The Note in Foreclosure
In the last ten years, changes to the Texas Property Code have significantly altered prior law concerning the enforcement of a promissory note secured by a deed of trust. Most significantly, changes to the statutes have (1) clearly distinguished between the procedures for enforcement of the promissory note and enforcement of the deed of trust, (2) introduced new parties (such as mortgage servicers) into the loan enforcement process, and (3) overturned long standing common law concepts. These changes are the basis of the discussion of the promissory note in this chapter and the deed of trust in the next chapter.
§ 5.2Identification of Parties, Their Roles, and Key Terms
Understanding the identity and role of the parties to a loan transaction involving a promissory note secured by a deed of trust is one of the first steps in understanding the note in foreclosure.
A promissory note is the instrument that evidences the borrower’s promise to pay a monetary obligation (i.e., the debt) to the person (the payee) named in the instrument. A promissory note may or may not be a negotiable instrument as defined in article three of the Uniform Commercial Code. Tex. Bus. & Com. Code § 3.104(a). To enforce payment on a promissory note, the plaintiff must be the owner or holder of the note at the time of the suit. Jernigan v. Bank One, Texas, N.A., 803 S.W.2d 774, 775 (Tex. App.—Houston [14th Dist.] 1991, no writ).
A holder is the person or entity in possession of a negotiable instrument that is either payable to the bearer or to an identified person that is the person in possession of the negotiable instrument. Tex. Bus. & Com. Code § 1.201(b)(21). A person can own a promissory note without being a holder, either because the note is not a negotiable instrument or the note was not properly negotiated to the owner. To enforce the payment of a promissory note, a plaintiff must show that it is in possession of a note that the plaintiff either owns or that the note has been indorsed to it or its order. See Jernigan v. Bank One, Texas, N.A., 803 S.W.2d 774, 775–76. See section 5.4 below.
The obligor is a person legally liable for the repayment of a debt evidenced by a promissory note. The obligor can be a maker, guarantor, or assumptor of the debt evidenced by the promissory note. See, e.g., Tex. Bus. & Com. Code § 3.103(a)(7) (defining “maker”), § 3.103(a)(11) (defining “principal obligor”), § 3.103(a)(17) (defining “secondary obligor”). The term obligor is used in the Texas Property Code but is not defined therein.
The mortgagor is the grantor of a deed of trust encumbering the interest in property that serves as the collateral for repayment of the debt evidenced by the promissory note. The mortgagor is not necessarily an obligor on the debt but may have separate monetary obligations under the deed of trust (such as, e.g., the obligation to pay ad valorem taxes, carry insurance on the property, keep the property in good condition and repair, etc.). See section 6.3:1 in this manual.
The mortgagee is (1) the grantee, beneficiary, owner, or holder of the mortgage or other contract lien on real property; (2) a book entry system; or (3) the last person to whom the security interest has been assigned of record. Tex. Prop. Code § 51.0001(4). (Note that this definition, effective as of January 1, 2004, represents a significant change from the prior common usage of “mortgagee” to mean the beneficiary of a deed of trust.) If there is a material breach of any covenant of the promissory note or deed of trust, the mortgagor’s signature evidences the agreement between the mortgagor and the mortgagee to authorize a trustee or a substitute trustee to sell the property pledged under the deed of trust at a nonjudicial foreclosure sale and apply the net sales proceeds to the balance due on the obligor’s note. See, e.g., Taylor v. Brennan, 621 S.W.2d 592, 593 (Tex. 1981); NCNB Texas National Bank v. Sterling Projects, Inc., 789 S.W.2d 358, 359 (Tex. App.—Dallas 1990, writ dism’d w.o.j.). See section 6.3:2 in this manual.
The mortgage servicer, which may range from one or two persons in a small local bank or credit union to a multinational financial institution with thousands of employees, administers the collection of payments on the promissory note and any foreclosure of the mortgagor’s mortgaged property, pursuant to Tex. Prop. Code § 51.0025. As the duly authorized agent for its principal, the mortgagee, the mortgage servicer manages the day-to-day loan level activities related to the obligor’s loan agreement account; keeps documents and electronic records of communications to and from the mortgage servicer, obligor, mortgagor, and any third party; debits and credits the obligor’s account according to monies received and paid out in accordance with generally accepted accounting practices and keeps electronic records of the same; remits the principal and interest received from the obligor’s scheduled loan payments to the account of the mortgagee; and, in some instances, maintains custody and control of the physical possession of the obligor’s promissory note. See section 6.3:7 in this manual.
The investor is a beneficiary or equity holder in the trust or other entity that is formed to own a pool of securitized promissory notes. As a beneficiary of the deed of trust, the investor is entitled to a share of the payments made by the various obligors on the pooled promissory notes. In the typical securitized loan pool, the mortgage servicer receives payments from the obligors on the promissory notes and remits the payments to the trustee of the pooling trust, which distributes the income stream to the investors in proportion to the investors’ beneficial ownership. See, e.g., Reinagel v. Deutsche Bank National Trust Co., 735 F.3d 220, 228 n.29 (5th Cir. 2013).
Negotiation is the transfer of possession (whether voluntary or involuntary) of a negotiable instrument by a person other than the issuer to a person who becomes its holder. Tex. Bus. & Com. Code § 3.201(a). If an instrument is payable to an identified person, negotiation requires transfer of possession and its indorsement by the holder; if the instrument is payable to bearer, it may be negotiated by transfer of possession alone. Tex. Bus. & Com. Code § 3.201(b).
The special indorsement of a promissory note is the indorsement of a promissory note as payable to a specific person or to bearer. See Tex. Bus. & Com. Code § 3.205(a).
A blank indorsement is any indorsement of the promissory note by the holder that is not a special indorsement. Under Texas law, physical possession of a promissory note that bears a blank indorsement becomes payable to the bearer and is transferred by possession alone until specially indorsed. Blank indorsements can be converted into special indorsements by the holder inserting words identifying the payee above the signature of the indorser. See Tex. Bus. & Com. Code § 3.205(b), (c); Kiggundu v. Mortgage Electronic Registration Systems, Inc., 469 F. App’x 330, 331–32 (5th Cir. 2012). See also Robeson v. Mortgage Electronic Registration Systems, Inc., No. 02-10-00227-CV, 2012 WL 42965, at *4 (Tex. App.—Fort Worth Jan. 5, 2012, pet. denied) (mem. op.). Thus, if a note is specially indorsed, it is payable to the party listed on the indorsement. If the note is indorsed in blank, then it is payable to the person in possession of the note.
§ 5.3Enforcement of Note Separate from Deed of Trust
It is well settled that Texas differentiates between enforcement of a note and foreclosure—the note must be enforced through a lawsuit, while a deed of trust can be enforced by foreclosure, without judicial supervision. Carter v. Gray, 81 S.W.2d 647, 648 (Tex. 1935); Tyler v. Bank of America, N.A., No. SA-12-CV-00909-DAE, 2013 WL 1821754, at *3 (W.D. Tex. Apr. 29, 2013); Bierwirth v. BAC Home Loans Servicing, L.P., No. 03-11-00644-CV, 2012 WL 3793190, at *4 (Tex. App.—Austin Aug. 30, 2012, no pet.) (mem. op.). Neither the doctrine of election of remedies nor Texas Property Code section 51.003 preclude a lender from first obtaining judgment on the note and later determining whether to pursue either judicial or nonjudicial foreclosure of the deed-of-trust lien. Stephens v. LPP Mortgage, Ltd., 316 S.W.3d 742, 748 (Tex. App.—Austin 2010, pet. denied). Similarly, the secured lender may pursue foreclosure of a deed-of-trust lien independent of any personal action against the borrower for collection on the note. Bierwirth, 2012 WL 3793190, at *3; Stephens, 316 S.W.3d at 748. See section 3.6:4 in this manual.
Texas law has long recognized that the foreclosure of a lien is a separate and distinct right from a suit to collect a debt. See Carter, 81 S.W.2d at 648 (“[I]t is so well settled as not to be controverted that the right to recover a personal judgment for a debt secured by a lien on land and the right to have a foreclosure of lien are severable.”); Aguero v. Ramirez, 70 S.W.3d 372 (Tex. App.—Corpus Christi–Edinburg 2002, pet. denied) (“Where there is a debt secured by a note, which is, in turn, secured by a lien, the note and lien constitute separate obligations.”); Lazidis v. Goidl, 564 S.W.2d 453, 456 (Tex. App.—Dallas 1978, no writ) (same); see also Bergs v. Hoover Bax & Slovacek, No. 3:01-CV-1572, 2003 WL 22255679, at *5–6 (N.D. Tex. Sept. 24, 2003), abrogated by Kaltenbach v. Richards, 464 F.3d 524 (5th Cir. 2006) (holding foreclosure of security interest is not collection of a debt for purposes of federal Fair Debt Collection Practices Act and Texas Debt Collection Act).
Additionally, the rules governing the enforcement of a deed of trust are separate and distinct from those which govern the right to enforce the note secured by that same deed of trust. The right to enforce a note is governed by the Texas Business and Commerce Code. See Tex. Bus. & Com. Code § 3.102. The Business and Commerce Code, however, expressly does not govern the enforcement of a deed of trust securing that same note if the deed of trust creates a lien against real property. See Tex. Bus. & Com. Code § 9.109(d)(11). While it is generally true that, pursuant to the Business and Commerce Code, only an owner or holder may enforce a promissory note (see, e.g., Nelson v. Regions Mortgage, Inc., 170 S.W.3d 858, 864 (Tex. App.—Dallas 2006, no pet.)), “a deed of trust may be enforced by the mortgagee, regardless of whether the mortgagee also holds the note.” Lowery v. Bank of America, N.A., No. 04-12-00729-CV, 2013 WL 5762227, at *2 (Tex. App.—San Antonio Oct. 23, 2013, no pet.) (mem. op.); accord Martins v. BAC Home Loans Servicing, L.P., 722 F.3d 249, 255 (5th Cir. 2013) (applying Texas law); Bierwirth, 2012 WL 3793190, at *3; Hornbuckle v. Countrywide Home Loans, Inc., No. 02-09-00330-CV, 2011 WL 1901975, at *3 (Tex. App.—Fort Worth May 19, 2011, no pet.) (mem. op.).
A noteholder or owner may decide to file suit on the note and not seek a judicial or nonjudicial foreclosure of the mortgaged property or collateral. Storms v. Reid, 691 S.W.2d 73, 75 (Tex. App.—Dallas 1985, no writ). There is no legal requirement that all collateral be liquidated before entry of judgment on the promissory note. To recover on a promissory note, the lender must prove (1) the note in question exists, (2) that the party sued signed or is the maker of the note, (3) that the plaintiff is the owner or holder of the note, and (4) that a certain balance is due and owing on the note. See Diversified Financial Systems, Inc. v. Hill, Heard, O’Neal, Gilstrap & Goetz, P.C., 99 S.W.3d 349, 354 (Tex. App.—Fort Worth 2003, no pet.); Commercial Services of Perry, Inc. v. Wooldridge, 968 S.W.2d 560, 564 (Tex. App.—Fort Worth 1998, no pet.); see also Roth v. JPMorgan Chase Bank, N.A., 439 S.W.3d 508, 512 (Tex. App.—El Paso 2014, no pet.).
See section 3.6:2 in this manual for further discussion of this topic.
§ 5.3:2Suit on Note with Nonjudicial Foreclosure
A noteholder or owner is entitled to conduct a nonjudicial foreclosure sale while concurrently prosecuting a suit on the promissory note that does not also seek judicial foreclosure of the deed of trust. C.I.T. Corp. v. Hanks, 48 S.W.2d 1015, 1016 (Tex. App. 1932); see French v. May, 484 S.W.2d 420, 428 (Tex. App.—Corpus Christi–Edinburg 1972, writ ref’d n.r.e.); see also Tex. Bus. & Com. Code § 9.601. If the mortgagee forecloses the deed of trust, the resulting proceeds from the trustee’s sale are credited to the judgment under the suit on the note in the same manner as any other payment on the judgment. Carter v. Gray, 81 S.W.2d 647, 648 (Tex. 1935); Kempner v. Comer, 11 S.W. 194, 196 (Tex. 1889); Stephens v. LPP Mortgage, Ltd., 316 S.W.3d 742, 746 (Tex. App.—Austin 2010, pet. denied); Lodal & Bain Engineers, Inc. v. Bayfield Public Utility District, 583 S.W.2d 653, 654–55 (Tex. App.—Houston [1st Dist.] 1979, rev’d on other grounds, 602 S.W.2d 262 (Tex. 1980)); see Tex. Prop. Code §§ 51.003, 52.005.
See section 3.6:1 for further discussion of this topic in light of the Texas doctrine of election of remedies.
§ 5.4Ownership and Negotiation of Promissory Note
The Texas Business and Commerce Code defines “holder” as being the person in possession of a negotiable instrument that is payable either to the bearer or to an identified person that is the person in possession. See Tex. Bus. & Com. Code § 1.201(b)(21)(A). While negotiation or assignment can change ownership of a promissory note, the indorsement of a nonnegotiable promissory note does not create a presumption of ownership in the transferee. FFP Marketing Co. v. Loan Lane Master Trust IV, 169 S.W.3d 402, 409 (Tex. App.—Fort Worth 2005, no pet.). Similarly, there is no presumption of ownership of the note if there is not indorsement to the holder of the note. See Tex. Bus. & Com. Code § 3.204. In the absence of an indorsement to the plaintiff, the plaintiff is not entitled to a presumption of ownership. Northwestern National Insurance Co. v. Crockett, 857 S.W.2d 757, 758 (Tex. App.—Beaumont 1993, no writ).
Negotiation of an instrument is a transfer of that instrument in such a way that the transferee becomes a holder. See Tex. Bus. & Com. Code § 3.302(a). Holder status depends on delivery plus proper indorsement. Lawson v. Gibbs, 591 S.W.2d 292 (Tex. App.—Houston [14th Dist.] 1979, writ ref’d n.r.e.). The nonnegotiable note is nevertheless susceptible of assignment. Dillard v. NCNB Texas National Bank, 815 S.W.2d 356 (Tex. App.—Austin 1991, no writ), overruled on other grounds, Amerboy v. Societe de Banque Privee, 831 S.W.2d 793 (Tex. 1992); see also First National Bank in Grand Prairie v. Lone Star Life Insurance Co., 524 S.W.2d 525 (Tex. App.—Dallas) (opinion on rehearing), writ ref’d n.r.e., 529 S.W.2d 67 (Tex. 1975). A transferee without indorsement of an instrument, who seeks to recover on the instrument, must account for its possession by proving the transaction through which it acquired the note. Lawson v. Finance America Private Brands, 537 S.W.2d 483 (Tex. App.—El Paso 1976, no writ); see also Carroll v. Kennon, 734 S.W.2d 34 (Tex. App.—Waco 1987, no writ).
Absent controverting evidence, affidavit testimony together with a true and correct copy of a note proves ownership for summary judgment purposes. Zarges v. Bevan, 652 S.W.2d 368, 369 (Tex. 1983). Negotiation or assignment can change ownership of a promissory note. Dillard, 815 S.W.2d at 360. Affidavit testimony can establish transfer of ownership or assignment from a federal agency to another institution. See NCNB Texas National Bank v. Johnson, 11 F.3d 1260, 1265 (5th Cir. 1994); Christian v. University Federal Savings Ass’n, 792 S.W.2d 533, 534 (Tex. App.—Houston [1st Dist.] 1990, no writ).
§ 5.5Holder-in-Due-Course Status
A holder in due course is a holder who takes the debt instrument (1) for value, (2) in good faith, and (3) without notice that it is overdue or has been dishonored or notice of any defense against or claim to it on the part of any person. See Tex. Bus. & Com. Code § 3.302(a)(2). The Texas Business and Commerce Code allows the holder in due course of a promissory note to hold the note free from personal defenses. See Tex. Bus. & Com. Code § 3.305. Note, however, that while holder in due course status may immunize the holder from certain personal defenses, it does not eliminate the holder’s responsibility to meet the elements of its own cause of action. Friedman v. Atlantic Funding Corp., 936 S.W.2d 38, 41 (Tex. App.—San Antonio 1996, no pet.).
When a date of payment is not specified in the promissory note, the obligation is considered payable on demand. Tex. Bus. & Com. Code § 3.108; Ada Oil Co. v. Logan, 447 S.W.2d 205 (Tex. App.—Houston [14th Dist.] 1969, no writ).
A demand note is matured on demand by the holder. Tex. Bus. & Com. Code § 3.108. However, one case has held that “[a] demand note is due from the moment of execution and actionable immediately without demand.” Stavert Properties, Inc. v. RepublicBank of Northern Hills, 696 S.W.2d 278, 281 (Tex. App.—San Antonio 1985, writ ref’d n.r.e.).
Formal demand for payment and failure to pay must occur on a demand note before commencement of the foreclosure process. The demand feature of the note involves a number of issues that have not been extensively dealt with by state and federal courts. A negotiable instrument that is payable at a definite time may provide for the right of acceleration of the debt on default. APM Enterprises, LLC v. National Loan Acquisitions Co., 357 S.W.3d 405, 407–08 (Tex. App.—Texarkana 2012, no pet.) (citing Tex. Bus. & Com. Code § 3.108). Because acceleration of a debt is viewed as a harsh remedy, however, any such clause will be strictly construed. APM Enterprises, 357 S.W.3d at 406; see Ramo, Inc. v. English, 500 S.W.2d 461, 466 (Tex. 1973). Texas law requires clear notice of intent to exercise acceleration rights, followed (if the debtor continues in default) by notice of actual acceleration. See Ogden v. Gibraltar Savings Ass’n, 640 S.W.2d 232, 233–34 (Tex. 1982). “If the required notices are given, acceleration occurs.” Burns v. Stanton, 286 S.W.3d 657, 661 (Tex. App.—Texarkana 2009, pet. denied). See chapter 8 in this manual for further discussion of these issues.
§ 5.7Note Payable at Definite Time
Texas Business and Commerce Code section 3.108(b) provides that—
A promise or order is “payable at a definite time” if it is payable on elapse of a definite period of time after sight or acceptance or at a fixed date or dates or at a time or times readily ascertainable at the time the promise or order is issued, subject to rights of:
(1)prepayment;
(2)acceleration;
(3)extension at the option of the holder; or
(4)extension to a further definite time at the option of the maker or acceptor or automatically on or after a specified act or event.
Tex. Bus. & Com. Code § 3.108(b). A term note matures at the expiration of the term or on the date stipulated in the note. As recognized in section 3.108(b)(2), a term note may provide that the maturity may or shall be accelerated on the occurrence of a default or other event before the end of the term.
Also note that under section 3.108(c), if an instrument payable at a fixed date is also payable on demand made before the fixed date, the instrument is payable on demand until the fixed date and, if demand for payment is not made before that date, becomes payable at a definite time on the fixed date. Tex. Bus. & Com. Code § 3.108(c).
§ 5.8Installment Note with Power to Accelerate Unmatured Principal
As with term notes, installment notes may provide that, on the occurrence of a default or other event, the unmatured (not yet due) installments may be matured.
Texas courts look with disfavor on acceleration because it imposes a severe burden on the mortgagor. For example, in one case, the Texas Supreme Court stated, “The accelerated maturity of a note, which is initially contemplated to extend over a period of months or years, is an extremely harsh remedy.” Allen Sales & Servicenter, Inc. v. Ryan, 525 S.W.2d 863, 866 (Tex. 1975).
Texas courts require that notes be accelerated in strict accordance with the contractual requirements of the loan documents, any applicable statutes, and case-law interpretation of these requirements. Generally, Texas courts require compliance with the following procedures:
1.Demand is made for payment, and the debtor is afforded an opportunity to remedy the default.
2.Advance notice is given of the payee’s intention to accelerate to maturity the unmatured balance of principal on the note.
3.Notice is given that acceleration has occurred.
Ogden v. Gibraltar Savings Ass’n, 640 S.W.2d 232, 233–34 (Tex. 1982).
The Texas Business and Commerce Code does not define the various events that may be a default on the loan. Default is defined by the agreement of the parties. Tex. Bus. & Com. Code § 9.601 cmt. 3. Default may consist of the failure to make a payment on the loan within a specified period or may be the breach of a covenant, representation, or warranty or the occurrence or nonoccurrence of some event. An uncertified check is merely a conditional payment for an obligation owed to the payee. See Probus Properties v. Kirby, 200 S.W.3d 258, 262–63 (Tex. App.—Dallas 2006, pet. denied). Where a party makes its payment by uncertified check, that party takes the risk that the check will not be honored and the payment obligation will not be fulfilled. See Deep Nines, Inc. v. McAfee, Inc., 246 S.W.3d 842 (Tex. App.— Dallas 2008, no pet.) (default occurred under settlement agreement when party failed to pay debt within three-day cure period after uncertified check dishonored).
All documents and communications between the parties and the course of conduct of the parties must be analyzed before a default is declared or payment is demanded. If care is not taken, the parties may discover after the fact that the debt was not due or a default did not exist. The erroneous publicizing of default can seriously affect the obligor’s ability to perform his obligations to the lender and others, and may also be a violation of the federal and state fair debt collection statutes. See chapter 7 in this manual.
Section 26.01 of the Texas Business and Commerce Code states that to be enforceable, agreements subject to chapter 26 of the Texas Business and Commerce Code must be in writing and signed by the party charged with the agreement. See Tex. Bus. & Com. Code § 26.01(a). The statute of frauds applies, among other agreements, to—
•loan agreements in excess of $50,000;
•an agreement for the sale of real property;
•an agreement that contemplates the creation of a lien or mortgage; and
•agreements that cannot be performed within one year from the date of the making of the agreement.
See Tex. Bus. & Com. Code §§ 26.01(b), 26.02(b); Khoshnoudi v. Bird, No. 05-98-00388-CV, 2000 WL 1176587, at *5 (Tex. App.—
Dallas Aug. 21, 2000, no pet.) (not designated for publication) (citing West v. First Baptist Church, 71 S.W.2d 1090, 1100 (Tex. 1934); Edward Scharf Associates, Inc. v. Skiba, 538 S.W.2d 501, 502 (Tex. App.—Waco 1979, no writ); and Woodman v. Bishop, 203 S.W.2d 977, 978 (Tex. App.—San Antonio 1947, no writ)).
Promissory estoppel may overcome the statute-of-frauds requirement in Texas, but “there must have been a promise to sign a written contract which had been prepared and which would satisfy the requirements of the statute of frauds.” Martins v. BAC Home Loans Servicing, L.P., 722 F.3d 249, 256–57 (5th Cir. 2013) (quoting Beta Drilling, Inc. v. Durkee, 821 S.W.2d 739, 741 (Tex. App.—Houston 1992, writ denied). See also Carpenter v. Phelps, 391 S.W.3d 143 (Tex. App.—Houston [1st Dist.] 2011, no pet.) (“For promissory estoppel to create an exception to the statute of frauds requires a promise to sign a prepared written contract which would satisfy the requirements of the statute of frauds.”); Ford v. City State Bank of Palacios, 44 S.W.3d 121, 139 (Tex. App.—Corpus Christi–Edinburg 2001, no pet.) (“When promissory estoppel is raised to bar the application of the statute of frauds, there is an additional requirement that the promisor promised to sign a written document complying with the statute of frauds.”).
A purported agreement to modify the terms of a promissory note or deed of trust is within the statute of frauds. Martins, 722 F.3d at 257. In order for the promissory estoppel exception to the statute of frauds to apply, a party must allege the other party promised to sign a written agreement which would satisfy the statute of frauds. Martins, 722 F.3d at 256–57.
See sections 3.3:2 and 10.4 in this manual for further discussion.
A plaintiff need not be a holder in due course to recover on a lost promissory note. See Tex. Bus. & Com. Code § 3.309; see also RTC v. Camp, 965 F.2d 25, 29 (5th Cir. 1992); Priesmeyer v. Pacific Southwest Bank, 917 S.W.2d 937, 939 (Tex. App.—Austin 1996, no writ); Bean v. Bluebonnet Savings Bank, 884 S.W.2d 520, 522 (Tex. App.—Dallas 1994, no writ); Jernigan v. Bank One, Texas, N.A., 803 S.W.2d 774, 776 (Tex. App.—Houston [14th Dist.] 1991, no writ). A collateral assignee may collect on a collaterally pledged note lost by the collateral assignee. See Bray v. Cadle Co., 880 S.W.2d 813, 817–18 (Tex. App.—Houston [14th Dist.] 1994, writ denied). For the steps to prove up a lost assignment of a note, see Western National Bank v. Rives, 927 S.W.2d 681, 684–85 (Tex. App.—Amarillo 1996, writ denied).
Texas Civil Practice and Remedies Code section 16.038 provides a statutory safe harbor for documenting an abandonment, waiver, or rescission of a notice of acceleration that previously matured a borrower’s debt and thus triggered the statute of limitations barring enforcement of a mortgagee’s lien if the property was not nonjudicially foreclosed or a suit for judicial foreclosure filed within four years of the notice of acceleration under section 16.035. See Tex. Civ. Prac. & Rem. Code § 16.038.
Rescission of acceleration is effective if made by a written notice of rescission served by the lienholder, the servicer of the debt, or an attorney representing the lienholder on each debtor who, according to the records of the mortgagee or servicer, is obligated to pay the debt. Tex. Civ. Prac. & Rem. Code § 16.038(b). Service of the written notice must be by first-class or certified mail, and service is complete when the notice is deposited in the United States mail, postage prepaid, and addressed to the debtor at the debtor’s last known address. Tex. Civ. Prac. & Rem. Code § 16.038(c). The notice of rescission does not affect a lienholder’s right to accelerate the maturity date of the debt in the future, nor does it waive past defaults. Tex. Civ. Prac. & Rem. Code § 16.038(d). Section 16.038 does not create an exclusive method for evidencing rescission of acceleration. See Tex. Civ. Prac. & Rem. Code § 16.038(e). For instance, courts applying Texas law have held that acceleration can be unequivocally abandoned or waived by subsequently requesting payment on less than the full amount of the loan. See, e.g., Boren v. U.S. National Bank Ass’n, 807 F.3d 99, 106 (5th Cir. 2015); Leonard v. Ocwen Loan Servicing, L.L.C., 616 Fed. App’x 677, 679–80 (5th Cir. 2015) (per curiam), cert. denied, 136 S. Ct. 554 (2015).
Section 16.038 is retroactive, but only if the four-year statute of limitations has not run. See Acts 2015, 84th Leg., R.S., ch. 759, § 2 (H.B. 2067). See section 10.26 in this manual for a discussion of this issue.
Under section 16.035(e) of the Texas Civil Practice and Remedies Code, the four-year statute of limitations does not begin to run on past-due installments until the entire debt is due. Section 16.035(e) provides: “If a series of notes or obligations or a note or obligation payable in installments is secured by a real property lien, the four-year limitations period does not begin to run until the maturity date of the last note, obligation, or installment.” Tex. Civ. Prac. & Rem. Code § 16.035(e). Section 16.035(e) applies not only to suits to foreclose a deed-of-trust lien but also to suits on the real property secured debt since the lien is an incident of and inseparable from the debt. Tex. Civ. Prac. & Rem. Code § 16.035(e). Section 16.035 modifies the general rule that a claim accrues and limitations begin to run on each installment when it becomes due. Holy Cross Church of God in Christ v. Wolf, 44 S.W.3d 562, 566 (Tex. 2001).
Importantly, if a note or deed of trust secured by real property contains an optional acceleration clause, default does not start the limitations running on the note. Holy Cross Church, 44 S.W.3d at 566. Instead, under these circumstances, a cause of action for foreclosure accrues only when the noteholder or owner actually exercises its option to accelerate. 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.). This requires two acts: (1) notice of intent to accelerate and (2) notice of acceleration. Holy Cross Church, 44 S.W.3d at 566; see also Burney v. Citigroup Global Markets Realty Corp., 244 S.W.3d 900, 903 (Tex. App.—Dallas 2008, no pet.). “Notice of intent to accelerate is necessary in order to provide the debtor an opportunity to cure his default prior to harsh consequences of acceleration and foreclosure,” while notice of acceleration “cuts off the debtor’s right to cure his default and gives notice that the entire debt is due and payable.” Ogden v. Gibraltar Savings Ass’n, 640 S.W.2d 232, 234 (Tex. 1982). Notice that the debt has been accelerated is ineffective unless preceded by proper notice of intent to accelerate. Ogden, 640 S.W.2d at 234. Both notices must be clear and unequivocal. Holy Cross Church, 44 S.W.3d at 566.
If the noteholder or owner is suing only on the note and not seeking to foreclose its lien, the six-year statute of limitations of section 3.118 of the Texas Business and Commerce Code is applicable. See Tex. Bus. & Com. Code § 3.118; Parker v. Dodge, 98 S.W.3d 297, 300–301 (Tex. App.—Houston [1st Dist.] 2003, no pet.); Aguero v. Ramirez, 70 S.W.3d 372, 375 (Tex. App.—Corpus Christi–Edinburg 2002, pet. denied). The court in Ward v. Stanford, 443 S.W.3d 334, 343 (Tex. App.—Dallas 2014, pet. denied) held that whether the six-year rather than the four-year statute of limitations applies depends on whether the note is negotiable or nonnegotiable, with the six-year statute of limitations applying to negotiable notes. The court in Stanford found the note in question to be a negotiable one.
§ 5.12:3Calculation of Limitations
By statute, if a series of notes or obligations or a note or obligation payable in installments is secured by a lien on real property, limitations do not begin to run until the maturity date of the last note, obligation, or installment. Tex. Civ. Prac. & Rem. Code § 16.035(e). If a note or deed of trust secured by real property contains an acceleration clause, default does not start limitations running on the note; rather, the action accrues only when the noteholder or owner exercises its option to accelerate. Holy Cross Church of God in Christ v. Wolf, 44 S.W.3d 562, 566 (Tex. 2001). In the case of a demand obligation, limitations begin to run on demand or, if no date is stated, on the date of issue. Tex. Bus. & Com. Code § 3.118(b). Whether a note will be treated as a demand instrument or a time instrument subject to acceleration depends on the language of all the loan documents and the circumstances. Reid v. Key Bank of Southern Maine, 821 F.2d 9, 14 (1st Cir. 1987). It is conclusively presumed that the debt has been paid after the expiration of four years after the maturity of the debt. On the expiration of the four-year limitations period, the real property lien and a power of sale to enforce the real property lien become void. Tex. Civ. Prac. & Rem. Code § 16.035(d).
§ 5.12:4Suit against Guarantor
The four-year statute of limitations barring recovery against a guarantor begins running the day the cause of action accrues. When the cause of action accrues on a guaranty is a question of law for the court to decide. See Moreno v. Sterling Drug, Inc., 787 S.W.2d 348, 351 (Tex. 1990). A cause of action generally accrues when facts come into existence that authorize a claimant to seek a judicial remedy. Provident Life & Accident Insurance Co. v. Knott, 128 S.W.3d 211, 221 (Tex. 2003); Gabriel v. Alhabbal, 618 S.W.2d 894, 896 (Tex. App.—Houston [1st Dist.] 1981, writ ref’d n.r.e.). Usually, a cause of action for the breach of a promise to pay arises when a demand for payment has been made and refused. Intermedics, Inc. v. Grady, 683 S.W.2d 842, 845 (Tex. App.—Houston [1st Dist.] 1984, writ ref’d n.r.e.).
In the case of a guaranty of payment, which provides that the payee may sue the guarantor without first bringing a cause of action to recover on the note against the maker, the statute of limitations runs independently on the obligation of the guaranty. See Willis v. Chowning, 40 S.W. 395, 396–97 (Tex. 1897); Beddall v. Reader’s Wholesale Distributors, Inc., 408 S.W.2d 237, 240 (Tex. App.—Austin 1966, no writ); Western Casket Co. v. Estrada, 116 S.W. 113, 113–14 (Tex. App.—El Paso 1909, no writ) (applying principles announced in Willis to guarantors); see also Ford v. Darwin, 767 S.W.2d 851, 854 (Tex. App.—Dallas 1989, writ denied).
When construing a guaranty agreement, the court’s primary goal is to ascertain and give effect to the intent of the parties. Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983); Hasty v. Keller HCP Partners, L.P., 260 S.W.3d 666, 670 (Tex. App.—Dallas 2008, no pet.). The surest guide to the parties’ intent is the language used in the guaranty, and where the language is clear and unambiguous, the court may not look to the subject matter or attending circumstances in order to give it a different construction. See University Savings Ass’n v. Miller, 786 S.W.2d 461, 462 (Tex. App.—Houston [14th Dist.] 1990, writ denied); Southwest Savings Ass’n v. Dunagan, 392 S.W.2d 761, 767 (Tex. App.—Dallas 1965, writ ref’d n.r.e.).
§ 5.12:5Two-Year Limitation on Deficiency Action
Section 51.003(a) of the Texas Property Code provides that, if real property is sold at a foreclosure sale for a price less than the unpaid balance of the indebtedness securing it, “any action brought to recover the deficiency must be brought within two years of the foreclosure sale and is governed by this section.” Tex. Prop. Code § 51.003(a). Courts have construed this as a statute of limitations, not a statute of repose. Trunkhill Capital, Inc. v. Jansma, 905 S.W.2d 464, 467–68 (Tex. App.—Waco 1995, writ denied). This is so because, from the date that section 51.003(a) requires the two-year period to begin, i.e., the date of foreclosure, a lender possesses all facts that authorize him to seek a judicial remedy. Trunkhill Capital, 905 S.W.2d at 468; see Celtic Life Insurance Co. v. Coats, 885 S.W.2d 96, 100 (Tex. 1994); Thompson v. Chrysler First Business Credit Corp., 840 S.W.2d 25, 28 (Tex. App.—Dallas 1992, no writ).
§ 5.13Third-Party Mortgage to Secure Borrower’s Debt
Generally, a deed of trust can be executed to secure the debt of a person other than the mortgagor. See Wilbanks v. Wilbanks, 330 S.W.2d 607 (Tex. 1960); Nelson v. Citizens Bank & Trust Co., 881 S.W.2d 128 (Tex. App.—
Houston [1st Dist.] 1994, no writ). This means, for example, that if the maker of a note dies and a default exists, the mortgagee is entitled to foreclose on the mortgaged property of a third party who as mortgagor had pledged his property to secure the obligor’s debt, without first having to proceed against the deceased obligor’s estate to collect the debt. Planters’ & Mechanics’ National Bank v. Robertson, 86 S.W. 643, 645 (Tex. App.—Galveston 1905, no writ); see also Kimball-Krough Pump Co. v. Judd, 88 S.W.2d 579, 584 (Tex. App.—Amarillo 1935, no writ).