2007, could

be foreclosed nonjudicially.

Senate Bill 1520 (SB 1520), of the 80th Regular Session

of the Texas Legislature, available here, went into effect

on September 1, 2007. Under SB 1520, Tex. Tax Code

§ 32.06(c) changed to say that property tax lenders were

“entitled to foreclose the lien . . . in the manner specified in

Section 51.002, Property Code, and Section 32.065 of [the

Tax Code], after the transferee or a successor in interest

obtains a court order for foreclosure under Rule 736, Texas

Rules of Civil Procedure.” (emphasis added) Additionally, Tex.

Tax Code § 32.06(c-1) was added to provide a few extra

requirements on property tax lien foreclosures under Rule

736 that did not apply to home equity loans.

From September 1, 2007, to May 29, 2013, private tax

liens originated during that time could be foreclosed quasi-

judicially through the expedited judicial foreclosure process

in Rules 735 and 736 of the Texas Rules of Civil Procedure.

Private tax loans originated before September 1, 2007,

could be foreclosed nonjudicially.

The current procedures for foreclosing on a property

tax lien are too complex and voluminous to explain in

this practice note. Much of the time, private property

tax lenders wait for the taxing authorities to start the

foreclosure process and then file a petition in intervention

in the judicial foreclosure tax suit filed by the municipalities’

law firm. The private tax lenders then let the government’s

law firm handle the details of the foreclosure sale. For a

private tax lender to foreclose, they must follow the same

procedures that the municipalities must follow.

Condominium Association

Liens

Unlike homeowner’s association liens, condominium liens

can be foreclosed nonjudicially by trustee’s sale. Tex.

Prop. Code § 82.113(d), (e). Condominium associations

have greater statutory protections than homeowner’s

associations because, with condominiums, the shared

ownership of the common areas causes a greater need for

enforcement of shared maintenance and other obligations.

The condominium association rules are found in Title 7,

Chapters 81 and 82 of the Texas Property Code. Chapter

82 is the Texas Uniform Condominium Act, while Chapter

81 applies to condominiums created before the adoption

of the Uniform Condominium Act (i.e., before January 1,

1994). Usually, the legal description in a condominium

deed will refer to the property by a unit or building number

rather than by a lot and block number for a subdivision.

A condominium must have a declaration filed in the deed

records, which typically references either the old Texas

Condominium Act, the Texas Uniform Condominium Act,

or some form of condominium regime. Tex. Prop. Code §

82.051(a).

Statutory Condominium Lien

Unlike homeowner’s association liens, condominium

liens can arise by statute even when the condominium

declaration on file in the deed records fails to create

a lien. Tex. Prop. Code § 82.113(a). The statutory lien

is broad, defining assessments as including regular and

special assessments as well as “does, fees, charges, interest,

late fees, fines, collection costs, attorney’s fees, and any

other amount due to the association by the unit owner or

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Ian D. Ghrist, Managing Attorney, Ghrist Law Firm PLLC

Ian practices general civil litigation, primarily in the areas of Debtor/Creditor, Real Estate, and Mineral Rights. Ian has handled cases involving

deed restrictions, mechanic’s liens, mortgages, lien subrogation, class actions, the Texas Mineral Interest Pooling Act, title disputes, fraud,

deceptive trade practices, evictions, foreclosures, lift stay motions and bankruptcy-related matters, post-judgment collections, breach of

contract, insurance claims, cases under the Uniform Fraudulent Transfer Act, contract-for-deed litigation, etc. Ian is certified in residential

real estate law by the Texas Board of Legal Specialization.

Before law school, Ian spent about four years as a banker for J.P. Morgan Chase where he held a Series 7 license and served as both a

stockbroker and a loan officer.

levied against the unit by the association.” Tex. Prop. Code

§ 82.113. The lien encumbers not only the unit, but also

any “rents and insurance proceeds received by the unit

owner and relating to the owner’s unit.” Tex. Prop. Code

§ 82.113. Condominium associations “may not foreclose a

lien for assessments consisting solely of fines.” Tex. Prop.

Code § 82.113(e). The association can bid on the unit at

the foreclosure sale as a common expense. Tex. Prop. Code

§ 82.113(f).

Statutory Condominium Lien Priority

The statutory condominium lien has priority over any other

lien except the following:

• Property taxes

• Encumbrances recorded before the condominium

declaration is recorded

• A first vendor’s lien or first deed of trust lien recorded

before the date on which the assessment sought to be

enforced becomes delinquent under the declaration,

bylaws, or rules –and–

• Unless the declaration provides otherwise, a lien

for construction of improvements to the unit or an

assignment of the right to insurance proceeds on

the unit if the lien or assignment is recorded or duly

perfected before the date on which the assessment

sought to be enforced becomes delinquent under the

declaration, bylaws, or rules

Tex. Prop. Code § 82.113(b).

Condominium associations, unlike property owners

associations, generally do not have to notify junior

lienholders of foreclosure sale, unless the declaration

contains such requirement, or the lienholder provides a

written request for notice pursuant to Tex. Prop. Code §

82.113(h).

Foreclosure Type Matrix for Property Tax Loans and

Condominium Association Liens

The matrix below sets forth the governing statutes and foreclosure type for property tax loans and condominium association

liens foreclosures.

Lien Type Foreclosure Type Citation

Property Tax Loans Originated after May

29, 2013

Judicial Tex. Tax Code § 32.06(c); Senate Bill

247 (SB 247), 83rd Regular Session

Property Tax Loans Originated between

September 1, 2007 and May 29, 2013

Quasi-Judicial Tex. Tax Code § 32.06(c); Senate Bill

1520 (SB 1520), 80th Regular Session

Property Tax Loans Originated before

September 1, 2007

Nonjudicial Tex. Tax Code § 32.06(c) prior to SB

1520, 80(R) and SB 247, 83(R)

Condominium Association Lien Nonjudicial Tex. Prop. Code § 82.113(d), (e)