Foreclosure Update Including Foreclosing Home Equity Loans

FORECLOSURE UPDATE INCLUDING FORECLOSING HOME EQUITY LOANS

W. MIKE BAGGETT, ESQ.

Portions are reprinted from Texas Foreclosure: Law & Practice by W. Mike Baggett© (Texas Practice Series, Vol. 15) by West Group. Reprinted by permission of the publisher. Further reproduction is strictly prohibited.

Foreclosure Update Including Foreclosing Home Equity Loans Chapter 9

TABLE OF CONTENTS

I. DEFAULT PRIOR TO FORECLOSURE...... 1 A. Default Defined by Debt Instrument, Security Agreement, Deed of Trust, or Loan Agreement...... 1 B. Demand Note...... 2 C. Term Note...... 3 D. Installment Note and Acceleration...... 4 E. Common Law and Statutory Law Governing Various Types of Collateral...... 21 F. Filing Suit for Judgment Prior to or Contemporaneously with Proceeding against Collateral...... 23 G. Effect of Judgment on a Note upon Subsequent Nonjudicial Foreclosure...... 24 H. Judicial Foreclosure versus Nonjudicial Foreclosure...... 25

II. REAL PROPERTY FORECLOSURE...... 26 A. Section 51.002 Property Code: Nonjudicial Sale...... 26 B. Section 51.003 Property Code: Deficiency Judgments after Foreclosure...... 27 C. Section 51.004 Property Code: Judicial Foreclosure—Deficiency...... 29 D. Section 51.005 Property Code: Judicial or Nonjudicia l Foreclosure after Judgment against Guarantor— Deficiency...... 29 E. Section 51.003 and FIRREA...... 29 F. Section 5.061 Property Code: Foreclosure under an Executory Contract for Purchase of Real Property to Be Used as Purchaser's Residence...... 29 G. Contractual Provision...... 30 H. Foreclosure of Subordinate Deeds of Trust...... 30

III. PRELIMINARY CONSIDERATIONS...... 31 A. Abstractor's Certificate: Other Liens...... 31 B. Federal Tax Lien Search...... 31 C. State Tax Lien Search...... 31 D. FDIC and RTC Liens...... 31 E. Amount of Bid Price...... 31 F. Costs and Liabilities Resulting from Ownership of the Real Property...... 33 G. Costs and Liabilities Resulting from Control of Borrower—Nonbankruptcy Control...... 34 H. Deed in Lieu of Foreclosure...... 41 I. Foreclosure of Property in Receivership...... 42 J. Pendency of Divorce...... 42 K. Statute of Limitations Affecting Right to Foreclose...... 42 L. Unilateral Reconveyance of Property by Mortgagor to Mortgagee Does Not Release Secured Debt and Deed of Trust...... 44 M. Section 51.006 of Property Code: Deed-of-Trust Foreclosure After Deed in Lieu of Foreclosure...... 44 N. Death of Mortgagor...... 44 O. Guardianship...... 45 P. Soldiers' and Sailors' Civil Relief Act of 1940...... 45 Q. Commercially Reasonable Standard Does Not Apply to Real Property Foreclosures...... 45

IV. APPOINTMENT OF TRUSTEE AND SUBSTITUTE TRUSTEE ...... 46 A. Mortgagor Designates Trustee in Deed of Trust...... 46 B. Authority to Appoint Solely from Deed of Trust...... 46 C. Sale by Other than Designated Trustee...... 46 D. Parties Designated to Appoint by Deed of Trust...... 46 E. Deed of Trust Conditions for Appointment...... 46 F. Appointment of Substitute Trustee after Proper Posting by Trustee...... 47 G. Sample Form for Resignation of Trustee and Appointment of Substitute Trustee...... 48 H. Trustee Fees...... 51

V. NOTICE OF SALE...... 51 A. Section 51.002 Property Code Notice...... 51 i Foreclosure Update Including Foreclosing Home Equity Loans Chapter 9

B. Posting of Notice...... 53 C. Personal Notice...... 53 D. Notice Filed with County Clerk...... 55 E. Notice to Junior Lienholders...... 55 F. Notice to Prior Lienholders...... 56 G. Federal Tax Lien Notice...... 56 H. Wrongful Foreclosure if Required Notices Not Given or Deed of Trust Requirements Not Satisfied...... 58

VI. CONDUCTING THE SALE...... 58 A. Place of Sale...... 59 B. Conducting the Sale...... 59 C. Sale in Parcels or as a Whole...... 60 D. Requirement to Bid Cash...... 61 E. Qualifying Bidders...... 61 F. If Problem Conducting the Foreclosure—Recess Foreclosure and Give Notice of the Time to Reconvene Sale...... 61 G. Stopping Foreclosure in Process...... 62 H. Mortgagee May Bid...... 62 I. Bid and Price...... 62 J. Adequacy of Consideration...... 63 K. Grossly Inadequate Consideration and Irregularity...... 64 L. Deficiency Judgments When There Is a Probable Significant Disparity between the Foreclosure Sale Price and the Fair Market Value...... 66 M. Deficiency Judgments after April 1, 1991—Addition of § 51.003...... 68 N. Deficiency Judgments Resulting from Judicial Foreclosure after June 5, 1991—Addition of § 51.004...... 69 O. Deficiency Judgments against Guarantors after Judgment and Judicial or Nonjudicial Foreclosure...... 70 P. Mortgagee as Purchaser...... 70 Q. Junior Mortgagee as Purchaser...... 71 R. No Warranties to Purchaser at Foreclosure Sale...... 71 S. Mortgagee's Duty of Good Faith and Fair Dealing...... 72

VII. POSTSALE MATTERS...... 76 A. Informational Returns to Internal Revenue Service...... 76 B. Trustee's Deed...... 77 C. Trustee's Distribution of Bid Proceeds...... 78 D. Bid by Mortgagee in Excess of Debt...... 78 E. Possession...... 78

VIII. INTERESTS AFFECTED B Y VALID FORECLOSURE...... 78 A. Mortgagor's Interest: No Right of Redemption...... 79 B. Mortgagee's Interest...... 79 C. Junior Lienholders...... 80 D. Mechanic's and Materialman's Liens that Are Removable...... 80 E. Removable Property Has Priority over Prior Deed of Trust...... 81 F. Federal Tax Liens...... 81 G. State Tax Liens...... 82 H. Tenants...... 82 I. Insurance Proceeds...... 83 J. Homestead Problems...... 83 K. Foreclosure of Inferior Mortgage–Effect on Prior Mortgage...... 83 L. Wraparound Mortgages...... 84 M. Subrogation of Purchaser to Rights of Senior Mortgagee...... 86

IX. REMEDIES FOR WRONGFUL FORECLOSURE...... 87 A. Equitable Relief...... 87 B. Election of Rescission or Damages...... 89 C. Damages for Wrongful Foreclosure...... 90 ii Foreclosure Update Including Foreclosing Home Equity Loans Chapter 9

D. Damages Not Recoverable if Foreclosure Defect Did Not Cause Damage...... 91 E. Proper Foreclosure Not a Deceptive Trade Practice Act Violation...... 92 F. No Deceptive Trade Practice Act Violation where Common Law Damages Not Properly Proved...... 94 G. Reconducting the Foreclosure If a Problem Is Discovered after the Sale...... 94 H. Special Issue and Instruction on Grossly Inadequate Consideration for Wrongful Foreclosure...... 94 I. Statute of Limitations for Wrongful Foreclosure...... 95 J. Standing to Bring Action Attacking Foreclosure...... 96

X. MISCELLANEOUS MATTERS...... 96 A. Fair Debt Collection Practices Act...... 96 B. Rents - Texas Lien State...... 96 C. Rents - Assignment Absolute or as Collateral...... 97 D. Rents - Right of Mortgagee to Rents...... 98 E. Rents - Bankruptcy Considerations...... 98 F. Open Beach Disclosure Act...... 98

XI. TEXAS RULES OF CIVIL PROCEDURE: RULES 735 AND 736 RELATING TO HOME EQUITY LOAN FORECLOSURES AND CERTAIN REVERSE MORTGAGE FORECLOSURES ...... 99 A. Texas Constitutional Amendment Authorizing Encumbrance of Homesteads for Home Equity Loans...... 99 B. Texas Constitutional Amendment Authorizing Encumbrance of Homesteads for Reverse Mortgage Loans...... 99 C. Constitutional Requirement for Valid Home Equity Loan...... 99 D. Constitutional Requirement for Valid Reverse Mor tgage Loan...... 99 E. Home Equity Loan Foreclosure Requires Court Order...... 100 F. Reverse Mortgage Foreclosure Requires Cure Notice...... 100 G. Reverse Mortgage Foreclosure Requires Court Order for Grounds (6)(C) and (D)...... 100 H. Texas Supreme Court Shall Promulgate Rules of Civil Procedure for Expedited Home Equity Loan Foreclosure Procedures...... 100 I. Texas Supreme Court Shall Promulgate Rule of Civil Procedure for Expedited Reverse Mortgage Foreclosure Procedures...... 101 J. Home Equity Loan and Reverse Mortgage Foreclosure Rules Task Force...... 101 K. No Change Intended for Existing Foreclosure Law Other Than an Order to Proceed with Foreclosure of Home Equity Loans and Certain Reverse Mortgage Payment Requirement...... 101 L. Home Equity Loan Foreclosure and Certain Reverse Mortgage Loan Foreclosure Require Judicial Order to Proceed with Security Instrument and § 51.002 Foreclosure...... 102 M. Rule 735 Allows Alternative Foreclosure Action...... 102 N. Rule 736 Expedited Foreclosure Procedure...... 102 O. Rules 735 and 736...... 103

XII. PERSONAL PROPERTY FORECLOSURE...... 103 A. Governing Law...... 103 B. Article Nine of the Texas Business and Commerce Code...... 103 C. Preliminary Inquiries upon Default or Maturity of Debt...... 108 D. Disposition By Sale, Lease, or Otherwise...... 112 E. Commercially Reasonable Sale...... 120 F. Who May Bid...... 127 G. Postsale Matters...... 128 H. Interests Affected by Foreclosure...... 134 I. Acceptance of the Collateral in Discharge of the Debt...... 137 J. Remedies for Wrongful Foreclosure...... 141 K. Miscellaneous Matters Affecting Power of Sale...... 145

XIII. INJUNCTIONS...... 146 A. Availability of Injunctive Relief and Application to Foreclosure...... 146 B. Overview of Injunctive Relief...... 147 C. Considerations in Obtaining Interlocutory Injunctive Relief from a Trial Court...... 149 D. Ownership of Real Property...... 153 iii Foreclosure Update Including Foreclosing Home Equity Loans Chapter 9

E. Adequacy of Legal Remedies...... 153 F. Grounds for Granting Injunctive Relief in Foreclosure Situation...... 154 G. Temporary Restraining Order Procedures...... 156 H. Temporary Injunction Procedures...... 157 I. Appellate Review of Order Granting or Denying Injunctive Relief...... 160 J. Injunctive Relief Pending Appeal...... 162

XIV. APPENDICES...... 165