Commercial Foreclosure Process
Commercial real property foreclosures do not operate under a different set of state laws or statutes from residential foreclosures. All nonjudicial foreclosures, whether commercial or residential, must strictly adhere to the standards and requirements of chapter 51 of the Texas Property Code and, as applicable, other state and federal statutes referenced in this chapter and throughout this manual.
Commercial loan documents and foreclosure considerations can still vary from residential in several ways:
1.Commercial loan documentation is frequently dense, complex, wordy, and encompasses many more types and styles of documents than a typical residential mortgage. In addition, the original loan agreement documents are often modified or amended over the life of the loan. All of the loan documents and public records need to be examined to guide the borrower’s or lender’s counsel as to their client’s rights regarding the collateral, such as personal property and fixtures, construction issues, tenants and lease matters, rentals, and management of the property.
2.Consumer debtor collector notices are conspicuously absent in commercial foreclosure forms because federal and state debt collection statutes only apply to consumer or household debt.
3.Environmental liability for commercial property in foreclosure is a frequent concern that is not present in a residential foreclosure. Good due diligence procedures at loan inception may mean an environmental problem is not an issue to worry about if the loan was originated by the mortgagee that is foreclosing. However, if the mortgaged loan was purchased or otherwise originated from a source that is not the attorney’s client, a careful due diligence review for any environmental concerns is warranted.
4.Challenges for faulty or defective foreclosure proceedings are more likely because commercial property owners have greater or easier access to lawyers and can more easily afford to legally challenge the process than a typical residential consumer.
5.The liability exposure for wrongful foreclosure is usually greater because commercial real estate loans tend to be significantly larger than residential loans.
§ 22.2Preforeclosure Considerations
§ 22.2:1Identification of All Loan Documents
As mentioned above, commercial loan documentation can be voluminous. It is important to obtain and review all of the constituent loan documents for compliance with various internal notice and opportunity to cure deadlines.
Commercial loan documentation will usually include—
•a note;
•a deed of trust;
•ancillary loan performance agreements;
•environmental indemnity agreements;
•guaranty agreements;
•subordination, nondisturbance, and attornment agreements;
•assignments and pledges of various contracts and agreements (such as construction contracts, architect’s contracts, and property management contracts);
•UCC-1 and UCC-1 addendum filings; and
•assignments of rents and leases (can be included in deed of trust).
Compiling a detailed foreclosure checklist is recommended to ensure review of all the various loan documents and as a reminder to check on other matters such as title, notices, correspondence from the parties, and payment history. See form 2-4 in this manual; see also Niles W. Holmes, Preforeclosure Documentation, in Advanced Real Estate Drafting Course, State Bar of Texas (2003).
A proper review and update of the mortgagee’s title policy, now called a Loan Policy of Title Insurance to mirror American Land Title Association policy names, is important.
As promulgated by the Texas Department of Insurance, the foreclosing lender may purchase a “Limited Pre-Foreclosure Policy” (Form T-98) and a “Limited Pre-Foreclosure Policy Downdate Endorsement” (Form T-99). In practice, most attorneys do not order or obtain such coverage. The premium cost of the policy, compared to the coverages provided, is why most attorneys prefer to engage a title company to perform a basic title search to update the title from the date of the title policy, forward. Procedural Rule P-43 sets forth the terms, conditions, and requirements for the issuance of a Limited Pre-Foreclosure Policy and Limited Pre-Foreclosure Policy Downdate Endorsement. Procedural Rule P-43 is found in section IV, “Procedural Rules,” of the Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas issued by the Texas Department of Insurance. The Basic Manual, forms, and endorsements can be found at the Texas Department of Insurance website at www.tdi.texas.gov/title/titleman.html.
It is important to note, however, that any non-title insurance product or service from a title company will almost invariably have a disclaimer or limitation of liability, often limiting damages for errors and omissions to zero or the cost charged for the product. Title searches, unlike the Limited Pre-Foreclosure Policy, are not policies of insurance and provide little recourse in the case of error.
One of the primary purposes of a title update is to ensure there are no filings or encumbrances recorded in the real property records after the date of the loan policy that could survive foreclosure sale. See, e.g., Mortgage & Trust, Inc. v. Bonner & Co., 572 S.W.2d 344 (Tex. App.—Corpus Christi–Edinburg 1978, writ ref’d n.r.e.). The liens, filings, and encumbrances that have special status and by law are not automatically extinguished by the foreclosure are described below.
Federal Tax Liens: If the foreclosing lender discovers that a federal tax lien has been filed in the name of the borrower or mortgagor more than thirty days before the proposed date of sale, the foreclosing lender must carefully review the lien and give the Internal Revenue Service (IRS) notice twenty-five days before the conduct of any sale. See 26 U.S.C. § 7425. After properly giving such notice, the property will remain subject to a right of redemption in favor of the IRS for a period of 120 days after the date of foreclosure sale. See 26 C.F.R. § 301.7425–4. However, the property will no longer be encumbered by the IRS lien against the borrower or mortgagor. These issues and procedures are set forth in greater detail in section 4.9 in this manual.
Criminal Fines: A federal lien securing the payment of a criminal fine is treated as if it was a federal tax lien. See 18 U.S.C. § 3613. In order to extinguish such a lien, a lender foreclosing a superior lien must make the United States a party to a judicial foreclosure or provide the United States with written notice of a nonjudicial foreclosure sale in the same manner as required for federal tax liens. 18 U.S.C. § 3613(c).
Ad Valorem Taxes: Along with an updated title search, a search of the current ad valorem tax records and payment status is important. The statutory lien for ad valorem taxes is superior to all other recorded liens and filings and is not extinguished by foreclosure of a first lien. Tex. Tax Code § 32.05(a), (b–l). The lender’s counsel should obtain tax certificates to confirm if there are any delinquent taxes or other assessments owed on the property. These reports and searches can take the form of a tax certificate from a third-party tax reporting service, usually obtained through or with the assistance of a title agent, or they can be ordered directly from the taxing authorities pursuant to Tex. Tax Code § 31.08, with a statutory fee not to exceed $10 for each certificate issued. Great care must be taken in reviewing such certificates to ensure that all of the property being foreclosed has been searched and disclosed by the tax certificates. It is not unusual for contiguous real property to be represented by several tax accounts, some representing very small parcels that have a historical basis in title resulting from being listed under a separate tax account. See also chapter 24.
Special Districts: Taxes and assessments owed to water, flood control, or similar quasi-municipal or special utility districts also have superlien priority under Tex. Water Code § 55.604 and Tex. Tax Code § 32.01. If the subject property is located within any of these types of districts, the lender’s counsel should check with the district to see if taxes are owed.
Tax Liens on Personal Property: Because personal property often serves as additional collateral for a commercial loan, to the extent such personal property is not deemed attached or a fixture to the real estate, personal property may have its own tax account that should be examined. A careful review of the collateral may reveal business personal property the lender wishes to seize and sell, which may have delinquent tax liabilities separate and distinct from the real estate. Manufactured housing and mobile home units are often initially taxed as personal property by local tax assessors before they are converted to real property and thus may have pre-attachment personal property tax liabilities not revealed by a real property tax search. See also chapter 29.
Local Government Liens: Certain liens in favor of governmental entities are entitled to superior lien status over a previously recorded deed of trust, such as for paving and street repairs (Tex. Transp. Code §§ 313.042, 313.054), water and sewer improvements (Tex. Loc. Gov’t Code § 552.065), demolition of structures (Tex. Loc. Gov’t Code §§ 214.001, 214.0015), and abatement of hazards such as trash and weeds (Tex. Health & Safety Code §§ 342.001–.008). Additionally, municipal lien authority can be found in certain city charters that purport to be superior to prior filed deeds of trust, so any lien in favor of a municipality should be treated with caution and thoroughly investigated.
Texas Workforce Commission Liens:Pursuant to chapter 61 of the Texas Labor Code, certain liens of the Texas Workforce Commission are superior to all other liens except ad valorem taxes. Tex. Lab. Code § 61.0825. However, these liens are less common and limited to those liens imposed by the commission against employers for unpaid wages to employees. All other types and varieties of labor liens under the Texas Labor Code, such as those for nonpayment of unemployment taxes, are ordinary liens with no superlien priority.
Federal Abstracts of Judgment: A judgment in favor of the United States creates a lien on all real property of a judgment debtor upon the filing of a certified copy of the abstract of judgment in the same way a recorded federal tax lien encumbers real property under the Internal Revenue Code. See 28 U.S.C. § 3201(a). The statute of limitations for enforcing this type of lien is twenty years from the date of assessment, not recording. 28 U.S.C. § 3201(c). It is superior to “any other lien or encumbrance perfected later in time.” 28 U.S.C. § 3201(b). Under the first-in-time rule, a federal abstract of judgment does not have superior lien status over a superior deed of trust filed before the abstract of judgment.
Mechanic’s Liens for Removables: A mechanic’s and materialman’s lien filed for “removables” has priority over a previously recorded deed of trust. First National Bank in Dallas v. Whirlpool Corp., 517 S.W.2d 262 (Tex. 1974). Whether an improvement is a removable depends on whether “the improvements made can be removed without material injury to the land and pre-existing improvements.” Whirlpool, 517 S.W.2d at 269. Greater discussion of removables can be found in section 4.9.
§ 22.2:3Waiver of Notice and Other Waiver Clauses
One of the most important questions in a commercial foreclosure is: if the note and other loan documents have clear, unequivocal waivers of demand, presentment, payment, acceleration, intent to accelerate—which they invariably do—is any notice of default and opportunity to cure required at all before accelerating the debt and posting the property for sale?
Texas Property Code section 51.002(d), requiring a notice of default and demand to cure be sent by certified mail to the borrower, does not appear to apply to commercial transactions, and one court has essentially held the same. See Parker v. Frost National Bank of San Antonio, 852 S.W.2d 741, 744–45 (Tex. App.—Austin 1993, writ dism’d by agr.). However, some commentators have scrutinized section 51.002(d) and declared that it is not expressly limited to residential transactions. To lessen litigation risks, since acceleration is still a harsh remedy under common law, which is strictly construed as to its waivers and limitations (see Motor & Industrial Finance Corp. v. Hughes, 302 S.W.2d 386 (Tex. 1957)), and due to concerns of equity and fairness, it is recommended that lender’s counsel comply with the same notice and timeline requirements that apply to a residential foreclosure before acceleration of the debt and posting of the sale.
Two courts have held cure periods of ten days or less to be reasonable. See Hammond v. All Wheel Drive Co., 707 S.W.2d 734, 737–38 (Tex. App.—Beaumont 1986, no writ) (relying on presentation requirements of former Texas Business and Commerce Code section 3.504 (now section 3.501), requiring payment by close of next business day following presentment); Investors Realty Trust v. Carlton Corp., 541 S.W.2d 289, 290–91 (Tex. App.—Dallas 1976, no writ) (finding ten-day period sufficient under circumstances).
The same twenty-one day notice period set forth in Tex. Prop. Code § 51.002(b), requiring notice of the date, time, and place of the foreclosure sale, must be employed in commercial foreclosures.
Additionally, for the same reasons of prudence, caution, and litigation risk set forth above, any guarantors on the note, even if the guarantor waived the foreclosure notice rights in the guaranty agreement, ought to be given the same minimal notices and opportunity to cure as the borrower, especially if the guarantor does not control the borrower and does not share the same address for notice with the borrower. See Carroll v. General Electric Credit Corp., 734 S.W.2d 153, 154–55 (Tex. App.—Houston [1st Dist.] 1987, no writ); see also Hernandez v. Bexar County National Bank, 710 S.W.2d 684 (Tex. App.—Corpus Christi–Edinburg), writ ref’d n.r.e. per curiam, 716 S.W.2d 938 (Tex. 1986); Peck v. Mack Trucks, Inc., 704 S.W.2d 583 (Tex. App.—Austin 1986, no writ); but see Long v. NCNB–Texas National Bank, 882 S.W.2d 861, 867 (Tex. App.—Corpus Christi–Edinburg 1994, no writ) (holding that, unlike transactions secured by personal property, guarantors of a note secured by real property do not enjoy the right to notice of foreclosure sale enjoyed by the note maker).
See chapters 8 and 12 in this manual for further discussion of these issues.
In a residential mortgage loan, the lender will typically default the borrower for failure to pay the loan, failure to pay property taxes, or failure to keep the collateral insured as required by the deed of trust.
However, commercial loan agreements, notes, and deeds of trust often have a wider avenue of default possibilities—the credit and business health of the borrower may be critical to the lender, and the credit and business health of wealthy guarantors may also be of vital importance.
Commercial loan documents may provide for any of the following to constitute default of the loan (some after notice and opportunity to cure, and some immediately with notice):
•the failure of borrower (or guarantor) to pay when due any part of the loan;
•the failure by borrower to maintain a contractually specified debt service coverage ratio in its business operations (typically a ratio of total cash flow to debt service on the loan, such as, for example, a total cash flow of 1.25x the debt service);
•the failure of borrower (or guarantor) to timely and properly observe, keep, or perform any covenant, agreement, warranty, or condition required in the note, deed of trust, or any renewal, modification, rearrangement, amendment, or extension thereof, or in any other loan document (other than covenants to pay any sum of money in accordance with the note);
•the breach of any representation, covenant, or warranty contained in the deed of trust, loan agreement, or any of the other loan documents or any other document ever delivered by the borrower to the lender in connection with the note, or if the same is false, misleading, erroneous, or breached in any material respect;
•if borrower (or guarantor) becomes insolvent, or makes a transfer in fraud of creditors, or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they become due or is generally not paying its debts as such debts become due;
•if borrower (or guarantor) has a receiver, trustee, or custodian appointed for, or take possession of, all or substantially all of the assets of borrower (or guarantor);
•if borrower (or guarantor) files a petition for relief for bankruptcy or an involuntary petition for relief is filed against borrower (or guarantor);
•if borrower (or guarantor) fails to have discharged within a period of thirty days any attachment, sequestration, or similar writ levied upon any property of borrower (or guarantor);
•if borrower (or guarantor) fails to pay within thirty days any final money judgment against borrower (or guarantor);
•if there is a levy against the collateral or any part thereof or against any material portion of borrower’s (or guarantor’s) other property or any execution, garnishment, attachment, sequestration, or other writ or similar proceeding;
•the abandonment of any portion of the collateral or any material portion of any of the other property of borrower (or guarantor);
•the dissolution, liquidation, termination, or forfeiture of borrower’s right to do business, or, if borrower (or guarantor) is an individual, the death or disability of borrower (or guarantor);
•the filing by borrower (or guarantor) of either a petition, complaint, answer, or other instrument that seeks to effect a suspension of, or which has the effect of suspending, any of the rights or powers of beneficiary or trustee granted in the note, the deed of trust, or in any loan document;
•the failure to commence construction of improvements or, after commencement of construction of improvements, the cessation of the construction of improvements;
•a failure of the construction of improvements or of any of the materials, articles, or fixtures supplied for incorporation into the construction of improvements to comply with the plans, any governmental requirement, or the requirements of any lease;
•an inability of borrower to satisfy any condition specified in the loan agreement as precedent to the obligation of lender to make an advance after an application for advance has been submitted by borrower to lender;
•a failure by the borrower to achieve completion of improvements by a determined completion date or a determination by lender that construction of improvements will not be completed on or before such completion date;
•if borrower (or guarantor) (1) conceals, removes, or permits to be concealed or removed any part of its property with the intent to hinder, delay, or defraud any of its creditors; or (2) makes or suffers a transfer of any of its property that may be fraudulent under any bankruptcy, fraudulent conveyance, or similar law; or (3) suffers or permits while insolvent (under any applicable definition of the term) any creditor to obtain a lien upon any of its property through legal proceedings;
•the occurrence of a “material adverse change” in borrower or guarantor, as defined by the loan documents (with the loan agreement setting out an appropriate definition); or
•the occurrence of any default under any lease covering any portion of the collateral property or the repudiation, termination, or attempted repudiation or termination of any such lease.
As previously mentioned, the loan documents will specify whether such defaults have a cure period, or not, before the lender may pursue its remedies for the default.
§ 22.2:5Letter of Strict Compliance
In reviewing the files of the mortgagee or mortgage servicer, counsel may discover that the lender or its agents have accepted late payments, failed to impose late fees or other charges, or permitted other defaults as defined by the loan documents. In such instances, it is important to send a letter of strict compliance to the borrower stating that in the future the terms of the loan documents will be strictly observed, and that the lender expects full and complete compliance with the same, before sending out any formal notices of default or other foreclosure notices. Sending a strict compliance letter will help reduce or prevent claims or waiver and estoppel by the borrower. See form 22-1 in this chapter for an example letter of strict compliance.
Once the loan documents have been reviewed and evaluated, the title policy reviewed and brought to date, the loan file reviewed for prior correspondence and actions of the lender, and the payment history reviewed, it is time to make demand to cure the default of the borrower.
It is long-standing common law that the holder of an installment note has the right to accelerate the maturity of the debt upon default by first presenting a demand for payment of the delinquent amounts, before exercising the acceleration right. Ogden v. Gibraltar Savings Ass’n, 640 S.W.2d 232 (Tex. 1982); Allen Sales & Servicenter, Inc. v. Ryan, 525 S.W.2d 863 (Tex. 1975); Lockwood v. Lisby, 476 S.W.2d 871 (Tex. App.—Fort Worth 1972, writ ref’d n.r.e.); Jernigan v. O’Brien, 303 S.W.2d 515 (Tex. App.—Austin 1957, no writ); Parker v. Mazur, 13 S.W.2d 174 (Tex. App.—San Antonio 1928, writ dism’d).
In commercial loan transactions, some defaults are of such nature that no cure can be effected primarily if misrepresentations by the borrower were made in the loan documents. These cases are rare, and in most default situations, a commercial lender will want the problem that triggered the default cured so that it may resume receiving the scheduled loan payments. To rectify the problem, demand to cure must be given to the borrower.
§ 22.4Notice of Intent to Accelerate
The Texas Supreme Court has clarified that, unless waived, acceleration of the debt at common law requires two separate notices—a notice of intent to accelerate and then a separate notice that acceleration has occurred. Ogden v. Gibraltar Savings Ass’n, 640 S.W.2d 232, 233 (Tex. 1982).
The court revisited this issue in Shumway v. Horizon Credit Corp., 801 S.W.2d 890, 893–94 (Tex. 1991) and reaffirmed that notice of acceleration, and notice of intent to accelerate were different notice rights under common law and that they required separate waivers if waiver was to be effective. In Shumway, the court was quick to strike down an ambiguous waiver of notice of intent to accelerate and held that any waiver of such notice must be “clear and unequivocal.” Shumway, 801 S.W.2d at 893 (reasoning that because a provision providing an option to accelerate a note’s maturity will only be effective if it is clearly and unequivocally stated, the same exacting standard is required for a waiver of the intent to accelerate to be effective). “To meet this standard, a waiver provision must state specifically and separately the rights surrendered. Waiver of ‘demand’ or ‘presentment’, and of ‘notice’ or ‘notice of acceleration’, in just so many words, is effective to waive presentment and notice of acceleration.” Shumway, 801 S.W.2d at 893.
See section 8.5 in this manual for further discussion of these issues.
Refer to section 10.26 of this manual regarding the statute of limitations accruing after a notice of acceleration of the maturity of the debt has been given to the obligor of a loan agreement, if the loan agreement is an installment loan.
Because of the harsh effect of acceleration—the total debt is now due—courts insist that acceleration be accomplished in strict accordance with all requirements established under both the loan documents and at common law. A right of acceleration must be stated in “clear and unequivocal” terms to be enforceable. Motor & Industrial Finance Corp. v. Hughes, 302 S.W.2d 386, 394 (Tex. 1957). The “clear and unequivocal” standard found in Hughes formed the basis that the Texas Supreme Court used when it decided on the standards to be used for a waiver of intent to accelerate in Shumway. See Shumway v. Horizon Credit Corp., 801 S.W.2d 890, 893 (Tex. 1991) (citing Hughes, 302 S.W.2d at 394).
Generally, the mortgagee sends a notice of default and demand to cure with a separate notice of intent to accelerate an installment note in the same envelope or mailer. If the borrower fails to cure the default arising under an installment note, the mortgagee is authorized to accelerate the maturity of the debt. The notice of acceleration is typically included in the notice of sale giving the obligor at least twenty-one days’ notice of the date, time, and place of the scheduled foreclosure sale. Ogden v. Gibraltar Savings Ass’n, 640 S.W.2d 232, 233 (Tex. 1982).
Under common law, absent any waivers, a mortgage lender must present the following notices to a borrower:
1.Demand for payment of the delinquency. (Technically, presentment of the note precedes demand, but in modern practice demand for payment is usually the first step, as formal presentment is almost invariably waived in most notes.)
2.Notice of intent to accelerate.
3.Notice that the debt has been accelerated.
A notice of foreclosure sale pursuant to chapter 51 of the Texas Property Code has been held to be sufficient notice of acceleration. McLemore v. Pacific Southwest Bank, FSB, 872 S.W.2d 286 (Tex. App.—Texarkana 1994, writ dism’d by agr.); see also Meadowbrook Gardens, Ltd. v. WMFMT Real Estate Ltd. Partnership, 980 S.W.2d 916, 919 (Tex. App.—Fort Worth 1998, pet. denied); Phillips v. Allums, 882 S.W.2d 71, 74 (Tex. App.—Houston [14th Dist.] 1994, writ denied). However, because the Texas Supreme Court has not addressed this issue and the issue has not been well discussed in other cases, prudent practice dictates a separate notice to the borrower of the acceleration, accompanied by any filed or unfiled notice of trustee’s sale. Ogden, 640 S.W.2d at 234 (stating that the court would not decide “whether, after proper notice of intent to accelerate, a notice of trustee’s sale is sufficient to give notice that the debt has been accelerated”).
In commercial practice, because of the extensive litigation over these issues in prior decades, and because it is the standard practice in residential foreclosure, most commercial foreclosure practitioners do not rely on all of the numerous waivers given by the borrower in the loan documents, which, if read and followed literally, suggest that no (1) notice of default, (2) intent to accelerate, or (3) acceleration is required whatsoever. In practice, most commercial foreclosures follow the same basic two-step process as a residential foreclosure:
1.Give the borrower notice of the default and demand payment or other action (if not a monetary default) to cure the same, allowing a fair and reasonable cure period (ten to twenty days are suggested for monetary default, thirty days for other default) if no such cure period is otherwise specified in the loan documents. In this same notice, even if waived, give notice of the lender’s intent to accelerate the note for such default if not cured within such deadline.
2.If the cure period passes without full cure, give the borrower notice that the default remains uncured and that the note has been accelerated, accompanied by a notice of trustee’s or substitute trustee’s sale, which notice must follow the requirements of Tex. Prop. Code § 51.002.
Form 8-3 in this manual is a sample letter giving notice of the default to the borrower in step 1 above.
Form 12-2 is a sample letter giving notice of acceleration and the posting of the property for sale.
§ 22.5:1Abandonment and Waiver of Acceleration
There are cases holding that a noteholder can waive acceleration if it accepts payments postacceleration. Thus, it is good practice to resend a notice to cure and intent to accelerate if payments were accepted postacceleration. See Holy Cross Church of God in Christ v. Wolf, 44 S.W.3d 562, 566–67 (Tex. 2001) (“Even when a noteholder has accelerated a note upon default, the holder can abandon acceleration if the holder continues to accept payments without exacting any remedies available to it upon declared maturity.”).
If parties to a note agree to deaccelerate the debt, then it is recommended that the parties enter an agreement in writing because the prior acceleration would have started the statute of limitations. See Holy Cross Church, 44 S.W.3d at 566; see also Khan v. GBAK Properties, Inc., 371 S.W.3d 347, 353 (Tex. App.—Houston [1st Dist.] 2012, no pet.) (“Abandonment of acceleration has the effect of restoring . . . the note’s original maturity date.”).
Tex. Civ. Prac. & Rem. Code § 16.038 allows a mortgagee to rescind the notice of acceleration of the maturity of an installment note by sending a notice by first-class and certified mail to the debtor at the debtor’s last known address.
See section 8.6 in this manual for further discussion of these issues and form 8-1 for a sample form agreement to withdraw acceleration of debt.
§ 22.5:2Effects of Bankruptcy Filing
The filing for bankruptcy protection allows borrowers to provide for a cure of monetary defaults (e.g., payment arrearages) through a bankruptcy plan. See Grubbs v. Houston First American Savings Ass’n, 730 F.2d 236 (5th Cir. 1984) (citing with approval In re Taddeo, 685 F.2d 24 (2d Cir. 1982)). Therefore, when a borrower’s bankruptcy case is dismissed, it is prudent to resend the demand to cure and notice of intent to accelerate. However, there are cases holding that if the borrower’s bankruptcy case is dismissed before the delinquent amount being cured through the bankruptcy plan, then the lender does not have to resend a notice to cure and notice of intent to accelerate. See Higginbotham v. Indymac Bank, F.S.B., No. 4:17-CV-00229, 2017 WL 2701939, at *4 (E.D. Tex. June 1, 2017).
The statutory procedures in chapter 51 of the Texas Property Code concerning contents, service on debtors, delivery, posting, and filing of a notice of sale are the same for commercial as for residential foreclosures. See chapter 12 in this manual for additional discussion on notice of sale, including section 12.1:2 regarding the notice of sale serving as the appointment of a substitute trustee under Texas Property Code section 51.0076.
§ 22.6:1Contents of Notice of Sale
Section 51.002 of the Texas Property Code provides that the notice of the sale must include the time of the sale and the location if no location has been designated by the county commissioners court. Notice of the sale must include a statement of the earliest time at which the sale will begin and must be given at least twenty-one days before the date of the sale. See Tex. Prop. Code § 51.002(a), (b). Exceptions, however, are made if the courthouse or county clerk’s office is closed because of inclement weather, natural disaster, or other act of God. See Tex. Prop. Code § 51.002(b–1).
The foreclosure sale “must be a public sale at auction held between 10:00 a.m. and 4:00 p.m. of the first Tuesday of a month.” Tex. Prop. Code § 51.002(a). However, if the first Tuesday of the month falls on January 1st or July 4th, the date for nonjudicial foreclosure sales will be the first Wednesday of January or July. Tex. Civ. Prac. & Rem. Code § 34.041.
Additionally, pursuant to Tex. Prop. Code § 51.002(i), the notice of sale must conspicuously contain the following proviso in boldface or underline type:
Assert and protect your rights as a member of the armed forces of the United States. If you are or your spouse is serving on active military duty, including active military duty as a member of the Texas National Guard or the national guard of another state or as a member of a reserve component of the armed forces of the United States, please send written notice of the active duty military service to the sender of this notice immediately.
See form 12-3 in this manual for a notice of foreclosure sale.
Just as in residential foreclosures, a notice of sale must be served by certified mail on each debtor who, according to the records of the lender, is obligated to pay the debt. Tex. Prop. Code § 51.002(b)(3). Service of notice must be delivered to the debtor’s last known address. Tex. Prop. Code § 51.002(e).
“Last known address” for foreclosures with respect to debts other than debts secured by a principal residence is the address “as shown by the records of the mortgage servicer of the security instrument unless the debtor provided the current mortgage servicer a written change of address before the date the mortgage servicer mailed a notice required by Section 51.002.” Tex. Prop. Code § 51.0001(2)(B). In addition, section 51.0021 provides that “a debtor shall inform the mortgage servicer of the debt in a reasonable manner of any change of address of the debtor for purposes of providing notice to the debtor under Section 51.002.” Tex. Prop. Code § 51.0021. As a result, it is imperative that the prudent practitioner not merely rely on the loan documents for the debtor’s last known address, but also inquire as to whether there are any such notices of change of address provided to the mortgagor/mortgage servicer. If a change of address has been provided and notice is not sent to that address, there could be an issue with the foreclosure that is later subject to attack. See Bauder v. Alegria, 480 S.W.3d 92, 97 (Tex. App.—Houston [14th Dist.] 2015, no pet.) (holding that text messages were part of the “records” of mortgage servicer and constituted notice of change of address).
Loan guaranties in commercial practice invariably waive any duty to notify the guarantor of any segment of the foreclosure or collection process, and Texas Property Code chapter 51 imposes no requirement to give notice to guarantors.
A number of cases have upheld waivers of notice to guarantors. Goff v. Southmost Savings & Loan Ass’n, 758 S.W.2d 822, 824–25 (Tex. App.—Corpus Christi–Edinburg 1988, writ denied) (waiver in guaranty upheld); Micrea, Inc. v. Eureka Life Insurance Co. of America, 534 S.W.2d 348, 357 (Tex. App.—Fort Worth 1976, writ ref’d n.r.e.) (notice to guarantor of acceleration waived and not properly pleaded). One court has specifically held that guarantors are not entitled to notice of a real property foreclosure sale under Property Code section 51.002. Long v. NCNB–Texas National Bank, 882 S.W.2d 861, 866 (Tex. App.—Corpus Christi–Edinburg 1994, no writ); see also Bishop v. National Loan Investors, L.P., 915 S.W.2d 241, 245 (Tex. App.—Fort Worth 1995, writ denied).
However, the lack of notice to guarantors has been held to affect personal property foreclosures. A guarantor is a debtor within the meaning of sections 9.102(a)(28), (61) and 9.611 of the Texas Business and Commerce Code. See Carroll v. General Electric Credit Corp., 734 S.W.2d 153 (Tex. App.—Houston [1st Dist.] 1987, no writ) (failure to notify guarantor of nonjudicial foreclosure sale of personal property bars assertion of deficiency claim on behalf of creditor); Peck v. Mack Trucks, Inc., 704 S.W.2d 583 (Tex. App.—Austin 1986, no writ); Hernandez v. Bexar County National Bank, 710 S.W.2d 684, 687 (Tex. App.—Corpus Christi–Edinburg), writ ref’d per curiam, 716 S.W.2d 938 (Tex. 1986).
The Fifth Circuit, after noting a split among Texas courts of appeals, has upheld a guarantor’s contractual waiver of notice of disposition of collateral by a secured party. In Steinberg v. Cinema N’ Drafthouse Systems, Inc., 28 F.3d 23, 25 (5th Cir. 1994), the Fifth Circuit held that the restriction on waivers of former Business and Commerce Code section 9.501 is inapplicable to guarantors. The court noted that the Texas Supreme Court had reserved judgment on this issue.
Accordingly, sending a notice of sale under section 51.002 of the Texas Property Code remains prudent practice until this issue is settled.
As with residential foreclosures, a notice of sale must be served on each maker or current direct obligor of the note at least twenty-one days before the date of sale. Tex. Prop. Code § 51.002(b). Service is deemed made when deposited in the United States mail, postage prepaid and addressed to the debtor at the debtor’s last known address. Tex. Prop. Code § 51.002(e). The entire calendar day on which the notice is deposited in the mail is included in the twenty-one-day calculation, and the entire calendar day of the sale is excluded in such calculations. Tex. Prop. Code § 51.002(g); see also chapter 12 in this manual. See section 22.6:2 above regarding a discussion of what constitutes the “last known address.”
§ 22.6:5Notice to Owner of Property
As discussed in section 12.3:3 of this manual, an owner of the property who is not the borrower, including an owner who purchases subject to the debt, is not entitled to the statutory notice of a nonjudicial foreclosure sale, absent a contractual agreement. See Lawson v. Gibbs, 591 S.W.2d 292, 295 (Tex. App.—Houston [14th Dist.] 1979, writ ref’d n.r.e.).
However, it is advisable that a courtesy notice of the foreclosure sale be sent to the owner of the property if the mortgage servicer is aware of an owner that is different from the borrower. “Any person who has an interest in the land and who would suffer a loss as a result of foreclosure holds an equity of redemption.” Scott v. Dorothy B. Schneider Estate Trust, 783 S.W.2d 26, 28 (Tex. App.—Austin 1990, no writ). This would likely include an owner of the property. It would be prudent to send notice to the owner, who might exercise the equity of redemption and pay off the outstanding obligation.
Because IRS liens can arise in both commercial and noncommercial transactions, it is imperative that the prudent practitioner run the appropriate title searches to check for IRS liens and provide the required notice to the IRS and avoid any issues with IRS liens. Refer to the discussion in section 4.3 of this manual regarding federal tax liens and, specifically, section 4.3:10 regarding the twenty-five-day notice requirements to the IRS.
The notice of sale must be posted at the “courthouse door” of each county in which the property is located at least twenty-one days before the date of sale. Tex. Prop. Code § 51.002(b)(1). See the discussion of posting at the courthouse door in section 12.3:1 in this manual. Additionally, the notice of sale must be filed in the office of the county clerk for each county in which the property is located. Tex. Prop. Code § 51.002(b)(2). The same rules for calculating the twenty-one days used for service of notice also apply to the posting and filing deadlines. See Tex. Prop. Code § 51.002(g).
§ 22.7Bid Evaluation and Determination
Careful consideration should be given to determining the bid amount at a foreclosure sale in the commercial context. Frequently, commercial transactions involve multiple items of collateral (e.g., real property, personal property, accounts receivable, etc.). It is recommended that an appraisal be obtained to provide guidance in determining a bid amount. In addition, it is recommended that some examination of title be conducted to determine if there are other liens that have priority, which when taken into consideration, impact strategy. Bidding too low in relation to the debt owed and the fair market value of the property on the date of sale could eliminate the right to collect a deficiency under Texas Property Code sections 51.003 or 51.004 (assuming there is no waiver of the right to challenge fair market value). See section 17.7:4 of this manual for a discussion of waivers of the antideficiency statutes.
For a more detailed discussion regarding bid evaluation, please refer to chapter 13 of this manual.
The legal procedures for conducting commercial foreclosure sales are the same as for residential—compliance with the loan documents and compliance with statutory law. See chapter 14 in this manual for additional discussion.
Pursuant to Texas Property Code section 51.002(a), the foreclosure sale “must be a public sale at auction held between 10:00 a.m. and 4:00 p.m. of the first Tuesday of a month.” Tex. Prop. Code § 51.002(a). However, if the first Tuesday of the month falls on January 1st or July 4th, the date and time for nonjudicial foreclosures will be between 10:00 a.m. and 4:00 p.m. on the first Wednesday of the month. Tex. Prop. Code § 51.002(a–1).
Pursuant to Texas Property Code section 51.0075(a), the 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.” Tex. Prop. Code § 51.0075(a). A list of some typical conditions of sale is contained in form 22-2 and may be incorporated into the script used at auction or may simply be offered by the trustee to be reviewed and read by any interested party before bidding is opened.
Use of a foreclosure sale transcript, while not required by law, is good practice, as it is written record that can be preserved in the file of how the sale was conducted. A sample form of script is contained in form 14-2.
As part of documenting the sale in case of later legal challenge, a written registration of all interested bidders should be considered. This registration would have to be set forth as part of the “reasonable conditions of sale” and serves an additional purpose for the lender client—it is a short list (including contact information) of parties who may be interested in purchasing the collateral as a real estate-owned property in the event the collateral is struck back to the lender. See form 14-3 for a sample bidder registration form.
In some instances, it may be recommended to have another person accompany the trustee to witness the trustee conduct the sale. Some trustees will either record the conducting of the sale or photograph the conducting of the sale with a time stamp to evidence that the sale was in fact conducted at the time and place designated in the foreclosure sale notice. This evidence may prove valuable in the event a debtor later challenges that the foreclosure sale occurred in a wrongful foreclosure action.
The Texas Property Code provides that “[t]he trustee or substitute trustee shall disburse the proceeds of the sale as provided by law.” Tex. Prop. Code § 51.0075(f).
Most commercial forms for deed of trust contractually provide for the means for applying the proceeds of a foreclosure sale. The following is a typical provision in a commercial deed of trust for application of proceeds:
Application of Proceeds. The proceeds from any sale, lease or other disposition made pursuant to this Article, or the proceeds from the surrender of any insurance policies pursuant to Subsection 3.02(i) hereof, or any rental collected by Beneficiary from the Property, or the reserves required by Section 6.03 hereof, or sums received pursuant to Section 6.01 hereof, or proceeds from insurance which Beneficiary elects to apply to the Obligation pursuant to Section 6.02 hereof, shall be applied by Trustee, or by Beneficiary, as the case may be, as follows: first, to the payment of all expenses of advertising, selling and conveying the Property or part thereof, including reasonable attorneys’ fees; second, to accrued interest on the Obligation; third, to principal on the matured portion of the Obligation; fourth, to prepayment of the unmatured portion, if any, of the Obligation applied to installments of principal in inverse order of maturity; and fifth, the balance, if any, remaining after the full and final payment and performance of the Obligation, to the person or persons legally entitled thereto.
In determining whether a deficiency or a surplus bid exists, credit is to be given by the mortgagee to premiums on force-placed insurance refunded to the mortgagee after the foreclosure sale that were included as part of the secured debt; also, interest that would have been earned on the mortgagor’s escrow accounts had the mortgagee followed the deed-of-trust requirements for interest-bearing escrow accounts is to be credited against the balance of the secured debt. See Myrad Properties, Inc. v. LaSalle Bank N.A., 252 S.W.3d 605, 621 (Tex. App.—Austin 2008); rev’d on other grounds, 300 S.W.3d 746 (Tex. 2009); see also Tex. Ins. Code ch. 549.
§ 22.10Distribution of Net Sales Proceeds
The distribution of net sales proceeds is determined by common law absent contrary provisions in the loan documents.
Junior lienholders’ liens attach to surplus sale proceeds in the same order of priority as their liens attach to the property foreclosed. Diversified Mortgage Investors v. Lloyd D. Blaylock General Contractor, 576 S.W.2d 794, 807–08 (Tex. 1978); Jeffrey v. Bond, 509 S.W.2d 563, 565 (Tex. 1974).
Most deeds of trust provide that the trustee pay (1) the expenses of the sale, (2) the mortgagee who is foreclosing the deed of trust the debt secured to the extent of the bid at foreclosure, (3) any amounts required by law to be paid before payment to mortgagor, and (4) the balance of the proceeds, if any, to the mortgagor and his heirs or assigns. However, in the case of Canfield v. Foxworth-Galbraith Lumber Co., 545 S.W.2d 583 (Tex. App.—Tyler 1976, writ ref’d n.r.e.), the trustee paid off the junior encumbrance that was foreclosed and also paid off the first lien deed of trust with the overage which was not foreclosed. The Dallas court of civil appeals held that the language in the deed of trust gave the trustee the power to pay off the senior encumbrance because the mortgagor waived and ratified the actions of the trustee even though the mortgagor was unaware of the payment at the time it was made and had assigned his rights to a third party who had attended the sale. Canfield, 545 S.W.2d at 587–88.
For wraparound mortgages, in the absence of an express agreement to the contrary, Texas courts will imply a covenant of the trustee to pay sale proceeds on the superior-lien debt. See Summers v. Consolidated Capital Special Trust, 783 S.W.2d 580 (Tex. 1989).
The trustee should interplead surplus sale proceeds into the registry of the court if there are conflicting demands between subordinate lienholders or between the mortgagor and a subordinate lienholder.
If the deed of trust so provides, the foreclosed debtor is entitled to any surplus proceeds remaining after satisfaction of inferior liens in order of lien priority. Conversion Properties, L.L.C. v. Kessler, 994 S.W.2d 810, 813–14 (Tex. App.—Dallas 1999, pet. denied); Mortgage & Trust, Inc. v. Bonner & Co., 572 S.W.2d 344, 351 (Tex. App.—Corpus Christi–Edinburg 1978, writ ref’d n.r.e.); Pearson v. Teddlie, 235 S.W.2d 757, 759 (Tex. App.—Eastland 1950, no writ).
If there are excess proceeds, after payment of all inferior liens in order of lien priority, the excess belongs to the mortgagor of the deed of trust foreclosed. Bonilla v. Roberson, 918 S.W.2d 17, 23 (Tex. App.—Corpus Christi–Edinburg 1996, no writ). If there are competing claimants to the sales proceeds, the trustee should interplead the proceeds into the registry of a court of appropriate jurisdiction and let the competing claimholders convince a judge or jury who is entitled to the funds. For example, the mortgaged property may be owned by several persons as cotenants.
See section 15.3 of this manual for a further discussion of distribution of sales proceeds.
In the event that a foreclosure sale results in a deficiency, the mortgagee can consider a deficiency action against the debtor or any guarantors. See chapter 17 in this manual for a detailed discussion of suits for a deficiency. In addition, the mortgagee can consider proceeding against other secured collateral that was not foreclosed to attempt to collect any remaining amount owed.
Holmes, Niles W. “Preforeclosure Documentation.” In Advanced Real Estate Drafting Course, 2003. Austin: State Bar of Texas, 2003.