Conducting the Sale
Texas Property Code section 51.106 authorizes rescission of a nonjudicial foreclosure sale under certain conditions and procedures. This provision applies to only residential foreclosures. Tex. Prop. Code § 51.016(a). Time is of the essence in completing a rescission because it must be accomplished within fifteen days after the sale. See Tex. Prop. Code § 51.016(b). However, the parties may agree to other means of rescinding a foreclosure sale. See Tex. Prop. Code § 51.016(m).
Six conditions must be met before rescinding a sale. See Tex. Prop. Code § 51.016(b). The procedures for giving notice of rescission are precise, and section 51.016(c) must be carefully followed to ensure the rescission process is conducted properly. See Tex. Prop. Code § 51.016(c).
If a third-party purchaser acquired the property at the foreclosure sale, the mortgagee must re-turn the bid amount to the purchaser within five days of rescission, and if any excess proceeds were distributed to the obligor of the debt, the obligor must return the excess proceeds to the trustee. See Tex. Prop. Code § 51.016(d). The statute does not, however, stipulate a period within which the obligor must return excess proceeds to the trustee.
Once the notice procedures for rescission are accomplished under section 51.016(c) and the bid amount returned, the mortgagee, trustee, or substitute trustee must file an affidavit in the real property records, which serves as prima facie evidence that the purchase price has been returned. See Tex. Prop. Code § 51.016(f), (g).
The original loan agreement between the obligor of the note and the mortgagee is restored if a rescission has been completed, and a court is prohibited from awarding specific performance to a third-party purchaser. See Tex. Prop. Code § 51.016(h), (k).
Immediately before conducting the sale, the trustee must verify that the loan has not been brought current, late payments have not been accepted, reinstatement has not been granted, and forbearance promises have not been made by the lender and that all or a part of the mortgaged property has not been released from the lien of the deed of trust. In several instances mortgaged property has been sold at foreclosure and bought by a good-faith purchaser for value after the lender orally reinstated the loan or promised not to foreclose. See Diversified, Inc. v. Gibraltar Savings Ass’n, 762 S.W.2d 620, 623 (Tex. App.—Houston [14th Dist.] 1988, writ denied) (holding that purchaser at void foreclosure sale may have cause of action against mortgagee under Texas Deceptive Trade Practices–Consumer Protection Act (DTPA)); Diversified, Inc. v. Walker, 702 S.W.2d 717, 723 (Tex. App.—Houston [1st Dist.] 1985, writ ref’d n.r.e.). The portions of the Diversified cases that involved causes of action brought under the DTPA are no longer applicable because of Texas Property Code section 51.009, which provides that a foreclosure sale purchaser is not a consumer and the purchaser acquires the property “as is” at the purchaser’s own risk and without any express or implied warranties. See Tex. Prop. Code § 51.009.
Section 51.002 of the Texas Property Code sets forth certain minimum requirements for the sale. See section 12.4 in this manual for a discussion of those requirements that must be set out in the notice. Under Texas law, a sale must be held on the first Tuesday of the month unless the first Tuesday is January 1 or July 4, and then it must be held on the first Wednesday of the month; otherwise, the sale is void. McLaren v. Jones, 33 S.W. 849, 850 (Tex. 1896); Durkay v. Madco Oil Co., 862 S.W.2d 14, 17 (Tex. App.—Corpus Christi 1993, writ denied). However, federal law purports to override state law on this point if the loan comes into the possession of federal agencies under the Multifamily Mortgage Foreclosure Act. See 12 U.S.C. §§ 3701–3717. See section 12.4:4 for further discussion of this federal preemption.
Section 51.002(a) of the Texas Property Code directs the commissioners court of each county to designate the area at the county courthouse or a public place within reasonable proximity to the county courthouse where foreclosure sales will be held and to record the designation in the real property records of the county. Tex. Prop. Code § 51.002(a). However, should the commissioners court change the designated foreclosure sale location, a notice describing the new location must be recorded in the real property records for ninety days before the new location becomes effective. Tex. Prop. Code § 51.002(h). See section 12.4:4 and Appendix B in this manual for a list of designated places for foreclosure sales in Texas counties. Unfortunately, some designations are not drafted with as much clarity as trustees might like. The trustee should check before the sale for local interpretations of and last-minute changes in designations.
The auction must be held between the hours of 10:00 A.M and 4:00 p.m. Tex. Prop. Code § 51.002(a). These hours of sale refer to whatever time—central standard or daylight saving—is in effect. McFarlane v. Whitney, 134 S.W.2d 1047, 1051–52 (Tex. 1940). Section 51.002(b) requires that the notice of sale must include a statement of the earliest time at which the sale will occur, and the sale must begin no later than three hours after the earliest time stated in the notice. Tex. Prop. Code § 51.002(c); see Bering v. Republic Bank, 581 S.W.2d 806, 808 (Tex. Civ. App.—Corpus Christi 1979, writ ref’d n.r.e.) (holding that trustee has no obligation to delay sale until 3:00 p.m. to afford mortgagor time to tender secured debt). However, the mortgagor must be afforded the full time promised by the mortgagee to reinstate the loan. See Tarter v. Metropolitan Savings & Loan Ass’n, 744 S.W.2d 926, 928 (Tex. 1988) (mortgagor awarded damages under Texas Deceptive Trade Practices–Consumer Protection Act for mortgagee’s failure to honor its commitment not to foreclose if mortgagor was able to reinstate before sale; mortgagee sold secured debt and lien to second lienholder before sale, and second lienholder foreclosed).
A sale by a person other than the designated trustee or the properly appointed substitute trustee is void. Sullivan v. Hardin, 102 S.W.2d 1110, 1113 (Tex. Civ. App.—Amarillo 1937, no writ). The sale will not be invalid solely because the trustee is also the holder of the secured indebtedness or because the trustee has some direct or indirect interest in the outcome of the sale. See Tarrant Savings Ass’n v. Lucky Homes, Inc., 390 S.W.2d 473, 476 (Tex. 1965); Valley International Properties v. Ray, 586 S.W.2d 898, 902 (Tex. Civ. App.—Corpus Christi 1979, no writ). A trustee, however, may not purchase the property for his own personal benefit absent express authorization in the deed of trust. For example, the trustee may not purchase the property through his spouse or a corporation controlled or dominated by the trustee. See Southern Trust & Mortgage Co. v. Daniel, 184 S.W.2d 465, 466–67 (Tex. 1944); Casa Monte Co. v. Ward, 342 S.W.2d 812, 813 (Tex. Civ. App.—Austin 1961, no writ).
Texas Property Code section 51.002 refers to the sale as a “public sale at auction.” See Tex. Prop. Code § 51.002(a). The predecessor statute referred to the sale as being at “public venue.”
The fundamental rule concerning the manner of sale is that the mortgagee must not take affirmative steps to adversely affect the sales price at foreclosure. Pentad Joint Venture v. First National Bank of La Grange, 797 S.W.2d 92, 96 (Tex. App.—Austin 1990, writ denied). Conversely, the mortgagee is under no duty to take affirmative action beyond that required by statute or deed of trust to ensure a “fair” sale. Pentad, 797 S.W.2d at 96. Unlike a personal property foreclosure under the Uniform Commercial Code, a real property foreclosure under a deed of trust need not be “commercially reasonable,” and the failure to conduct a commercially reasonable foreclosure sale of real property is not actionable. Huddleston v. Texas Commerce Bank–Dallas, 756 S.W.2d 343, 346 (Tex. App.—Dallas 1988, writ denied). “[A] mortgagee owes but one duty to the mortgagor, to conduct the sale properly.” RTC v. Westridge Court Joint Venture, 815 S.W.2d 327, 332 (Tex. App.—Houston [1st Dist.] 1991, writ denied).
The same principle is applicable to the trustee. The trustee does not owe a fiduciary duty or a duty of good faith and fair dealing to the borrower. Tex. Prop. Code § 51.0074(b)(2); see also FDIC v. Myers, 955 F.2d 348, 350 (5th Cir. 1992) (citing University Savings Ass’n v. Springwoods Shopping Center, 644 S.W.2d 705 (Tex. 1923); English v. Fischer, 660 S.W.2d 521 (Tex. 1983); and FDIC v. Coleman, 795 S.W.2d 706 (Tex. 1990)). Accordingly, the lack of effort by the trustee to obtain fair market value is not grounds for relief in an action for a deficiency judgment, and the trustee is obligated only to comply with the terms of the deed of trust. Myers, 955 F.2d at 350.
See section 11.20 in this manual, which describes the new duties and responsibilities placed on a trustee conducting a public sale of residential real property pursuant to Texas Business and Commerce Code chapter 22.
Texas Property Code section 51.002 does not detail what the trustee must say at the auction. However, a trustee may set reasonable conditions for conducting the public sale if the conditions are announced before bidding is opened for the first sale of the day conducted by the trustee or substitute trustee. Tex. Prop. Code § 51.0075(a). It is recommended that a trustee prepare and read a script before the first sale the trustee conducts that day that describes how typical foreclosure-related issues will be handled, for example, bankruptcy, receivership, reinstatement, and excess proceeds. To avoid complaints that the trustee is chilling the bidding, the trustee should speak loudly enough to be heard at a reasonable distance. Usually the trustee reads a copy of the public notice and opens the auction for bids. See form 14-1 in this manual for a form employing a local agent to act as a bidder, form 14-2 for a foreclosure sale transcript for the trustee to use in conducting the sale, form 14-3 for an attendance registration form, and form 13-2 for a bid calculation worksheet. A transcript is useful to ensure that proper procedures are followed in case there are multiple bidders or the sale is questioned at a later date. Some trustees have court reporters record the proceeding or have it tape-recorded or videotaped. Form 14-2 also documents the information required by Tex. Bus. & Com. Code § 22.004 if the sale is for residential real property under a power of sale.
§ 14.4:2Open-Beach Disclosures
The Open Beach Act provides that purchasers of property located seaward of the Gulf Intracoastal Waterway must be given and acknowledge receipt of a statutorily prescribed notice. Tex. Nat. Res. Code § 61.025. The Texas attorney general has opined that this notice requirement is applicable to foreclosure sales. Tex. Att’y Gen. Op. No. JM-834 (1987). See the discussion at section 12.4:10 in this manual.
To Highest Bidder for Cash: Although section 51.002 of the Texas Property Code does not provide that the sale be for cash, most deeds of trust require that the sale be to the “highest bidder for cash.” This contractual requirement has been upheld. See Kirkman v. Amarillo Savings Ass’n, 483 S.W.2d 302, 308–09 (Tex. Civ. App.—Amarillo 1972, writ ref’d n.r.e.). Pursuant to Code section 51.0075(f), the purchase price for a foreclosure sale is “due and payable without delay on acceptance of the bid or within such reasonable time as may be agreed upon by the purchaser and trustee.” Tex. Prop. Code § 51.0075(f). It should be noted that the statute that concerns time of payment for a foreclosure sale bid was amended in 2007 and 2009 and now controls over older cases on the issue.
A prospective bidder must be prepared to tender cash at the sale if cash is required by the deed of trust and the trustee. The trustee is not required to accept a credit bid but may extend credit to selected buyers. Valley International Properties v. Ray, 586 S.W.2d 898, 901 (Tex. Civ. App.—Corpus Christi 1979, no writ); French v. May, 484 S.W.2d 420, 425 (Tex. Civ. App.—Corpus Christi 1972, writ ref’d n.r.e.). Absent a contractual requirement for cash, cashier’s checks are acceptable. Wertz v. Richardson Heights Bank & Trust, 495 S.W.2d 572, 574 (Tex. 1973); Humble National Bank v. DCV, Inc., 933 S.W.2d 224, 237–38 (Tex. App.—Houston [14th Dist.] 1996, writ denied).
Reasonable Conditions: A trustee or substitute trustee may set reasonable conditions for conducting the public sale if the conditions are announced before bidding is opened for the first sale of the day held by the trustee or substitute trustee. See Tex. Prop. Code § 51.0075(a). An example of conditions contractually accepted by the mortgagor is the following:
At any time during the bidding, the Trustee may require a bidding party (A) to disclose its full name, state and city of residence, occupation, and specific business office location, and the name and address of the principal the bidding party is representing (if applicable), and (B) to demonstrate reasonable evidence of the bidding party’s financial ability (or, if applicable, the financial ability of the principal of such bidding party), as a condition to the bidding party submitting bids at the foreclosure sale. If any such bidding party (the “Questioned Bidder”) declines to comply with the Trustee’s requirement in this regard, or if such Questioned Bidder does respond but the Trustee, in Trustee’s sole and absolute discretion, deems the information or the evidence of the financial ability of the Questioned Bidder (or, if applicable, the principal of such bidding party) to be inadequate, then the Trustee may continue the bidding with reservation; and in such event (1) the Trustee shall be authorized to caution the Questioned Bidder concerning the legal obligations to be incurred in submitting bids, and (2) if the Questioned Bidder is not the highest bidder at the sale, or if having been the highest bidder the Questioned Bidder fails to deliver the cash purchase price payment promptly to the Trustee, all bids by the Questioned Bidder shall be null and void. The Trustee may, in Trustee’s sole and absolute discretion, determine that a credit bid may be in the best interest of Grantor and Beneficiary, and elect to sell the Mortgaged Property for credit or for a combination of cash and credit; provided, however, that the Trustee shall have no obligation to accept any bid except an all cash bid. In the event the Trustee requires a cash bid and cash is not delivered within a reasonable time after conclusion of the bidding process, as specified by the Trustee, but in no event later than 3:45 p.m. local time on the day of sale, then said contingent sale shall be null and void, the bidding process may be recommenced, and any subsequent bids or sale shall be made as if no prior bids were made or accepted.
John M. Nolan & Edward A. Peterson, Texas Annotated Deed of Trust 82–83, attachment to “Annotated” Document Series 111–262, in Advanced Real Estate Law Course, State Bar of Texas, Austin (2007). Note that these conditions permit a bidder to deliver payment within a reasonable time after its bid, but in no event later than 3:45 p.m. An issue may exist about whether the mortgagor and mortgagee may agree to this condition because, as noted below, Texas Property Code section 51.0075(f) was amended in 2007 to provide that the purchase price is payable immediately on acceptance of the bid, and then again in 2009 to provide that the purchase price “is due and payable without delay on acceptance of the bid or within such reasonable time as may be agreed upon by the purchaser and the trustee.” Tex. Prop. Code § 51.0075(f).
Time to Produce Cash: In 2007, the legislature passed Tex. Prop. Code § 51.0075(f), which provides that the purchase price is payable immediately on acceptance of the bid by the trustee or substitute trustee. In 2009, section 51.0075(f) was again amended to state that the purchase price was payable “without delay on acceptance of the bid or within such reasonable time as may be agreed upon by the purchaser and trustee.” Under the 2007 version of the statute, “immediately” meant “without interval of time, without delay, straightway, or without any delay or lapse of time.” BACM 2001-1 San Felipe Road Ltd. Partnership v. Trafalgar Holdings I, Ltd., 218 S.W.3d 137, 146 (Tex. App.—Houston [14th Dist.] 2007, pet. denied) (quoting Black’s Law Dictionary 750 (6th ed. 1990)). This addition to the foreclosure statute raises the issue of whether the sale may be adjourned to permit the bidder a reasonable time to deliver the successful bid amount. The public policy against chilling bidding and for maximizing the foreclosure bid price, the practical challenge of carrying a large amount of cash or even cash in the exact amount of the winning bid, and the public policy reflected in section 51.0075(a) support construing “acceptance of the bid” in section 51.0075(f) as permitting the trustee to follow the process set out in the Texas Annotated Deed of Trust of adjourning the sale to allow a reasonable time to produce cash. In Kirkman, the trustee’s sale was recessed from 11:15 a.m. to 2:00 p.m. to permit the bidder to produce cash for his bid. The court upheld the validity of a sale to the second-highest bidder (which happened to be the creditor), because the highest bidder failed to produce his cash bid within the reasonable time set by the trustee. Kirkman, 483 S.W.2d at 308. At the time the original sale was recessed, the creditor and the high bidder were the only two bidders present. In First Texas Service Corp. v. McDonald, 762 S.W.2d 935 (Tex. App.—Fort Worth 1988, writ denied), overruled on other grounds, Kitchen v. Frusher, 181 S.W.3d 467 (Tex. App.—Fort Worth 2005, no pet.), the court upheld the jury’s findings that the trustee failed to wait a reasonable time for the highest bidder to produce cash and that the bidder did produce cash within a reasonable time. In that case, the trustee told the bidder that he would remain at the courthouse to accept the bid for “approximately forty-five minutes.” The court held that such an agreement was not governed by the statute of frauds. McDonald, 762 S.W.2d at 941; see also Tex. Bus. & Com. Code § 26.01.
The court approved the following definition of “reasonable time”:
“Reasonable time” means such time that a person of reasonable prudence and diligence would have needed under all the circumstances to perform the act contemplated; you are further instructed that the foreclosure sale had to be concluded sometime between 10:00 a.m. and 4:00 p.m. on the date in question.
McDonald, 762 S.W.2d at 939 (quoting trial court’s definition).
At an execution sale of property by the sheriff, Tex. R. Civ. P. 653 provides: “When the terms of the sale shall not be complied with by the bidder the levying officer shall proceed to sell the same property again on the same day, if there be sufficient time; but if not, he shall readvertise and sell the same as in the first instance.”
In execution sales, a successful bidder who fails to comply with the terms of the sale is liable for a penalty of 20 percent of the value of the property plus costs and all loss sustained if the second sale brings less. Tex. R. Civ. P. 652.
Postponements: The sale may be postponed for numerous reasons, usually by reposting the mortgaged property by the deadline for the next available sale. See form 14-4 in this manual for a notice of reposted foreclosure sale. Repeated postponements should be avoided. If a sale is repeatedly posted and rescheduled, the borrower or mortgagor may be lulled into believing the sale will not be held. A consumer could argue that repeated postings indicate the mortgagee is using the posting process to harass the consumer into paying the debt. The trustee’s failure to announce the postponement might be seen as evidence of chilling the bidding, particularly if a potential bidder had come to the sale or the sale had been postponed repeatedly. In Charter National Bank—Houston v. Stevens, 781 S.W.2d 368 (Tex. App.—Houston [14th Dist.] 1989, writ denied), a bank officer’s behavior was found to have chilled the bidding. The property had been posted for sale and the sale canceled three times. When the property was posted a fourth time, a potential bidder contacted the bank. The bank officer promised to call the potential bidder if the sale was to be held. The bank officer did not call, the sale was held, and the potential bidder did not attend. The mortgagor recovered the difference between the amount of the unpaid indebtedness and the fair market value of the property. The court held that the mortgagor need not prove that irregularities resulted in a grossly inadequate price because the facts showed bid chilling rather than technical irregularities and the suit was for damages rather than rescission. Stevens, 781 S.W.2d at 374–75.
The safest practice is for the trustee to appear at the appointed time and announce the postponement of the sale, inquire whether anyone is present who desires to bid on the mortgaged property, take the names of everyone who is interested in bidding, write “postponed until further notice” on the posted and filed notices, and then again follow the noticing procedure. See form 14-5 for a notice of postponement of foreclosure sale.
All bidders at the sale must be given notice of the time at which the sale will reconvene if the highest bidder does not produce cash within the time permitted by the trustee. Mitchell v. Texas Commerce Bank-Irving, 680 S.W.2d 681, 683 (Tex. App.—Fort Worth 1984, writ ref’d n.r.e.). If the highest bidder does not produce the cash, the failure of the trustee to have notified all bidders of the time of the reconvened sale necessitates reposting the mortgaged property for a sale in a later month. Intertex, Inc. v. Cowden, 728 S.W.2d 813, 817–18 (Tex. App.—Houston [1st Dist.] 1986, writ ref’d n.r.e.); Clearman v. Graham, 4 S.W.2d 581, 582–83 (Tex. Civ. App.—Austin 1928, writ dism’d). See form 14-6 in this manual for a notice of recess of foreclosure sale to be posted on the notice board and filed with the county clerk.
The mortgagee may bid at the sale and apply the amount of the bid as a credit to the secured debt owed the mortgagee without producing cash at the sale. See Thomason v. Pacific Mutual Life Insurance Co. of California, 74 S.W.2d 162, 164 (Tex. Civ. App.—El Paso 1934, writ ref’d). The mortgagee may bid even if the mortgagee is the trustee conducting the sale, as long as no fraud or unfairness is involved. Tarrant Savings Ass’n v. Lucky Homes, Inc., 390 S.W.2d 473, 476 (Tex. 1965). The mortgagee may also bid through an agent. Valley International Properties v. Ray, 586 S.W.2d 898, 902 (Tex. Civ. App.—Corpus Christi 1979, no writ).
The mortgagee and the trustee are obligated not to discourage bidding by acts or statements made before or during the sale. However, the mortgagee’s failure to disclose to the mortgagor that the mortgagee intends to bid less than the fair market value of the collateral at the foreclosure sale is not a defect or irregularity that would invalidate a sale. Pentad Joint Venture v. First National Bank of La Grange, 797 S.W.2d 92, 96–97 (Tex. App.—Austin 1990, writ denied); see also Biddle v. National Old Line Insurance Co., 513 S.W.2d 135, 138 (Tex. Civ. App.—Dallas 1974, writ ref’d n.r.e.); Beaman v. Bell, 352 S.W.2d 923, 924 (Tex. Civ. App.—San Antonio 1961, writ ref’d n.r.e.) (holding that sale “was not void but voidable at most”).
The type of conduct a court will hold to be chilling is not predictable. Conflicting communications with the mortgagor about whether or at what time a scheduled foreclosure sale will be held can be the basis for chilling the bidding by encouraging the mortgagor not to attend. See Gainesville Oil & Gas Co. v. Farm Credit Bank of Texas, 847 S.W.2d 655, 660–61 (Tex. App.—Texarkana 1993, no writ). However, the mortgagee is under no duty to take affirmative action beyond that required by statute or deed of trust to ensure a “fair” sale. Pentad, 797 S.W.2d at 96. The foreclosure of real property under a deed of trust does not have to be a “commercially reasonable” sale, and failure to conduct a commercially reasonable foreclosure is not actionable. Pentad, 797 S.W.2d at 97; see also Huddleston v. Texas Commerce Bank–Dallas, 756 S.W.2d 343, 347 (Tex. App.—Dallas 1988, writ denied). An endorser’s discussion with the mortgagee to repurchase the property before the foreclosure sale was held not to have chilled bids in Teas v. Republic National Bank, 460 S.W.2d 233, 243 (Tex. Civ. App.—Dallas 1970, writ ref’d n.r.e.). A bank officer’s failure to call a potential bidder as promised was found to have chilled the bid in Charter National Bank—Houston v. Stevens, 781 S.W.2d 368 (Tex. App.—Houston [14th Dist.] 1989, writ denied). The court also held that the mortgagor did not need to prove that the sale resulted in a grossly inadequate price, because the issue was bid chilling, not technical irregularities, and the suit was for damages rather than rescission. Stevens, 781 S.W.2d at 374–75. In Flato Bros. v. Builders Loan Co., 457 S.W.2d 154 (Tex. Civ. App.—Dallas 1970, no writ), the court held that a mortgagee’s bid resulting in a deficiency, contrary to the mortgagee’s promise to enter a full credit bid, was not grounds to set the sale aside as there was no fraudulent intent by the mortgagee. Flato Bros., 457 S.W.2d at 157. One court has interpreted a sale during the noon hour as possible evidence of a fraudulent conspiracy to chill bidding and set aside the sale. See Reisenberg v. Hankins, 258 S.W. 904, 909 (Tex. Civ. App.—Amarillo 1924, writ dism’d w.o.j.). The following actions were held not to constitute “chilling the bidding” in First State Bank v. Keilman, 851 S.W.2d 914 (Tex. App.—Austin 1993, writ denied): “advertising” the time, place, and terms of sale only by following the posting requirements of Texas Property Code section 51.002 without further placing ads in the local newspaper; the trustee’s refusal to wait for an unspecified period of time to allow the mortgagor to go to the newspaper to see if the sale was advertised; and including in the posted notice UCC-type disclaimers as to merchantability, fitness for purpose, and quality even though these disclaimers were not contained in the deed of trust. Keilman, 851 S.W.2d at 922–24.
In Myrad Properties, Inc. v. LaSalle Bank N.A., 252 S.W.3d 605 (Tex. App.—Austin 2008, reversed and rendered) (also discussed in section 14.11:3 in this manual), the notice of substitute trustee’s sale omitted one of two apartment complexes in its definition of the real property secured by the deed of trust. At the sale, the trustee read aloud the description of only one of the complexes and subsequently executed and recorded a foreclosure sale deed for only one of the complexes. The court noted that the notice of foreclosure sale did not fail to provide any notice that both complexes would be sold but, rather, contained an internal inconsistency regarding what property would be sold. Myrad, 252 S.W.3d at 617. The court noted that this type of inconsistency might be a basis under which the mortgagor could prove that bidding had been chilled. Myrad, 252 S.W.3d at 617–18. The court noted that such internal inconsistency might confuse or deter prospective bidders but found that the mortgagor did not offer any evidence that the bidding had been chilled. Myrad, 252 S.W.3d at 618. The court held that the mere fact that no one showed up at the sale was not evidence that bidding had been chilled. Myrad, 252 S.W.3d at 618–19. Myrad had the burden of proving that (1) the price received at the sale was grossly inadequate and (2) such inadequacy was caused by the complained-of irregularity. Myrad, 252 S.W.3d at 618. The court cited the following authority in support of this conclusion: RTC v. Summers & Miller Gleneagles Joint Venture, 791 F. Supp. 653, 654–55 (N.D. Tex. 1992) (challenge to validity of foreclosure sale wherein notice of foreclosure erroneously transposed legal descriptions of two to-be-foreclosed properties in manner that resulted in “an offer of more land for sale than was actually the case as to one tract, and an offer of less land for sale than was actually the case as to the other tract”); Diversified Developers, Inc. v. Texas First Mortgage REIT, 592 S.W.2d 43, 45–46 (Tex. Civ. App.—Beaumont 1979, writ ref’d n.r.e.) (upholding directed verdict against claim to invalidate foreclosure sale on basis that previously released property erroneously included in foreclosure notice; finding no evidence that erroneous property description caused grossly inadequate price or that any prospective bidder was prevented or deterred from bidding at trustee’s sale). As a result of the Myrad case opinion, the legislature amended Texas Property Code sections 5.028 and 5.030 to tighten the rules for the correction of conveyance instruments. See the discussion of this at section 14.11 below.
§ 14.6:1Conspiracy against Junior Lienholders
A senior lienholder is not permitted to conspire with the mortgagor against a junior lienholder to prevent the junior lienholder from discovering the time of sale or to conduct the sale at an unusual time to stifle and prevent bidding. See Chandler v. Orgain, 302 S.W.2d 953, 956 (Tex. Civ. App.—Fort Worth 1957, no writ).
§ 14.6:2Mortgagor’s Attempts to Secure Refinancing or Sale
The mortgagee is not required to postpone the foreclosure sale if the mortgagor is in negotiations with another lender to refinance the debt. Sparkman v. McWhirter, 263 S.W.2d 832, 837 (Tex. Civ. App.—Dallas 1953, writ ref’d). The mortgagee’s sending notice of the foreclosure sale to prospects that were negotiating to purchase the property from the mortgagor and advertising the sale in the newspaper—a means not specified in the deed of trust for advertising the sale—did not constitute tortious interference with the contract. Allied Capital Corp. v. Cravens, 67 S.W.3d 486, 491–92 (Tex. App.—Corpus Christi 2002, no pet.).
§ 14.7Sale in Parcels or as Whole
Most deeds of trust contain an express provision directing the trustee to sell “all of the property as an entirety or in such parcels as the Trustee acting may elect.” State Bar of Tex., Legal Form Manual for Real Estate Transactions 7C (1976). The current Texas Real Estate Forms Manual’s form states that the trustee shall “sell and convey all or part of the Property ‘AS IS.’ ” 2 State Bar of Tex., Texas Real Estate Forms Manual ch. 8, form 8-1 (3d ed. 2017).
The court in Bellah v. First National Bank of Hereford, 474 S.W.2d 785 (Tex. Civ. App.—Eastland 1971, writ ref’d n.r.e.), upheld a sale of the property as an entirety and not in parcels. At the sale the trustee stated that he was ready to sell in parcels if that was desired, but no request was made to conduct the sale in that manner. The court found no evidence of any damage caused by selling as a whole rather than in parcels. Bellah, 474 S.W.2d at 788; see also Hunt v. Jefferson Savings & Loan Ass’n, 756 S.W.2d 762, 764 (Tex. App.—Dallas 1988, writ denied) (involved five contemporaneous deeds of trust resulting in five separate foreclosure sales).
In another case involving a challenge to a judicially directed execution sale, the Texas Supreme Court found that the sale of the property as a whole, as opposed to in parcels, was wrongful because the fair market value of each of the parcels was in excess of the foreclosed debt. Stanglin v. Keda Development Corp., 713 S.W.2d 94 (Tex. 1986). The court stated: “It is reasonable to infer that any of the tracts, if sold separately or in combination with one other tract, would have satisfied the judgment. This is some evidence that the bulk sale caused or contributed to cause the grossly inadequate consideration.” Stanglin, 713 S.W.2d at 95.
The Texas Supreme Court addressed the propriety of entering a single bid on a foreclosure sale held as a single sale on a multiple-parcel shopping center in Provident National Assurance Co. v. Stephens, 910 S.W.2d 926 (Tex. 1995). See section 17.7:1 in this manual for a detailed discussion of that case.
§ 14.8Consideration Received at Sale
The issue of whether the bid at the foreclosure sale is adequate arises in a postforeclosure attack on the sale as wrongful, as a fraudulent transfer, or as a defense to a deficiency suit brought by the mortgagee. See chapter 13 in this manual for a general discussion of a bid strategy and evaluation.
§ 14.8:1Adequate Consideration
The long-standing rule in Texas on real property foreclosure sales is that mere inadequacy of consideration bid at the foreclosure sale is not enough to render a foreclosure sale wrongful if the sale is otherwise legal and proper. American Savings & Loan Ass’n of Houston v. Musick, 531 S.W.2d 581, 587 (Tex. 1975); see also NCNB Texas National Bank v. Johnson, 11 F.3d 1260, 1267 (5th Cir. 1994); Savers Federal Savings & Loan Ass’n v. Reetz, 888 F.2d 1497, 1507–08 n.14 (5th Cir. 1989); Greater Southwest Office Park, Ltd. v. Texas Commerce Bank N.A., 786 S.W.2d 386, 390 (Tex. App.—Houston [1st Dist.] 1990, writ denied). Before the enactment of Texas Property Code section 51.003, if the foreclosure sale was properly conducted and without irregularity, the traditional rule was that the mortgagee was entitled to a deficiency judgment against the borrower in an amount equal to the difference between the net proceeds realized from the winning bid at the foreclosure sale and the amount of the unpaid indebtedness without regard to the fair market value of the mortgaged property. Tarrant Savings Ass’n v. Lucky Homes, Inc., 390 S.W.2d 473, 475 (Tex. 1965). But if an irregularity existed in the sale that contributed to a grossly inadequate highest bid and the mortgaged property was sold to a third party, the mortgagor was entitled to have the reasonable market value of the mortgaged property, rather than the foreclosure sale price, credited to the secured debt. Tarrant Savings Ass’n, 390 S.W.2d at 475.
Since the enactment of Property Code section 51.003, if real property is sold at a foreclosure sale for less than the unpaid balance of the indebtedness secured by the real property, resulting in a deficiency, an action may be brought to recover the deficiency within two years of the foreclosure sale. Any person against whom recovery is sought may request a determination of the fair market value of the real property as of the date of the foreclosure sale. The deficiency will be the difference between the fair market value and the amount of the unpaid indebtedness. If no party requests a determination of fair market value or if no competent evidence of fair market value is introduced, the sale price at the foreclosure sale will be used to compute the deficiency. See Tex. Prop. Code § 51.003(a)–(c). See also section 20.5 in this manual.
§ 14.8:2Grossly Inadequate Consideration Coupled with Irregularity
Texas courts have sustained attacks on foreclosure sales in which an irregularity in the sale has been found to contribute to a grossly inadequate consideration being bid.
“Grossly inadequate consideration” has been defined as “a consideration so far short of the real value of the property as to shock a correct mind, and thereby raise a presumption that fraud attended the purchase.” Richardson v. Kent, 47 S.W.2d 420, 425 (Tex. Civ. App.—Dallas 1932, no writ). However, “[g]ross inadequacy of consideration alone is not . . . sufficient to set aside a Trustee’s Sale.” Crow v. Davis, 435 S.W.2d 176, 178 (Tex. Civ. App.—Waco 1968, writ ref’d n.r.e.). The courts found that an irregularity contributed to grossly inadequate consideration being bid at the sale in the following cases: Gainesville Oil & Gas Co. v. Farm Credit Bank of Texas, 847 S.W.2d 655, 661 (Tex. App.—Texarkana 1993, no writ) (misrepresentation by lender’s officer that oil and gas lease would not be included in sale); Jinkins v. Chambers, 622 S.W.2d 614, 617 (Tex. App.—Tyler 1981, no writ) (mortgagee accepted late payments just before scheduled foreclosure sale, thereby giving false impression that sale would not go forward); Collum v. DeLoughter, 535 S.W.2d 390, 392–93 (Tex. Civ. App.—Texarkana 1976, writ ref’d n.r.e.) (lot and block number inverted in notice of sale, notice sent by regular mail only, and debtor not allowed to designate order of sale of multiple tracts); Crow v. Heath, 516 S.W.2d 225, 228 (Tex. Civ. App.—Corpus Christi 1974, writ ref’d n.r.e.) (failure to give notice of intention to accelerate); Davis, 435 S.W.2d at 176 (bid price .007 percent of value, deed of trust had erroneous property description, and mortgagors did not have notice of sale); and Gandy v. Cameron State Bank, 2 S.W.2d 971, 973 (Tex. Civ. App.—Austin 1927, writ ref’d) (bid price 20 percent of fair market value coupled with attempted simultaneous judicial and nonjudicial foreclosure sales).
The courts declined to set aside the foreclosure sale in the following cases: American Savings & Loan Ass’n of Houston v. Musick, 531 S.W.2d 581, 587–88 (Tex. 1975) (irregularities in appointment of substitute trustee, alterations in deed of trust and note, lack of personal notice, and conflict of interest of party); Tarrant Savings Ass’n v. Lucky Homes, Inc., 390 S.W.2d 473, 476 (Tex. 1965) (employee of mortgagee as purchaser at sale); Terra XXI, Ltd. v. Harmon, 279 S.W.3d 781, 788 (Tex. App.—Amarillo 2007, pet. denied) (no evidence presented to demonstrate that irregularity in property description caused or contributed to lower bid, fewer bids, or grossly inadequate price; in addition to sales price of $20,000, property was sold encumbered by superior liens of more than $3 million while property had fair market value of $5.7 million); First State Bank v. Keilman, 851 S.W.2d 914, 922–24 (Tex. App.—Austin 1993, writ denied) (failure to advertise in newspaper as required by deed of trust, but posted notice as required by Property Code; failure to include property’s street address in notice; failure to wait for mortgagor to attend sale); Diversified Developers, Inc. v. Texas First Mortgage REIT, 592 S.W.2d 43, 44–45 (Tex. Civ. App.—Beaumont 1979, writ ref’d n.r.e.) (notice erroneously listed property previously released in addition to sale property, but trustee explained error at time of sale); Bering v. Republic Bank, 581 S.W.2d 806, 808 (Tex. Civ. App.—Corpus Christi 1979, writ ref’d n.r.e.) (trustee refused to delay sale several hours at mortgagor’s request for it to obtain funds to bid at sale); Forestier v. San Antonio Savings Ass’n, 564 S.W.2d 160, 163 (Tex. Civ. App.—El Paso 1978, writ ref’d n.r.e.) (failure to give notice of sale); Purnell v. Follett, 555 S.W.2d 761, 764–66 (Tex. Civ. App.—Houston [14th Dist.] 1977, no writ) (failure to give notice of acceleration); Koehler v. Pioneer American Insurance Co., 425 S.W.2d 889, 891–92 (Tex. Civ. App.—Fort Worth 1968, no writ) (irregularities in posting and conflict of interest of trustee); Sparkman v. McWhirter, 263 S.W.2d 832, 837–38 (Tex. Civ. App.—Dallas 1953, writ ref’d) (failure to record power of attorney from substitute trustee to attorney-in-fact and pending negotiations for renewal of indebtedness); and Richardson, 47 S.W.2d at 425 (sales price of more than 50 percent of property value is not grossly inadequate as matter of law).
The issues of whether an irregularity existed, a grossly inadequate consideration was paid, and the irregularity and the grossly inadequate bid were causally connected are fact issues. Therefore, little comfort can be afforded a successful bidder at a foreclosure sale if an irregularity existed and a dispute in value arises. See FLR Corp. v. Blodgett, 541 S.W.2d 209, 215 (Tex. Civ. App.—El Paso 1976, writ ref’d n.r.e.).
§ 14.8:3Bids Less Than “Reasonably Equivalent Value” and Review of Bankruptcy
If a mortgagor files a petition in bankruptcy, section 548 of the Bankruptcy Reform Act permits a foreclosure sale to be set aside as a fraudulent transfer of the mortgagor’s property if the mortgagor received less than a “reasonably equivalent value.” 11 U.S.C. § 548(a)(1)(B)(i).
The United States Supreme Court in BFP v. RTC, 511 U.S. 531 (1994), overturned the long-standing 70-percent-of-fair-market-value guideline announced in the Fifth Circuit in Durrett v. Washington National Insurance Co., 621 F.2d 201, 203–04 (5th Cir. 1980). The Supreme Court held that “reasonably equivalent value” at a foreclosure sale, for purposes of section 548, 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. See section 13.3:1 in this manual for further discussion of BFP v. RTC.
§ 14.8:4Texas Fraudulent Conveyance Statute
The Texas Uniform Fraudulent Transfer Act (codified at Tex. Bus. & Com. Code §§ 24.001–.013) provides a safe harbor concerning regularly conducted, noncollusive foreclosure sales under deeds of trust. The statute provides that—
a person gives a reasonably equivalent value if the person acquires an interest of the debtor in an asset pursuant to a regularly conducted, noncollusive foreclosure sale or execution of a power of sale for the acquisition or disposition of the interest of the debtor upon default under a mortgage, deed of trust, or security agreement.
Tex. Bus. & Com. Code § 24.004(b).
For other dispositions of assets, the statute provides that if a transfer is made while the debtor is insolvent, or if the debtor becomes insolvent as a result of the transfer and the debtor makes the transfer “without receiving a reasonably equivalent value in exchange for the transfer,” the conveyance will be deemed a fraudulent conveyance as to the present creditors of the debtor. Tex. Bus. & Com. Code § 24.005(a)(2).
A debtor is insolvent under the statute if the sum of the debtor’s obligations is greater than all his assets at a fair valuation. A debtor who is generally unable to pay debts as they become due is presumed to be insolvent. Tex. Bus. & Com. Code § 24.003(a), (b).
“Reasonably equivalent value” is defined to include the range of values for which the debtor would have willfully sold the assets in an arm’s-length transaction. Tex. Bus. & Com. Code § 24.004(d).
A foreclosure sale may be set aside as a fraudulent conveyance under the Texas Uniform Fraudulent Transfer Act by a junior lien creditor if at the time of the foreclosure sale the debtor was insolvent, the purchaser at the sale is an “insider” as defined in the statute for an antecedent debt, and the insider had reasonable cause to believe that the debtor was insolvent. See Tex. Bus. & Com. Code § 24.006(b); United States v. Shepherd, 834 F. Supp. 175 (N.D. Tex. 1993), rev’d on other grounds, 23 F.3d 923 (5th Cir. 1994). An “insider” is defined as including (1) a relative of the debtor or of a general partner of the debtor; (2) a partnership in which the debtor is a general partner; (3) a general partner in such a partnership; or (4) a corporation of which the debtor is a director, officer, or person in control. Tex. Bus. & Com. Code § 24.002(7)(A); see also 28 U.S.C. § 3301(5); In re Holloway, 955 F.2d 1008, 1010 (5th Cir. 1992); J. Michael Putman, M.D.P.A., Money Purchase Pension Plan v. Stephenson, 805 S.W.2d 16, 18 (Tex. Civ. App.—Dallas 1991, no writ); 2 Collier on Bankruptcy § 101(31) at 101-87 (Alan N. Resnick & Henry J. Sommer eds., 15th ed. 1991).
A mortgagee has been compelled to pay the mortgagor cash because the mortgagee mistakenly bid more than the balance owed on the secured indebtedness. See McClure v. Casa Claire Apartments, 560 S.W.2d 457, 461–62 (Tex. Civ. App.—Beaumont 1977, no writ) (mortgagee failed to give notice to mortgagor of its unilateral mistake of overbidding until sued, three months after sale; court held mortgagee equitably estopped from rescinding sale).
§ 14.9Personal Property Foreclosure Sales
Unlike real property foreclosure sales, personal property foreclosure sales are not conducted by a trustee appointed by the debtor and directed to act by the secured party. Section 9.610 of the Texas Business and Commerce Code provides that “[a]fter default, a secured party may sell, lease, license, or otherwise dispose of any or all of the collateral.” Tex. Bus. & Com. Code § 9.610(a). See section 15.3 in this manual for discussion of distribution of foreclosure sale proceeds.
Texas Business and Commerce Code section 9.611(b) requires reasonable notification of the time and place of any public sale or reasonable notification of the time after which any private sale or other intended disposition is to be made. See Tex. Bus. & Com. Code § 9.611(b); see also Wright v. Interfirst Bank Tyler, 746 S.W.2d 874, 877 (Tex. App.—Tyler 1988, no writ) (notice of public sale not notice of private sale). Former Business and Commerce Code sections did not prescribe the form and contents of the notice, the minimum notice requirement, the method of giving notice to the debtor, the place of sale, the time of sale, or the public notice requirements. However, Business and Commerce Code sections 9.611–.614 now set forth requirements concerning the timeliness, contents, and form of notification of a proposed disposition of the collateral. Former section 9.504(c) was not interpreted as requiring written notice of sale as long as the oral notice of sale was reasonable. See, e.g., Beltran v. Groos Bank, N.A., 755 S.W.2d 944, 946 (Tex. App.—San Antonio 1988, no writ); MBank Dallas v. Sunbelt Manufacturing, 710 S.W.2d 633, 635–36 (Tex. App.—Dallas 1986, writ ref’d n.r.e.); see also Tex. Bus. & Com. Code § 1.201(b)(36)(B) (receipt of any timely notice has effect of proper sending); Crest Investment Trust v. Alatzas, 287 A.2d 261, 264 (Md. 1972). However, revised Code section 9.611 now requires that the secured party send “an authenticated notification of disposition” unless the collateral is perishable, threatens to decline speedily in value, or is of the type customarily sold on a recognized market. See Tex. Bus. & Com. Code § 9.611(c), (d).
Contrary to the procedure for deed-of-trust foreclosures, the Business and Commerce Code does provide for giving notice of sale to junior lienholders, except in the case of consumer goods. Section 9.611(c) provides in part that—
the secured party shall send an authenticated notification of disposition to:
(1)the debtor;
(2)any secondary obligor; and
(3)if the collateral is other than consumer goods:
(A)any other person from which the secured party has received, before the notification date, an authenticated notification of a claim of an interest in the collateral;
(B)any other secured party or lienholder that, 10 days before the notification date, held a security interest in or other lien on the collateral perfected by the filing of a financing statement that:
(i)identified the collateral;
(ii)was indexed under the debtor’s name as of that date; and
(iii)was filed in the office in which to file a financing statement against the debtor covering the collateral as of that date; and
(C)any other secured party that, 10 days before the notification date, held a security interest in the collateral perfected by compliance with a statute, regulation, or treaty described in Section 9.311(a).
Tex. Bus. & Com. Code § 9.611(c).
§ 14.9:2Commercially Reasonable Sale and Bid Price
Section 9.610(b) of the Texas Business and Commerce Code requires that every aspect of the secured party’s disposition of the personal property in foreclosure of its security interest be “commercially reasonable,” including the method, manner, time, place, and other terms. Tex. Bus. & Com. Code § 9.610(b). The Code does not define “commercially reasonable,” but this issue is a question of fact for determination by the trier of fact (the jury). See Siboney Corp. v. Chicago Pneumatic Tool Co., 572 S.W.2d 4 (Tex. Civ. App.—Houston [1st Dist.] 1978, writ ref’d n.r.e.). The price bid at the foreclosure sale in and of itself does not determine whether the sale is commercially reasonable. Siboney Corp., 572 S.W.2d at 8. The price obtained at the sale and the adequacy of the notice are the most important factors. Section 9.627 provides the following:
(a)The fact that a greater amount could have been obtained by a collection, enforcement, disposition, or acceptance at a different time or in a different method from that selected by the secured party is not of itself sufficient to preclude the secured party from establishing that the collection, enforcement, disposition, or acceptance was made in a commercially reasonable manner.
(b)A disposition of collateral is made in a commercially reasonable manner if the disposition is made:
(1)in the usual manner on any recognized market;
(2)at the price current in any recognized market at the time of the disposition; or
(3)otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.
(c)A collection, enforcement, disposition, or acceptance is commercially reasonable if it has been approved:
(1)in a judicial proceeding;
(2)by a bona fide creditors’ committee;
(3)by a representative of creditors; or
(4)by an assignee for the benefit of creditors.
(d)Approval under Subsection (c) need not be obtained, and lack of approval does not mean that the collection, enforcement, disposition, or acceptance is not commercially reasonable.
Tex. Bus. & Com. Code § 9.627 (emphasis added).
As noted in the statutory language emphasized above, section 9.627 provides that the sale is commercially reasonable if the collateral is sold in a recognized market at the price current in that market. See Tex. Bus. & Com. Code § 9.627(b)(2).
In Daniell v. Citizens Bank, 754 S.W.2d 407, 409–10 (Tex. App.—Corpus Christi 1988, no writ), the court placed the burden on the creditor to prove notice of sale and commercially reasonable disposition of collateral. The court in Huddleston v. Texas Commerce Bank–Dallas, 756 S.W.2d 343, 347 (Tex. App.—Dallas 1988, writ denied), refused to require the mortgagee to prove that its deed-of-trust foreclosure sale on real property was conducted in a commercially reasonable manner, citing former Texas Business and Commerce Code section 9.104(10), which excludes from Chapter 9 the “creation or transfer of an interest in or lien on real estate.” (Former section 9.104(10) has been amended and is recodified at Tex. Bus. & Com. Code § 9.109(d)(11).)
§ 14.9:3Retention of Collateral in Satisfaction of Debt
Texas Business and Commerce Code section 9.620 provides for various situations in which the secured party may retain the collateral in satisfaction of the secured debt. See Tex. Bus. & Com. Code § 9.620.
§ 14.9:4Deficiencies in Personal Property Foreclosures
In Tanenbaum v. Economics Laboratory, 628 S.W.2d 769 (Tex. 1982), the Texas Supreme Court established that in personal property foreclosure cases the secured party is entitled to obtain a deficiency judgment against the debtor only if the disposition of the collateral was commercially reasonable and after advance notification to the debtor, if required by former Texas Business and Commerce Code section 9.504, stating, “Then and only then is [the secured party] entitled to sue for a deficiency.” Tanenbaum, 628 S.W.2d at 771. In Tanenbaum the debtor was not given notice of the foreclosure disposition of the collateral. The court held that the secured party’s failure to give the debtor notice of the intended disposition was an election to accept the collateral in full satisfaction of the secured debt under former section 9.505. Tanenbaum, 628 S.W.2d at 771–72. Tanenbaum overruled prior cases’ holdings that failure to give notice under former section 9.504 merely created a rebuttable presumption that the value of the collateral equaled the secured debt. Before Tanenbaum, this presumption could be overcome and did not bar recovery of a deficiency. See Roylex, Inc. v. E.F. Johnson Co., 617 S.W.2d 760, 762 (Tex. Civ. App.—Houston [14th Dist.] 1981, no writ), disapproved of by Tanenbaum, 628 S.W.2d at 771. However, Tanenbaum has been legislatively overturned as to nonconsumer transactions with the adoption of section 9.626 of the Business and Commerce Code. See Tex. Bus. & Com. Code § 9.626. Thus Tanenbaum would seem to have continued effect only as to consumer transactions involving personal property, as Texas courts have not adopted the Tanenbaum rule for real property foreclosures. The court in Van Brunt v. BancTexas Quorum, N.A., 804 S.W.2d 117, 122 (Tex. App.—Dallas 1990, no writ), held that the penalty enunciated in Tanenbaum would not be extended to bar suit for a deficiency existing after a real property foreclosure sale, even though the creditor had previously held a defective personal property sale. The Business and Commerce Code foreclosure sale requirement of “commercial reasonableness” does not apply to real property foreclosure sales. See Savers Federal Savings & Loan Ass’n v. Reetz, 888 F.2d 1497, 1507–08 n.14 (5th Cir. 1989). In Knights of Columbus Credit Union v. Stock, 814 S.W.2d 427 (Tex. App.—Dallas 1991, writ denied), the court was unwilling to extend the Tanenbaum rule to bar suit on two of three notes even though it found that the notice of disposition of personal property securing a third note was defective and all three loans were cross-collateralized. “Cross-collateralization does not magically transform three separate loans into one loan. We determine that the adverse consequences of the insufficient notice should logically affect only [the single loan].” Knights of Columbus Credit Union, 814 S.W.2d at 431–32.
A deficiency suit may still be maintained against a guarantor, even though the deficiency suit would be barred against the note maker after a personal property foreclosure sale if the guaranty agreement contains an enforceable waiver as to the particular defect in the foreclosure sale procedures.
Waiver of Duty to Preserve Collateral: In FDIC v. Nobles, 901 F.2d 477, 480 (5th Cir. 1990), the court upheld a guaranty that waived the lender’s duty to preserve the collateral.
Waiver of Commercially Reasonable Disposition: In United States v. Terrey, 554 F.2d 685, 692–93 (5th Cir. 1977), the court found that a guarantor did not waive his commercial reasonableness defense despite giving the lender full power to dispose of the collateral, where the guaranty expressly incorporated Texas law.
§ 14.10Warranties and Title Delivered at Sale
At the conclusion of the foreclosure sale, the trustee conveys title to the mortgaged property by executing and delivering a deed. See the foreclosure sale deed at form 14-7 in this manual and the foreclosure sale bill of sale at form 14-8. See also 2 State Bar of Tex., Texas Real Estate Forms Manual ch. 14, form 14-15 (3d ed. 2017), for an alternative form for a trustee’s deed. A trustee’s deed transfers only the interest the mortgagor had in the property at the time the trustee’s deed was executed. Diversified, Inc. v. Walker, 702 S.W.2d 717 (Tex. App.—Houston [1st Dist.] 1985, writ ref’d n.r.e.).
§ 14.10:1No Requirement to Deliver Deed at Time of Sale
The trustee is not required to execute and deliver the foreclosure sale deed concurrently with the payment of the bid at the sale, because the purchaser obtains equitable title pending execution and delivery of the deed. Kirkman v. Amarillo Savings Ass’n, 483 S.W.2d 302, 308–09 (Tex. Civ. App.—Amarillo 1972, writ ref’d n.r.e.) (citing Pioneer Building & Loan Ass’n v. Cowan, 123 S.W.2d 726 (Tex. Civ. App.—Waco 1938, writ dism’d judgm’t cor.)). But a bidder should not be required to produce cash in a substantial amount to an unbonded, unknown trustee without the trustee’s delivery of the deed. See First Federal Savings & Loan Ass’n v. Sharp, 347 S.W.2d 337 (Tex. Civ. App.—Dallas 1961), aff’d, 359 S.W.2d 902 (Tex. 1962).
However, for a public sale of residential real property under a power of sale in a security instrument, the trustee or substitute trustee must provide the winning bidder with a receipt for the sale proceeds tendered and, except when prohibited by law, within a reasonable time, deliver the deed to the winning bidder or file the deed for recording. Tex. Bus. & Com. Code § 22.005.
§ 14.10:2Position of Foreclosure Sale Purchaser
The purchaser of real property at a deed-of-trust foreclosure sale succeeds to the position of the mortgagee. Thus, if the mortgagee took the lien in good faith for valuable consideration without notice of the equitable claims of third parties, the purchaser at the sale, regardless of its knowledge or notice of the equitable claims, takes title free of such claims. Moran v. Adler, 570 S.W.2d 883, 885 (Tex. 1978) (citations omitted); Gwin v. Griffith, 394 S.W.2d 191, 197 (Tex. Civ. App.—Corpus Christi 1965, no writ); Ebner v. Nall, 127 S.W.2d 506, 507 (Tex. Civ. App.—Beaumont 1939, writ dism’d judgm’t cor.); Lyday v. Federal Land Bank, 103 S.W.2d 441, 442 (Tex. Civ. App.—Texarkana 1937, writ dism’d). The exception to this rule is that no title passes to the purchaser if the foreclosure sale was void because of the trustee’s lack of authority to conduct the sale. Phillips v. Latham, 523 S.W.2d 19, 24 (Tex. Civ. App.—Dallas 1975, writ ref’d n.r.e.).
The claimant of equitable title seeking to set aside the trustee’s deed to a foreclosure sale purchaser has the burden of proving that the mortgagee had knowledge or notice of the equitable claim. Dillard v. Broyles, 633 S.W.2d 636, 644 (Tex. App.—Corpus Christi 1982, writ ref’d n.r.e.); Gwin, 394 S.W.2d at 197; Connor v. Lane, 355 S.W.2d 223, 224 (Tex. Civ. App.—Waco 1962, no writ).
§ 14.10:3Warranties of Title Binding Mortgagor
Most deeds of trust provide that the trustee is to convey title to the mortgaged property pursuant to the foreclosure sale “with a general warranty binding the grantor” (the mortgagor). The Texas Real Estate Forms Manual’s current form for deed of trust provides for “a general warranty binding Grantor, subject to the Prior Lien and to the Other Exceptions to Conveyance and Warranty” and further states that “Grantor warrants and agrees to defend the title to the Property, subject to the Other Exceptions to Conveyance and Warranty.” 2 State Bar of Tex., Texas Real Estate Forms Manual ch. 8, form 8-1 (3d ed. 2017). The “subject to” exception appears to be contrary to the usual representations by the mortgagor to the mortgagee at the time of the closing of the loan. It additionally provides that “[r]ecitals in any trustee’s deed conveying the Property will be presumed to be true.” 2 State Bar of Tex., Texas Real Estate Forms Manual, State Bar of Texas, ch. 8, form 8-1 (3d ed. 2017). Such recitals in the foreclosure sale deed are prima facie evidence of the regularity of the sale. See Burnett v. Manufacturer’s Hanover Trust Co., 593 S.W.2d 755, 758 (Tex. Civ. App.—Dallas 1979, writ ref’d n.r.e.).
The warranty of title contained in the deed of trust and the subsequent foreclosure sale deed warrants title from the mortgagor, not the mortgagee or the trustee, to the foreclosure sale purchaser. See Sandel v. Burney, 714 S.W.2d 40, 41 (Tex. App.—San Antonio 1986, no writ); see also In re Niland, 825 F.2d 801 (5th Cir. 1987) (refusing to find mortgagee had warranted to purchaser at foreclosure sale that deed of trust granted valid lien on mortgaged property). The court in Niland upheld the mortgagor’s homestead claim even though the mortgagor had falsely designated another property as his homestead at the time of the loan. The court also refused to permit the foreclosure sale purchaser to obtain a return of its bid from the mortgagee, even though the purchaser proved that the loan officer who made the loan received a bribe from the mortgagor to make the impermissible loan. Niland, 825 F.2d at 810–11.
Sometimes the mortgagor negotiates an amendment to the printed form of the deed of trust to incorporate a schedule of exceptions to the general warranty of title, to limit the warranty to a “special” warranty of title as opposed to a general warranty of title, or to limit the warranty by broad categories of potential interests (for example, “any and all restrictive covenants of record”). A breach of the mortgagor’s warranty of title discovered after the foreclosure sale may be of little practical value to the purchaser at the sale because the mortgagor may be insolvent. A foreclosure sale deed with warranty of title affords the purchaser the benefits of the cases and statutes that recognize certain rights of claimants holding title under a warranty deed, such as the adverse-possession statutes and in after-acquired title situations.
Some concern might be raised about drafting a foreclosure sale deed with warranties of title binding on the mortgagor if the mortgagor is a Chapter 7 bankruptcy debtor. The foreclosure sale notice and deed should recite that the sale is being held pursuant to a bankruptcy court order. This fact should be pointed out to the bidders at the sale.
§ 14.10:4Warranties Binding Mortgagee or Trustee
Section 51.009 of the Texas Property Code provides the following:
A purchaser at a sale of real property under Section 51.002:
(1)acquires the foreclosed property “as is” without any expressed or implied warranties, except as to warranties of title, and at the purchaser’s own risk; and
(2)is not a consumer.
Some cases hold that a foreclosure sale purchaser purchases at its peril and without recourse against the trustee or the mortgagee. One court has stated this position as follows:
Purchasers of land from a substitute trustee’s sale are not relieved from the necessity of inquiring whether the trustee had been empowered to sell. One who bids on property at a foreclosure sale does so “at his peril.” Purchasers assume that the trustee has power to make the sale at their peril, and where he is without power, or there is other defect or irregularity that would render the foreclosure sale void, then the purchaser cannot acquire title to the property.
Diversified, Inc. v. Walker, 702 S.W.2d 717, 723–24 (Tex. App.—Houston [1st Dist.] 1985, writ ref’d n.r.e.) (citations omitted) (holding that purchaser at void foreclosure sale not entitled to damages against foreclosing lender for purchaser’s loss of benefit of bargain (no lost profits recovery)). Supporting this finding is Peterson v. Black, 980 S.W.2d 818, 823 (Tex. App.—San Antonio 1998, no pet.) (finding mortgagor could not, as matter of law, recover damages for loss of opportunity to do business (property management) with potential purchaser allegedly prevented from purchasing mortgaged property at foreclosure sale). See also Sandel, 714 S.W.2d at 41; Bowman v. Oakley, 212 S.W. 549, 552 (Tex. Civ. App.—Fort Worth 1919, writ ref’d).
In most instances the attorney for the lender prepares the loan documents, ultimately acts as the trustee conducting the sale, and drafts the foreclosure sale deed. In such instances, the attorney may have a duty to alert the purchaser at the foreclosure sale and to limit the warranty in the foreclosure sale deed by title exceptions contained in the mortgagee’s title insurance policy or surveys delivered by the mortgagor to the mortgagee.
Inadvertent Warranties: Caution is urged for the trustee and the mortgagee. A disgruntled purchaser may be able to recover against the trustee and the mortgagee for oral or written representations and warranties made in the notice of foreclosure sale, in the foreclosure proceeding, in response to presale inquiries, and in the foreclosure sale deed. Most notices of foreclosure sale and foreclosure sale deeds contain express representations concerning the mortgagor’s default and the giving of proper notice of sale. The attorney for the mortgagee may execute an affidavit attached to the foreclosure sale deed concerning the due mailing and posting of the notice of foreclosure sale or may provide to a prospective bidder copies of the mailed notices of foreclosure sale and current federal tax lien searches and notices to the Internal Revenue Service of the sale. The successful bidder might seek recourse for a defective notice to the IRS or the attorney’s failure to detect a properly filed IRS lien.
Duty to Disclose Defects: Although no Texas cases have addressed the issue of the trustee’s or the mortgagee’s duty to disclose known defects about the condition of the mortgaged property, a California court has held that the failure of the trustee to disclose soil conditions and other defects affecting a residence being sold at foreclosure sale constituted common-law fraud, entitling the foreclosure sale purchaser to rescind the sale. See Karoutas v. HomeFed Bank, 232 Cal. App. 3d 767 (Cal. Ct. App. 1991) (noting under common law in California that in absence of fiduciary or confidential relationship, duty to disclose arises if material facts are known only to seller and buyer does not know or cannot reasonably discover undisclosed facts). In Karoutas, the mortgagor disclosed to the mortgagee the defects. Additionally, the mortgagee obtained reports that repairs would cost in excess of two times the loan balance and would not be economically feasible. The court also implied that the trustee has a duty to disclose known material facts. Karoutas, 232 Cal. App. 3d at 771; see also Reed v. King, 145 Cal. App. 3d 261, 267 (Cal. Ct. App. 1983); Buist v. C. Dudley DeVelbiss Corp., 182 Cal. App. 2d 325, 331–32 (Cal. Ct. App. 1960); Rothstein v. Janss Investment Corp., 45 Cal. App. 2d 64, 69 (Cal. Dist. Ct. App. 1941); but see Sumitomo Bank v. Taurus Developers, Inc., 185 Cal. App. 3d 211, 221 (Cal. Ct. App. 1986) (holding that mortgagor does not have similar disclosure duty since mortgagor is not setting price or representing value of property at sale). The rule is stated as follows:
At a sale by a trustee under a power, where the facts or means of information concerning the condition and value of the property sold are equally accessible to both parties, and nothing is said or done which tends to impose on the other, or to mislead him or her, there is no fraud of which the law can take notice; nevertheless, where material facts are accessible to the vendor, and he or she knows them not to be within the diligent attention, observation, and judgment of the other party, he or she is bound to disclose those facts and make them known to purchaser.
55 Am. Jur. 2d Mortgages § 871 at 451 (1996).
The court in First State Bank v. Keilman, 851 S.W.2d 914, 924 (Tex. App.—Austin 1993, writ denied), held that the inclusion in the posted notice of foreclosure sale of a disclaimer of the UCC warranties of merchantability, fitness for a particular purpose, workmanship, or quality, although not contained in the deed of trust, was not as a matter of law a defect or irregularity that would give rise to a cause of action for damages and did not chill the bidding.
The foreclosure sale deed at form 14-7 in this manual contains a disclaimer by the trustee or the mortgagee that neither of them is making any UCC warranties or warranties as to title or lien priority.
§ 14.11Reforeclosure and Correcting Defective Trustee’s Deed
In the past, Texas cases have held that a corrective trustee’s foreclosure sale deed may be executed to correct erroneous recitals in a previously filed trustee’s deed. For example, see Adams v. First National Bank, 154 S.W.3d 859, 871 (Tex. App.—Dallas 2005, no pet.), which upheld a correction deed filed to correct the erroneous recital that the default on the loan was failure to pay timely installments, as opposed to violation of the due-on-sale clause. Much of the prior case law, however, is affected by the 2011 changes to Texas Property Code sections 5.027 through 5.031, which categorized corrections as “material” or “nonmaterial” and set out statutory requirements for each type of correction. See the discussion in section 14.11:3 below.
§ 14.11:1Revival of Interests Extinguished at Foreclosure
After the foreclosure sale, the purchaser may determine that the sale extinguished a valuable interest appurtenant to the mortgaged property that was subordinate to the lien of the deed of trust. Whether the trustee and the purchaser without the joinder of the mortgagor can change the foreclosure sale deed after the sale or rescind the sale in an attempt to preserve the extinguished subordinate interest has not been definitively resolved, but the case law is generally against such a proposition. See generally Joe T. Garcia’s Enterprises v. Snadon, 751 S.W.2d 914 (Tex. App.—Dallas 1988, writ denied).
Where the grantor has divested himself of title, although by mistake he has not conveyed the title in the way in which he intended, he may not by a subsequent conveyance correct his mistake, there being no title remaining in him to convey except where the conveyance has been rescinded or canceled by a mutual consent of the parties.
Joe T. Garcia’s Enterprises, 751 S.W.2d at 916 (quoting 26 C.J.S. Deeds § 31 (1956)).
See also Bonilla v. Roberson, 918 S.W.2d 17, 21–22 (Tex. App.—Corpus Christi 1996, no writ), in which the court found that after a foreclosure sale at which the lender purchased the mortgaged property and a deed was delivered to the mortgagee, the trustee and mortgagee could not nonjudicially set aside the sale, file a rescission deed, and reforeclose at a lesser bid price because of the discovery after foreclosure that the mortgagor had extensively damaged the property before foreclosure (water heaters, toilets, bathtubs, gas stoves, and refrigerators discovered missing after sale). The court also found that the mortgagee bid more than the note balance, resulting in a surplus bid. Bonilla, 918 S.W.2d at 22–23. The court in Peterson v. Black, 980 S.W.2d 818, 822 (Tex. App.—San Antonio 1998, no pet.), found that no condition existed that would permit the trustee and mortgagee to rescind the sale because the sale was validly held, and the following provision did not authorize them to unilaterally set aside the sale: “[I]f any sale hereunder is not completed or is defective in the opinion of the beneficiary, such sale shall not exhaust the power of sale hereunder and beneficiary shall have the right to have a subsequent sale or sales to be made by the trustee or by any other successor or substitute trustee.”
§ 14.11:2Correction of Bid Amount
A fact issue exists as to the actual bid at a foreclosure sale if a correction deed is filed after the sale revising the amount stated as the bid in the recorded trustee’s deed. Buccaneer’s Cove, Inc. v. Mainland Bank, 831 S.W.2d 582, 584 (Tex. App.—Corpus Christi 1992, no writ).
In Beneficial Standard Life Insurance Co. v. Trinity National Bank, 763 S.W.2d 52, 55–56 (Tex. App.—Dallas 1988, writ denied), the court declined to follow the judgment entered in a reformation suit between the foreclosing first lienholder and its substitute trustee. In a separate court action the foreclosure sale bid had been reformed and reduced by the amount of casualty insurance proceeds overlooked by the foreclosing lender, who was unaware of the casualty loss.
§ 14.11:3Myrad and Its Legislative Progeny
In Myrad Properties, Inc. v. LaSalle Bank N.A., 300 S.W.3d 746 (Tex. 2009), the deed of trust being foreclosed pledged two tracts of land but the trustee inadvertently posted a foreclosure notice that described only one tract, and at the actual foreclosure sale, the trustee read the description of the one tract described in the notice. At the conclusion of the sale, the purchaser was given a trustee’s deed that described the one tract actually posted in the notice and described by the trustee at the sale. After the sale, the trustee then attempted to prepare a correction trustee’s deed listing both tracts covered by the deed of trust, and the borrower sued to stop the trustee. Both the trial court and the court of appeals ruled in favor of the trustee and purchaser, on the grounds of unilateral mistake. However, the Texas Supreme Court held that a trustee’s correction deed that purports “to convey additional, separate properties not described in the original [trustee’s] deed” is void as a matter of law, as a correction deed is appropriate in only limited circumstances to correct defects and imperfections in the original deed. Myrad, 300 S.W.3d at 750. In light of the equities involved, however, and the potential unjust enrichment of a delinquent borrower if the original trustee’s deed stood, the supreme court further granted a motion to rescind the original trustee’s deed, essentially putting the parties back in the status quo ante existing before the foreclosure. Myrad, 300 S.W.3d at 753.
In light of the controversy engendered by the court of appeals’ decision in Myrad (252 S.W.3d 605 (Tex. App.—Austin 2008)) upholding the trustee’s right to correct the original deed by adding significant property in a correction deed, the legislature intervened with new amendments to the correction instrument statute at Texas Property Code sections 5.027 through 5.031. The amendments define material and nonmaterial changes to an instrument by a correction instrument; expressly provide for giving notice to the parties to the instrument of nonmaterial changes and requiring execution of the correction instrument by the parties in interest when a material change is involved; and defines when ratification of a change is required from the parties in interest. See Tex. Prop. Code §§ 5.027–.031. With regards to trustee’s deeds, section 5.027(b) now expressly provides the following:
(b) A correction instrument may not correct an ambiguity or error in a recorded original instrument of conveyance to transfer real property or an interest in real property not originally conveyed in the instrument of conveyance for purposes of a sale of real property under a power of sale under Chapter 51 unless the conveyance otherwise complies with all requirements of Chapter 51.
Tex. Prop. Code § 5.027(b). A correction instrument recorded before September 1, 2011, that substantially complies with Texas Property Code section 5.028 or 5.029 and that purports to correct a recorded original instrument of conveyance is effective to the same extent as provided by section 5.030 unless a court of competent jurisdiction renders a final judgment determining that the correction instrument does not substantially comply with section 5.028 or 5.029. Tex. Prop. Code § 5.031. See form 14-9 in this manual.
If the statutes referenced above do not apply, a party can look to the court to reform a conveyance document. Reformation is an equitable remedy that a court may grant to correct a written document so that it conforms to the parties’ true intent. Litigation involving title to real property is one of the most common areas for invoking the remedy of reformation and generally arises in an action for a declaratory judgment. Note, however, that a reformation action is subject to a four-year statute of limitations, which runs from the date the mistake was discovered or, in the exercise of reasonable diligence, should have been discovered.
§ 14.12Recording Trustee’s Deed
Failure to record the trustee’s deed does not mean that the sale is not complete or that title has not passed to the successful bidder; rather, equitable title passes to the buyer. Peterson v. Black, 980 S.W.2d 818, 822 (Tex. App.—San Antonio 1998, no pet.); Pioneer Building & Loan Ass’n v. Cowan, 123 S.W.2d 726, 730 (Tex. Civ. App.—Waco 1938, writ dism’d judgm’t cor.). The purpose for recording the trustee’s deed is simply to protect the grantee under the Texas recording statutes.
§ 14.13Enjoining Foreclosure Sale
The debtor must tender the full sum of the admitted debt in order to enjoin the foreclosure sale. Ginther-Davis Center, Ltd. v. Houston National Bank, 600 S.W.2d 856, 864 (Tex. Civ. App.—Houston [1st Dist.] 1980, writ ref’d n.r.e.). Mortgagors are not entitled to enjoin a sale merely because they have equity in the property. Lincoln National Life Insurance Co. v. Freudenstein, 87 S.W.2d 810, 812 (Tex. Civ. App.—San Antonio 1935, no writ).
§ 14.14Procedure for Trustee or Substitute Trustee to Be Dismissed from Suit
Texas Property Code section 51.007 provides a procedure whereby a trustee or a substitute trustee under a deed of trust, contract lien, or security instrument can seek dismissal from a suit or proceeding where he is named solely in his capacity as trustee or substitute trustee and is not a necessary party. See Tex. Prop. Code § 51.007. Dismissal of the trustee or substitute trustee does not prejudice a party’s right to seek injunctive relief to prevent the trustee from proceeding with a foreclosure sale. Tex. Prop. Code § 51.007(e). Section 51.007 does not, however, require a trustee defendant to file verified pleadings if the proceeding is not one in which the trustee is contending that he is not a necessary party to the proceeding. Terra XXI, Ltd. v. Harmon, 279 S.W.3d 781 (Tex. App.—Amarillo 2007, pet. denied) (motion for summary judgment by trustee as to validity of foreclosure sale).
§ 14.15Rescissions of Foreclosure Sale
See the discussion in section 14.1 above regarding Texas Property Code section 51.016, which authorizes rescission of a nonjudicial foreclosure sale under certain conditions and procedures. The statute gives a foreclosure professional a means to legally rescind a foreclosure sale without a foreclosure sale buyer using the threat of litigation as a means to extract additional compensation from the mortgagee or borrower other than return of the bid price. See Tex. Prop. Code § 51.016.
§ 14.15:1Rescissions Generally
Just as parties may enter into a contract, they may also rescind the contract. The effect of the agreement to rescind depends on the intent of the parties at the time the agreement was made. Rescission is an equitable remedy that operates to extinguish a contract that is legally valid but must be set aside due to fraud, mistake, or for some other reason to avoid unjust enrichment. Martin v. Cadle Co., 133 S.W.3d 897, 903 (Tex. App.—Dallas 2004, pet. denied). Usually, the parties’ intent when they rescind the foreclosure sale is to be returned to the status quo that existed before the foreclosure sale. The most efficient and practical way to rescind a foreclosure sale is by agreement. However, there are times when it is necessary to seek court assistance to accomplish a rescission.
§ 14.15:2Rescissions by Agreement
Although the law is not entirely settled in Texas, the prudent practitioner should avoid seeking a unilateral rescission in most circumstances. In Bonilla v. Roberson, 918 S.W.2d 17 (Tex. App.—Corpus Christi 1996, no writ), a mortgagee attempted to rescind a foreclosure sale by advising the substitute trustee to file a cancellation deed. The court held that the cancellation deed had no effect and stated that when a party with a property interest wishes to challenge a sale’s validity, the proper action is to bring a cause of action to set aside the sale and cancel the trustee’s deed. Bonilla, 918 S.W.2d at 21–22. The party cannot simply ask the substitute trustee to cancel the deed obtained at the foreclosure sale. Therefore, to avoid looking to the court for a judicial rescission, the most effective and efficient way to rescind a foreclosure sale is by agreement. See form 14-10 in this manual.
Generally, title issues are determined by a trespass to try title action. However, with a rescission of a foreclosure sale, the conflict is not who has title to the land but whether or not the mortgagee or trustee had the right to conduct the foreclosure sale. In this situation, a declaratory judgment is an effective alternative to obtain a judicial rescission.
The purpose of a declaratory action is to establish existing rights, status, or other legal relationships. City of El Paso v. Heinrich, 284 S.W.3d 366, 370 (Tex. 2009). In 2004, the Texas Supreme Court stated that the Declaratory Judgments Act “provides an efficient vehicle for parties to seek a declaration of rights under certain instruments.” Martin v. Amerman, 133 S.W.3d 262, 265 (Tex. 2004). Section 37.004(a) of the Texas Civil Practice and Remedies Code provides that a person under a deed, written contract, or other writing constituting a contract may have determined any question of validity arising under the instrument. Tex. Civ. Prac. & Rem. Code § 37.004(a). The trial court is duty-bound to declare the rights of the parties as to those matters and has limited discretion to refuse a declaratory judgment, and it may do so only where judgment would not remove the uncertainty giving rise to the proceedings. SpawGlass Construction Corp. v. City of Houston, 974 S.W.2d 876, 878 (Tex. Civ. App.—Houston 1998, pet. denied).
The question generally asked in a rescission of a foreclosure sale is: did the substitute trustee have the right to conduct a nonjudicial foreclosure sale under the power of sale included in the underlying deed of trust? Whether a trustee’s deed at foreclosure sale is void or voidable depends on its effect upon the title at the time it was executed and delivered. Diversified, Inc. v. Walker, 702 S.W.2d 717, 721 (Tex. App.—Houston [1st Dist.] 1985, writ ref’d n.r.e.). If the deed is a mere nullity, passing no title and conferring no rights whatsoever to the purchaser, then it is void ab initio. Diversified, 702 S.W.2d at 721. In order to correct a void sale, the parties typically execute a rescission and record it in the real property records to give notice that title did not pass to the entity or person that purchased the property at the underlying foreclosure sale. However, that is not always the case.
In Slaughter v. Qualls, 162 S.W.2d 671 (Tex. 1942), the Texas Supreme Court found that the mortgagor was not in default under the note. As such, the trustee had no power to sell the debtor’s property. Slaughter, 162 S.W.2d at 675. As in most security agreements, the deed of trust authorizes the sale only upon default by the debtor. Therefore, without default, there was no authority for sale. In Slaughter, the court stated that if the conditions for default did not arise, the trustee’s power never came into being, rendering the foreclosure sale and trustee’s deed void. Slaughter, 162 S.W.2d at 675.
In a similar situation, the Houston court of appeals found that the sale was void ab initio for failure to cancel the proposed foreclosure sale after the parties to the mortgage agreed to do so. Diversified, 702 S.W.2d at 721. The court held that since the conditions required to give the trustee his power to convey the land were not fulfilled, the trustee had no power, and therefore, the foreclosure sale and trustee’s deed were void. Diversified, 702 S.W.2d at 721.
This doctrine has been taken further to include situations in which the parties specifically agreed that if the mortgagor made certain past-due payments that the loan would be reinstated and no foreclosure sale would occur. See Henke v. First Southern Properties, Inc., 586 S.W.2d 617, 618 (Tex. App.—Waco 1979, writ ref’d n.r.e.). The property in Henke sold at a foreclosure sale, and the court found that the trustee had no power to convey because the loan was not in default, rendering the foreclosure sale void. Henke, 586 S.W.2d at 620.
If the foreclosure sale is voidable, the parties can look to a trespass to try title suit if an agreement to rescind cannot be reached. If the court grants the rescission, the parties may record a copy of the judgment together with the underlying substitute trustee’s deed in the real property records. Recording the judgment gives notice that the substitute trustee’s deed has no effect.
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