Chapter 13 

Bid Evaluation

§ 13.1Introduction

Any person who, whether representing the mort­gagee or a third-party bidder, desires to formu­late a rational strategy for bidding at a foreclosure sale should, in advance of the sale, determine not only the value of the collateral in the abstract, but should also review the particu­lar circumstances of the collateral and lien being foreclosed to determine if other factors will influence the price the person is willing to bid at sale. These other factors include matters such as casualty damage to the mortgaged property, environmental problems, the priority of the lien being foreclosed, and the existence of wrap­around debt.

§ 13.2Appraisal

The process of formulating a rational bid strat­egy must necessarily begin with valuing the col­lateral. The mortgagee has several reasons for obtaining a preforeclosure appraisal of the mort­gaged property. If the lien is a second lien, the mortgagee should determine whether there is enough equity in the property to justify the expense of foreclosing. Obviously, an inferior lienholder will not want to bid more than the market value of the property less the balance owed on prior liens, including delinquent or accrued property taxes. The mortgagee will also want to determine, in light of the property’s value and anticipated “holding time” and resale costs if the mortgagee were to acquire the prop­erty, at what price the mortgagee would sell its note or stop bidding to let a third party acquire the property at a foreclosure sale. A mortgagee, however, has no duty to provide the mortgagor with a copy of the mortgagee’s appraisal unless the mortgagee agrees to provide the appraisal in the loan agreement documents. See Everson v. Mineola Community Bank, S.S.B., No. 12-05-334 CV, 2006 WL 2106959, at *2 (Tex. App.—Tyler July 31, 2006, pet. denied) (mem. op.).

§ 13.2:1Importance of Appraisal for Deficiency Suit

Section 51.003 of the Texas Property Code pro­vides additional importance to the appraisal. In a suit for deficiency following a foreclosure sale, the person against whom recovery is sought may request the finder of fact to determine the fair market value of the property, and, if the fair market value exceeds the amount of the success­ful bid, the defending party will be entitled to an offset in the amount of the difference. See Tex. Prop. Code § 51.003. Evidence of fair market value may include expert opinion testimony, prices at comparable sales, anticipated market­ing time and holding costs, and the necessity and amount of any discount to be applied to the future sale price or the cash flow generated by the property to arrive at a current fair market value. Tex. Prop. Code § 51.003(b). An appraisal allows the lender to evaluate in advance whether a suit on a guaranty could be thwarted under section 51.003. However, the mortgagee runs the risk that the appraiser will appraise the mortgaged property higher than anticipated, forcing the mortgagee to bid higher than it otherwise feels is justified and thereby giving up part of its recourse in a deficiency judgment.

§ 13.2:2Selection of Appraiser

Care should be taken in selecting the appraiser, since the appraisal will probably be discoverable in any subsequent litigation or bankruptcy pro­ceedings. The appraiser should be a good wit­ness as well competent appraiser. If at all possible, the appraiser should be a member of a recognized appraisal society, such as the Ameri­can Institute of Real Estate Appraisers. In some counties, the only expert available may be a real estate broker. See Tex. Occ. Code § 1101.002(1)(A)(xi), which defines “broker” to include persons who provide estimates of worth not constituting an appraisal, but which are pro­vided in the person’s ordinary course of busi­ness and are related to the actual or potential acquisition or disposition of an interest in real property. The mortgagee runs the risk that the appraiser will appraise the mortgaged property higher than anticipated, forcing the mortgagee to bid higher than it otherwise feels is justified and thereby giving up part of its recourse in a defi­ciency judgment. The twenty-one-day period for the foreclosure sale notice is a very short time within which to obtain an appraisal. Many times the appraisal is received on the eve of the fore­closure sale with little chance for evaluation by the mortgagee. Therefore, ordering an appraisal should be one of the first steps in the foreclosure process. See form 13-1 in this chapter for a letter employing an appraiser and form 13-2 for a bid calculation worksheet.

§ 13.2:3Effect of Mineral Interests

In reviewing any appraisal of the collateral real property, the mortgagee should keep in mind that the value of the collateral real property may be materially and adversely affected by out­standing mineral interests, as the mineral estate owners have the right to use such part of the sur­face as is reasonably necessary to develop the mineral estate. Ball v. Dillard, 602 S.W.2d 521, 523 (Tex. 1980); Humble Oil & Refining Co. v. Williams, 420 S.W.2d 133, 134 (Tex. 1967); Warren Petroleum Corp. v. Monzingo, 304 S.W.2d 362, 363 (Tex. 1957). While Texas law does recognize that the mineral owner must accommodate existing surface uses,

to obtain relief on a claim that the mineral lessee has failed to accom­modate an existing use of the surface, the surface owner has the burden to prove that (1) the lessee’s use com­pletely precludes or substantially impairs the existing use, and (2) there is no reasonable alternative method available to the surface owner by which the existing use can be contin­ued. If the surface owner carries that burden, he must further prove that given the particular circumstances, there are alternative reasonable, cus­tomary, and industry-accepted meth­ods available to the mineral lessee which will allow recovery of the min­erals and also allow the surface owner to continue the existing use.

Merriman v. XTO Energy Inc., 407 S.W.3d 244, 249 (Tex. 2013) (citations omitted). Some com­fort as to the scope of an existing use to which the accommodation doctrine applies may be found in Texas Genco, LP v. Valence Operating Co., 187 S.W.3d 118 (Tex. App.—Waco 2006, pet. denied), where the court held that a permit for use of surface as a landfill was tantamount to an “existing use,” and the mineral lessee had to accommodate that use by directional drilling). See James M. Summers, The Impact on Lenders of the Correlative and Conflicting Rights of Competing Estates and Interests: Surface, Min­eral, Water, and Wind, in Mortgage Lending Institute, University of Texas School of Law, Austin (2013).

Many existing mortgagee’s title insurance poli­cies exclude the mineral estate from the scope of policy coverage. Texas Insurance Code section 2703.0515 provides that a title insurance com­pany is not required to offer or provide in con­nection with a title insurance policy an endorsement insuring a loss from damage result­ing from the use of the surface of the land for the extraction or development of coal, lignite, oil, gas, or another mineral if the policy includes a general exception or exclusion from coverage a loss from damage resulting from the use of the surface of the land for the extraction or develop­ment of coal, lignite, oil, gas, or another mineral. Tex. Ins. Code § 2703.0515. For a further dis­cussion of the protection title insurance can pro­vide with respect to mineral interests, see David J. Weiner, Mineral Rights and Surface Damage: An Overview of Recent Changes in the Title Insurance Industry, in Advanced Real Estate Strategies Course, State Bar of Texas, Austin (2014).

§ 13.3Effect of Postforeclosure Review on Bidding

§ 13.3:1BFP v. RTC and Fraudulent Transfers

See sections 14.8:1 through 14.8:5 in this man­ual for a discussion of the state-law rule that mere inadequacy of consideration does not ren­der a foreclosure sale invalid. Section 548 of the Bankruptcy Code permits transfers that occurred within two years of filing bankruptcy to be set aside if the debtor was insolvent at the time of the transfer and the debtor received “less than a reasonably equivalent value” in exchange for the transfer. 11 U.S.C. § 548(a)(1)(B)(i). Such transfers are termed “fraudulent transfers” in that they deplete the bankrupt’s estate of value that otherwise might be available for the bank­rupt’s unsecured creditors. Concerns that a non­judicial deed-of-trust lien foreclosure sale could be set aside based on the amount paid for the mortgagor’s property partially have been elimi­nated by the decision of the United States Supreme Court in BFP v. RTC, 511 U.S. 531 (1994). Before this decision, lenders in Texas followed the “70 percent of value paid” guide­line announced in Durrett v. Washington National Insurance Co., 621 F.2d 201 (5th Cir. 1980). In Durrett, the Fifth Circuit held that a foreclosure sale that yielded 57 percent of the fair market value of property was not a transfer for reasonably equivalent value and supplied a rule of thumb that 70 percent of fair market value was the level below which a transfer was subject to being set aside. Durrett, 621 F.2d at 202–03. See also Matheson v. Powell (In re Matheson), 84 B.R. 435, 437 (Bankr. N.D. Tex. 1987) (fraudulent transfer rules of Bankruptcy Code section 548 apply only to prepetition transfers and are not applicable to postpetition transfers, such as a foreclosure sale after lifting of stay).

In BFP, the Supreme Court eliminated the rela­tionship of “fair market value” from the test for “reasonably equivalent value.” The court noted that section 548 does not refer to “market value.” The court reasoned that fair market value is not typically obtained in a forced-sale context. The court found that section 548 did not embrace a fair market value bid test in the con­text of a foreclosure sale. The court also refused to substitute a “fair forced sale” test. The court held that, for purposes of section 548, “reason­ably equivalent value” at a foreclosure sale means “the price in fact received at the foreclo­sure sale, so long as all the requirements of the State’s foreclosure laws have been complied with.” BFP, 511 U.S. at 545.

However, the foreclosure sale may be avoided under section 548 if the price paid is not reason­ably equivalent to its actual foreclosure sale value and if the sale was the result of irregulari­ties under state law that would permit judicial invalidation of the sale. The court defined the property’s actual value as being the price the property would have brought if the foreclosure sale had proceeded according to the state’s stat­utory foreclosure process. See BFP, 511 U.S. at 545–46.

§ 13.3:2Ninety-Day Preference Review

In Whittle Development, Inc. v. Branch Banking & Trust Co. (In re Whittle Development, Inc.), 463 B.R. 796 (Bankr. N.D. Tex. 2011), the bankruptcy court for the Northern District of Texas denied a preference defendant’s motion to dismiss a mortgagor’s claim that the foreclosure constituted a preference. The court found that the Supreme Court’s holding in BFP did not apply in preference actions. The court framed the issue as follows: “whether a debtor in pos­session can avoid a pre-petition real property foreclosure on the grounds that the foreclosure constituted a preferential transfer, even though the foreclosure sale complied with state law and was non-collusive.” Whittle Development, Inc., 463 B.R. at 767. The court noted:

Although the Code at time is “awk­ward, and even ungrammatical . . . that does not make it ambiguous.” (citation omitted) Therefore, looking at the unambiguous language of the statute, it would seem that the only thing that must be shown is that the creditor did, in fact, receive more from the pre-petition transfer than it would have under a Chapter 7 liqui­dation in order for § 547(b)(5)(A) to be satisfied.

Whittle Development, Inc., 463 B.R. at 800.

In Whittle, the mortgaged property was sold to a subsidiary of the mortgagee at a foreclosure sale within the section 547(b)(5)(A) ninety-day pref­erence period for $1,220,000.00, leaving a defi­ciency of $1,181,513.27. See Whittle Development, Inc., 463 B.R. at 798. The debtor in possession alleged that the property was worth $3,300,000.00 and that Branch Banking & Trust was thus over secured by $1,100,000.00. Whittle Development, Inc., 463 B.R. at 798. The court cited the following ratio­nale for this result set out in In re FIBSA For­warding, Inc., 230 B.R. 334, 341 (Bankr. S.D. Tex. 1999), aff’d, 244 B.R. 94 (S.D. Tex. 1999):

The issue posed before the Supreme Court was a wholly different quality. If the court had ruled differently in BFP all transfers of real estate in a foreclosure sale could be declared fraudulent since the transfer would not, as a matter of law, yielded “rea­sonably equivalent value in exchange.” In dealing with preferen­tial transfers, there is no such risk. If an otherwise valid foreclosure sale is found to enable a creditor to obtain more than he would in a chapter 7 liquidation, then the additional amount of benefit conferred to the creditor is simply brought back into the estate. The purchaser of the real estate at the foreclosure does not nec­essarily lose its property unless the purchaser is the creditor himself. This approach furthers the state’s interest in maintaining the security of titles without subverting the policy of the Code of maintaining equality among the creditors.

As a matter of policy, this is probably the optimal approach to this issue. As the court in FIBSA Forwarding, Inc. noted, a creditor who is able to fore­close prepetition may be able to achieve a windfall unless the debtor or the other creditors file an involun­tary petition before the foreclosure. In re FIBSA Forwarding, Inc., 230 B.R. at 341. Such a result creates the so-called “race to the court house” that the Code tries to prevent. By allowing the trustee (or the debtor-in-possession in a chapter 11 case) to bring an avoidance action, a court risks wasting judicial resources on another evidentiary hearing to deter­mine whether the foreclosure sale did result in a better outcome for the creditor than he might otherwise have received. Such a risk is marginal compared to the risk of a creditor is able to achieve a windfall profit at the expense of the estate by the mere vir­tue that she had the prescience to foreclose before a petition could be filed.

Whittle Development, Inc., 463 B.R. at 801–02. See also Villareal v. Showalter (In re Villarreal), 413 B.R. 633, 639–42 (Bankr. S.D. Tex. 2009) (court found that foreclosure resulted in a $3,250,000 windfall to lender). If the debtor in possession is successful in challenging the fore­closure sale as a preference, it may recover from the mortgagee the property subject to a lien for the amount the mortgagee has paid through its bid, or the value of the property in excess of the bid. See Alvin Arnold and Marshall Tracht, Construction and Development Financing § 6:141 (3d ed. 2001); Gerald L. Blanchard, Lender Liability: Law, Practice and Prevention § 11:19 (2013 ed.); and Joyce Palomar, Title Insurance Law § 14:18 (2013–14 ed.).

§ 13.4Casualty Loss and Effect on Bid

In connection with foreclosure proceedings, the mortgagee should both confirm that the mort­gaged improvements are insured and review the terms of the applicable insurance policies. If the mortgaged property is damaged by casualty before the foreclosure sale, the following ques­tions should be answered: (1) Will the claim be settled before the foreclosure sale? (2) Who is entitled to the proceeds: the noteholder, the mortgagor, or the purchaser at the foreclosure sale? (3) Will a greater recovery be available if the proceeds are applied in reconstruction of the mortgaged property than if they are taken as a cash payment? (4) Will the insurer insist on the premises being repaired as opposed to its paying a cash settlement? (5) Do the policy and pro­ceeds cover contents or trade fixtures not encumbered by the deed of trust? For additional information, see the following resources: Wil­liam H. Locke, Jr., and Charles E. Comiskey, 11 Things You Wish You Had Known About Com­mercial Project Insurance, in State Bar of Tex., Advanced Real Estate Law Course (2013); Wil­liam H. Locke, Jr., and Marilyn C. Maloney, Insurance Issues in Distressful Times, in State Bar of Tex., Advanced Real Estate Drafting Course (2011); William H. Locke, Jr., and Mari­lyn C. Maloney, Top Ten Insurance Tips for Mortgage Lending, in Mortgage Lending Insti­tute, University of Texas School of Law (2011); William H. Locke, Jr., and Marilyn C. Maloney, Top 10 Insurance Tips for Lenders, 28 Practical Real Estate Lawyer 45 (2012); and 13 Williston on Contracts § 37:51 (2013).

§ 13.4:1Types of Mortgagee Clauses in Property Insurance

Absent a contractual undertaking to insure the mortgaged property and to insure the interest of the mortgagee, the mortgagor does not have an obligation to do so. However, it is customary in commercial financing to require the mortgagor to carry insurance for the joint interest of both mortgagor and mortgagee. At least three types of mortgagee clauses cover the mortgagee’s interest under a hazard insurance policy and the policy’s proceeds: the open mortgage clause, the standard mortgage clause, and the assignment of the mortgagor’s interest clause.

Simple Loss Payee/Open Mortgage Clause: An open mortgage clause provides that any loss is payable to the lender “as its interest may appear.” Courts have held that a clause that sim­ply provides that insurance proceeds will be payable to a mortgagee “as its interest may appear” links the mortgagee’s recovery to the right of the mortgagor to recover and exposes the mortgagee to risks that the insurer will be afforded a defense to payment to the mortgagee based upon inequitable conduct of the mort­gagor. This type of clause exposes the lender to all the defenses and limitations that the insurer has against the insured mortgagor, such as fail­ure to pay the premium or perform a condition for coverage under the policy. See cases and dis­cussion at Steven Plitt et al., 4 Couch on Insur­ance § 65:8 (3d ed. 2011); Annotation, Remedy and Measure of Damages for Wrongful Cancel­lation of Life Insurance, 48 A.L.R. 107, 121 (1927); and Annotation, Breach of Policy by Mortgagor as Affecting Mortgagee under a Loss-Payable Clause which does not Provide for that Event, 38 A.L.R. 367 (1925). Examples of the effect of such a clause are discussed in Commerce Bank & Trust Co. v. Centennial Insurance Co., 446 N.E.2d 73 (Mass. 1983) and Pioneer Food Stores Cooperative, Inc. v. Fed­eral Insurance Co., 563 N.Y.S.2d 828 (N.Y. App. Div. 1991). In Commerce Bank, the mort­gagee claimed that it should receive the insur­ance proceeds regardless of whether the loss was caused by a fire set by the mortgagor. While the court did not determine the question of arson, it held that because the mortgagee was essentially merely a loss payee, it could recover only if the mortgagor would have been entitled to recover. Commerce Bank, 446 N.E.2d at 75. Pioneer Food Stores also involved suspected arson by the mortgagor; because the mortgagor would not provide financial information or sub­mit sworn affidavits regarding the loss, the mortgagee was denied recovery. Pioneer Food Stores, 563 N.Y.S.2d at 830. Not all borrowers facing financial difficulty consider insurance fraud as the way out of their problems, but the mortgagee of one who has taken this path will be unprotected if it is simply named as loss payee or is covered under an “open mortgage clause” type of endorsement.

Standard Mortgage Clause:   Standard com­mercial property policies, for example, Insur­ance Services Office’s (ISO’s) CP 00 10, automatically extend coverage to the mortgagee as an insured through the inclusion of the stan­dard mortgage clause. See 4 Couch on Insurance § 65:48. Other property insurance forms that do not include a mortgage clause must be endorsed to provide coverage equivalent to that contained in CP 00 10.

The standard mortgage clause was developed to protect recovery by the mortgagee even though the insurance contract between the mortgagor and the insurer might be voided by the insurance company because of certain omissions or acts by the mortgagor (for example, neglect, arson, or concealment). The most significant protections afforded by the standard mortgage clause are the following:

1.Insurance proceeds are paid to the mortgagee and not to the insured or to the mortgagee and the insured jointly (see Standard Mortgage Clause sec­tion F.2.b in the ISO CP 00 10 10 12 Building and Personal Property Cov­erage Form).

2.Coverage applies for the benefit of the named mortgagee even if coverage is denied the insured because of some violation by the insured of the policy’s conditions (see Standard Mortgage Clause section F.2.d in the ISO CP 00 10 10 12 Building and Personal Prop­erty Coverage Form).

3.The mortgagee is to be given notice of policy cancellation by the insurer: ten days’ notice of cancellation for non­payment of premium and thirty days’ notice when cancellation is for other reasons (see Standard Mortgage Clause section F.2.f(1) in the ISO CP 00 10 10 12 Building and Personal Property Coverage Form).

4.The mortgagee is to be given ten days’ notice on nonrenewal (see Standard Mortgage Clause section F.2.g in the ISO CP 00 10 10 12 Building and Per­sonal Property Coverage Form).

Numerous cases uphold the standard mortgage clause’s requirement that notice must be given. For example, in Firstbank Shinnston v. West Vir­ginia Insurance Co., 408 S.E.2d 777 (W. Va. 1991), the court held that a fire insurance com­pany could not remove the lender under a deed of trust from the owner’s insurance policy with­out giving notice to the lender of the cancella­tion. In that case, a homeowner had agreed through a standard mortgage clause to maintain fire insurance on his home, which was subject to a deed of trust securing a loan from Firstbank Shinnston. After two items of correspondence sent to the bank were returned undelivered to the insurance company, the insurance company uni­laterally deleted the bank as an additional insured under the policy. The house burned, and the homeowner collected $18,000 from the insurance company but did not rebuild. As a result, the insurance company canceled the pol­icy. The homeowner also defaulted on his loan. Firstbank Shinnston sought to collect the insur­ance proceeds from the fire, and the insurance company refused coverage. The court held on those facts that cancellation of the policy was not effective as to Firstbank Shinnston, because the insurance company failed to notify the bank that its interest as mortgagee was being can­celed. Firstbank Shinnston, 408 S.E.2d at 782–83.

Courts have held that a standard mortgage clause grants independent rights to the mort­gagee from the insurer that can be enforced regardless of the actions of the mortgagor. A standard mortgage clause, like the open mort­gage clause, provides that the loss will be pay­able to the mortgagee “as its interest may appear,” but it goes further to provide that the insurance, as to the mortgagee, will not be inval­idated by acts of the insured. 4 Couch on Insur­ance § 65:9. Examples of cases that provided payments to the mortgagee under such clauses are National Commercial Bank & Trust Co. v. Jamestown Mutual Insurance Co., 334 N.Y.S.2d 1000 (N.Y. Sup. Ct. 1972) and Foremost Insur­ance Co. v Allstate Insurance Co., 460 N.W.2d 242 (Mich. Ct. App. 1990). In National Com­mercial Bank, the insurer claimed that material misrepresentations of the insured voided the policy. However, the court found that the stan­dard mortgage clause created a separate contract between insurer and mortgagee that was not affected by the actions of the insured. National Commercial Bank, 334 N.Y.S.2d at 1001. Fore­most involved yet another case of arson by the insured, but because the policy named the mort­gagee under the standard or union clause, it was entitled to recover despite the actions of the insured. Foremost Insurance Co., 460 N.W.2d at 244; see also John W. Steinmetz et al., The Standard Mortgage Clause in Property Insur­ance Policies, 33 Tort & Ins. L. J. 81 (1997).

§ 13.4:2Mortgagee’s Rights in Property Insurance on Bankruptcy of Mortgagor

In the context of a mortgagor’s bankruptcy pro­ceeding, the property policy’s proceeds up to the mortgagee’s insurable interest are not property of the mortgagor in bankruptcy. In Paskow v. Calvert Fire Insurance Co., 579 F.2d 949, 951 (5th Cir. 1978), the court held, “Because the mortgagee has a contractual right to money pay­able under the loss payable clause, the mort­gagor has no right to that money. Thus the money or right to receive the money is not prop­erty or a right to property belonging to the mort­gagor.”

The Uniform Commercial Code recognizes that a mortgagee loss payee’s interest in mortgaged property policy proceeds takes precedence over claims of a holder of a perfected security interest in collateral that has been damaged or destroyed. Lary Lawrence, 9 Lawrence’s Anderson on the Uniform Commercial Code § 9-306:15 (3d ed. 1981, revised 1999).

§ 13.4:3Issues Arising before Foreclosure

Some property insurance policies require the mortgagee to notify the insurance carrier of the commencement of foreclosure. Notice is given to the insurance carrier so that it may protect its position by purchasing the secured indebtedness or bidding at the foreclosure sale, especially if a casualty loss has occurred before the foreclosure sale. The safest practice is to notify the insur­ance company of a pending foreclosure sale and of the change of ownership after the foreclosure sale.

Further, if the mortgagor abandons the mort­gaged property before the foreclosure sale, the mortgagee must confirm continuation of cover­age. Most property insurance policies exclude or reduce coverage if the insured property is vacant for more than a certain period of time, usually sixty days. This limitation arises from the possi­bility that vandalism, glass breakage, theft, and other casualties may occur when the property is unprotected. Although a company may offer an endorsement to override the vacancy exclusion, these endorsements typically provide for short term coverage at a much greater cost.

§ 13.4:4Loss to Property before Foreclosure

If the mortgaged property is damaged before the foreclosure sale, the lender will be concerned as to whether the mortgagor, the lender, or the pur­chaser at the foreclosure sale will receive the insurance proceeds. In addition, the lender should consider whether a greater recovery is available if the proceeds are applied in recon­struction of the mortgaged property or if they are taken as a cash payment. The greater replacement cost proceeds are payable only if the property is repaired. If proceeds are applied to the mortgage debt, the lower “actual cash value” will be paid.

§ 13.4:5Loss after Foreclosure

If the loss occurs after a foreclosure sale, the mortgagor no longer has an insurable interest, and even though the mortgagor continues to reside on the property as a tenant at sufferance, the mortgagor does not have an insurable inter­est in the property and does not have a claim to the insurance proceeds payable due to a fire loss. Rhine v. Priority One Insurance Co., 411 S.W.3d 651, 660–61 (Tex. App.—Texarkana 2013, no pet.); Jones v. Texas Pacific Indemnity Co., 853 S.W.2d 791, 793 (Tex. App.—Dallas 1993, no writ).

§ 13.4:6Mortgagee’s Option to Repair or to Apply Proceeds to Debt

In Texas, parties may contract as to the disposi­tion to be made of the insurance proceeds for a casualty loss. Schultz v. Morton, 101 S.W.2d 373, 375 (Tex. App.—Dallas 1936, writ ref’d). The mortgagee is generally given the option to apply the proceeds to the secured debt. The Texas Real Estate Forms Manual’s deed of trust specifies: “Lender may apply any proceeds received under the property insurance policies covering the Property either to reduce the Obli­gation or to repair or replace damaged or destroyed improvements covered by the policy.” 1 State Bar of Texas, Texas Real Estate Forms Manual ch. 8, form 8-1 (2022 ed.). If the mort­gagee has notice that the insured damage to the mortgaged property is “fairly extensive,” the mortgagee has the obligation to notify the bor­rower of its election “within a fairly short period after receiving the proceeds” so that the bor­rower may make a decision about whether and how to repair the property. Statewide Bank & SN Servicing Corp. v. Keith, 301 S.W.3d 776, 782 (Tex. App.—Beaumont 2009, pet. abated).

If the lender has total discretion in the use of the proceeds, in making a decision to allow rebuild­ing, it will consider the viability of the project, the strength of the borrower, the lender’s rela­tionship with the borrower and its affiliates, and other credit-driven factors. It should also con­sider the effect this decision will have on the amount of the recovery. The lender will typi­cally require the borrower to obtain replacement value insurance. This provides more coverage than “actual cash value” because it provides funds necessary to replace the project, rather than taking the original cost of the insured prop­erty and then applying a reduction for physical depreciation. Because replacement value insur­ance provides more coverage, it is more expen­sive. However, receipt of replacement proceeds depends on replacement of the project. If the project is not rebuilt, the insurer will pay only the lesser actual cash value proceeds. The lender should be aware of this as it considers whether to allow rebuilding or to require repayment of its loan.

Application of Proceeds to Debt:      In Zidell v. John Hancock Mutual Life Insurance Co., 539 S.W.2d 162, 165 (Tex. App.—Dallas 1976, writ ref’d n.r.e.), the court stated that it knew of no public policy reason to prevent a mortgagor from agreeing that a mortgagee may apply insurance proceeds to the secured debt. The court refused to find such an arrangement grossly inequitable, because the mortgagor actu­ally benefits by having the proceeds applied to his debt. The landmark case of English v. Fischer, 660 S.W.2d 521 (Tex. 1983), upheld the mortgagee’s right to apply the proceeds to the debt and to refuse to allow the proceeds to be used to repair the mortgaged property. In Anchor Mortgage Services, Inc. v. Poole, 738 S.W.2d 68 (Tex. App.—Fort Worth 1987, writ denied), the court held that the mortgagors failed to show that they sustained any damages from the mortgagee’s breach of its agreement to dis­burse a portion of the insurance proceeds to start repair work. The court reasoned that although the mortgagors may have suffered the loss of the funds because of foreclosure in accordance with the terms of the deed of trust, the mortgagors were also relieved of the obligation to make repairs. Anchor Mortgage Services, 738 S.W.2d at 71.

Application of Proceeds to Repair or Restoration:      Unlike the issue presented in Zidell, the court in Lewis v. Wells Fargo Home Mortgage, Inc., 248 S.W.3d 828 (Tex. App.—Texarkana 2008, no pet.), reviewed a mort­gagee’s conduct in applying insurance proceeds to reconstruct a home destroyed by fire. After the fire, which occurred two weeks after Lewis bought the home, Lewis made no payments on the note, and Wells Fargo foreclosed. Lewis sued to declare that the debt had been satisfied by the payment of the insurance proceeds to Wells Fargo, that as a result thereof the foreclo­sure was wrongful, title remained in Lewis, and that Wells Fargo had constructed the home on Lewis’s land as an unencumbered improvement. Lewis also complained that the house as con­structed was inferior to the house that preexisted the fire and thus Wells Fargo had not used the insurance proceeds for “restoration or repair” but instead for “reconstruction or rebuilding.” The court found that Lewis’s complaint about the quality of construction was a severed matter remaining to be resolved by the trial court and affirmed the trial court’s granting of partial sum­mary judgment in favor of Wells Fargo that it was the owner of the property. Lewis, 248 S.W.3d at 830–31.

§ 13.4:7Relationship of Proceeds to Secured Debt

The noteholder’s right to the insurance proceeds depends on the existence of an interest in the mortgaged property and in the property insur­ance policy, typically referred to in policies with the phrase as their interest may appear at time of loss.

If the mortgagee does not carry its own insur­ance but requires the mortgagor to carry insur­ance for the benefit of both parties, the mortgagee must also verify that its interests are properly reflected in the policy. There is more than one form of endorsement for this purpose, and each provides widely different protection. Both the mortgagor and mortgagee have insur­able interests in mortgaged property. Either the mortgagor or mortgagee can purchase a property insurance policy on the mortgaged property. A mortgagor may insure the mortgaged property in an amount equal to the property’s value.

A mortgagee’s interest in the policy is limited to the secured indebtedness due it. In Sportsmen’s Park, Inc. v. New York Property Underwriting Ass’n, 470 N.Y.S.2d 456, 459 (N.Y. App. Div. 1983), the court noted, “The extent of a mort­gagee’s interest is determined, in the first instance, by the total amount of its lien, includ­ing the outstanding principal amount of the debt plus interest, plus any amounts expended to pro­tect its security (i.e., taxes, insurance premiums, etc.), all as of the date of the fire.”

The noteholder’s interest will vary depending on the action taken before the insurer disburses the insurance proceeds. If the property is foreclosed on before the proceeds are distributed, the mort­gagee’s right to the proceeds may be reduced or extinguished, depending on the mortgagee’s interest remaining after foreclosure. If the mort­gagee purchases the mortgaged property for the amount of the debt outstanding, the mortgagee will have no right to the insurance proceeds. In Helmer v. Texas Farmers Insurance Co., 632 S.W.2d 194, 196 (Tex. App.—Fort Worth 1982, no writ), the court succinctly stated “no mort­gagee’s indebtedness; no indebtedness or liabil­ity to mortgagee from the insurance company.” In Beneficial Standard Life Insurance Co. v. Trinity National Bank, 763 S.W.2d 52 (Tex. App.—Dallas 1988, writ denied), the court refused to find that the insurer’s full credit bid at the foreclosure sale should be reformed to be reduced by the amount of the insurance pro­ceeds even though the mortgagee was unaware of the casualty loss at the time of the foreclosure sale. The insurer brought the action to determine who was entitled to the insurance proceeds. The court upheld the award of the proceeds to the second lienholder and the mortgagor as opposed to the first lienholder, who had mistakenly bid an amount equal to the balance due on the first-lien indebtedness. Beneficial Standard Life Insurance Co., 763 S.W.2d at 55–56. The court refused to conform its decision to the judgment in a separate court action brought by the first lienholder against the substitute trustee to reform the bid price. The second lienholder and the mortgagor were not parties to the separate reformation suit. Additionally, because there was no agreement between the lienholders, there could be no reformation on the theory of mutual mistake of the parties. Beneficial Standard Life Insurance Co., 763 S.W.2d at 56.

If the mortgagee purchases the mortgaged prop­erty for less than the balance owed on the secured debt, the mortgagee may recover from the insurer, as from the mortgagor, the defi­ciency (up to the policy limits). In Helmer, the court held that an insurer was obligated to pay only $25.70 to a mortgagee on a secured debt of $6,725.70, after the mortgagee had bid and pur­chased the mortgaged property at the foreclo­sure sale for $6,700.00. See Helmer, 632 S.W.2d at 195. In Campagna v. Underwriters at Lloyd’s London, 549 S.W.2d 17 (Tex. App.—Dallas 1977, writ ref’d n.r.e.), the mortgagee’s recov­ery against the insurer was $408, the difference between the $2,551 balance on the secured debt and the mortgagee’s successful bid of $2,143. The court rejected the mortgagee’s argument that the mortgagee’s right of recovery under the policy should be the difference between the amount of the debt and the market value of the mortgaged property after the fire and that the amount bid at the foreclosure should be irrele­vant. Campagna, 549 S.W.2d at 18–19.

In Fireman’s Fund Insurance Co. v. Jackson Hill Marina, Inc., 704 S.W.2d 131 (Tex. App.—Tyler 1986, writ ref’d n.r.e.), the court held that the mortgagee, which had purchased the mort­gaged property at the foreclosure sale, was enti­tled to the insurance proceeds on the policy purchased by the mortgagor before foreclosure for a casualty occurring after the foreclosure sale. The recovery was limited to the amount of the loan deficiency. The mortgagor was held not to be entitled to the insurance proceeds, because the insurer had been put on notice of the change of ownership. Fireman’s Fund Insurance Co., 704 S.W.2d at 136.

If the deed of trust requires the mortgagor to list the mortgagee as an additional insured on its property insurance policy, the mortgagee is pro­tected by an equitable lien on property insurance proceeds even if the mortgagee is not listed on the insurance policy as an additional insured or mortgagee. Beneficial Standard Life Insurance Co., 763 S.W.2d at 55; Duval County Ranch Co. v. Alamo Lumber Co., 663 S.W.2d 627, 632 (Tex. App.—Amarillo 1983, writ ref’d n.r.e.); Fidelity & Guaranty Insurance Corp. v. Super-Cold Southwest Co., 225 S.W.2d 924, 927 (Tex. App.—Amarillo 1949, writ ref’d n.r.e.).

In U.S. Bank N.A. v. Safeguard Insurance Co., 422 F. Supp. 2d 698 (N.D. Tex. 2006), the court held that although the mortgagee was not listed on the mortgagor’s property policy as an addi­tional insured, the mortgagee was entitled to the insurance proceeds under the equitable lien doc­trine because the mortgage required the mort­gagor to cause the insurance company to list the mortgagee as an additional insured. The court also held that the mortgagee’s right to the pro­ceeds could not be defeated by its subsequent foreclosure on three of the four apartment proj­ects insured under the policy, including the two projects that sustained insured damage, as a deficiency still existed, even though the deed of trust expressly recited that the mortgage lien continued as a lien on the balance of the mort­gaged property.

§ 13.4:8Casualty Loss Bid Strategy

Liquidating Casualty-Loss Claim before Foreclosure Sale:      The mortgagee should postpone the foreclosure sale until after the amount payable on the insurance policy is deter­mined. Otherwise, the mortgagee risks overbid­ding by establishing a deficiency less than the amount of the insured casualty loss.

Foreclosure before Applying Insurance Pro­ceeds to Secured Debt:      The mortgagee may feel that foreclosing before the insurance pro­ceeds are liquidated and applied to reduce the secured debt is necessary. In such situations, the mortgagee should be careful to bid low enough to establish a deficiency equal to the insurance proceeds.

The lender may be placed in a dilemma should it face competitive bidding. To be the successful bidder at the foreclosure sale and thereby be the owner of the policy and the recipient of its pro­ceeds, the lender may be forced to bid up to its outstanding indebtedness and thereby extinguish or pro rata extinguish its claim on the insurance policy.

Assuming the lender has elected not to make the insurance proceeds available for the restoration of the mortgaged property, the best course of action appears to be to have the proceeds liqui­dated and applied to the secured debt before the foreclosure sale. The lender is then in the posi­tion to bid at the foreclosure sale an amount equal to the lesser of the then indebtedness or the perceived value of the mortgaged property as is.

See form 13-2 in this manual for a bid calcula­tion worksheet.

§ 13.5Prior Liens

A foreclosure sale does not extinguish a lien against the mortgaged property that has a higher priority than the lien being foreclosed. As a result, the debt secured by the prior lien remains against the mortgaged property, and if this prior debt is not paid or otherwise resolved, the holder of this prior lien will presumably at some point proceed with foreclosure or other collection action to enforce its rights in the mortgaged property. While the successful bidder at a junior lien foreclosure takes the mortgaged property subject to and not in assumption of the debt secured by the prior lien, the existence of such debt will obviously affect the amount a party is willing to bid at a junior lien foreclosure sale. If the trustee is aware that the lien being foreclosed is a junior lien, it is good practice to announce at the foreclosure sale the existence of prior liens.

§ 13.6Wraparound Secured Debt

The foreclosure of wraparound debt involves significant issues under Texas law regarding the “true” amount of the debt being foreclosed, the position of the successful bidder following fore­closure, and the amount of any deficiency owing by the mortgagor after foreclosure. A review of the basic concept and several of the variables involved in wraparound financing is helpful in understanding the issues in the enforcement of wraparound mortgage documents.

§ 13.6:1Wraparound Mortgage

A wraparound mortgage is essentially a junior mortgage loan. The wraparound note includes in the principal all or part of the prior or superior indebtedness plus any additional secured debt that the lender loans to the borrower. The lender pays the prior underlying debt secured by a superior lien on the mortgaged property.

The wraparound loan documents may condition the lender’s payment of the underlying indebt­edness on receipt of payment on the wraparound secured debt from the borrower. The wrap­around loan documents may require the lender to advance all or a portion of the payments due on the underlying debt.

The periodic debt service required on the wrap­around secured debt may not match the debt ser­vice on the underlying indebtedness. An extreme example of this is wraparound financ­ing providing for interest-only payments on the wraparound secured debt and a balloon payment at the end of the term with the lender’s servicing the underlying debt out of the interest payments paid by the borrower. The different relationships between the wraparound secured debt and the underlying debt can be categorized by the man­ner of the debt service of each as follows:

1.The debt service on the wraparound secured debt is sufficient to pay the debt service on the underlying debt and to amortize the wraparound secured debt on or before maturity of the underlying debt.

2.The debt service on the wraparound secured debt is sufficient to pay the debt service on the underlying debt, but the sum remaining will not amor­tize the wraparound secured debt before the maturity of the underlying debt.

3.The debt service on the wraparound secured debt is sufficient to pay the debt service on the underlying debt but is not sufficient to pay all the accruing interest on the wraparound secured debt.

4.The debt service is insufficient to pay the debt service on the underlying debt, and the lender advances the dif­ference, which is included in the wrap­around loan.

The interest rate on the wraparound note is gen­erally higher than the interest rate provided for in the underlying debt.

A wraparound secured debt may be created either in a sales transaction between a seller and a purchaser or between the owner of the mort­gaged property and a third-party creditor that is not a seller of the property. Such financing may be recourse or nonrecourse and may include separate guaranties of only the “true principal” of the wraparound secured debt (that is, the net equity financed), of the underlying debt, or of the entire debt. In a sales transaction, the seller–wraparound creditor may have personal liability on the underlying debt. See Armsey v. Channel Associates, Inc., 229 Cal. Rptr. 509 (Cal. Ct. App. 1986); Mitchell v. Trustees of United States Mutual Real Estate Investment Trust, 375 N.W.2d 424 (Mich. Ct. App. 1985); J.M. Realty Investment Corp. v. Stern, 296 So.2d 588 (Fla. Dist. Ct. App. 1974) (did not follow net equity approach); Mindlin v. Davis, 74 So.2d 789 (Fla. 1954) (followed net-to-bidder equity approach).

The following is an example of wraparound financing in a sales transaction: the mortgagee (seller) contracts to convey the mortgaged prop­erty to the mortgagor (buyer) for a total pur­chase price of $100,000. The property is encumbered with a first lien of $50,000 at 9.75 percent interest per year. The buyer can raise only $25,000 in cash for a down payment. The mortgagor (buyer) executes a note to the mort­gagee (seller) for $75,000, which is secured by a second lien on the mortgaged property and bears interest at 14.5 percent per year and pays the mortgagee a cash down payment of $25,000. In a discussion of loans governed by former chap­ter 5 of the Texas Consumer Credit Code (now chapter 344 of the Texas Finance Code), this example is tested for compliance with the usury laws as follows:

The “amount advanced” is the differ­ence between the amount of the wraparound loan and the outstanding balance of the underlying loan. The “true principal” is the difference between the “amount advanced” and any “prepaid interest (points).” The “interest rate” is the annual rate nec­essary to liquidate the loan by amorti­zation; this calculation uses the “true principal” as the beginning balance, divided by the stated number of monthly payments at the stated “net monthly P&I payment.”

In this example the loan is considered usurious for any rate ceiling less than 23.93 percent.

This example was used by the consumer credit commissioner in the Interpretive Letter to Sec­ondary Mortgage Lenders and Other Interested Parties dated December 31, 1981, and predates the holdings in Greenland Vistas, Inc. v. Planta­tion Place Associates, 746 S.W.2d 923 (Tex. App.—Fort Worth 1988, no writ), Summers v. Consolidated Capital Special Trust, 783 S.W.2d 580 (Tex. 1989), and Lee v. O’Leary, 742 S.W.2d 28 (Tex. App.—Amarillo 1987), dis­cussed at sections 13.6:2 through 13.6:4 below.

In foreclosing on wraparound secured debt, the following questions must be answered before the lender demands payment and forecloses on the mortgaged property:

1.How much is owed to the mortgagee?

2.How much can or should the mort­gagee bid at the foreclosure sale?

3.Does the amount bid at a foreclosure sale on the underlying debt affect the amount owed on the wraparound secured debt?

Discussion of these questions follows in sec­tions 13.6:2 through 13.6:4 below.

§ 13.6:2How Much Is Owed to Mortgagee?

In Greenland Vistas, Inc. v. Plantation Place Associates, 746 S.W.2d 923 (Tex. App.—Fort Worth 1988, no writ), the court of appeals reversed the trial court’s finding that a mort­gagee’s demand for the unpaid principal balance of the wraparound note (as opposed to the true principal) constituted a charging of usurious interest. Greenland Vistas sold and financed Plantation Place Associates’ purchase of an apartment project. Plantation Place Associates executed a wraparound note for $2,707,433.96 payable to Greenland Vistas. The note included in its face principal amount the balance of $2,074,830.19 owed on an underlying third lien. The trial court held that the seller was not owed the face principal amount of the wraparound note but only the equity or the balance on the true principal (that is, the difference between the balance due on the wraparound secured debt and the balance due on the underlying debt). The trial court held that demanding the payment of the underlying debt amounted to a charging of interest and a usurious loan. The court of appeals found that the full principal of the wrap­around secured debt was owed by Plantation Place Associates. Since the buyer received the full benefit of the property purchased, it had the full benefit of the principal of the wraparound note. The court of appeals found the following provisions of the wraparound loan documents supported its conclusion: (1) Greenland Vistas obligated itself in the wraparound loan docu­ments to pay the underlying debt on the condi­tion that Plantation Place was not in default on the wraparound loan, (2) the underlying debt was to be paid out of the payments on the wrap­around note, (3) the wraparound maker could obtain the mortgaged property free of the lien of the underlying debt by paying the wraparound secured debt in full, and (4) the wraparound deed of trust authorized the seller to pay the underlying debt if the buyer did not make its payments on the wraparound note. The court of appeals found that the intent of the parties expressed in the loan documents was that the full face principal was owed and that although the seller could demand the full face amount, it could retain only the difference between the face amount and the amount required to be paid on the underlying debt. Greenland Vistas, 746 S.W.2d at 926–27; see also Tanner Development Co. v. Ferguson, 561 S.W.2d 777 (Tex. 1977); Nevels v. Harris, 102 S.W.2d 1046 (Tex. 1937) (court seeking to find “true principal” of debt for usury-rate purposes). See also the discussions of Summers v. Consolidated Capital Special Trust, 783 S.W.2d 580 (Tex. 1989), rev’d 737 S.W.2d 327 (Tex. App.—Houston [14th Dist.] 1987), and Lee v. O’Leary, 742 S.W.2d 28 (Tex. App.—Amarillo 1987), in sections 13.6:3 and 13.6:4 below.

In French v. May, 484 S.W.2d 420 (Tex. App.—Corpus Christi–Edinburg 1972, writ ref’d n.r.e.), the court held that an assuming wraparound note maker assumes primary liability for the obliga­tion assumed to the underlying noteholder. The underlying note maker has a cause of action against the wraparound note maker for recovery of sums paid by the underlying note maker on the underlying note. French, 484 S.W.2d at 424–25.

In Lyons v. Montgomery, 701 S.W.2d 641, 643–44 (Tex. 1985), the Texas Supreme Court held that a purchaser taking “subject to” a prior note and lien could recover damages against the defaulting prior note maker. In Newsom v. Starkey, 541 S.W.2d 468 (Tex. App.—Dallas 1976, writ ref’d n.r.e.), a wraparound note maker recovered against the wraparound note­holder for failing to pay the underlying note payments as was provided for in the wraparound deed of trust.

§ 13.6:3How Much Can Mortgagee Bid?

The Texas Supreme Court in Summers v. Con­solidated Capital Special Trust, 783 S.W.2d 580, 583 (Tex. 1989), rev’d, 737 S.W.2d 327 (Tex. App.—Houston [14th Dist.] 1987), adopted the “outstanding balance” approach to computing the wraparound note balance at fore­closure. Under this method, the unpaid balance of the entire amount of principal of the wrap­around note, including the principal of the wrapped debt and accrued interest, is owed at the foreclosure sale. The amount bid for the property at the sale, less any sale expenses, is credited to the outstanding balance of the wrap­around note. If the bid exceeds the balance, a surplus results. If the unpaid balance exceeds the bid, a deficiency exists. The court chose this method over the “true debt” approach followed by the court of appeals and many lawyers. The supreme court said that the court of appeals’ approach would enable a debtor to obtain a windfall profit, escape any deficiency obliga­tion, and leave the wraparound note payee still liable on the wrapped debt. The court of appeals determined that a foreclosure sale bid by the wraparound mortgagee on a wraparound note resulted in a surplus bid to be paid to the mort­gagor rather than a deficiency liability against the mortgagor.

Summers involved the foreclosure of a fifth-lien wraparound deed of trust securing a wraparound note payable to English Village Apartments (the “wrap seller”). The wraparound note had a prin­cipal balance of $6,206,952. Four prior liens were included in the wraparound note. The first three lien notes totaled $3,017,581, and the fourth lien had a balance due of $976,685. The equity financed by the wrap seller totaled $2,212,686. The fourth-lien debt had been accel­erated and was due at the time of the wrap­around foreclosure sale. Out of the foreclosure sale’s proceeds, the trustee paid the fourth lien of $976,685 and applied the difference of $1,773,315 to the wraparound equity, leaving a deficit of $439,371.

The positions of the parties are stated below:

The trial court granted summary judgment in favor of the wrap seller on the wraparound deed of trust and denied the debtor’s motion for sum­mary judgment. The court of appeals reversed and rendered judgment in favor of the debtor. The court of appeals stated that the law is well established that “foreclosure of a junior lien nor­mally has no effect on the rights of senior inter­est holders, even if the interests are in default.” Consolidated Capital Special Trust v. Summers, 737 S.W.2d at 331 (citing United States v. Sage, 566 F.2d 1114 (9th Cir. 1977)). Absent language to the contrary in the instrument foreclosed, pre­existing interests remain unaffected. The court held that the wraparound deed of trust did not authorize the trustee to apply the foreclosure sale proceeds to the underlying debt, even though it was past due. Apparently, the court did not consider the underlying debt portion of the wraparound note to be debt secured by the wrap­around deed of trust.

The Texas Supreme Court reversed the court of appeals, stating the following:

In adopting the “true debt” approach, the court of appeals confused the pur­chaser’s personal liability on the seller’s prior notes with the pur­chaser’s obligation to pay for the property pursuant to the express terms of its own agreement. It is true that [the debtor] did not agree to assume liability for the balance of the underlying four prior mortgages. That is, they did not become guaran­tors of that debt, additional makers on those notes, or undertake any other obligation which would render them legally liable to the holders of those earlier obligations. . . . But this reservation in no way affects [the debtor’s] obligation to [the wrap seller] for the entire amount of the fifth note.

Summers, 783 S.W.2d at 582. The supreme court also created an implied covenant “requir­ing the trustee to apply the proceeds first to the satisfaction of pre-existing debt before making any distribution to the mortgagor” unless there was an express agreement otherwise. Summers, 783 S.W.2d at 583.

If the wraparound mortgagee is considering or is forced to bid more than its “true principal,” in light of the holding in Summers, it will have to be prepared to pay cash to the underlying lien­holder rather than entering a credit bid against the balance owing on the wrap note. This raises an interesting but unresolved issue as to what happens if the underlying note does not permit prepayment.

The Summers opinion was followed by Beach v. RTC, 821 S.W.2d 241, 243 (Tex. App.— Houston [1st Dist.] 1991, no writ), in which the court rejected the borrower’s argument that because the foreclosing mortgagee applied no part of the bid proceeds on the wraparound fore­closure to payment of the underlying note, the “true debt” approach should have been used rather than the “outstanding balance” method. See Janet L. Hunter, Note, Texas Adopts the “Outstanding Balance” Method of Calculating the Deficiency or Surplus After Foreclosure of a Wraparound Deed of Trust: Summers v. Con­solidated Capital Special Trust, 783 S.W.2d 580 (Tex. 1989), 21 Tex. Tech. L. Rev. 873 (1990).

§ 13.6:4Does Bid at Foreclosure of Underlying Debt Affect Amount Owed on Wraparound Secured Debt?

In Lee v. O’Leary, the court of appeals held that the bid price at the foreclosure of an underlying and wrapped lien was immaterial in determining the balance owed on the wraparound secured debt. Lee v. O’Leary, 742 S.W.2d 28 (Tex. App.—Amarillo 1987), rev’d sub nom. Lee v. Key West Towers, Inc., 783 S.W.2d 586 (Tex. 1989). The case involved an apartment project that had been sold and successively resold with each subsequent seller taking back a wrap­around note. Key West executed a wraparound note for $1,125,000 payable to the Lees (the Lee note). The Lee note wrapped and included the balance owed by the Lees to the O’Learys on a $1,150,000 note (the O’Leary note). Key West and its president, Richard O. Eid, were required to guarantee the O’Leary note. The Lee note wrapped and included three prior notes includ­ing a note payable to Berney and Peters (the Berney/Peters note). Key West defaulted on the Lee note, causing a chain of defaults back to the first lienholder, Berney and Peters, who initiated foreclosure proceedings. Berney and Peters foreclosed and bid $700,000 at the foreclosure sale. The O’Learys sued the Lees on the O’Leary note and Key West and Eid on their guarantees of the O’Leary note. The Lees then sued Key West and Eid on the Lee note.

The trial court gave the O’Learys judgment against the Lees for $157,489.85 and also against Key West and Eid for $157,489.85 and gave the Lees judgment against Key West and Eid for $73,702.70. The Lees appealed, claim­ing they should have been awarded $348,084.82. The figures are reached as follows:

In determining the amount owed on the Lee note, the trial court credited to the unpaid wrap­around note balance of $1,038,495.86 at the time of the foreclosure the unpaid balance on the O’Leary note of $974,382.12. The trial court added to its judgment $9,588.96 in interest that had accrued on the $64,113.74 difference or equity from the foreclosure date to the time of trial.

The Lees argued that the proper method for cal­culating the amount owed by Key West to the Lees would be to credit the foreclosure sale bid price of $700,000.00 and not the $974,382.12 balance of the O’Leary note to the Lee note. Apparently the Lees did not claim that interest should be awarded them on the difference between the $974,382.12 balance on its note and the $700,000.00 credited to the prior debts.

The court of appeals summarized the issue as “how to calculate a deficiency judgment on a wraparound note.” See Lee, 742 S.W.2d at 31. The court determined that this issue is resolved by answering the question, “What did the parties agree to do?” The court found the following agreements between the Lees and Key West as evidencing the parties’ clear intent to exclude the balance owed on the underlying debt in cal­culating the amount owed on the wraparound note: (1) the deed from the Lees to Key West provided that the conveyance was “subject to,” and the grantee expressly negated assumption of the underlying debt, and (2) the Lee wraparound note stated that it included within its principal amount the unpaid principal balances of the underlying debt specifically listed in the deed. Therefore, the court concluded that the bid at the foreclosure sale was immaterial. See Lee, 742 S.W.2d at 32. The court of appeals reformed the trial court’s judgment to provide that the O’Learys’ judgment against the Lees, Key West, and Eid was joint and several. The lan­guage used in the trial court’s judgment appeared to have granted two separate awards of $157,489.85. Lee, 742 S.W.2d at 33.

The court of appeals also found the following example given by Key West and Eid as persua­sive that adoption of the Lees’ position would be inequitable:

The question presented by this appeal is: In a suit brought by B against C for a deficiency, what is the proper computation of C’s liability?

The “true debt” owing to . . . the wraparound mortgagee (B) is $500,000.00, the difference between the wraparound debt ($1,500,000.00) and the included debt ($1,000,000.00). This sum rep­resents the actual equity of B, the seller-wraparound mortgagee in the transaction.

In this context, to allow the bid price as the applicable credit due to C on the wraparound debt would result in a windfall to B because the deficiency ($800,000.00) would exceed the true debt ($500,000.00).

Lee, 742 S.W.2d at 32 n.3. The court of appeals did not explain why it is not inequitable to B to have B liable to A for the $300,000 deficiency on the debt to A and not be able to recoup this loss from C as promised in the wraparound note by C.

On motion for rehearing, the court of appeals replied that its resolution of the issue was not based on a balancing of the equities but on an interpretation of the contract of the parties. The court stated it lacked the power to change the parties’ contract. Lee, 742 S.W.2d at 34.

The Texas Supreme Court reversed Lee v. O’Leary and held that, under the outstanding-balance approach adopted in Summers v. Con­solidated Capital Special Trust, 783 S.W.2d 580 (Tex. 1989), Key West and Eid were liable to the Lees for the entire amount of the Lee note less the amount bid at foreclosure. Key West Towers, Inc., 783 S.W.2d at 588.

A later court of appeals decision makes it clear that a subsequent default on the wrapped note or notes does not excuse a prior default on the wraparound note or bar the wraparound note payee from obtaining a deficiency. See Hampton v. Minton, 785 S.W.2d 854, 859 (Tex. App.—Austin 1990, writ denied).

§ 13.7Fair Market Value and Suits for Deficiencies

§ 13.7:1Deficiency Actions

In deficiency suits following nonjudicial fore­closure sales, any person against whom an action to recover a deficiency is sought may request the court to determine the fair market value of the real property as of the date of the sale. If the court determines that the fair market value exceeds the amount of the successful bid at the foreclosure sale, the debtor is entitled to an offset in the amount of the excess against the remaining indebtedness. See Tex. Prop. Code § 51.003.

The debtor is entitled to a credit for the fair mar­ket value of the property whether a third party or the mortgagee is the successful bidder. The fore­closure sale price is not included in the factors listed for determining the fair market value of the property. The statutory list, however, is not exclusive. The mortgagee may be able to argue that the price brought at a contested sale is the fair market value.

§ 13.7:2Effect on Bid Strategy

While Texas Property Code section 51.003 does not alter foreclosure sale procedure or bank­ruptcy law, it will affect the bid analysis. First, if a mortgagee foresees a contested deficiency suit, the mortgagee may choose to bid the full fair market value rather than explain the reasons for a lower bid to a jury. Second, in the event of contested bidding at the foreclosure sale, the mortgagee must be prepared to bid enough to prevent a third party from purchasing the collat­eral at a price below the fair market value, thus depriving the mortgagee of the benefits of pos­session of the collateral while reducing the defi­ciency the mortgagee can recover in a subsequent suit against the debtor.

The time limitation for bringing a deficiency suit following a foreclosure sale is two years. Tex. Prop. Code § 51.003(a). The time limita­tion for bringing an action in bankruptcy court to set aside a sale as a fraudulent transfer is two years. 11 U.S.C. § 548(a)(1). Before waiting to allow the two-year time limitation to run in bankruptcy court, the mortgagee will need to weigh the advantages against the concomitant disadvantages created by waiting.

The mortgagee has little guidance in making decisions. There are many potential variations on the straightforward summary judgment in a deficiency suit that were common in the past. If a state court determines that the amount bid was significantly less than the fair market value and the mortgagor later brings an action in bank­ruptcy court to have the sale set aside, the bank­ruptcy court may accept the jury finding from state court on value or the parties may have a second opportunity to litigate the value of the property. The bankruptcy court also will have to determine if the credit received as a result of the suit was received in exchange for the transfer in accordance with the phrase “received less than a reasonably equivalent value in exchange for such transfer.” 11 U.S.C. § 548(a)(1)(B)(i). In those cases in which the debtor does not chal­lenge the deficiency in state court or the court rules that the debtor failed to introduce compe­tent evidence of fair market value, a bankruptcy court conceivably could conclude that the Texas Property Code section 51.003(c) implication that the sale price equals the fair market value is determinative of the reasonably equivalent value.

§ 13.8Redemption Rights of Mortgagor and Lienholders

The common law rule in Texas is that a regu­larly and validly conducted trustee’s sale cuts off both junior liens and estates in the collateral and any equity or right of redemption in favor of the mortgagor. Scott v. Dorothy B. Schneider Estate Trust, 783 S.W.2d 26, 28 (Tex. App.—Austin 1990, no writ); Rogers v. Fielder, 392 S.W.2d 797, 799–800 (Tex. App.—Fort Worth 1965, writ ref’d n.r.e.). However, specific state statutes grant the foreclosed property owner (and, in certain situations, the assignees and heirs of the property owner and junior lienhold­ers) a right of redemption with respect to fore­closures involving ad valorem tax liens, liens against mineral interests, and liens in favor of property owner and condominium owner associ­ations. See Tex. Tax Code §§ 34.21–.23 for ad valorem sale redemption rights; Tex. Tax Code § 32.06(k–1) for property tax lien redemption rights; and Tex. Prop. Code § 209.011 for prop­erty owners’ association redemption rights. The statutory redemption periods vary from as short as ninety days to as long as two years, depend­ing on the nature of the collateral and the type of lien foreclosed, and the right of redemption is normally conditioned upon the foreclosed prop­erty owner paying, in addition to the winning bid amount, a redemption premium and other statutorily enumerated costs to the foreclosure sale purchaser. In some instances, the statutes creating the redemption right also restrict trans­fers of interest in the foreclosed property before the expiration of the redemption period (as, e.g., with property owners’ association assessment liens). See section 30.5 in this manual.

The existence and nature of any redemption rights that run in favor of the mortgagor (and other persons such as junior lienholders, if appli­cable) are obviously significant considerations in formulating a bid strategy, but the exact impact of the redemption rights on any particu­lar bidder will vary considerably according to both the specific redemption right in question and the bidder’s reasons for purchasing the property. (For example, a bidder who hopes to acquire the mortgaged property for immediate use or a quick resale may well evaluate redemp­tion rights differently than a bidder looking for a long-term investment.) Thus a potential bidder should determine in advance of the foreclosure sale whether any redemption rights exist and, if such rights do exist, how such affect the maxi­mum price the bidder is willing to pay at the foreclosure sale. The mortgagee of mortgaged property subject to redemption rights may well find that such rights limit the market value of the collateral and the level of interest among poten­tial third-party bidders.

§ 13.9Limitations on Purchaser’s Right to Possession of Property

With respect to third parties, a lease or other estate (e.g., a prior easement) that was prior in time to the lien would survive foreclosure, absent a voluntary subordination by the holder of the lease or estate, and the foreclosure sale purchaser would take title subject to such lease or estate. See section 4.12 in this manual. Leases and estates junior to the foreclosed lien are (absent any nondisturbance agreement) cut off by foreclosure of a prior lien (see section 4.13), but recent federal and Texas statutes now allow nondefaulting tenants under junior residential leases to remain on the property for statutorily defined periods of time following the foreclo­sure. See sections 15.9:1 and 15.9:4. Thus the purchaser at a foreclosure sale is generally enti­tled to immediate possession of the mortgaged property against the property owner and the holders of junior leases and estates, but (1) the right of possession may be subject to certain res­idential leases and (2) there is always the possi­bility that the foreclosed property owner or other third-party occupant may wrongfully refuse to vacate the property after foreclosure, thus neces­sitating the cost and delay of eviction proceed­ings. See section 15.9. These considerations will obviously affect a party’s foreclosure bid strat­egy, and the potential bidder should accordingly determine in advance of sale whether such issues exist or are likely to arise and how this will affect the bid price.

§ 13.10Bidder Checklist and Considerations

This section sets out a checklist for the foreclo­sure bidder, with special attention to the position of a mortgagee bidder as compared to a third-party bidder.

§ 13.10:1Mortgagee vs. Third-Party Bidder

The rights of a purchaser at a nonjudicial fore­closure sale should be the same regardless of whether the purchaser is the lender or a third party. Their positions, however, are anything but comparable. The lender has agreed to fund a loan secured by the property. Prior to making the loan, the lender has underwritten the loan to determine not only the creditworthiness of the borrower and any guarantors, but also the value of the property. The lender obtains a title com­mitment, which is reviewed and approved, for a loan policy insuring its lien position upon the closing of the loan. Prior to the closing of the loan and throughout the loan term, including upon an event of default, the mortgagee has the right to inspect the physical condition of the property and to review inspection reports, ser­vice contracts, and leases. The mortgagee, through its loan documents, imposes on the bor­rower the obligations to maintain the property and complete any mortgagee required repairs, pay the ad valorem taxes and insurance premi­ums, and deliver operating statements and other information relating to the property. As dis­cussed above, prior to directing the trustee to conduct a foreclosure sale, the mortgagee will take additional steps, such as obtaining a current title run, appraisal, and inspection and environ­mental reports. Armed with this information, the mortgagee will bid at the public auction.

In contrast, a third-party bidder will learn about the public sale when notice of sale is posted at the courthouse and filed with the county clerk, stating that the property will be sold at public auction on the first Tuesday of the month no sooner than twenty-one days from the date of the posting and filing of the notice. Tex. Prop. Code § 51.002(b). The borrower, mortgagee, and trustee are not required to give any addi­tional information to third parties interested in bidding at the public auction.

§ 13.10:2Due Diligence

Property Condition:      The potential bidder will want to access the mortgaged property to determine the physical condition of the property and any improvements and to confirm that there are no environmental problems associated with the property. While the mortgagee may have a contractual right of access under its deed of trust, the third-party bidder will likely not have access to the property. A third-party bidder’s request made to the borrower or lender to inspect the mortgaged property and review the borrower’s or mortgagee’s records as to the property’s condition will also likely be denied. A third-party bidder can make inquiries of gov­ernmental agencies regarding the existence and current status of permits (such as building per­mits, certificates of occupancy, code violations history, underground storage tank registrations, and licenses). Both the mortgagee and third-party bidder should consider having an environ­mental assessment done, even though the third-party bidder will not have access to the property. With assurances that it will be the high bidder, a third-party bidder will want to minimize the costs incurred to obtain information about the property. See sections 14.10:3 and 14.10:4 in this manual regarding warranties of title and chapter 35 for a discussion of environmental issues.

Property Description and Survey:      The mortgagee should seek to review any existing surveys of the property that it has in its loan files. A survey may indicate encroachments, boundary line conflicts, overlaps, protrusions, and other due diligence information (for exam­ple, improvement square footage, parking space count, flood plain lines, appurtenant easements, location of easements and other encumbrances). The recorded deed of trust may reference the existing survey and thus put a third-party bidder on notice of matters reflected by this unrecorded document. References to a survey in the recorded deed of trust only makes a third-party bidder aware that a survey exists. It does not afford the third-party bidder the opportunity to review of the survey. See sections 14.10:3 and 14.10:5 regarding warranties of title acquired at foreclosure.

Deed and Title Insurance:      The mortgagee has the benefit of its mortgagee title insurance. In Texas, the Loan Policy of Title Insurance pro­vides at Condition 2:

2.   Continuation of Insurance. The coverage of this policy shall continue in force as of Date of Policy in favor of an Insured [i.e., the mortgagee] after acqui­sition of the Title by an Insured or after conveyance by an Insured, but only so long as the Insured retains an estate or interest in the Land, or holds an obligation secured by a pur­chase money Mortgage given by a purchaser from the Insured, or only so long as the Insured shall have liability by reason of warranties in any transfer or conveyance of the Title. This policy shall not con­tinue in force in favor of any purchaser from the Insured of either (i) an estate or interest in the Land, or (ii) an obligation secured by a purchase money Mortgage given to the Insured.

See Texas Department of Insurance, The Basic Manual of Rules, Rates and Forms for the Writ­ing of Title Insurance in the State of Texas, form T-2 (last updated Jan. 3, 2014), available at www.tdi.texas.gov/title/documents/ form_t-02.pdf.

The loan policy will convert to essentially an owner’s policy where the lender is the highest bidder at the foreclosure sale. “The coverage of this policy shall continue in force as of Date of Policy in favor of the Insured… ” means that the title company will not insure against any claims based upon occurrences after the date of the loan policy. For instance, if there is a federal tax lien filed against the property after the date of the policy and it survives foreclosure, the loan pol­icy will not provide insurance coverage for costs incurred to remove the IRS lien.

A third-party purchaser does not step into the position of the lender with respect to its loan policy coverage. A third-party purchaser can purchase an owner’s policy incident to the fore­closure sale. Most underwriters will not provide owner’s title insurance to a foreclosure sale pur­chaser. The usual practice is for the third-party purchaser to accept the trustee’s deed and not obtain title insurance coverage or obtain an owner’s policy based upon a title commitment subject to exceptions for any defect in the fore­closure process and any liens or encumbrances not clearly removed from the property by the foreclosure sale.

Third-Party Bidder’s Title Insurance Checklist:      In the event a title underwriter is found that will issue to a third-party bidder an Owner’s Policy of Title Insurance, the following checklist items will need to be addressed by the third-party bidder: (1) before bidding at the fore­closure sale, a title commitment and pro forma policy with all desired endorsements should be issued and the conditions to a policy’s issuance should be thoroughly reviewed with the under­writer; (2) to the extent available, a copy of the foreclosure sale documents (for example, deed, affidavit, notices, and letters) should be obtained and furnished to the underwriter for its approval before bidding at the foreclosure sale; (3) a list and copy of all documents required by the title underwriter to issue its policy should be obtained, and arrangements should be made for their execution and delivery to the underwriter; (4) a representative of the title underwriter will likely need to be in attendance to witness the foreclosure sale; (5) the means and timing of payment of the title insurance premium to the title underwriter will need to be confirmed; and (6) acceptable arrangements for timing and delivery to the title underwriter’s representative of the foreclosure sale deed for recording with the county clerk will need to be made with the trustee. A title commitment for an owner’s pol­icy will include the “survey exception” and exception for “rights of parties in possession” because the title company will not have access to information required to delete these standard exceptions, such as a current survey or certified rent roll. Consequently, a third-party bidder has these added risks and no title insurance to cover them. See sections 14.10:3 and 14.10:5 regard­ing warranties of title acquired at foreclosure, form 4-7 for a letter requesting a title search, and form 4-10 for a letter requesting a search of UCC records.

Recent Construction Activities:      If there has been recent construction activity at the mort­gaged property, there is a risk that an unpaid original contractor may be able to assert a supe­rior right to remove “readily removable” fix­tures from the mortgaged property. In calculating their foreclosure sale bids, bidders will need to take into account the loss in market value of the mortgaged property if there are sub­ordinate mechanic’s liens that have preferential rights to remove readily removable fixtures. See GCI GP, LLC v. Stewart Title Guaranty Co., 290 S.W.3d 287 (Tex. App.—Houston [1st Dist.] 2009, no pet.). There is also the possibility of prior in time constitutional and statutory mechanic’s and materialmen’s liens based upon a time of inception predating the recording of the deed of trust being foreclosed. Tex. Const. art. XVI, § 37; Tex. Prop. Code ch. 53. See sec­tions 4.8 and 4.9 for a discussion of mechanic’s liens.

Tenants and Parties in Possession:      The mortgaged property may be occupied at the time of the foreclosure sale by tenants under written or oral leases. A third-party bidder will not have access to the leases and will not be able to deter­mine whether tenants have rights that survive the foreclosure sale. Creditors of tenants may have security interests in removable, tenant-installed fixtures that have priority under Texas Business and Commerce Code section 9.334(d)–(g) over the mortgagee’s lien. See sections 15.9:1 and 15.9:4 for a discussion of tenants and their rights in the premises following foreclo­sure; sections 10.2:6, 15.9, and 15.9:2 concern­ing eviction; and section 10.9 concerning trespass to try title.

§ 13.10:3Bidding

See form 13-2 in this chapter for a bid calcula­tion worksheet.

Property Taxes:      In determining its maximum bid, a bidder will need to factor in as a reduction to market value the amount of delinquent prop­erty taxes, including interest and penalties, as well as property taxes accrued on the mortgaged property for the current year. A third-party bid­der will be able to obtain this information from most taxing authorities websites. See chapter 24 regarding ad valorem tax liens, form 4-8 for a preforeclosure checklist, and form 4-9 for a let­ter to the taxing jurisdiction.

Prior Liens:      If the lien being foreclosed is subordinate to other deed-of-trust liens, the sta­tus of these other liens should be investigated and determined before bidding at the foreclosure sale. The bidder will need to determine how much equity it believes exists above the balance owing on all prior liens. It will need to deter­mine whether it may continue making payments on the prior lien loans or will be placed in the position of being forced to pay off one or more of these liens. See sections 3.4:3 and 4.11 for a discussion of junior liens.

Attendance:      The third-party bidder should contact the trustee and determine the time of sale and who will be conducting the sale. In situ­ations where a number of foreclosure sales will be conducted by many trustees at the same loca­tion and time, the third-party bidder should make arrangements to meet the trustee in advance of the sale. Also, the third-party bidder should confirm with the trustee as to whether a substitute trustee will be appointed to conduct the sale. Regardless of any agreements with the trustee, a third-party bidder should be at the location of the public sale well in advance of “the earliest time at which the sale will begin” set out in notice of sale under Tex. Prop. Code § 51.002(b). See form 14-2 announcing reason­able terms for a foreclosure sale.

Method of Bid Payment:      Many sales are now being conducted with a trustee-imposed require­ment that the successful bidder produce a cashier’s check or a series of cashier’s checks totaling the bid price. A third-party bidder will need to confirm with the trustee the allowable time and means of payment that will be imposed. If the sale is being conducted on a banking holiday, understanding the bid payment process in advance of the sale is critical. See section 14.4:3 regarding the terms of the fore­closure sale.

§ 13.10:4Operations

Utilities and Telephone Numbers: Establishment of service as of foreclosure sale and continuation of telephone numbers for site management should be arranged by the bidder with the utilities before the foreclosure sale. See section 15.8 for a discussion of utility service.

Access and Security:      In advance of its bid, both the mortgagee and third-party bidder will need to plan the steps it will take on becoming the owner of the mortgaged property to gain immediate access to the mortgaged property and to institute new means of securing the property, such as guard/security services, fire alarm ser­vices, change of locks, reissuance of keys, and change of alarm codes. If personal property is located in the mortgaged property, ownership and third-party lien claims will need to be inves­tigated and responsibility for removal, security, or storage of personal property determined.

Tenants and Tenants’ Deposits:      If tenants of the former owner are in occupancy of the mort­gaged property after the foreclosure sale, the bidder will need to advise each of these persons as to whether their leases have been terminated by the foreclosure or whether continued occu­pancy will be permitted and on what terms. (See sections 15.9:1 and 15.9:4 concerning the rights of certain residential tenants to remain on the property following foreclosure.) As to termi­nated tenancies that will not be permitted to con­tinue under new leases, instructions as to removal of such tenants’ personal property, removal or nonremoval of fixtures, and return of the premises to good condition will need to be issued. See also sections 15.9, 15.9:1, and 15.9:4 for a discussion of tenants; section 4.15 regard­ing security deposits; sections 10.9 and 15.9 for a discussion of eviction and trespass to try title; form 15-5 for a letter to a tenant accepting lease; and form 15-6 for a letter to a tenant at suffer­ance.

Insurance:      Both the mortgagee and third-party bidder will need to have its insurance pro­gram in place to take effect immediately upon its acquisition of title to the mortgaged property. If the property is vacant or unoccupied, then this condition will be a factor in arranging proper insurance coverage. If the premises are occupied by tenants, insurance obligations by tenants to the new owner and by the new owner to the ten­ants will need to be established, effective as of acquisition of title at the foreclosure sale.

Management:      As with security, a clear under­standing as to how the property will be man­aged, commencing at the moment of acquisition of title at the foreclosure sale, is important.

§ 13.11Foreclosure Sale of Property Subject to Oil or Gas Lease

In 2015, the Texas legislature adopted Texas Property Code chapter 66, which addressed the effect of a foreclosure of a deed-of-trust lien on an oil or gas lease executed and recorded before a foreclosure sale. See Tex. Prop. Code ch. 66. Section 66.001(b) provides that, notwithstand­ing any other law, an oil or gas lease covering real property subject to a security instrument that has been foreclosed remains in effect after the foreclosure sale if the oil or gas lease has not terminated or expired on its own terms and was executed and recorded in the real property records of the county before the foreclosure sale. Section 66.001(b) further provides that an inter­est of the mortgagor or the mortgagor’s assigns in the oil or gas lease, including a right to receive royalties or other payments that become due and payable after the date of the foreclosure, passes to the purchaser of the foreclosed prop­erty to the extent that the security instrument under which the real property was foreclosed had priority over the interest in the oil or gas lease of the mortgagor or the mortgagor’s assigns. Tex. Prop. Code § 66.001(b).

Section 66.001(c) provides that, notwithstand­ing subsection (b), if real property that includes the mineral interest in hydrocarbons together with the surface overlying such mineral interest is subject to both an oil or gas lease and security instrument and the security interest is fore­closed, the foreclosure sale terminates and extin­guishes any right granted under the oil or gas lease for the lessee to use the surface of the real property to the extent that the security instru­ment under which the real property was fore­closed had priority over the rights of the lessee under the oil or gas lease. Tex. Prop. Code § 66.001(c).

Section 66.001(d) provides that an agreement, including a subordination agreement, between a lessee of an oil or gas lease and a mortgagee of real property or the lessee of an oil or gas lease and the purchaser of foreclosed real property controls over any conflicting provision of this section. Section 66.001(d) further prohibits an agreement between a mortgagor and mortgagee from modifying the application of this section unless the affected lessee agrees to the modifica­tion. Tex. Prop. Code § 66.001(d).

Section 66.001(e) provides that this section does not apply to a security instrument that does not attach to a mineral interest in hydrocarbons in the mortgaged real property. Tex. Prop. Code § 66.001(e).

§ 13.12Additional Resources

Dysart, Sara E. “Buyer at Foreclosure (New Meaning to ‘Buyer Beware’).” Mortgage Lending Institute, 2010. Austin: Univer­sity of Texas School of Law, 2010.

Hunter, Janet L. “Texas Adopts the ‘Outstand­ing Balance’ Method of Calculating the Deficiency or Surplus After Foreclosure of a Wraparound Deed of Trust: Summers v. Consolidated Capital Special Trust, 783 S.W.2d 580 (Tex. 1989).” Note, Texas Tech Law Review 21, no. 2 (1990): 873–96.

Locke, William H., Jr., and Charles E. Comis­key. “11 Things You Wish You Had Known About Commercial Project Insur­ance.” In Advanced Real Estate Law Course, 2013. Austin: State Bar of Texas, 2013.

Locke, William H., Jr., and Marilyn C. Malo­ney. “Insurance Issues in Distressful Times.” In Advanced Real Estate Drafting Course, 2011. Austin: State Bar of Texas, 2011.

———. “Top 10 Insurance Tips for Lenders.” 28 Practical Real Estate Lawyer 45 (2012).

———. “Top Ten Insurance Tips for Mortgage Lending.” In Mortgage Lending Institute, 2011. Austin: University of Texas School of Law, 2011.

Weiner, David J. “Mineral Rights and Surface Damage: An Overview of Recent Changes in the Title Insurance Industry.” In Advanced Real Estate Strategies Course, 2014. Austin: State Bar of Texas, 2014.

“Wrap-Around Financing: A Technique for Skirting the Usury Laws?” Note, Duke Law Journal (1972): 785–811.