Chapter 6 

The Deed of Trust

§ 6.1Introduction—Deed of Trust as Contract

Although the deed of trust reads as if it is a con­veyance, sale, or transfer of the mortgaged prop­erty to the trustee “in trust,” Texas law characterizes the transaction as creating a non­possessory lien on the mortgaged real property and personal property collateral in favor of the mortgagee. A deed of trust is a mortgage with a power of sale. Benbrook Economic Develop­ment Corp. v. National Bank of Texas, 644 S.W.3d 871 (Tex. App.—Fort Worth 2022, no pet. h.); Johnson v. Snell, 504 S.W.2d 397, 399 (Tex. 1973); Cortez v. Brownsville National Bank, 664 S.W.2d 805, 810 (Tex. App.—El Paso 1984, no writ). The purpose of the deed of trust is to secure the repayment of the debt, and the deed of trust creates a lien against the mort­gaged property. Financial Freedom Senior Funding Corp. v. Horrocks, 294 S.W.3d 749, 755–56 (Tex. App.—Houston [14th Dist.] 2009, no pet.). When a mortgagor executes a deed of trust to secure an extension of credit, the mort­gagor conveys only equitable title to the mort­gaged property and retains legal title. Flag-Redfern Oil Co. v. Humble Exploration Co., 744 S.W.2d 6, 8 (Tex. 1987); Leighton v. Leighton, 921 S.W.2d 365, 368 (Tex. App.—Houston [1st Dist.] 1996, no writ). Accordingly, before default and the pursuit of its remedies, the mort­gagee is not entitled to possession, rentals, or profits from the mortgaged property. Taylor v. Brennan, 621 S.W.2d 592, 593 (Tex. 1981). Additional authority on the nature of the deed of trust includes Humble Oil & Refining Co. v. Atwood, 244 S.W.2d 637, 644 (Tex. 1951); Car­roll v. Edmondson, 41 S.W.2d 64 (Tex. Comm’n App. 1931, judgm’t adopted); Armenta v. Nuss­baum, 519 S.W.2d 673 (Tex. App.—Corpus Christi–Edinburg 1975, writ ref’d n.r.e.); Lucky Homes, Inc. v. Tarrant Savings Ass’n, 379 S.W.2d 386 (Tex. App.—Fort Worth 1964), rev’d on other grounds, 390 S.W.2d 473 (Tex. 1965); Pioneer Building & Loan Ass’n v. Cowan, 123 S.W.2d 726 (Tex. App.—Waco 1938, writ dism’d judgm’t cor.); and Texas Loan Agency v. Gray, 34 S.W. 650 (Tex. App. 1896, writ ref’d).

§ 6.1:1Contract between Parties

The deed of trust is regarded as a binding con­tract between the mortgagor, the trustee, and the mortgagee. Greenville v. Bills, No. 01-19-00264-CV, 2020 WL 1942457 (Tex. App.—Houston [1st Dist.] Apr. 23, 2020, no pet.). Cer­tain statutory provisions apply notwithstanding an agreement to the contrary, including Texas Property Code section 51.002(d) (twenty-day notice of default and right to cure for lien on property used as debtor’s residence); Texas Property Code section 51.0075 (appointment of substitute trustee); Texas Property Code section 51.002(a-1), Texas Civil Practice and Remedies Code section 34.041(c), and Texas Tax Code sections 34.01(r-1) and 34.01(r-2) (relating to the date of the foreclosure sale on the first Tues­day or first Wednesday of the month, depending on whether the first Tuesday is January 1 or July 4); and Texas Business and Commerce Code chapter 22 (relating to the public sale of residen­tial real property under a power of sale). In addi­tion, section 51.002 of the Property Code controls to the extent of any conflict between the terms of the deed of trust and the statute. See Tex. Prop. Code §§ 51.002(d), 51.0075. See sec­tion 6.5 below. The deed of trust is typically executed only by the mortgagor and not by the trustee or mortgagee. The deed of trust must include a grant of the lien, a description of the real property and any other collateral, a descrip­tion or identification of the debt and other obli­gations secured by the deed of trust, and a description of the defaults triggering the mort­gagee’s right to pursue remedies. See Sunbelt Service Corp. v. Vandenburg, 774 S.W.2d 815, 817 (Tex. App.—El Paso 1989, writ denied). A general description of the debt is sufficient. Clementz v. Jones Lumber Co., 18 S.W. 599, 600 (Tex. 1891). A failure to state the amount of the debt secured by the deed of trust does not invalidate the deed of trust where the amount can be ascertained, or so long as the deed of trust is sufficient to identify the debt from other sources or by parol evidence. Barnett v. Hous­ton, 44 S.W. 689, 692 (Tex. App. 1898, writ ref’d). Texas law does not require the maturity date of the debt to be stated in the deed of trust. Cadle Co. v. Butler, 951 S.W.2d 901, 909 (Tex. App.—Corpus Christi–Edinburg 1997, no writ). Trivial discrepancies between the description of the note in the deed of trust and the note itself do not impact enforceability or create a fact ques­tion to defeat a summary judgment motion for foreclosure. Edwards v. Fannie Mae, 545 S.W.3d 169, 175–76 (Tex. App.—El Paso 2017, pet. denied). If the reference to the instrument provides enough information to enable one to identify the particular property to the exclusion of others, the discrepancy is immaterial. Edwards, 545 S.W.3d at 175–76.

A deed of trust will typically contain representa­tions and warranties by the mortgagor with respect to: title to the collateral; affirmative and negative covenants regarding the maintenance, repair, use, and protection of the property; the protection of the mortgagee’s lien position (such as covenants obligating the mortgagor to pay taxes and to maintain insurance for the prop­erty); covenants prohibiting waste, removal of fixtures, and certain uses or changes in the prop­erty; provisions regarding the use or application of insurance proceeds and condemnation pro­ceeds; provisions listing the defaults which per­mit the mortgagee to pursue remedies and cause the mortgaged property to be sold; and provi­sions stating the procedures to be followed in connection with the mortgagor’s breach of the deed of trust (for example, acceleration, notices, waivers, substitution of trustee, and require­ments of sale).

§ 6.1:2Power of Sale

Although a power of sale is not necessary for the deed of trust to create a lien against the property described in the deed of trust, a power of sale is necessary to permit a nonjudicial foreclosure of the lien pursuant to the terms of the deed of trust and Texas Property Code section 51.002. See Bonilla v. Roberson, 918 S.W.2d 17, 21 (Tex. App.—Corpus Christi–Edinburg 1996, no writ). A trustee has no power to sell the mortgaged property except as provided for in the deed of trust. Slaughter v. Qualls, 139 Tex. 340, 162 S.W.2d 671, 675 (1942). Section 51.002 pro­vides the procedures for a nonjudicial foreclo­sure “of real property under a power of sale conferred by a deed of trust or other contract lien.” Tex. Prop. Code § 51.002(a). In the absence of a power of sale, a nonjudicial fore­closure is unavailable.

§ 6.2Enforcement Is Independent of Note and Vendor’s Lien

Texas law differentiates between the enforce­ment of a promissory note and foreclosure of the deed-of-trust lien securing the note. See section 5.3 in this manual. The mortgage or deed of trust secures the debt, and the note is evidence of the debt. W.C. Belcher Land Mortgage Co. v. Tay­lor, 212 S.W. 647, 650 (Tex. Comm’n App. 1919, judgm’t adopted). The note and lien are separate obligations. Stephens v. LPP Mortgage, Ltd., 316 S.W.3d 742, 747 (Tex. App.—Austin 2010, pet. denied); Aguero v. Ramirez, 70 S.W.3d 372, 374 (Tex. App.—Corpus Christi–Edinburg 2002, pet. denied). In addition, differ­ent statutes of limitation apply to the foreclosure of the lien and a suit to collect the debt. See Aguero, 70 S.W.3d at 374–75. See section 10.26. Foreclosure enforces the deed of trust, not the underlying note. See Slaughter v. Qualls, 162 S.W.2d 671 (Tex. 1942), Rearden v. Citi­Mortgage, Inc., No. A-11-CA-420-SS, 2011 WL 3268307, at *3 (W.D. Tex. July 25, 2011). The right to recover a personal judgment for the debt secured by a lien on land and the right to foreclosure of the lien are severable rights, and the mortgagee may elect to pursue a personal judgment for the debt without foreclosure of the lien and without waiving the lien. Carter v. Gray, 81 S.W.2d 647, 648 (Tex. 1935). Foreclo­sure of a lien is an in rem proceeding. Tierra Sol Joint Venture v. City of El Paso, 311 S.W.3d 492, 499 (Tex. App.—El Paso 2009, pet. denied). Enforcement of the note, however, is a personal action against the maker. TrueStar Petroleum Corp. v. Eagle Oil & Gas Corp., 323 S.W.3d 316, 319 (Tex. App.—Dallas 2010, no pet.). Texas courts recognize that the note and deed of trust afford distinct remedies on separate obligations and have rejected the argument that a note and its security are inseparable. Martins v. BAC Home Loans Servicing, L.P., 722 F.3d 249, 255 (5th Cir. 2013) (citing Bierwirth v. BAC Home Loans Servicing, L.P., 2012 WL 3793190, at *3 (Tex. App.—Austin, Aug. 30, 2012, no pet.), and 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.)).

In Texas, a seller of real property retains a ven­dor’s lien against the conveyed property for the unpaid portion of the purchase price. Helm v. Weaver, 6 S.W. 420, 421 (Tex. 1887). In a typi­cal seller-financed transaction, the purchaser executes a note payable to the seller, which is secured by a deed of trust for the benefit of the seller. However, the vendor’s lien is in addition to and independent of any deed-of-trust lien arising out of the sale. A vendor’s lien can be an express lien reserved in the deed transferring the property, or in the absence of an express reser­vation in the deed, an equitable vendor’s lien is implied. Wilcox v. First National Bank, 55 S.W. 317, 319–20 (Tex. 1900); Skelton v. Washington Mutual Bank, F.A., 61 S.W.3d 56, 60 (Tex. App.—Amarillo 2001, no pet.); Delley v. Unknown Stockholders of Brotherly & Sisterly Club of Christ, Inc., 509 S.W.2d 709, 714 (Tex. App.—Tyler 1974, writ ref’d n.r.e.). Where there is an express vendor’s lien in the deed or otherwise acknowledged in a recorded docu­ment, the seller retains superior title to secure the unpaid purchase price, and the purchaser merely acquires an equitable right to acquire title by carrying out the agreement. State v. For­est Lawn Lot Owners Ass’n, 254 S.W.2d 87, 91 (Tex. 1953); Benbrook Economic Development Corp. v. National Bank of Texas, 644 S.W.3d 871 (Tex. App.—Fort Worth 2022, no pet. h.); Dominey v. Unknown Heirs & Legal Represen­tatives of Lokomski, 172 S.W.3d 67, 73 (Tex. App.—Fort Worth 2005, no pet.); Jones v. Bank United of Texas, FSB, 51 S.W.3d 341, 343 (Tex. App.—Houston [1st Dist.] 2001, pet. denied). In the absence of an express vendor’s lien, the implied lien in favor of the seller arises by oper­ation of law. McGoodwin v. McGoodwin, 671 S.W.2d 880, 882 (Tex. 1984). The implied ven­dor’s lien creates a constructive trust that pre­cludes the purchaser from obtaining the estate of the seller without paying the entirety of the pur­chase price. Trison Investment Co. v. Woodard, 838 S.W.2d 790, 792 (Tex. App.—Dallas 1992, writ denied).

Upon a default by the purchaser, the vendor has a choice of remedies. Whiteside v. Bell, 347 S.W.2d 568, 570 (Tex. 1961). When there is an express vendor’s lien, the vendor may sue for payment of the purchase price, may rescind the contract and take possession of the property, may recover title and possession of the property in a suit for that purpose or by agreement, or may sue for the debt and to foreclose the ven­dor’s lien. Whiteside, 347 S.W.2d at 570; Dominey, 172 S.W.3d at 73; Zapata v. Torres, 464 S.W.2d 926, 928 (Tex. App.—Dallas 1971, no writ). The remedy of rescission is separate and distinct from and wholly independent of the remedies to enforce payment. Lusk v. Mintz, 625 S.W.2d 774, 775 (Tex. App.—Houston [14th Dist.] 1981, no writ). In the absence of an express vendor’s lien reserved in the deed, the vendor’s implied lien may be established by suit and judicially foreclosed. Zapata, 464 S.W.2d at 928. See section 3.5:4.

See also W. Mike Baggett and Brian Thompson Morris, 1 Texas Practice Guide, Real Estate Lit­igation §§ 4:108–4:110 (2012).

§ 6.3Identification of Parties

In the past, the traditional real estate secured loan involved the lender who originated the loan and who was the named payee in the note and the named beneficiary in the deed of trust. The borrower was more often than not the owner or one of the owners of the property, and the bor­rower would sign the note as maker and execute the deed of trust as the grantor and mortgagor. The trustee named in the deed of trust was often an employee or agent of the lender or the lender’s counsel. With the advent of the second­ary mortgage market, residential and commer­cial mortgage-backed securities, the use of servicers in monitoring and collecting the loans and administering the foreclosure process and the role of electronic registration systems and the use of Mortgage Electronic Registration Systems, Inc., (MERS) as beneficiary, few loans fit the traditional model at the time of origina­tion and even fewer involve the parties named in the loan documents at the time of enforcement.

See the discussion of the difference between “mortgagee” and “noteholder” at sections 10.3:3 and 10.3:4 in this manual.

§ 6.3:1Mortgagor, Pro Forma Mortgagor, Nonobligated Collateral Owner

The Texas Property Code defines a “mortgagor” as the “grantor of a security instrument” and defines a “security instrument” as “a deed of trust, mortgage, or other contract lien on an interest in real property.” Tex. Prop. Code § 51.0001(5), (6). The mortgagor may be any individual or any legal entity holding an interest in the mortgaged property encumbered by the deed of trust. The mortgagor need not be the borrower or maker of the promissory note that is secured by the deed-of-trust lien. Wilbanks v. Wilbanks, 330 S.W.2d 607, 608 (Tex 1960). A mortgagor may pledge property as security for the repayment of the debt of another. First Bap­tist Church v. Baptist Bible Seminary, 347 S.W.2d 587, 591 (Tex. 1961); Nelson v. Citizens Bank & Trust Co., 881 S.W.2d 128 (Tex. App.—Houston [1st Dist.] 1994, no writ); Law­ler v. Loomis & Nettleton Financial Corp., 583 S.W.2d 810, 812 (Tex. App.—Dallas 1979, no writ). In such cases, the granting of the lien by itself does not impose personal liability on the mortgagor for the repayment of the debt but does create liability to the extent of the mort­gagor’s interest in the mortgaged property. Hodges v. Roberts, 12 S.W. 222, 223 (Tex. 1889).

Either spouse can incur debts that will subject the contracting spouse’s interest in the commu­nity property to being attached by the creditor through a judgment, but the noncontracting spouse is not personally liable for the debt. See Tex. Fam. Code § 3.201. A conveyance of sepa­rate property by an individual does not require the joinder of the spouse of that individual unless the property is the homestead. See Tex. Fam. Code § 5.001; Wessely Energy Corp. v. Jennings, 736 S.W.2d 624, 626 (Tex. 1987). A spouse who holds record title to a community asset may mortgage the property without the joinder of the nonrecord owner spouse, provided that the creditor does not have actual knowledge that the nonjoining spouse objects to the pro­posed encumbrance. See Tex. Fam. Code § 3.104(b).

The better practice when dealing with spouses is for both spouses to sign the deed of trust as grantors regardless of whether both spouses are borrowers and regardless of whether the prop­erty is the separate property of one of the spouses. In the case of the homestead, no encumbrance or conveyance by a spouse is valid without the joinder of the other spouse except when there has been a declaration of incapacity or unusual circumstances as set forth in Texas Family Code chapter 5. See Tex. Fam. Code ch. 5. In the case of a home equity loan, the consent of each owner and each owner’s spouse is required. Tex. Const. art. XVI, § 50(a)(6)(A).

§ 6.3:2Mortgagee

Historically, at the time of the origination of the loan, the originating lender, the mortgagee, and the beneficiary were the same person or entity. As amended effective January 1, 2004, Texas Property Code section 51.0001(4) now defines a “mortgagee” as (1) the grantee, beneficiary, owner, or holder of a security instrument; (2) a book entry system; or (3) if the security instru­ment has been assigned of record, the last person to whom the security interest has been assigned of record. Tex. Prop. Code § 51.0001(4). At the time of the origination of the loan, the mort­gagee may be the originating lender and the payee on the note who is also named as the ben­eficiary in the deed of trust. However, the payee on the note and the beneficiary in the deed of trust do not have to be the same person or entity, and the beneficiary can be a book entry system such as MERS. If the loan has been transferred by indorsement and delivery of the note or by assignment, the holder or transferee of the loan can be a mortgagee, and if the lien has been assigned, the last person to whom the security instrument has been assigned of record is the mortgagee. A book entry system such as MERS can be the assignee of record. See Tex. Prop. Code § 51.0001(4). See section 6.3:5 below for further discussion of MERS.

§ 6.3:3Lender

At origination, the lender is the person or entity who makes the loan secured by the property or who sells the property and finances the pur­chase. The lender is the payee on the debt instru­ment and may or may not be the beneficiary identified in the deed of trust. If the loan has been assigned, the transferee who acquires the rights of the transferor is the lender entitled to enforce the instrument. A person entitled to enforce a promissory note includes a holder of the note, a nonholder in possession of the note who has the rights of a holder, or a person not in possession of the note who is entitled to enforce an instrument that has been lost or destroyed; a person may be entitled to enforce a note even though the person is not the owner. See Tex. Bus. & Com. Code § 3.301. A “holder” of the note means the person in possession of the origi­nal negotiable instrument that is payable either to that person or to the bearer. Tex. Bus. & Com. Code § 1.201(b)(21); Chance v. CitiMortgage, Inc., 395 S.W.3d 311, 315 (Tex. App.—Dallas 2013, pet. denied). For the transferee to be a holder, the note must be indorsed to the trans­feree or indorsed in blank. See Tex. Bus. & Com. Code § 1.201(b)(21). Both possession and the indorsement are required for the transferee to be a holder of the note. See Tex. Bus. & Com. Code § 1.201(b)(21). If the transferee is in pos­session of an original note that has not been either indorsed to the transferee or in blank, the transferee does not qualify as a holder but may still prove ownership of the note or its right to enforce the note. See Tex. Bus. & Com. Code § 3.301. An owner may transfer a note without indorsement, and in that case, the transferee acquires whatever right the transferor had in the note but does not become a holder of the note. Martin v. New Century Mortgage Co., 377 S.W.3d 79, 84 (Tex. App.—Houston [1st Dist.] 2012, no pet.). The nonholder, however, must prove the transfer by which he acquired the note. Martin, 377 S.W.3d at 84. The foreclosure is conducted by the mortgage servicer or mort­gagee, and there is no requirement that the fore­closure be administered by an owner or holder of the note or that the mortgagee be an owner or holder of the note. See Chance, 395 S.W.3d at 314; Kyle v. Countrywide Home Loans, Inc., 232 S.W.3d 355, 361–62 (Tex. App.—Dallas 2007, pet. denied).

§ 6.3:4Beneficiary

The beneficiary is the person or entity for whom the conveyance of the property unto the trustee is granted in the deed of trust. Texas Property Code section 11.003 provides that the validity of a conveyance between the parties is not affected by the failure to include the address of the bene­ficiary in the instrument or an attached writing, but for any instrument executed after December 31, 1981, the instrument may not be accepted for recordation unless the beneficiary’s or grantee’s address is included. See Tex. Prop. Code § 11.003(a), (b).

§ 6.3:5Mortgage Electronic Registration Systems, Inc.

Mortgage Electronic Registration Systems, Inc. (MERS) is a wholly owned subsidiary of
MERSCORP Holdings, Inc. MERS is a book entry system, which acts as a nominee for the lender and the lender’s successors and assigns. A “book entry system” is defined as “a national book entry system for registering a beneficial interest in a security instrument that acts as a nominee for the grantee, beneficiary, owner, or holder of the security instrument and its succes­sors and assigns.” Tex. Prop. Code § 51.0001(1). Typically, a deed of trust naming MERS as beneficiary will identify MERS “act­ing solely as nominee for [lender] and [lender’s] successors and assigns” as the beneficiary, such that MERS is the mortgagee as that term is defined in Texas Property Code section 51.0001(4)(B). MERS serves as the mortgagee of record and is the beneficiary in the deed of trust. MERS does not perform any mortgage ser­vicing or payment collections, nor does MERS hold deeds of trust, mortgages, or promissory notes. In some instances, MERS is not named as the original beneficiary in the deed of trust, but following origination of the loan, the deed of trust is assigned to MERS.

MERS maintains an electronic registry system that tracks changes in servicing rights and the beneficial ownership interest in mortgages. Each registered mortgage is assigned a mortgage identification number, and by using the mort­gage identification number, the mortgagor can obtain information regarding the servicer and the beneficial ownership interest in the deed of trust. The deed of trust is not recorded with MERS; it is recorded in the real property records. When a loan is transferred, MERS tracks the transfer on its system, but MERS, as nominee for the lender and the lender’s succes­sors and assigns, remains the mortgagee of record. There is no recorded assignment of the deed of trust unless and until the loan is trans­ferred to a non-MERS member or before a fore­closure as discussed below.

MERS is used primarily for residential mort­gages, but MERS Commercial provides a simi­lar and separate registration system for commercial mortgage backed securities. The use of MERS eliminates breaks in the chain of title through MERS’s role as the common agent for its members. Additionally, data on the MERS system is accessible to borrowers and to county and regulatory officials, and use of MERS sim­plifies identifying the servicer for the loan. MERS also reduces multiple recording fees, which would otherwise be required for each transfer. MERS is not required to record each assignment of the deed of trust. Harris County v. MERSCORP, Inc., 791 F.3d 545, 553–56 (5th Cir. 2015). The recording system in Texas is permissive, not mandatory, and there is no requirement that the deed of trust beneficiary record assignments of either the deed of trust or the promissory note. MERSCORP, Inc., 791 F.3d at 555–56.

There has been substantial litigation regarding MERS involving various issues, including whether MERS can assign a deed of trust or conduct a foreclosure. Based in part on the inclusion of a book entry system within the defi­nition of “mortgagee” in the Texas Property Code, there has been substantially less contro­versy in Texas regarding MERS’s role. See Tex. Prop. Code § 51.0001(1), (4). However, there was a split among federal district courts in Texas regarding whether MERS has authority to transfer the deed of trust and whether an assign­ment of the deed of trust by MERS separate from the note has any force and effect. The split was based largely on language in McCarthy v. Bank of America, N.A., No. 4:11-CV-356-A, 2011 WL 6754064 (N.D. Tex. Dec. 22, 2011). In McCarthy, the court denied a rule 12(b)(6) motion to dismiss and held that MERS, as the mortgagee of record and as the nominee of the lender, had no authority to assign the deed of trust. The court’s decision was based in part on the language of the assignment from MERS to Bank of America, N.A., which purported a transfer of both the note and the security instru­ment to Bank of America, N.A. even though MERS had no interest in the note. McCarthy, 2011 WL 6754064, at *1–2. Other cases have held that where MERS is the nominee for the lender named in the deed of trust, MERS has the power of sale, which it can transfer to assigns. See Odum v. Mortgage Electronic Registration Systems, Inc., No. 4:12-cv-959, 2012 WL 2376071, at *3 (S.D. Tex. Jun. 22, 2012); DeFranceschi v. Wells Fargo Bank, N.A., 837 F. Supp. 2d 616, 623 (N.D. Tex. 2011); Richard­son v. CitiMortgage, Inc., No. 6:10cv119, 2010 WL 4818556, at *5 (E.D. Tex. Nov. 22, 2010). The Fifth Circuit Court of Appeals in Martins v. BAC Home Loans Servicing, L.P., 722 F.3d 249, 255 (5th Cir. 2013), rejected the “split-the-note” theory and held that the party seeking to fore­close need not possess the note itself, and where the deed of trust named MERS as the benefi­ciary for the originating lender and where the lien was assigned by MERS to BAC, BAC was entitled to foreclose. See also MERSCORP, Inc., 791 F.3d at 555–56; Casterline v. OneWest Bank, F.S.B., 537 F. App’x 314, 316–17 (5th Cir. 2013). Additionally, the court in Martin ruled that because MERS qualifies as a mortgagee under Texas Property Code section 51.0001(4), the Property Code contemplates and permits MERS to either grant a mortgage servicer the authority to foreclose or to administer the fore­closure itself. Martins, 722 F.3d at 255.

Although pursuant to the Texas Property Code MERS, as a book entry system, is authorized to conduct a foreclosure, MERS no longer con­ducts foreclosures in MERS’s name. MERS Rules of Membership require MERS to execute an assignment of the deed of trust from MERS to the note owner or servicer before initiating a foreclosure, and as a result, foreclosures are no longer conducted in MERS’s name. See MERS System Rules of Membership, Rule 8, § 1 (eff. July 3, 2017).

§ 6.3:6Trustee

Texas Property Code section 51.0076, codified in 2015, provides that the mandatory notice of sale required by Property Code section 51.002(b) may also serve as the means to appoint a substitute trustee. Under this provi­sion, if the notice of sale is signed by an attorney or agent of the mortgagee or mortgage servicer and contains the mandatory disclosure found in section 51.0076(3), the notice may serve as proof of the appointment of a substitute trustee as of the date of the notice. See Tex. Prop. Code § 51.0076.

A trustee is defined in the Texas Property Code as “a person or persons authorized to exercise the power of sale under the terms of a security instrument in accordance with Section 51.0074.” Tex. Prop. Code § 51.0001(8). A trustee may be any person or entity with the legal capacity to serve as trustee. The Texas Finance Code expressly authorizes a Texas bank to serve as a trustee. See Tex. Fin. Code § 32.001(b)(3). The mortgagee may act as trustee. Valley v. Patterson, 614 S.W.2d 867, 872 (Tex. App.—Corpus Christi–Edinburg, 1981, no writ). There is no conflict of interest for the mortgagee or its officers or attorneys to act as the trustee. Tarrant Savings Ass’n v. Lucky Homes, Inc., 390 S.W.2d 473, 475–76 (Tex. 1965); Donaldson v. Mansel, 615 S.W.2d 799, 802 (Tex. App.—Houston [1st Dist.] 1980, writ ref’d n.r.e.); Heiner v. Homeland Realty Co., 100 S.W.2d 793, 796 (Tex. App.—Waco 1936, no writ).

Texas cases have held that the trustee becomes a special agent for both the mortgagor and benefi­ciary and must act with upmost fairness and impartiality in conducting the foreclosure. Ham­monds v. Holmes, 559 S.W.2d 345, 347 (Tex. 1977); First Federal Savings & Loan Ass’n v. Sharp, 359 S.W.2d 902, 904 (Tex. 1962). A trustee, however, “does not owe a fiduciary duty to the mortgagor.” Zanfordino v. Jeffus, 117 S.W.3d 495, 499 (Tex. App.—Texarkana 2003, no pet.); Stephenson v. LeBoeuf, 16 S.W.3d 829, 837 (Tex. App.—Houston [14th Dist.] 2000, pet. denied). The duties of a trustee are con­tained in Texas Property Code section 51.0074, which provides that one or more persons may be authorized to exercise the power of sale under the security instrument, and further provides that the trustee may not be assigned a duty under the security instrument other than to exercise the power of sale in accordance with the terms of the security instrument. Tex. Prop. Code § 51.0074. Section 51.0074 also provides that the trustee may not “be held to the obligations of a fiduciary of the mortgagor or the mortgagee.” Tex. Prop. Code § 51.0074(b)(2). Section 51.0074 applies only to a trustee under a secu­rity instrument executed on or after June 15, 2007. The duties and obligations of a trustee under deeds of trust executed before June 15, 2007, are governed by the law in effect immedi­ately before that date and that law is continued in effect for that purpose. See Acts 2007, 80th Leg., R.S. ch. 903, § 5(c) (H.B. 2738), eff. June 15, 2007. Texas Property Code section 51.007, which became effective on September 1, 1999, provides that a trustee shall not be liable for any good faith error resulting from reliance on any information in law or fact provided by the mort­gagor or mortgagee or their respective attorney, agent, or representative or other third party. See Tex. Prop. Code § 51.007(f).

A substitute trustee is defined as “a person appointed by the current mortgagee or mortgage servicer under the terms of the security instru­ment to exercise the power of sale” as substitute for a previously designated trustee. See Tex. Prop. Code § 51.0001(7). A substitute trustee may be appointed by the mortgagee, the mort­gage servicer, or an attorney authorized by the mortgage servicer to appoint a substitute trustee. Tex. Prop. Code § 51.0075(c), (d). Before the September 1, 2005, effective date of subsection 51.0075(c) and (d), the power to appoint a sub­stitute trustee in place of the trustee designated in the deed of trust was required to be expressly stated in the deed of trust, and the provisions in the deed of trust for appointing the trustee were strictly construed. See Johnson v. Koening, 353 S.W.2d 478, 484 (Tex. App.—Austin 1962, writ ref’d n.r.e.).

§ 6.3:7Mortgage Servicer

Unless the mortgagee is also the mortgage ser­vicer, the mortgage servicer is not identified or named in the deed of trust. See Tex. Prop. Code § 51.0001(3). A mortgage servicer “is the last person to whom a mortgagor has been instructed by the current mortgagee to send payments for the debt secured by a security instrument, and a mortgagee may be the mortgage servicer.” Tex. Prop. Code § 51.0001(3). Texas Property Code section 51.0025 provides that a mortgage ser­vicer may administer the foreclosure of the property pursuant to section 51.002 on behalf of the mortgagee if the mortgage servicer and mortgagee have entered into an agreement granting the current mortgage servicer authority to service the mortgage and the notices required by section 51.002(b) disclose that the mortgage servicer is representing the mortgagee under a servicing agreement with the mortgagee, the name of the mortgagee, and the address of the mortgagee or the address of the mortgage ser­vicer if there is an agreement granting the mort­gage servicer the authority to service the mortgage. Tex. Prop. Code § 51.0025.

§ 6.3:8Relationship between Mortgagor and Mortgagee

Although sometimes referred to as a relationship of trust, the relationship between a mortgagor and mortgagee is not a fiduciary relationship. Lovell v. Western National Life Insurance Co., 754 S.W.2d 298, 303 (Tex. App.—Amarillo 1988, writ denied). In addition, the relationship between a lender and borrower or mortgagor and mortgagee does not involve a duty of good faith and fair dealing. English v. Fischer, 660 S.W.2d 521, 522 (Tex. 1983); Powell v. Stacy, 117 S.W.3d 70, 74 (Tex. App.—Fort Worth 2003, no pet.).

§ 6.4Effect of Recording Deed of Trust

A properly recorded deed of trust is notice to all persons of the existence of the deed of trust. Tex. Prop. Code § 13.002(1). When a deed of trust is recorded in the county where the land is located, all the world is charged with notice of the deed of trust. First Savings & Loan Ass’n v. Avila, 538 S.W.2d 846, 849 (Tex. App.—El Paso 1976, writ ref’d n.r.e.). A properly exe­cuted, acknowledged, and recorded instrument “is notice to any and all subsequent purchasers and creditors of its existence and of the rights which it secures, and any person dealing with said property contrary to said instrument does so at his peril.” Potka v. Potka, 205 S.W.2d 51, 53 (Tex. App.—Waco 1947, writ ref’d n.r.e.); see also Smith v. Morris & Co., 694 S.W.2d 37, 39 (Tex. App.—Corpus Christi–Edinburg 1985, writ ref’d n.r.e.). A deed of trust should be recorded immediately following the closing of the loan or as soon as it is discovered that the deed of trust is unrecorded.

§ 6.4:1Enforceability of Unrecorded Deed of Trust

A deed of trust or mortgage that has not been acknowledged, sworn to, and filed for record as required by law is void as to a creditor or to a subsequent purchaser for valuable consider­ation who does not have notice of the deed of trust or mortgage. See Tex. Prop. Code § 13.001(a). However, the unrecorded deed of trust or mortgage is binding on the parties to the instrument, their heirs, and any subsequent pur­chaser who does not pay valuable consideration or who has actual or constructive notice of the instrument. Tex. Prop. Code § 13.001(b); Den­son v. First Bank & Trust of Cleveland, 728 S.W.2d 876, 877 (Tex. App.—Beaumont 1987, no writ); Fitzgerald v. LeGrande, 187 S.W.2d 155, 158–59 (Tex. App.—El Paso 1945, no writ). A party has actual notice when the party has knowledge of the unrecorded claim. Hamp­shire v. Greeves, 130 S.W. 665, 668 (Tex. App.—Galveston 1910), aff’d, 143 S.W. 147 (Tex. 1912); Masterson v. Harris, 83 S.W. 428, 429 (Tex. App.—Galveston 1904, no writ). Although constructive notice typically arises when an instrument is of record, notice can also be implied if the parties are aware of certain facts that would cause a reasonably prudent per­son to inquire further into those facts. Smith v. Morris & Co., 694 S.W.2d 37, 39 (Tex. App.—Corpus Christi–Edinburg 1985, writ ref’d n.r.e.); Wessels v. Rio Bravo Oil Co., 250 S.W.2d 668, 670 (Tex. App.—Eastland 1952, writ denied); O’Ferral v. Coolidge, 225 S.W.2d 582, 584 (Tex. App.—Texarkana 1950), aff’d, 228 S.W.2d 146 (Tex. 1950). An implied duty arises if a third party is in possession of the property, and when the duty arises, the purchaser is charged with notice of all of the occupant’s claims that the purchaser might reasonably have discovered upon proper inquiry. Madison v. Gordon, 39 S.W.3d 604, 606 (Tex. 2001).

§ 6.4:2Filing of Previously Unrecorded Deed of Trust

The unrecorded deed of trust should be recorded in the county where the property is located as soon as possible after discovering that the deed of trust is not of record. Doing so will cut off the possibility of subsequent creditors or purchasers acquiring an interest in the property without notice of the deed of trust. Tex. Prop. Code § 13.002. As to instruments erroneously recorded in a county other than the county where the property is located, Texas Property Code section 13.003 provides that the original or a certified copy of a deed of trust or mortgage relating to land that has been recorded in a county other than the county where the land is located is valid as to a creditor or subsequent purchaser acquiring his interest after the mort­gage or deed of trust is recorded in the county in which the land is located. See Tex. Prop. Code § 13.003.

§ 6.5Contract Rights Restricted by Statute

Texas Property Code section 51.002 establishes the minimum requirements for a nonjudicial foreclosure of real property under the power of sale conferred by a deed of trust or other con­tract lien. See Tex. Prop. Code § 51.002. In the event that a provision in the deed of trust con­flicts with the provisions in section 51.002, the provisions in section 51.002 control. See Wylie v. Hays, 263 S.W. 563 (Tex. Comm’n App. 1924, judgm’t adopted). The deed of trust can estab­lish additional requirements for foreclosure, and if such requirements for foreclosure are estab­lished, those requirements must also be satisfied for there to be an effective foreclosure sale. Har­wath v. Hudson, 654 S.W.2d 851, 854 (Tex. App.—Dallas 1983, writ ref’d n.r.e.); see also Faine v. Wilson, 192 S.W.2d 456 (Tex. App.—Galveston 1946, no writ).

§ 6.6Identifying Secured Collateral

Before writing the first demand letter or notice of intent to accelerate, the types of collateral securing the obligation should be identified. Any type of property that may be sold or con­veyed or that may pass by descent may be mort­gaged to secure an obligation. See Bellah v. First National Bank of Hereford, 478 S.W.2d 636, 638 (Tex. App.—Amarillo 1972, writ ref’d n.r.e.). Many deeds of trust include only the real property, but other deeds of trust use separate definitions to identify the different types of col­lateral that comprise the mortgaged property.

§ 6.6:1Real Property

Unless the description of the mortgagor’s estate in the land is expressly limited by the language of the deed of trust, the deed of trust will cover the mortgagor’s entire estate in and to the mort­gaged real property. Reeves v. Towery, 621 S.W.2d 209, 212 (Tex. App.—Corpus Christi–Edinburg 1981, writ ref’d n.r.e.); Jasper State Bank v. Goodrich, 107 S.W.2d 600, 602 (Tex. App.—Beaumont 1937, writ dism’d). The real property is often identified by a metes-and-bounds description or, where there is an approved plat, by lot number, block number, and plat name, and the description is often either stated within the deed of trust or attached as an exhibit. Some deeds of trust refer to the descrip­tion to identify the mortgaged real property but include within the definition of “real property” or “property” all rights, title, interest, and privi­leges in and to such property, all streets, road­ways, alleys, easements, rights of way, licenses, rights of ingress and egress, parking rights, pub­lic places, any strips or gores of real property between such real property and abutting or adja­cent properties, and all reversions and remain­ders in or to such property. The description of the mortgaged property may have changed sub­sequent to the origination of the loan through platting, replatting, partial release of liens, or condominium declaration. Failure to verify the description may result in a clouding of the title, inadequately advertising the sale, or foreclosing on more or less property than the actual mort­gaged property.

In Stribling v. Millican DPC Partners, LP, 458 S.W.3d 17, 22 (Tex. 2015), the Texas Supreme Court held that when the metes-and-bounds description in a deed conflicts with another, more general description in the deed, the metes-and-bounds description controls. It would seem safe to assume that the same rule of construction will apply to the deed of trust.

§ 6.6:2Improvements

An improvement to real property generally includes anything that permanently enhances the value of the real property. See Kraisch v. Allied Signal, Inc., 837 S.W.2d 679, 680 (Tex. App.—Corpus Christi–Edinburg 1992, no writ). The term improvement covers a broader range of items than does the term fixture. Bunch v. Wood­lands Land Development Co., No. 09-16-00136-CV, 2017 WL 3081095, at *5 (Tex. App.—Beaumont July 20, 2017, pet. denied); Dubin v. Carrier Corp., 731 S.W.2d 651, 653 (Tex. App.—Houston [1st Dist.] 1987, no writ). Items which have been held under Texas law to be improvements include buildings (Producers Lumber & Supply Co. v. Olney Building Co., 333 S.W.2d 619, 624 (Tex. App.—San Antonio 1960, writ ref’d n.r.e.)); a house (Dennis v. Den­nis, 256 S.W.2d 964, 966 (Tex. App.—Amarillo 1952, no writ)); fences (Jarrell v. Boedeker, 146 S.W.2d 293, 295 (Tex. App.—Fort Worth 1940, no writ)); oil wells (Jenkins v. Pure Oil Co., 53 S.W.2d 497, 503 (Tex. App.—Dallas 1932, no writ)); and storage tanks (Big West Oil Co. v. Wilborn Bros. Co., 836 S.W.2d 800, 803 (Tex. App.—Amarillo 1992, no writ)). Deeds of trust often expressly include all improvements and list all buildings, structures, additions, alter­ations, betterments, and appurtenances in, on, situated, placed, or constructed on the real prop­erty or any portion thereof. A description of the land without reference to improvements is prob­ably sufficient to convey the improvements based on the general rules that deeds are con­strued to convey to the grantee the greatest estate possible and that a deed that does not except or reserve interests owned by the grantor conveys the grantor’s entire interest, but the bet­ter practice is to include the term improvements and to identify types of improvements included within the grant. See Piranha Partners v. Neuhoff, 596 S.W.3d 740, 746 (Tex. 2020), reh’g denied (Apr. 17, 2020); Reeves v. Towery, 621 S.W.2d 209, 212 (Tex. App.—Corpus Christi–Edinburg 1981, writ ref’d n.r.e.) (citing Waters v. Ellis, 312 S.W.2d 231, 234 (Tex. 1958)).

§ 6.6:3Fixtures

Fixtures are items of property that are personal in nature but that have been annexed to the realty so as to become part of the real estate. Gawerc v. Montgomery County, 47 S.W.3d 840, 842 (Tex. App.—Beaumont 2001, pet. denied); Houston Building Service, Inc. v. American General Fire & Casualty Co., 799 S.W.2d 308, 311 (Tex. App.—Houston [14th Dist.] 1990, writ denied). Generally the term fixtures includes all chattels or structures attached to the real property that cannot be removed without materially damaging the real property. Cam­mack the Cook, L.L.C. v. Eastburn, 296 S.W.3d 884, 892 (Tex. App.—Texarkana 2009, pet. denied); W.H.V., Inc. v. Associates Housing Finance, LLC, 43 S.W.3d 83, 88 (Tex. App.—Dallas 2000, pet. denied). A three-part test has been developed to determine whether an item of personal property has become a fixture: (1) Did the person who annexed the chattel to the realty intend it to become a fixture? (2) Was the mode and sufficiency of annexation adequate to attach the chattel to the realty? and (3) Has the chattel been adapted to the use of the realty? State v. Clear Channel Outdoor, Inc., 463 S.W.3d 488, 493 (Tex. 2015); Logan v. Mullis, 686 S.W.2d 605, 607 (Tex. 1985); Harris County Flood Control District v. Roberts, 252 S.W.3d 667, 670 (Tex. App.—Houston [14th Dist.] 2008, no pet.). Absent evidence to the contrary, an owner who affixes improvements onto land is assumed to have intended for such improvements to become fixtures. McDaniel v. Pettigrew, 536 S.W.2d 611, 615 (Tex. App.—Dallas 1976, writ ref’d n.r.e.); Clark v. Clark, 107 S.W.2d 421, 424 (Tex. App.—Texarkana 1963, no writ). If there was an intent that the improve­ment be temporary in nature, however, such an improvement will not be deemed a fixture. O’Neill v. Quilter, 234 S.W. 528, 529 (Tex. 1921). The term fixtures is defined in Texas Business and Commerce Code section 9.102(a)(41) as “goods that have become so related to particular real property that an interest in them arises under the real property law of the state in which the real property is situated.” Tex. Bus. & Com. Code § 9.102(a)(41). A creditor with a security interest in fixtures can perfect its lien by either filing a financing statement with the Texas secretary of state or recording the financing statement as a fixture filing in the real property records in the county in which the real property is located. See Tex. Bus. & Com. Code § 9.501. In most instances, the recording of a deed of trust will be sufficient to constitute a fix­ture filing by the beneficiary provided that the deed of trust expressly refers to fixtures or describes the fixtures covered, provides the name of the debtor, provides the name of the secured party or representative of the secured party, indicates that it is to be filed for record in the real property records, and provides a description of the real property to which the fix­tures are related. See Tex. Bus. & Com. Code § 9.502. When a deed of trust covers both realty and personalty, the beneficiary has the option of pursuing the foreclosure both under the real estate foreclosure procedures or pursuing only the personal property under the provisions of the Texas Uniform Commercial Code. See Tex. Bus. & Com. Code § 9.604(a); Van Brunt v. BancTexas Quorum, N.A., 804 S.W.2d 117, 128 (Tex. App.—Dallas 1989, no writ).

§ 6.6:4Appurtenances

An appurtenance means something that belongs to, is attached to, or is incident to a tract of real property. Black’s Law Dictionary, (11th ed. 2019). “Appurtenance” includes improvements and easements and all rights and interests for the full use and enjoyment of the property. See Henry v. Smith, 637 S.W.3d 226, 234 (Tex. App.—Fort Worth 2021, pet. denied), reh’g denied (Dec. 16, 2021); Aery v. Hoskins, 493 S.W.3d 684, 699 (Tex. App.—San Antonio 2016, pet. denied); Angelo v. Biscant, 441 S.W.2d 524, 526 (Tex. 1969); Pine v. Gibraltar Savings Ass’n, 519 S.W.2d 238, 241 (Tex. App.—Houston [14th Dist.] 1974, writ ref’d n.r.e.). Under common law, the conveyance of a tract of real property includes appurtenances unless the deed provides otherwise. Pollock v. Lowry, 345 S.W.2d 587, 590 (Tex. App.—San Antonio 1961, writ ref’d n.r.e.).

§ 6.6:5Water Rights

Water rights are included as part of the mort­gaged property if the deed of trust does not expressly reserve or except water rights. Gra­ham v. Kuzmich, 876 S.W.2d 446, 449 (Tex. App.—Corpus Christi–Edinburg 1994, no writ). The obligation of a municipal utility district to lease and later purchase water, sanitary sewer, and drainage facilities installed by the mort­gagor has been held to be an appurtenance pass­ing at a foreclosure sale. See Olmos v. Pecan Grove Municipal Utility District, 857 S.W.2d 734, 738–39 (Tex. App.—Houston [14th Dist.] 1993, no writ).

§ 6.6:6Manufactured Homes

A manufactured home is personal property except as provided by Texas Property Code sec­tion 2.001(b). Tex. Prop. Code § 2.001(a). Texas Property Code section 2.001(b) provides that a manufactured home is real property if (1) the statement of ownership for the home issued under Texas Occupations Code section 1201.207 reflects that the owner has elected to treat the home as real property and (2) a certified copy of the statement of ownership has been filed in the real property records in the county in which the manufactured home is located. Tex. Prop. Code § 2.001(b). Texas Property Code chapter 63 addresses manufactured home liens arising out of the purchase of a manufactured home and includes sections regarding the con­version of the lien from a personal property lien to a real property lien, the refinancing of the lien, and the conversion of the lien from a per­sonal property lien to a real property lien for the debt for new improvements to the property. See Tex. Prop. Code ch. 63. When a manufactured home converts to real property as provided by Texas Property Code section 2.001(b), the lien on the property is converted to a purchase money lien on the real property by operation of law and exists independent of any existing lien on the real property to which the home is perma­nently attached. Tex. Prop. Code § 63.003. A person who provides funds to refinance the lien secured by a manufactured home is subrogated to the lien position of the previous lienholder. Tex. Prop. Code § 63.004(a). A lien that con­verts to a purchase money lien on real property pursuant to Texas Property Code section 63.003 or a lien for the debt for new improvements thereon under section 63.005 may be refinanced with another lien on the real property to which the manufactured home is permanently attached as provided by section 2.001. Tex. Prop. Code § 63.004(c). See generally chapter 29 in this manual concerning the enforcement of liens against manufactured housing units.

A manufactured home becomes a new improve­ment to the homestead of a family or single adult person upon the filing of a statement of ownership as provided in Occupations Code chapter 1201. Thereafter, if the debt for the manufactured home was contracted for in writ­ing, that debt is considered to be for working materials used in constructing new improve­ments thereon and constitutes a valid lien on the homestead when the statement of ownership is filed in the real property records in the county where the land is located. Tex. Prop. Code § 63.005(a). When the manufactured home con­verts to real property as provided for in Texas Property Code section 2.001, the lien on the property exists independently of any existing lien on the real property to which the home is permanently attached. Tex. Prop. Code § 63.005(b). If the manufactured home is per­sonal property, chapter 9 of the Texas Business and Commerce Code governs foreclosure of the security interest, and if the manufactured home is part of the real property, Texas Property Code section 51.002 applies.

The titling of ownership and recordation of liens on manufactured homes is governed by Texas Occupations Code chapter 1201 and the regula­tions and procedures of the Texas Department of Housing Community Affairs (TDHCA). See Tex. Occ. Code §§ 1201.001–.611. The Manu­factured Housing Division (MHD) of the TDHCA maintains and issues records for all manufactured homes, indicating whom the state of Texas recognizes as the owner, where the home is recognized as being located and installed, whether the owner has elected to treat it as real property, and any liens recorded against the home that is being treated as per­sonal property. Tex. Occ. Code §§ 1201.201–.222.

The official record detailing ownership of the manufactured home is called a statement of ownership. See Tex. Occ. Code §§ 1201.003(30), 1201.205. If the owner desires to elect for the home to be real property, a certi­fied copy of the statement of ownership reflect­ing the election and description of the land on which the home is located must be issued by the TDHCA and filed in the real property records of the county in which the land is located. Tex. Prop. Code § 2.001(b). Texas Finance Code chapter 347 provides specific provisions appli­cable to debt collection and foreclosures for credit sales and consumer loans for the purchase of manufactured homes. See chapter 29 for fur­ther discussion of documenting title ownership of manufactured homes, the conversion of man­ufactured homes from personal property to realty, and the procedures for foreclosing on manufactured homes.

The Texas Finance Code provides that regula­tions of the Office of the Comptroller of the Currency (“OCC”) relating to the disclosures required to repossess, foreclose, or accelerate a loan are applicable to any actions to repossess, foreclose, or accelerate payment of the entire outstanding balance of an obligation secured by a manufactured home, except in the case of abandonment, voluntary surrender, or extreme circumstances. See Tex. Fin. Code § 347.356. The OCC regulations are found at 12 C.F.R. § 190.4(h). These regulations, which are other­wise applicable to only “federally related loans,” are made applicable by the Texas Finance Code to all persons who have extended credit that is secured by a manufactured home.

The OCC regulations require, except in the case of abandonment or other extreme circumstances, that no action be taken to repossess, foreclose, or accelerate a manufactured housing loan until thirty days after the creditor sends a notice of default and a right to cure to the debtor in the form promulgated in subsection (h)(2) of 12 C.F.R. § 190.4. The notice must be sent by regis­tered or certified mail, with return receipt requested. 12 C.F.R. § 190.4(h)(1). In the case of a default on periodic payments, the sum stated as being required to cure may include only the payments in default, plus any applica­ble late or deferral charges. 12 C.F.R. § 190.4(h)(1). Section 190.4(h)(2) provides the form of the notice. The notice must include a description of the default, the action the debtor must take to cure the default, a description of the creditor’s intended actions if the debtor fails to cure the default, and the debtor’s right to redeem under state law, as applicable. See 12 C.F.R. § 190.4(h)(2). Although the OCC regulations except from the federal notice situations involv­ing abandonment, an abandonment does not eliminate the notices required by Texas Busi­ness and Commerce Code section 9.611. See All Valley Acceptance Co. v. Durfey, 800 S.W.2d 672, 675 (Tex. App.—Austin 1990, writ denied) (holding that abandonment or voluntary repos­session does not constitute a waiver by debtor of debtor’s right to notice of repossession and intent to sale as required by Texas Business and Commerce Code). If the debtor cures the default within thirty days of the postmarked date of the initial notice required by 12 C.F.R. § 190.4(h)(1) and the debtor subsequently defaults a second time, the creditor is again required to give the notice. 12 C.F.R. § 190.4(h)(1). However, a debtor is not entitled to be notified more than twice in any one-year period. 12 C.F.R. § 190.4(h)(1).

Texas Finance Code sections 347.351 through 347.355 provide the requirements for the accel­eration of maturity; the charging and collection of out-of-pocket expenses incurred in connec­tion with the repossession or foreclosure, stor­age, and resale of the manufactured home; the application of insurance and tax escrow accounts; a postacceleration interest rate; and the prior right of the first recorded perfected security interest holder to repossess the manu­factured home. See Tex. Fin. Code §§ 347.351–.355. Texas Finance Code section 347.307 pro­vides that the credit document may provide for the payment of reasonable attorney’s fees, court costs and disbursements, and the charge and col­lection of actual and reasonable out-of-pocket expenses incurred in connection with the repos­session of the manufactured home that secures the payment of the credit transaction or foreclo­sure of the lien on the manufactured home, including the storing, reconditioning, and resell­ing of the manufactured home, subject to the standards of good faith and commercial reason­ableness as set by the Business and Commerce Code. Tex. Fin. Code § 347.307.

If the manufactured home has been affixed to the real property, the creditor after the thirty-day right to cure notice may repossess the manufac­tured home from the real property in accordance with the applicable provisions of the Texas Business and Commerce Code as if the manu­factured home were personal property. Tex. Fin. Code § 347.355(b); see also Moore v. General Electric Capital Corp., No. 01-96-01252-CU, 1999 WL 82621 (Tex. App.—Houston [1st Dist.] Feb. 4, 1999, no pet.) (not designated for publication). After repossession, the creditor is still subject to all the creditor’s obligations under chapter 9 of the Texas Business and Com­merce Code.

Following foreclosure, title and the name of the foreclosure purchaser is obtained by filing with the TDHCA an application of a statement of ownership, Form B (Release of Lien or Foreclo­sure of Lien) (see Block 3, “For Foreclosure of Lien”) and Form T (Notice of Installation), if the manufactured home has been moved and installed at a new location. See Tex. Occ. Code § 1201.212(b). The forms may be downloaded from the TDHCA website at www.tdhca
.state.tx.us/mh/ownership-location.htm.

See the website of the Texas Department of Housing Community Affairs—Manufactured Housing Division (www.tdhca.state.tx.us/mh/index.htm) or call (800) 500-7074 for current forms and information. Also, for further discus­sion of this topic, see 51 Tex. Jur. 3d, Manufac­tured Housing and Mobile Homes §§ 135–136 (2004).

§ 6.6:7Crops, Crop Rent, and Farm Tenants

The purchaser at foreclosure will take title to crops and crop rent only if there has not been an actual or constructive severance of the crops and the rent from the land. The severance may be created by harvest, sale, assignment, or mort­gage. A lease of the land creates a severance of the crops under the proper circumstances. The severance may be subsequent in time to the mortgage and without actual or constructive notice to the mortgagee. Furthermore, a tenant of the mortgagor may also have rights in the crops that will survive the foreclosure, notwith­standing the fact that the tenant’s lease is junior to the deed of trust.

Crops:      Texas case law is well settled that crops produced by annual cultivation, whether growing or matured, are distinct in nature from the land on which they are cultivated and that title to the crops may reside in a person other than the owner of the land. However, unless the deed of trust specifically covers crops, the crops will pass with the land at a foreclosure sale only if they have not been actually or constructively severed from the land before the foreclosure sale. See Greenland v. Pryor, 360 S.W.2d 423, 425 (Tex. App.—San Antonio 1962, no writ); Gulf Stream Realty Co. v. Monte Alto Citrus Ass’n, 253 S.W.2d 933, 936 (Tex. App.—San Antonio 1952, writ ref’d); Dodson v. Beaty, 144 S.W.2d 609, 611 (Tex. App.—Dallas 1940, writ dism’d, judgm’t cor.). The severance may be by harvesting or constructively by assignment or mortgage. Willis v. Moore, 59 Tex. 628, 638–39 (1883); Gulfstream Realty Co., 253 S.W.2d at 936; Dodson, 144 S.W.2d at 611. There is some authority that even crops not yet planted may be severed by sale or mortgage. See Sanger Bros. v. Hunsucker, 212 S.W. 514, 516 (Tex. App.—Fort Worth 1919, no writ). There is also author­ity that an executory contract of sale, which pro­vides that title to crops shall not pass until they are “picked and prepared for delivery” is not sufficient to create a severance with the crops from the land, and the crops shall pass to the purchaser at foreclosure. See Gulfstream Realty Co., 253 S.W.2d at 936.

Crop Rent:      The same reasoning is applied to crop rent due to the mortgagor under a lease. The rent passes to the purchaser at foreclosure only if there has not been a previous assignment of the rent. Dodson, 144 S.W.2d at 611; Stan­dridge v. Vines, 81 S.W.2d 289, 290 (Tex. App.—Eastland 1935, no writ); Sanger Bros., 212 S.W. at 515. In Standridge, the court stated the following:

It is immaterial that no constructive notice may be given of the sale, mort­gage, assignment, etc. Where not interdicted by the statute of frauds, the evidence thereof is not required to be in writing. It necessarily follows that the purchaser at the foreclosure sale is charged with knowledge of the law that he gets no title to growing crops and rents if there has been a severance. In other words, a pur­chaser is under the obligation to ascertain if there has been a sever­ance and only takes title to the crops and rents if there has been none.

Standridge, 81 S.W.2d at 290.

Crop allotments under the Agricultural Adjust­ment Act, 7 U.S.C. §§ 1281–1393, which are assigned as an annual allotment and under which farmers are allowed to grow an annual quota of crops, runs with the land, and unless the allotment is reserved when the lien against the property is granted, the allotment is subject to the lien under the deed of trust and passes to the purchaser who acquires the property at the fore­closure of the lien. See Lindsey v. FDIC, 960 F.2d 567, 571 (5th Cir. 1992).

Rights of Farm Tenants:      The distinction between crops and the land is the basis for the common law doctrine of emblements, an equita­ble doctrine protecting leases of farm land. The doctrine of emblements is a common law right of the tenant whose lease of uncertain duration has been terminated without his fault and with­out previous knowledge on his part, to enter on the lease premises to cultivate, harvest, and remove the crops planted by him before termi­nation of the lease. Dinwiddie v. Jordan, 228 S.W. 126, 127 (Tex. Comm’n App. 1921, jugm’t adopted); see also Miller v. Gray, 149 S.W.2d 582, 583 (Tex. 1941). In Dinwiddie, the court held that the three elements of emblement—(1) existence of a tenancy of uncertain duration, (2) the termination of the tenancy by the act of the lessor, and (3) the planting of the crop by the tenant during his period of legal occupancy without notice—were satisfied by (1) a five-year lease subject to earlier termination under certain specified conditions, (2) a default by the lessor leading to the foreclosure of the lessor’s mort­gage, and (3) the tenant’s planting of the crops before the tenant received notice of the pending foreclosure sale. Dinwiddie, 228 S.W. at 127. The court in Dinwiddie stated that the tenant not only retained title to the crop but also had a right of entry onto the land to cultivate the crop until maturity and harvest. Dinwiddie, 228 S.W. at 127; see also Brown v. Leath,  42 S.W. 655 (Tex. App.—Austin 1897, writ ref’d). The court in Dinwiddie further quoted with approval a decision of the Supreme Court of Nebraska stat­ing that while the tenant’s right was a right of ingress and egress and not of possession of the land, the tenant had a cause of action for any interference by the owner of the land with his right of entry. Dinwiddie, 228 S.W. at 128. The doctrine of emblements does not apply when a lease of certain duration expires, and thus the lessee is not entitled to crops planted so late in the lease term that they do not and cannot mature before expiration of the lease. Miller, 149 S.W.2d at 583; Beken v. Elstner, 503 S.W.2d 408, 410 (Tex. App.—Houston [14th Dist.] 1973, no writ). In Beken, however, the court drew an exception to this rule by stating that a lessee is entitled to the crop if the evi­dence shows the lessor knew the crop could not mature during the term of the lease and still con­sented to or acquiesced in the planning and cul­tivating of the crop. Beken, 503 S.W.2d at 410.

§ 6.6:8USDA Insured Farm and Ranch Property

Federal Loan Programs:      Various agencies of the United States Department of Agriculture (USDA) make, guarantee, or service farm and ranch loans. In Texas, for example, the Farm Credit System accounts for approximately 30 percent of all farm and ranch lending in Texas. A farm or ranch loan that is originated, guaran­teed, or serviced under these federal programs cannot simply be foreclosed on default by the borrower. Instead, the applicable federal law provides the borrower with significantly greater rights than under Texas foreclosure law, and the borrower’s rights under federal law must be exhausted before the defaulted loan can be referred to the Office of the General Counsel of the USDA for foreclosure.

Loans originated or serviced under the USDA’s Farm Service Agency (FSA) are governed by the regulations at 7 C.F.R. pts. 765 and 766 and FSA Handbook 5-FLP, Direct Loan Servicing—Special and Inventory Property Management. Because numerous other agencies under the USDA make, guarantee, or service loans under a variety of federal programs, however, it can be a very difficult process to determine the exact pro­visions of the federal statutes and regulations applicable to the loan in question.

Borrower’s Rights:      Certain statutes or regu­lations are generally applicable to these federal loan programs. The “borrower’s rights” provi­sions set forth at 12 U.S.C. §§ 2199–2202e and particularly 7 C.F.R. pt. 766, subpt. C, apps. A–C, are applicable to agricultural loans serviced under the various federal programs. In addition, the debt settlement policies and procedures found at 7 C.F.R. §§ 792.1–.22 generally apply to all collection efforts involving agricultural loans.

In situations involving the collection of a dis­tressed loan made under the Farm Credit Sys­tem, the regulations at 7 C.F.R. pt. 766 require that, before any foreclosure action may be initi­ated, the borrower must be given written notice of all the options available to the borrower to restructure or modify the loan.

Additional information is available from the websites of the Farm Credit Administration at www.fca.gov/ and the Farm Service Agency at www.fsa.usda.gov/. See also chapter 32 in this manual for a fuller discussion of USDA farm and ranch loan foreclosures.

§ 6.6:9Personal Property

The deed of trust may extend to personalty, including removable items, and it is not uncom­mon for a deed of trust to include furniture, fur­nishings, equipment, machinery, goods, general intangibles, insurance proceeds, accounts, con­tract and subcontract rights, trademarks, trade names, rights, architectural works, and other chattel paper. The Texas Real Estate Forms Manual in clause 8-9-10 contains suggested lan­guage for inclusion in the deed of trust for the creation of the lien on such mixed collateral. The first part of clause 8-9-10 provides—

In addition to creating a deed-of-trust lien on all the real and other property described above, Grantor also grants to Lender a security interest in all of the above-described personal prop­erty pursuant to and to the extent per­mitted by the Texas Uniform Commercial Code.

1 State Bar of Texas, Texas Real Estate Forms Manual, ch. 8, form 8-9, clause 8-9-10 (2022 ed.). If personal property is included, the owner may proceed against the personal property under the personal property foreclosure provisions of article 9 as if there is no real property involved, or the lender may elect to foreclose on both the real property and personal property pursuant to Texas Property Code section 51.002. See Tex. Bus. & Com. Code § 9.604(a); Tex. Prop. Code § 51.002. Comment 2 to Texas Business and Commerce Code section 9.604 provides—

In the interest of simplicity, speed and economy, subsection (a), like former Section 9-501(4), permits (but does not require) the secured party to proceed as to both real and personal property in accordance with its rights and remedies with respect to the real property. Subsection (a) also makes clear that a secured party who exer­cises rights under Part 6 with respect to personal property does not preju­dice any rights under real property law.

Tex. Bus. & Com. Code § 9.604 cmt. 2.

The election between real property and personal property foreclosure procedures is set out in the second part of clause 8-9-10 in the form of deed of trust in the Texas Real Estate Forms Manual, which provides: “In the event of a foreclosure sale under this deed of trust, Grantor agrees that all the Property may be sold as a whole at Lender’s option and that the Property need not be present at the place of sale.” 1 State Bar of Texas, Texas Real Estate Forms Manual, ch. 8, form 8-9, clause 8-9-10 (2022 ed.).

In Van Brunt v. BancTexas Quorum, N.A., 804 S.W.2d 117, 127 (Tex. App.—Dallas 1990, no writ), the court relied on former Texas Business and Commerce Code section 9.501(d) to justify not extending the rule announced in Tanenbaum v. Economics Laboratory, 628 S.W.2d 769 (Tex. 1982), eliminating deficiencies after a defective personal property sale to bar a subsequent real property foreclosure or suit for deficiency after the subsequent real property foreclosure sale. “We hold that any defect in [lender’s] foreclo­sure under the Code has no effect on its rights under the real property mortgage, including its right to seek a deficiency.” Van Brunt, 804 S.W.2d at 129–30. The defect in Van Brunt was the failure of the lender to renotify the debtor that the lender would sell the collateral at a pri­vate sale after the lender held a public sale but rejected the highest bid and later sold to the highest bidder at the private sale for a higher price. Additionally, the debt in Van Brunt was a series of notes each guaranteed by a guarantor and secured by separate security agreements granting a security interest in accounts, inven­tory, and equipment to secure all indebtedness of the borrower to the lender. One of the bor­rower’s notes expressly stated that it was secured by a deed of trust but did not refer to any of the security agreements.

The Tanenbaum rule was overturned in noncon­sumer personal property foreclosure cases by the Texas legislature’s adoption of revised chap­ter 9 of the Uniform Commercial Code. Texas Business and Commerce Code section 9.626 provides that in a nonconsumer transaction, a secured party need not prove compliance with the provisions of subchapter F, sections 9.601through 9.628, relating to collection, enforcement, disposition, or acceptance, unless the debtor or secondary obligor places the secured party’s compliance in issue. Tex. Bus. & Com. Code § 9.626(a)(1). If the secured party’s compliance is placed in issue, the secured party has the burden of establishing that the collec­tion, enforcement, disposition, or acceptance was conducted in accordance with subchapter F. Tex. Bus. & Com. Code § 9.626(a)(2). Except as otherwise provided in section 9.628, if the secured party fails to prove that the collection, enforcement, disposition, or acceptance was conducted in accordance with the provisions of subchapter F, the liability of the debtor or sec­ondary obligor for deficiency is limited to an amount by which the sum of the secured obliga­tion, expenses, and attorney’s fees exceeds the greater of (1) the proceeds of the collection, enforcement, disposition, or acceptance or (2) the amount of the proceeds that would have been realized had the noncomplying secured party proceeded in accordance with the provi­sions of subchapter F. Tex. Bus. & Com. Code § 9.626(a)(3). For this purpose, the amount of proceeds that would have been realized is deemed equal to the sum of the secured obliga­tion, expenses, and attorney’s fees unless the secured party establishes that the amount is less than that sum. Tex. Bus. & Com. Code § 9.626(a)(4). If a deficiency or surplus is calcu­lated under section 9.615(f), the debtor or obli­gor has the burden of establishing that the amount of proceeds of the disposition is signifi­cantly below the range of prices that a comply­ing disposition to a person other than the secured party, a person related to the secured party, or a secondary obligor would have brought. Tex. Bus. & Com. Code § 9.626(a)(5). Section 9.626 further provides that its limitation to transactions other than consumer transactions is intended to leave to the court the determina­tion of the proper rules in consumer transac­tions, but that “the court may not infer from that limitation the nature of the proper rule in con­sumer transactions and may continue to apply established approaches.” Tex. Bus. & Com. Code § 9.626(b).

Texas Business and Commerce Code section 9.610(b) requires that a disposition of personal property collateral including the method, man­ner, time, place, and other terms must be com­mercially reasonable. Tex. Bus. & Com. Code § 9.610(b). If a lender decides to proceed against the personal property separately, the lender must comply with the commercially reasonable stan­dard in the repossession and disposition of the collateral. Texas Business and Commerce Code 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.

Whether the standard has been met is generally a question of fact. Al Gailani v. Riyad Bank, Houston Agency, 144 S.W.3d 1, 3 (Tex. App.—El Paso 2003, pet. denied). Although commer­cial reasonableness is not precisely defined, courts have considered a number of factors when determining whether a disposition was commercially reasonable, such as (1) whether the secured party endeavored to obtain the best price possible; (2) whether collateral was sold in bulk or piecemeal; (3) whether it was sold via private or public sale; (4) whether it was avail­able for inspection before the sale; (5) whether it was sold at a propitious time; (6) whether expenses incurred from the sale are reasonable and necessary; (7) whether the sale was adver­tised; (8) whether multiple bids were received; (9) what state the collateral was in; and (10) where the sale was conducted. Regal Finance Co. v. Texas Star Motors, Inc., 355 S.W.3d 595, 601–02 (Tex. 2010); Airpro Mobile Air, LLC v. Prosperity Bank, 631 S.W.3d 346, 349–50 (Tex. App.—Dallas 2020, pet. denied). The commer­cial reasonableness standard does not apply when the personal property and real property are sold in accordance with the rights with respect to real property. Tex. Bus. & Com. Code § 9.604(a)(2); Cantu v. Falcon International Bank, No. 04-17-00467-CV, 2018 WL 1831651 (Tex. App.—San Antonio, Apr. 18, 2018, pet. denied); Huddleston v. Texas Commerce Bank–Dallas, 756 S.W.2d 343, 347 (Tex. App.—Dal­las 1988, writ denied).

In foreclosing on personal property together with real property, a UCC search should be con­ducted to determine initial perfection, continued perfection, and priority. Before the foreclosure sale, the mortgagee needs to determine to the extent possible the scope of the personal prop­erty and whether all of the personal property described in the deed of trust is property that should be included in the foreclosure. The deed of trust may include an omnibus description of mortgaged property, such as “all agreements affecting or benefiting the mortgage property.” There is no way of knowing at the time of the execution of the deed of trust which present or future agreements will be assets and which will be liabilities. Whether the mortgagee or pur­chaser can pick and choose the foreclosure or whether the foreclosure sale documents can spe­cifically exclude undesirable agreements are unsettled issues. Even if they can be excluded, the undesirable agreements may not be identifi­able as such at the time of foreclosure.

§ 6.6:10Cross-Collateral

When two debts are cross-collateralized, excess foreclosure proceeds from the foreclosure of one mortgage may be applied by the mortgagee against the balance owing on the indebtedness secured by the other mortgage, even if the obli­gor is not the same. See Nelson v. Citizens Bank & Trust Co., 881 S.W.2d 128, 129–30 (Tex. App.—Houston [14th Dist.] 1994, no writ).

§ 6.6:11Bankruptcy Effect

A lien created on or within ninety days before the date of the filing of a bankruptcy petition (or between ninety days and one year in the case of an insider) may be set aside as a preference if determined to unjustifiably favor the creditor or other creditors. 11 U.S.C. § 547(b); Weaver v. Aquila Energy Marketing Corp., 196 B.R. 945, 950–51 (Bankr. S.D. Tex. 1996); see also 11 U.S.C. § 547(i).

§ 6.6:12Minerals

In Texas, a grantor can sever the minerals from the surface estate. See Humphreys-Mexia Co. v. Gammon, 254 S.W. 296, 299 (Tex. 1923). The severance is accomplished by conveying the property and reserving the mineral estate or con­veying the mineral estate and reserving the sur­face estate. See Elliott v. Nelson, 251 S.W. 501, 504 (Tex. Comm’n App. 1923, judgm’t adopted); Klein v. Humble Oil & Refining Co., 86 S.W.2d 1077, 1079 (Tex. 1935). Of the two estates, the mineral estate is the dominant estate. See Ball v. Dillard, 602 S.W.2d 521, 523 (Tex. 1980); Acker v. Guinn, 464 S.W.2d 348, 352 (Tex. 1971); Texaco Inc. v. Faris, 413 S.W.2d 147, 149 (Tex. App.—El Paso 1967, writ ref’d n.r.e.).

Minerals should be clearly defined in the docu­ment by identifying the specific minerals included such as oil, gas, hydrocarbons, coal, lignite, carbon dioxide, nonhydrocarbon gases, uranium, gold, silver, copper, iron, other metal­lic ores and substances, and radioactive sub­stances. Otherwise, the term minerals will be left to construction. See Mosser v. United States Steel Corp., 676 S.W.2d 99, 101–02 (Tex. 1984); Reed v. Wiley II, 597 S.W.2d 743, 744–748 (Tex. 1980); Reed v. Wiley, 554 S.W.2d 169, 170–73 (Tex. 1977); Acker, 464 S.W.2d at 349–53. The owner of the dominant mineral estate is entitled to access to the surface estate in order to have access to the minerals. See Harris v. Cur­rie, 176 S.W.2d 302, 305 (Tex. 1943). A deter­mination of whether the grant includes both the surface and mineral estate is important to the value and use of the property beyond just the value of the minerals. The access rights of the mineral owner impact the ability of the property owner to develop and use property. Conversely, if the mortgagee’s valuation of the property includes a valuation of the minerals, it is import­ant to not only determine that the mineral estate has not been severed, but also to determine whether there are any antidrilling ordinances or land use restrictions that would preclude a sub­sequent owner of the property from extracting the minerals.

See the discussion of chapter 66 of the Texas Property Code at section 13.11 in this manual.

§ 6.7Default under Contract

Before the exercise of any remedies available under the deed of trust, there must be a default. The default must be defined by the agreement between the parties. A default may be found in the debt instrument, the deed of trust, or in a loan agreement governing the overall relation­ship between the parties. The default may be a failure to pay or a breach of an affirmative or negative covenant in the documents. The factual circumstances must be reviewed to determine if there is a default and whether the default has been waived or estopped based on the actions or course of dealings of the parties. The loan docu­ments must be carefully reviewed to determine whether an event of default has occurred and what actions, if any, by the mortgagee are neces­sary to trigger an event of default. For example, a breach of a covenant or a failure to pay an installment by a due date may in and of itself be an event of default, which entitles the mortgagee to immediately provide a notice of intent to accelerate if such notice has not been waived, or the loan documents may require a notice to the borrowers of the breach of the covenant or fail­ure to pay the past-due amount and an opportu­nity to eliminate the breach or cure the failure to pay before the breach or failure to pay ripens into a default or event of default.

§ 6.7:1Failure to Pay

A default arising out of a failure of the borrower to pay the debt as it becomes due is the most common default. See Shumway v. Horizon Credit Corp., 801 S.W.2d 890, 891 (Tex. 1991). The determination of when the payment is due and, in the absence of a matured debt or a demand note, what action is required by the lender to accelerate maturity based on the default, depends on the terms of the debt instru­ment. See Holy Cross Church of God in Christ v. Wolf, 44 S.W.3d 562, 566 (Tex. 2001). Promis­sory notes are typically (1) demand notes pay­able on demand, (2) term notes that are payable in full on or before a specified date, or (3) installment notes with periodic payments due in specified intervals and that can be accelerated on the failure of the borrower to pay an install­ment when due. For installment notes, in the absence of an effective waiver provision, the holder must provide the notice of intent to accel­erate the maturity, and when the maturity has been accelerated, notice that the debt has been accelerated. Holy Cross Church, 44 S.W.3d at 566; Ogden v. Gibraltar Savings Ass’n, 640 S.W.2d 232, 234 (Tex. 1982); Perry v. Cam XV Trust, 579 S.W.3d 773, 777 (Tex. App.—Hous­ton [1st Dist.] 2019, no pet.). For an installment obligation, in the absence of acceleration of the maturity date, the only outstanding indebtedness due before maturity is the amount of the past-due installments. See General Motors Accep­tance Corp. v. Uresti, 553 S.W.2d 660, 663 (Tex. App.—Tyler 1977, writ ref’d n.r.e.).

§ 6.7:2Insecurity

Texas Business and Commerce Code section 1.309 provides that when a contract permits a party to accelerate payment or performance or require collateral or additional collateral at will or when the party deems itself insecure or words of similar import, that party has the power to do so only if that party in good faith believes that the prospect of payment or the performance is impaired. Tex. Bus. & Com. Code § 1.309. The burden of establishing good faith is on the party against whom the power has been exercised. Tex. Bus. & Com. Code § 1.309; Tex. Jur. 3d Secured Transactions § 120, 134. The comment to section 1.309 makes clear that the good faith requirement has “no application to demand instruments or obligations whose very nature permits call at any time or without reason.” Tex. Bus. & Com. Code § 1.309 cmt 1.

§ 6.7:3Bankruptcy or Insolvency

It is common for a deed of trust to provide for an event of default upon the execution of an assign­ment for the benefit of creditors, admission in writing by the borrower of the borrower’s inability to pay, the filing of a bankruptcy case or proceeding, or any other applicable law involving insolvency, liquidation, or reorganiza­tion affecting the rights of creditors. Upon a bankruptcy filing, the automatic stay provided by Bankruptcy Code section 362 will preclude a mortgagee from pursuing remedies against the mortgagor or borrower filing bankruptcy and from foreclosing on or taking any action against the property of the bankrupt mortgagor or bor­rower. See 11 U.S.C. § 362. However, the auto­matic stay under section 362 does not restrict the lender from pursuing a guarantor following the default resulting from the bankruptcy of the maker. See Browning Seed, Inc. v. Bayles, 812 F.2d 999, 1004 (5th Cir. 1987); In re Mort­gageAmerica Corp., 714 F.2d 1266, 1268, 1273–78 (5th Cir. 1983). A foreclosure sale knowingly made in violation of an automatic stay can expose the mortgagee to liability for actual damages, including attorney’s fees, as well as punitive damages. See 11 U.S.C. § 362(k)(1).

Some deeds of trust contain clauses whereby the mortgagor purports to waive the effect of the automatic stay upon filing of a bankruptcy peti­tion. These “stay waiver” clauses have been inconsistently enforced by bankruptcy courts. For additional discussion, see Matthew P. Goren, Chip Away at the Stone: The Validity of Pre-Bankruptcy Clauses Contracting Around Section 363 of the Bankruptcy Code, 51 N.Y. L. Sch. L. Rev. 1077, 1091–92 (2007); C. Edwards Dobbs, Negotiating Points in Secured Lien Financing Transactions, 4 Depaul Bus. & Com. L. J. 189, 222 (2006); Pamela Dunlop Gate, Drafting Considerations in Anticipation of Insolvency or Bankruptcy, in Real Estate Docu­ments, Closings and Workouts, 2001, University of Houston Law Foundation, Houston (2001); Michael D. Fielding, Preventing Voluntary and Involuntary Bankruptcy Petitions by Limited Liability Companies, 18 Bankr. Dev. J. 51, 71 (2001); Steven L. Schwarcz, Rethinking Free­dom of Contract: A Bankruptcy Paradigm, 77 Tex. L. Rev. 515 (1999).

§ 6.7:4Loss, Damage, Destruction, or Reduction of Value of Mortgaged Property

Most loan documents contain a default clause based on the loss, damage, destruction, or reduc­tion in value of the mortgaged property. This type of default clause is also referred to as a waste clause. This type of default is more diffi­cult to prove or sustain than a purely monetary default or a default based on an objective stan­dard. Usually declarations of default on breach of the waste clause are asserted in conjunction with other more quantifiable defaults. Some­times the loan documents provide for a measure of loss or waste (such as reduction in fair market value below the balance of the secured debt) to determine whether a default has occurred.

Cases concerning waste and foreclosure include U.S. Bank, N.A. v. American Realty Trust, Inc., 275 S.W.3d 647, 650–51 (Tex. App.—Dallas 2009, pet. denied) (failing to reapply for fran­chise license and entering franchise agreement with cheaper hotel chain did not constitute “waste” where loan documents did not obligate borrower to maintain franchise agreement with any specific hotel chain); Frio Investments, Inc. v. 4M-IRC/Rohde, 705 S.W.2d 784, 786 (Tex. App.—San Antonio 1986, writ ref’d n.r.e.) (damages not recoverable for waste if value of property after alleged injury remains sufficient to secure debt; waste not sufficient grounds for default and foreclosure if waste did not unrea­sonably impair mortgagee’s security); and Chapa v. Herbster, 653 S.W.2d 594, 600–601 (Tex. App.—Tyler 1983, no writ) (foreclosure upheld based in part on failure to keep mort­gaged property in good repair and condition), disapproved on other grounds, Shumway v. Horizon Credit Corp., 801 S.W.2d 890 (Tex. 1991).

Waste is an injury to reversionary interest in land resulting from the wrongful act committed by one rightfully in possession or in failure by one rightfully in possession to exercise reason­able care to preserve the property. See R.C. Bowen Estate v. Continental Trailways, 256 S.W.2d 71, 72 (Tex. 1953); Lesiker v. Rap­peport, 809 S.W.2d 246, 250 (Tex. App.—
Texarkana 1991, no writ); Weaver v. Royal Palms Associates, Inc., 426 S.W.2d 275, 277 (Tex. App.—Houston [1st Dist.] 1968, no writ). There can be no breach of a covenant against waste to support a foreclosure unless there is evidence of a wrongful act or failure to exercise reasonable care in preserving the property. Erickson v. Rocco, 433 S.W.2d 746, 750–51 (Tex. App.—Houston [1st Dist.] 1968, writ ref’d n.r.e.). Additionally, the waste must impair the mortgagee’s security even if the waste results from the removal of improvements or structures. Frio Investments, 705 S.W.2d at 786.

§ 6.7:5Maintenance of Insurance

Loan documents may also contain a default clause for failure to maintain insurance. Chapa v. Herbster, 653 S.W.2d 594, 601 (Tex. App.—Tyler 1983, no writ) (foreclosure upheld based in part on default of requirement to maintain insurance), disapproved on other grounds, Shumway v. Horizon Credit Corp., 801 S.W.2d 890 (Tex. 1991). In the absence of provisions to the contrary, the beneficiary or mortgagee has no right to participate in the proceeds of the insurance policy. Shelton v. Providence Wash­ington Insurance Co., 131 S.W.2d 330, 332 (Tex. App.—El Paso 1939, no writ). Disposition of insurance proceeds from casualty or loss as to mortgaged property depends on the agreement between the parties. See Roberts v. Wells Fargo Bank, N.A., 406 S.W.3d 702, 709–10 (Tex. App.—El Paso 2013, no pet.); Lewis v. Wells Fargo Home Mortgage, Inc., 248 S.W.3d 828, 830–31 (Tex. App.—Texarkana 2008, no pet.); Zidell v. John Hancock Mutual Life Insurance Co., 539 S.W.2d 162, 165 (Tex. App.—Dallas 1976, writ ref’d n.r.e.). Deeds of trust and loan documents commonly require the maintenance of insurance on the property, proof of insurance, and, upon a casualty, the payment of the pro­ceeds to the mortgagee or to the mortgagor and mortgagee jointly, with the requirement that the mortgagor endorse the proceeds to the mort­gagee to be disbursed for repairs or applied to reduce the debt.

Texas Insurance Code section 549.003 provides that, after foreclosure, the lender is entitled to cancel an insurance policy covering the fore­closed property and is entitled to any unearned premiums from the policy if the unearned pre­miums are applied to the deficiency and any excess delivered to the borrower. See Tex. Ins. Code § 549.003. Texas Insurance Code sections 549.051 through 549.102 identify certain pro­hibited practices and exceptions for lenders with regard to insurance for real and personal prop­erty collateral and create both a private cause of action by the borrower and an enforcement action by the state for any violation. See Tex. Ins. Code §§ 549.051–.102. See section 13.4 in this manual for additional discussion.

§ 6.7:6Defaults on Other Indebtedness

Loan documents often contain a cross-default clause providing that a default on any indebted­ness owed by the maker, the guarantor, or the mortgagor to the mortgagee or other persons qualifies as a default on the indebtedness secured by the deed of trust. The Texas Real Estate Forms Manual’s form for deed of trust does not contain a cross-default clause.

§ 6.7:7Payment of Taxes

Failure to pay property taxes may also be defined as a default. Terra XXI, Ltd. v. Harmon, 279 S.W.3d 781, 787–88 (Tex. App.—Amarillo 2007, pet. denied) (upholding foreclosure over challenge that default due to nonpayment of taxes did not in fact exist based on mortgagor’s allegations that tax office applied tax payment to wrong account and finding that trustee had a valid basis for initiating foreclosure proceedings because tax records showed taxes as delinquent as of date trustee sent debtor notice of default on security instrument); Chapa v. Herbster, 653 S.W.2d 594, 600–01 (Tex. App.—Tyler 1983, no writ) (foreclosure upheld based in part on default under deed-of-trust requirement to pay ad valorem taxes due on mortgaged prop­erty), disapproved on other grounds, Shumway v. Horizon Credit Corp., 801 S.W.2d 890 (Tex. 1991). See chapter 24 and section 4.23 in this manual for further discussion of ad valorem tax liens.

§ 6.7:8Death

Often the death of the maker or guarantor con­stitutes a default under the loan documents. See chapter 26 and section 4.20 in this manual con­cerning the foreclosure process when the mort­gagor is deceased.

§ 6.7:9Due-on-Sale Clause

Due-on-sale clauses that permit the acceleration of the indebtedness upon a disposition without the beneficiaries’ prior written consent has been upheld in Texas. Sonny Arnold, Inc. v. Sentry Savings Ass’n, 633 S.W.2d 811, 814 (Tex. 1982); A.R. Clark Investment Co. v. Green, 375 S.W.2d 425, 432 (Tex. 1964); Slusky v. Coley, 668 S.W.2d 930, 934 (Tex. App.—Houston [14th Dist.] 1984, no writ). A due-on-sale clause is not a restraint on alienation because the con­veyance only causes an acceleration of the debt, not a forfeiture of the mortgaged property. See Sonny Arnold, 633 S.W.2d at 815; Slusky, 668 S.W.2d at 934; Crestview, Ltd. v. Foremost Insurance Co., 621 S.W.2d 816, 818 (Tex. App.—Houston 1981, writ ref’d n.r.e.). In Adams v. First National Bank, 154 S.W.3d 859, 869–71 (Tex. App.—Dallas 2005, no pet.), the court upheld the acceleration of the debt and foreclosure of the property based on a violation of the due-on-sale clause resulting from the transfer by an individual owner/borrower to a corporation owned by the owner/borrower even though the deed signed in connection with the transfer was never recorded and that following acceleration the transfer was rescinded. The fact that the mortgaged property becomes subject to a dependent administration by the probate court following the death of the mortgagor does not invalidate the mortgagee’s right to accelerate the loan in the event of a sale approved by the pro­bate court. See Howell v. Murray Mortgage Co., 890 S.W.2d 78, 83–84 (Tex. App.—Amarillo 1994, writ denied).

Some Texas cases have held that optional accel­eration clauses in a deed of trust providing for a prepayment penalty when the mortgagor trans­fers the mortgaged property without the consent of the mortgagee are impermissible restraints on alienation. In North Point Patio Offices Venture v. United Benefit Life Insurance Co., 672 S.W.2d 35, 37–38 (Tex. App.—Houston [14th Dist.] 1984, writ ref’d n.r.e.), the court held that where a provision precluded a transfer of the property without the lender’s consent, and the lender required the borrower to pay a percentage of the loan balance in order to avoid acceleration and to obtain the lender’s consent notwithstand­ing the absence of any specific provision of the agreement for such a fee, the lender’s imposition was arbitrary, coercive and by its nature a restraint on alienation of the property. In Metro­politan Savings & Loan Ass’n v. Nabours, 652 S.W.2d 820, 821–23 (Tex. App.—Tyler 1983, writ dism’d), the lender accelerated after a trans­fer of the property without its consent. In Nabours, the provision precluded any transfer of the property and permitted the lender to charge a prepayment penalty upon an acceleration result­ing from the transfer, and the court held that the deed of trust was an unreasonable restraint or alienation and void and unenforceable. Nabours, 652 S.W.2d at 824. In Meisler v. Republic of Texas Savings Ass’n, 758 S.W.2d 878, 885 (Tex. App.—Houston [14th Dist.] 1988, no writ), the court of appeals held in dictum that coupling a prepayment penalty with a prohibition against the transfer without the mortgagee’s consent is not an unreasonable restraint on alienation if the consent requirement is expressly qualified by the requirement of reasonable conduct on the part of the mortgagee. The focus of these cases was largely the propriety of the assessment of the prepayment penalty upon acceleration resulting from the transfer. Subsequent Texas cases held that a lender may contractually charge a prepayment premium on the acceler­ated amount of principal as a result of the lender’s exercise of the lender’s right to acceler­ate the indebtedness evidenced by the note, pro­vided that the note clearly states that the premium is to be charged subsequent to an acceleration of maturity. Parker Plaza West Partners v. UNUM Pension & Thrift Co., 941 F.2d 349, 355–56 (5th Cir. 1991); Affiliated Capital Corp. v. Commercial Federal Bank, 834 S.W.2d 521, 526–27 (Tex. App.—Austin 1992, no writ).

A due-on-encumbrance provision is similar to a due-on-sale provision. A deed of trust may pro­vide that a default occurs when the mortgagor places or acquiesces in the placing or allowing of any lien or encumbrance against the property, including any inferior encumbrance. However, in Lavigne v. Holder, 186 S.W.3d 625, 628 (Tex. App.—Fort Worth 2006, no pet.), the deed of trust excepted from the due-on-sale clause the creation of a lien or encumbrance subordinate to the deed of trust, and the court held that the mortgagor’s granting of a thirty-five foot ease­ment was a permitted encumbrance because the term encumbrance includes easements and the easement was subordinate to the deed of trust.

The Garn–St. Germain Depository Institutions Act of 1982, codifided at 12 U.S.C.
§ 1701j-3(a)–(g), preempts state prohibitions on the exercise of due-on-sale clauses by lenders and reaffirms the authority of federal lenders to use and enforce due-on-sale clauses in their loan instruments. See 12 U.S.C. § 1701j-3(b), (c). However, the statute exempts certain real prop­erty loans secured by a lien on residential real property containing less than five dwelling units and prohibits the exercise of due-on-sale clauses for certain transfers, including a transfer into an inter vivos trust in which the borrower is and remains the beneficiary and which does not relate to transfer of rights of occupancy in the property. 12 U.S.C. § 1701j-3(d)(8).

§ 6.7:10Properties in Receivership

Property in the custody of a receiver may not be foreclosed on without court approval. First Southern Properties, Inc. v. Vallone, 533 S.W.2d 339, 341 (Tex. 1976); Pratt v. Amrex, Inc., 354 S.W.3d 502, 506 (Tex. App.—San Antonio 2011, pet. denied); Cline v. Cline, 323 S.W.2d 276, 282 (Tex. App.—Houston 1979, writ ref’d n.r.e.). Once a property is placed in receivership, it is held in custodia legis by the receiver and any sale or disposition of the property must be authorized by the court in which the receiver­ship is pending. Huffmeyer v. Mann, 49 S.W.3d 554, 559–60 (Tex. App.—Corpus Christi–Edin­burg 2001, no pet.). However, the appointment of a receiver destroys no prior vested rights nor does it determine any rights as between the par­ties by reason of an existing contract. Huff­meyer, 49 S.W.3d at 560. The enforcement of the third parties’ rights or liens are merely sus­pended until the enforcement is approved by the court having custody of the property. Huff­meyer, 49 S.W.3d at 560. As a general rule, a lienholder’s interest in property held by a receiver has priority over the cost and expenses incurred and the administration and operation of the receiver. CitiMortgage, Inc. v. Hubener, 345 S.W.3d 193, 197 (Tex. App.—Dallas 2011, no pet.); Chase Manhattan Bank v. Bowles, 52 S.W.3d 871, 880 (Tex. App.—Waco 2001, no pet.). However, a lienholder who requests the appointment of receiver or who acquiesces in the receivership and seeks its benefits may not be entitled to priority over the receiver’s fees and expenses. Bowles, 52 S.W.3d at 880. See sections 3.4:2 and 3.5:6 in this manual for addi­tional discussion.

§ 6.7:11Change in Form of Entity

The court in Burns v. Stanton, 286 S.W.3d 657, 660–61 (Tex. App.—Texarkana 2009, pet. denied), held that the conversion of a corpora­tion to a limited partnership was a violation of the loan document covenants even though the conversion was undertaken to save substantial taxes.