Trustees and Substitute Trustees
The process for appointing a substitute trustee radically changed with the codification of Texas Property Code section 51.0076 in 2015. As a result, a foreclosure professional may document the appointment of a substitute trustee by adding information to a legacy notice-of-sale form required by Property Code section 51.002(b). The appointment of substitute trustee is accomplished under this provision if it is signed by an attorney or agent of the mortgagee or mortgage servicer and contains the statutory disclosure found in section 51.0076(3). See Tex. Prop. Code § 51.0076. The effective date of the appointment is the date of the notice. Notice of the appointment may be permanently documented by recording the modified notice of sale in the real property records. See Tex. Prop. Code § 12.0012.
Most foreclosure practitioners believe that the power of the trustee to conduct a foreclosure sale is derived wholly from the terms of the deed of trust and that a trustee’s duties are fulfilled by complying with the terms of the deed of trust. Winters v. Slover, 251 S.W.2d 726, 728 (Tex. 1952); Peterson v. Black, 980 S.W.2d 818, 822 (Tex. App.—San Antonio 1998, no pet.). One of the purposes of this chapter is to alert foreclosure practitioners that much of the familiar case law dealing with trustees in a foreclosure context is now obsolete because of legislative changes. For convenience, unless the context dictates otherwise, the word trustee in this chapter means both “trustee” and “substitute trustee,” though in most foreclosures the person actually exercising the power to foreclose will be a substitute trustee.
Beginning in 2003, the Texas legislature recognized that the origination and servicing of mortgage loans secured by real estate were radically changing due to securitization. Lending institutions no longer kept loans in their own portfolio but sold the loans they originated into the secondary market to be pooled with similar loans as collateral for mortgage-backed securities. In addition, the valuable mortgage servicing rights for these securitized loans were sold to the highest bidder. Consequently, the originating lender was no longer the owner or holder of the note, the beneficiary of the deed of trust, or the mortgage servicer in charge of administering the foreclosure process if the loan went into default.
Texas was the first state to recognize the systemic changes in mortgage lending caused by securitization and amend its foreclosure statutes to allow the mortgage servicer of a borrower’s loan agreement to conduct a foreclosure if the loan went into default. See Tex. Prop. Code §§ 51.0001(3); 51.0025. This change from owner to mortgage servicer made sense because in the new era of loan securitization, the mortgage servicer was the only entity that dealt with the borrower and managed all the loan-level activities related to the borrower’s account and loan agreement.
Along with the foreclosure administration change, the legislature effectively preempted much of long-standing case law that dealt with the trustee or substitute trustee who exercised the “power of sale” found in the security instrument if there was a breach of the borrower’s loan agreement. See Tex. Prop. Code §§ 51.007(f), 51.0074, 51.0075.
Starting in January 2004, the legislature used the definition section in Texas Property Code section 51.0001 to adjust foreclosure law to match changing business practices resulting from securitization. For example, substitute trustee was defined as “a person appointed by the current mortgagee or mortgage servicer under the terms of the security agreement to exercise the power of sale.” Tex. Prop. Code § 51.0001(7). Two legislative sessions later, trustee was defined as “a person or persons authorized to exercise the power of sale under the terms of the security agreement in accordance with Section 51.0074.” Tex. Prop. Code § 51.0001(8).
The duties of trustee listed in Texas Property Code section 51.0074 effectively preempted much of the old case law related to responsibilities and duties of a trustee and settled whether more than one substitute trustee could be appointed to exercise the power of sale. See Tex. Prop. Code § 51.0074(a).
Further, Texas Property Code section 51.0074(b) provided: “a trustee may not be: (1) assigned a duty under a security instrument other than to exercise the power of sale in accordance with the terms of the security instrument; or (2) held to the obligations of a fiduciary of the mortgagor or mortgagee.” Tex. Prop. Code § 51.0074(b). Accordingly, if read in conjunction with Texas Property Code section 51.0025 that authorizes a mortgage servicer to “administer the foreclosure of the property under Section 51.002,” a trustee’s sole statutory responsibility in a foreclosure context is to conduct the public auction of the property and distribute the sale’s proceeds. See Tex. Prop. Code §§ 51.002, 51.0025, 51.0074. Section 51.0074 also made clear that, contrary to case law, the trustee is not a fiduciary of the mortgagor or mortgagee. Tex. Prop. Code § 51.0074(b)(2).
The subject of innumerable appellate court opinions is the method and process for appointing a substitute trustee to exercise the power of sale found in a deed of trust or security instrument.
The legislature, however, has preempted all case law that holds a substitute trustee must be appointed according to the terms of the deed of trust with the phrase notwithstanding any agreement to the contrary in section 51.0075. Tex. Prop. Code § 51.0075(c). This phrase was first used in section 51.002(d) requiring the notice of default be sent according to subsection (b) and not the terms of the security instrument. Tex. Prop. Code § 51.002(d). The legislature, by enacting section 51.0075(c) and (d), determined how a substitute trustee could be appointed, not the deed of trust. See Wylie v. Hays, 263 S.W. 563 (Tex. 1924), often quoted for the proposition that statutory law overrides contract terms; Home Building & Loan Ass’n v. Blaisdell, 290 U.S. 398 (1934), holding that an implied term in any contract is that the contract complies with statutory law; and Exxon Corp. v. Eagerton, 462 U.S. 176 (1983), noting that a state may impair contractual obligations when the impairment is reasonable and necessary to serve an important public purpose.
Because a substitute trustee is now appointed pursuant to Texas Property Code section 51.0075(c) and (d), the mortgagee, which means a grantee, beneficiary, holder, book entry system, last person assigned of record, or the last person to whom a security instrument has been assigned, can appoint or authorize a mortgage servicer to appoint a substitute trustee. See Tex. Prop. Code §§ 51.0001(4), 51.0075(c). The mortgage servicer can then authorize an attorney to appoint a substitute trustee on behalf of the mortgagee to succeed to all the title powers and duties of the original trustee named in the security instrument. Tex. Prop. Code § 51.0075(d).
In the past, the appointment of a substitute trustee was the subject of much litigation because case law contained many nuances as to who could appoint, who had authority to appoint, and how an appointment was evidenced. This is no longer the case—statutory law now applies, regardless of the terms of the security instrument. The current mortgagee has the authority to appoint a trustee and a mortgagee can be the grantee, beneficiary, owner, or holder of a security instrument or note, or the holder or transferee of the note secured by the deed of trust. See Tex. Prop. Code §§ 51.0001, 51.0075; Tex. Bus. & Com. Code §§ 3.203, 3.301. A substitute trustee is properly appointed and succeeds to all the title, powers, and duties of the original trustee so long as the mortgagee appoints the substitute trustee or authorizes the appointment of a substitute trustee by power of attorney, corporate resolution, or other written instrument to the mortgage servicer. The mortgage servicer can then authorize an attorney to appoint the trustee. Tex. Prop. Code § 51.0075(c), (d).
Several legal developments lessen the benefit of filing a wrongful foreclosure lawsuit based on challenges to the appointment of substitute trustee process.
For example, acts related to the appointment of a trustee and the acts and omissions of a trustee during foreclosure can be ratified after the fact to cure most irregularities or defects. Benser v. G.E. Capital Mortgage Services Inc., No. 05-93-00995-CV, 1994 WL 156245, at *4 (Tex. App.—Dallas Apr. 25, 1994, writ denied). In Benser, the court made two points: (1) “when a party appoints the substitute trustee . . . his later acts under the appointment ratify and affirms his prior acts as substitute trustee” (citing Chandler v. Guaranty Mortgage Co., 89 S.W.2d 250, 254 (Tex. App.—San Antonio 1935, no writ)) and (2) minor irregularities in the conduct of a foreclosure sale will not invalidate the sale unless “the irregularities result in injury to the mortgagor” (citing Charter National Bank—Houston v. Stevens, 781 S.W.2d 368, 371 (Tex. App.—Houston [14th Dist.] 1989, writ denied)). Benser, 1994 WL 156245, at *4.
The holding in Benser was followed in Bernal-Bell v. Saxon Mortgage Services, Inc., No. 04-10-00099-CV, 2010 WL 3250115, at *2 (Tex. App.—San Antonio, Aug. 18, 2010, no pet.) (mem. op.), where the court found that a trustee could ratify and affirm any act made before the trustee was appointed, citing Chandler, 89 S.W.2d 250, and Wilson v. Armstrong, 236 S.W. 755, 760 (Tex. App.—Beaumont 1921, no writ).
§ 11.1:2Trustee’s Acts Are Ministerial
The ratification argument is supported by the proposition that acts of a trustee are ministerial and a trustee’s duties can be performed by the trustee personally or by a representative with the requisite authority from the trustee. Hart v. Estelle, 34 S.W.2d 665, 670 (Tex. App.—Austin 1930), aff’d, 55 S.W.2d 510 (Tex. Comm’n App. 1932, judgm’t adopted).
The Texas Supreme Court has proclaimed that “minor defects in an otherwise valid foreclosure sale do not void it.” Kourosh Hemyari v. Stephens, 355 S.W.3d 623, 628 (Tex. 2011). In a successful wrongful foreclosure suit, a foreclosure defect must cause the foreclosed property to be sold for a “grossly inadequate sales price.” Sauceda v. GMAC Mortgage Corp., 268 S.W.3d 135, 139 (Tex. App.—Corpus Christi–Edinburg 2008, no pet.). The exception to this rule is if the acts of the mortgagee or trustee “chilled” the bidding. Miller v. BAC Home Loans Servicing, L.P., 726 F.3d 717, 727 (5th Cir. 2013). Therefore, any minor defect in the appointment or performance of a trustee will not be the cause of a wrongful foreclosure, unless the appointment or acts or omissions of the trustee chilled the bid or caused the property to be sold for a grossly inadequate sale price.
§ 11.1:3Retroactive Application
It is clear the trustee-related statutes apply to all loan agreements and deeds of trust executed after the effective date of the statute. The question arises, however, whether the trustee-related statutes preempt or have retroactive effect on deeds of trust executed before the statutes’ effective date.
So long as the trustee statutes are deemed to be remedial in nature and do not disturb a vested right, they do not violate Tex. Const. art. I, § 16, which prohibits retroactive laws from impairing the obligations of contracts. Rey v. Acosta, 860 S.W.2d 654, 656–57 (Tex. App.—El Paso 1993, no writ); Pratt v. Story, 530 S.W.2d 325, 328 (Tex. App.—Tyler 1975, no writ).
Analyzing whether Texas Property Code sections 51.002 and 51.0075 could be applied retroactively, the court found that these were remedial statutes that did not disturb vested contract rights. G4 Trust v. Consolidated Gasoline, Inc., No. 02-10-0404-CV, 2011 WL 3835656, at *2–3 (Tex. App.—Fort Worth, Aug. 31, 2011, pet. denied) (mem. op.). As long as a new statute does not “take away or impair vested rights acquired under existing law,” a new statute cannot be “said to be a retroactive law prohibited by the Constitution.” McCain v. Yost, 284 S.W.2d 898, 900 (Tex. 1955).
However, to lessen litigation risk—especially from pro se litigants using Internet pleadings—a foreclosure practitioner should try to comply with all the terms and conditions of the deed of trust unless the deed of trust was executed after the effective date of the trustee statute.
Regardless of all the statutory changes dealing with trustees, it is still good law that a trustee should act with “absolute impartiality and with fairness to all concerned . . . to achieve the objective of the trust.” First Federal Savings & Loan Ass’n v. Sharp, 359 S.W.2d 902, 904 (Tex. 1962) (citation omitted); see also Hammonds v. Holmes, 559 S.W.2d 345, 347 (Tex. 1997).
Usually, when a borrower files a wrongful foreclosure lawsuit, the trustee is made a party to the suit even though the trustee (1) generally has nothing to do with the administration of the borrower’s loan, (2) has no duty under the security agreement other than to exercise the power of sale, (3) has no fiduciary obligation to the mortgagor or mortgagee, and (4) is not a debt collector. See Tex. Prop. Code § 51.0074.
When the real dispute is between the borrower and the mortgagee or mortgage servicer, Texas Property Code section 51.007 allows a trustee to file a verified denial stating “the basis for the trustee’s reasonable belief that the trustee was named as a party solely in the capacity as trustee under the deed of trust, contract, lien or security instrument.” Tex. Prop. Code § 51.007(a). See form 11-1 in this chapter.
Contrary to common practice, the trustee must plead sufficient facts to support the reasons why he believes that he is not a necessary party to the suit. Simply quoting the “reasonable belief” language from the statute is not enough. Marsh v. Wells Fargo Bank, N.A., 760 F. Supp. 2d 701, 707 (N.D. Tex. 2011).
After the verification is filed, the trustee is to be dismissed as a party without prejudice unless all other parties to the suit file a verified response within thirty days after the verified denial is filed setting forth all matters, whether in law or in fact, that rebut the trustee’s verified denial. See Tex. Prop. Code § 51.007.
If a timely response is filed, the court must hold a hearing. If the court determines a trustee is not a necessary party, the trustee is dismissed without prejudice. Tex. Prop. Code § 51.007(d). If the court later determines that the trustee is a necessary party, the trustee is made a defendant.
One reason a trustee’s verified denial should liberally state the facts, reasons, and justification for the trustee’s belief that the trustee was made a party solely in the capacity as trustee is so the court has something in writing to point to should there be a future challenge to the trustee’s dismissal.
The dismissal of the trustee does not prejudice a party’s right to seek injunctive relief or prevent the trustee from proceeding with the foreclosure sale. Tex. Prop. Code § 51.007(e).
One of the most important trustee protections is that a trustee is not “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.” Tex. Prop. Code § 51.007(f).
One of the collateral effects of Texas Property Code section 51.0075 is that much of the case law related to the appointment of a substitute trustee is now obsolete. (See section 11.1:3 above discussing whether the appointment statute has retroactive effect on loan agreements and deeds of trust executed before September 1, 2005.)
The appointment of a substitute trustee is straightforward:
(c) Notwithstanding any agreement to the contrary, a mortgagee may appoint or may authorize a mortgage servicer to appoint a substitute trustee or substitute trustees to succeed to all title, powers, and duties of the original trustee. A mortgagee or mortgage servicer may make an appointment or authorization under this subsection by power of attorney, corporate resolution, or other written instrument.
(d) A mortgage servicer may authorize an attorney to appoint a substitute trustee or substitute trustees on behalf of a mortgagee under Subsection (c).
(e) The name and a street address for a trustee or substitute trustees shall be disclosed on the notice required by Section 51.002(b).
Tex. Prop. Code § 51.0075(c)–(e). See form 11-2 in this chapter. The question often arises whether the appointment of a substitute trustee is valid if the appointment was dated before the person who signed the appointment acquired the lien. Even though the transfer of lien was executed after the appointment, if the “effective date” of the transfer—as expressly stated in the transfer document—was before the appointment, the appointment is valid. See Crowell v. Bexar County, 351 S.W.3d 114, 117 (Tex. App.—San Antonio 2011, no pet.) (assignment with effective date that preceded execution date had retroactive effect).
§ 11.4Recording an Appointment
There is no statutory requirement that the appointment of a substitute trustee be recorded in the real property records. However, most appointments are recorded as an accommodation to title industry examiners who want some assurance that the person who signed the trustee’s deed was in fact appointed to conduct the sale. Recording an appointment in the real property records eliminates an inquiry from a title examiner months and even years after a sale seeking proof that the substitute trustee had the authority to conduct a sale.
There is old case law that holds if the deed of trust requires an appointment to be recorded, the appointment must be recorded. See, e.g., Faine v. Wilson, 192 S.W.2d 456, 459 (Tex. App.—Galveston 1946, no writ); Chandler v. Guaranty Mortgage Co., 89 S.W.2d 250, 254 (Tex. App.—San Antonio 1935, no writ). However, in University Savings Ass’n v. Springwoods Shopping Center, 644 S.W.2d 705, 706 (Tex. 1982), the Texas Supreme Court held that as long as the failure to record the appointment was not unfair to the mortgagor, there was no wrongful foreclosure.
§ 11.5Appointment of Substitute Trustee after Property Is Posted for Sale
Conventional wisdom, based on case law, is that there is no necessity to repost and send new notices of the scheduled foreclosure sale date if a new trustee is appointed after the original notice of sale was mailed to the obligor of the debt, filed with the county clerk, and posted at the courthouse. See Tarrant Savings Ass’n v. Lucky Homes, Inc., 390 S.W.2d 473, 475 (Tex. 1965); Loomis Land & Cattle Co. v. Diversified Mortgage Investors, 533 S.W.2d 420, 424 (Tex. App.—Tyler 1976, writ ref’d n.r.e.); Koehler v. Pioneer American Insurance Co., 425 S.W.2d 889, 891 (Tex. App.—Fort Worth 1968, no writ). However, under Texas Property Code section 51.0075(e), failure to provide the borrower with twenty-one days’ notice of the name and address of the newly appointed trustee who will conduct the sale may create an unwanted litigation risk if the property is sold for a grossly inadequate sales price. See Tex. Prop. Code § 51.0075(e). To prevent litigation risks, new foreclosure sale notices with the name and address of the newly appointed trustee should be mailed and reposted so as to give the borrower twenty-one days’ notice of the newly appointed trustee.
A street address for the trustee who is to conduct the foreclosure sale must be contained in the Texas Property Code section 51.002(b) foreclosure sale notice giving the date, time, and place of the foreclosure sale. Tex. Prop. Code § 51.0075(e).
“A” street address—instead of “the” street address—was intentionally used in section 51.0075(e) so that the foreclosure professional actually handling the foreclosure process could be the point of contact should anyone need to communicate with the trustee. See Moore v. Brown, No. SA-89-CA-0714, (W.D. Tex. May 1, 1991) for a discussion of the use of “a” as an indefinite article that denotes an unspecified person or thing. See also Black’s Law Dictionary, (7th ed. 1999).
As indicated in Moore, at one time, there was a controversy whether one or more trustees could be appointed to conduct a sale. It is now clear that “one or more persons may be authorized to exercise the power of sale under a security instrument.” Tex. Prop. Code § 51.0074(a).
§ 11.7Trustee—Natural Person or Entity
Texas Property Code section 51.0001(8) defines the “trustee” 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.” Texas Property Code section 51.0001(7) also defines “substitute trustee” as “a person appointed by the current mortgagee or mortgage servicer under the terms of the security instrument to exercise the power of sale.” However, Texas Property Code chapter 51 does not include a specific definition of what a “person” means in this context.
“Person,” as defined in the Texas Code Construction Act, includes a “corporation, business trust, estate, trust, partnership, association, or any other business entity.” Tex. Gov’t Code § 311.005(2). Any of these entities may serve as a trustee. Other portions of the Texas Property Code also support this interpretation. Texas Property Code section 111.004(10) defines a “person” to mean not just an individual but also a corporation, limited liability company, partnership, joint venture, association, joint-stock company, business trust, unincorporated organization, two or more persons having a joint or common interest, a government, a governmental subdivision, a public corporation, or any other legal or commercial entity. See In re AMROCO, Inc., 496 B.R. 442 (Bankr. W.D. Tex. 2013), for a discussion that artificial persons are included within the definition of “person” under this section of the Texas Property Code and may therefore serve as trustee or substitute trustee.
However, since only a natural person can conduct the foreclosure sale, a business entity is rarely named as the trustee. If a business entity is the named trustee, the entity itself must make a resolution to appoint the natural person who will conduct the sale on behalf of the entity as trustee.
If the notice of sale will be used to document the appointment of a substitute trustee under Property Code section 51.0076, the notice of sale must be signed by an attorney or agent of the mortgagee or mortgage servicer. See Tex. Prop. Code § 51.0076(2).
The right to sell a borrower’s property at a foreclosure sale is not an inherent right of the creditor. If there is no power of sale language found in the security instrument, foreclosure must be by a judicial sale, not a nonjudicial sale. Slaughter v. Qualls, 162 S.W.2d 671 (Tex. 1942); Hart v. McClusky, 118 S.W.2d 1077 (Tex. App.—Amarillo 1964, writ ref’d).
A trustee may delegate ministerial duties to another person so long as the person is under the trustee’s supervision or the delegation is authorized by the terms of the deed of trust. American Savings & Loan Ass’n of Houston v. Musick, 531 S.W.2d 581, 587 (Tex. 1976); Todd v. Hunt, 127 S.W.2d 340 (Tex. App.—El Paso 1939, writ ref’d); Wilson v. Armstrong, 236 S.W. 755 (Tex. App.—Beaumont 1921, no writ). See form 11-3 in this chapter for a letter employing a local attorney to post the notice of foreclosure sale and forms 11-4 through 11-7 for various affidavits.
§ 11.10Failure to Name Trustee
If the security instrument fails to name a trustee, the current mortgagee may appoint a substitute trustee. See In re Bisbee, 754 P.2d 1135, 1138 (Ariz. 1988), where the Arizona Supreme Court cited Mid City Management Corp. v. Loewi Realty Corp., 643 F.2d 386, 388 (5th Cir. 1981), for the proposition that a failure to name a trustee in the deed of trust was not fatal if a substitute trustee was properly appointed and conducted the sale.
In the past, old case law indicated a written appointment of trustee was not required, only a manifest intent to appoint a particular trustee was necessary. See, e.g., FDIC v. Bodin Concrete Co., 869 S.W.2d 372 (Tex. App.—Dallas 1993, writ denied). However, Texas Property Code section 51.0075(c) makes clear that the appointment or authorization to appoint a trustee must be in writing. See Tex. Prop. Code § 51.0075(c). If a substitute trustee is appointed in writing, the effective date for the appointment is the date the appointment is signed, not the date the appointment is acknowledged. Martin v. Skelton, 567 S.W.2d 585 (Tex. App.—Fort Worth 1978, writ ref’d n.r.e.).
§ 11.12Acknowledgment of Appointment
There is no requirement that the trustee’s appointment be acknowledged by a notary. Onwuteaka v. Cohen, 846 S.W.2d 889, 895 (Tex. App.—Houston [1st Dist.] 1993, writ denied). However, if the appointment is to be recorded in the real property records, the appointment instrument must be acknowledged in accordance with Texas Property Code section 12.001. See Tex. Prop. Code § 12.001.
Though the mortgagee of record usually designates a third party to act as the trustee, the mortgagee can be named the trustee. Valley International Properties v. Ray, 586 S.W.2d 898, 901 (Tex. App.—Corpus Christi–Edinburg 1979, no writ).
More than one person can be appointed as a substitute trustee. Tex. Prop. Code § 51.0074(a).
§ 11.15Delegation by Corporate Resolution
A board of directors can delegate the power to appoint a substitute trustee to a person with administrative authority by means of a corporate resolution. In Helms v. Home Owners’ Loan Corp., 103 S.W.2d 128, 134 (Tex. 1937), the Texas Supreme Court found that the regional manager for the lender had the administrative authority to appoint a trustee. Therefore, the court concluded, “[u]ndoubtedly, the board of directors can appoint agents, whether in the form of committees or as single agents, to transact the ordinary business of the corporation.” Helms, 103 S.W.2d at 133. Texas Property Code section 51.0075(c) removes all doubt that a mortgagee or mortgage servicer can appoint or authorize the appointment of a trustee by a corporate resolution. See Tex. Prop. Code § 51.0075(c).
§ 11.16Irregularity Causing Bad Sale
The following factors seem to influence a court’s determination whether an irregularity in the appointment of a substitute trustee constitutes an invalid foreclosure:
•Whether the debtor seeks rescission or monetary damages. University Savings Ass’n v. Springwoods Shopping Center, 644 S.W.2d 705 (Tex. 1982).
•If the failure to appoint the trustee affected the fairness of the foreclosure sale. American Savings & Loan Ass’n of Houston v. Musick, 531 S.W.2d 581 (Tex. 1975); Charter National Bank—Houston v. Stevens, 781 S.W.2d 368, 371 (Tex. App.—Houston [14th Dist.] 1989, writ denied).
•If the foreclosure caused the borrower to lose a substantial amount of equity. Delley v. Unknown Stockholders of Brotherly & Sisterly Club of Christ, Inc., 509 S.W.2d 709 (Tex. App.—Tyler 1974, writ ref’d n.r.e.).
§ 11.17Signature on Notice of Sale
In Wilson v. Armstrong, 236 S.W. 755, 760 (Tex. App.—Beaumont 1921, no writ), the court held that a notice of sale (now Texas Property Code section 51.002(d)) did not require a trustee’s signature and that an error in the date of the notice of sale was immaterial.
If the notice of sale will be used to document the appointment of a substitute trustee under Property Code section 51.0076, the notice of sale must be signed by an attorney or agent of the mortgagee or mortgage servicer. See Tex. Prop. Code § 51.0076(2).
§ 11.18Sale by Person Other Than Designated Trustee
A foreclosure sale conducted by anyone other than a person properly authorized to do so is void. Miller v. Boone, 23 S.W. 574 (Tex. 1893); Sullivan v. Hardin, 102 S.W.2d 1110, 1113 (Tex. App.—Amarillo 1937, no writ).
The failure to include the name and an address for the trustee or substitute trustee who will conduct the sale in the foreclosure notice required by Texas Property Code section 51.002(b) may create litigation risks. Without a name and address, a borrower has no means to contact the trustee before the scheduled sale. However, in University Savings Ass’n v. Springwoods Shopping Center, 644 S.W.2d 705 (Tex. 1982), the Texas Supreme Court articulated what appears to be the true test of whether strict compliance is required in the appointment of a trustee. The court found that failure to record an appointment of trustee as required by the deed of trust did not unfairly affect the mortgagor or the fairness of the sale. University Savings Ass’n, 644 S.W.2d at 706.
It is no longer good law that the trustee is the special representative of both the mortgagor and mortgagee. See, e.g., Peterson v. Black, 980 S.W.2d 818 (Tex. App.—San Antonio 1998, no writ). Beginning in 2007, “a trustee may not be held to the obligations of a fiduciary of the mortgagor or mortgagee.” Tex. Prop. Code § 51.0074(b)(2).
In addition, no longer can a trustee be “assigned a duty under a security instrument other than to exercise the power of sale in accordance with the terms of the security instrument.” Tex. Prop. Code § 51.0074(b)(1).
Unless the trustee has been engaged to perform all the foreclosure tasks required under Texas Property Code chapter 51 and the security instrument—which is generally the case in most commercial property foreclosures—the only duty a trustee must perform is conducting the public auction. The mortgage servicer may administer all the other foreclosure tasks on behalf of the mortgagee pursuant to section 51.0025 of the Texas Property Code. See Tex. Prop. Code § 51.0025.
Texas Property Code section 51.007(f) provides, “[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.” Tex. Prop. Code § 51.007(f). This provision should be incorporated into any verified denial a trustee makes in seeking to be dismissed as an unnecessary party under section 51.007. See section 11.2 above.
As of the publication date of this manual, there appears to be no guidance from the appellate courts on how to construe the statutory provisions of Texas Property Code section 51.0074(b)(1) and (2) with respect to a trustee’s duties. Until an opinion is rendered, the following cases are cited as background information on the duties and responsibilities of a trustee.
A trustee’s duty is to obtain the highest possible price for the foreclosure property while acting with impartiality and fairness. Hammonds v. Holmes, 559 S.W.2d 345 (Tex. 1977); First Federal Savings & Loan Ass’n v. Sharp, 359 S.W.2d 902 (Tex. 1962); Stephenson v. LeBoeuf, 16 S.W.3d 829 (Tex. App.—Houston [14th Dist.] 2000, pet. denied).
The trustee does not owe a fiduciary duty to the mortgagor. Tex. Prop. Code § 51.0074(b)(2); FDIC v. Myers, 955 F.2d 348, 350 (5th Cir. 1992). Myers follows the principle that there is no fiduciary relationship between a borrower and the lender. FDIC v. Claycomb, 945 F.2d 853, 859 (5th Cir. 1991).
The trustee is not required to take any affirmative action beyond what is required by statute and the security instrument. First State Bank v. Keilman, 851 S.W.2d 914 (Tex. App.—Austin 1993, writ denied). A trustee is not responsible for providing the borrower with payoff or reinstatement information. Sanders v. Shelton, 970 S.W.2d 721 (Tex. App.—Austin 1998, no writ).
A trustee is authorized to accept a credit bid from the mortgagee that is equal to or less than the amount owed on the debt. Cash is not required. Thomason v. Pacific Mutual Life Insurance Co. of California, 74 S.W.2d 162 (Tex. App.—El Paso 1934, writ ref’d).
A mortgagee who is also the trustee can bid for the mortgagee’s own account, so long as the sale is conducted fairly. Skeen v. Glenn Justice Mortgage Co., 526 S.W.2d 252, 256 (Tex. App.—Dallas 1975, no writ). However, see Casa Monte Co. v. Ward, 342 S.W.2d 812, 813 (Tex. App.—Austin 1961, no writ), that held—based on specific terms contained in the deed of trust—a sale made by a trustee to himself is voidable at the election of the maker of the note.
A trustee may delegate ministerial duties connected with a foreclosure sale. Natali v. Witthaus, 135 S.W.2d 969 (Tex. 1940); Titterington v. Deutsch, 179 S.W. 279 (Tex. App.—Dallas 1915, no writ); Roe v. Davis, 142 S.W. 950 (Tex. App.—Texarkana 1911), aff’d, 172 S.W. 708 (Tex. 1915).
All issues related to trustees’ duties in conducting a foreclosure are considered questions of law, not fact. Centeq Realty, Inc. v. Siegler, 899 S.W.2d 195 (Tex. 1995).
A two-year statute of limitations applies for claims questioning the authority of the trustee. See Tex. Civ. Prac. & Rem. Code § 16.033(a)(7).
The amount of fees a trustee may collect for conducting a foreclosure is discussed in Edwards v. Holleman, 893 S.W.2d 115 (Tex. App.—Houston [1st Dist.] 1995, writ denied), where a bank president collected $18,061.31 in trustee’s fees on a $120,000.00 loan made by the bank. The Houston court of appeals held that a trustee’s fees must be reasonable based on the amount of time spent, tasks performed, and other attending circumstances. Holleman, 893 S.W.2d at 118–19.
See form 11-8 in this chapter for a letter employing a local attorney to conduct the foreclosure sale, form 11-9 for an agreement indemnifying the substitute trustee for acting under the deed of trust, and form 11-10 on resignation of the trustee.
§ 11.20Conducting Foreclosure Sale
If the trustee encounters problems while conducting the public sale, the trustee should consider recessing the sale to obtain advice and new instructions. A short recess or even canceling the sale can prevent litigation risks; however, a recess or cancellation may be prevented by using a carefully worded script that announces the conditions that will apply to the sale. See Tex. Prop. Code § 51.0075(a).
These conditions must be reasonable and must be announced before the trustee starts the bidding on the first property the trustee will sell. See Tex. Prop. Code § 51.0075(a).
The foreclosure sale transcript should expressly state that if a successful bidder fails to accept the conditions of sale, which includes signing a document acknowledging the conditions of sale, the trustee will reconvene the sale.
See form 14-2 in this manual.
A condition precedent for reconvening any sale is that all the original bidders be advised of the new time the sale will be reconvened. Mitchell v. Texas Commerce Bank-Irving, 680 S.W.2d 681, 693 (Tex. App.—Fort Worth 1984, writ ref’d n.r.e.).
A trustee sometimes faces the dilemma of whether to accept “official checks” issued by a lending institution instead of cashier’s checks for the foreclosure bid price. Official checks are not considered good funds because payment can be refused by the issuing bank based on a stop-pay order. Cashier’s checks are guaranteed funds and consequential damages can be imposed if the issuer refuses to pay the cashier’s check. See Tex. Bus. & Com. Code § 3.411; Guaranty Federal Savings Bank v. Horseshoe Operating Co., 793 S.W.2d 652 (Tex. 1990).
A common practice among investors bidding on properties at foreclosure sales is to have multiple cashier’s checks or official checks, in various denominations, made payable to themselves. If the investor is the successful bidder, the investor then endorses the cashier’s check(s) to the trustee. Accepting third party endorsed checks heightens the possibility for fraud in the transaction, refusal by the issuing bank, or delay in negotiating the third-party endorsed check. Texas Property Code section 51.0075(a) permits a trustee to set reasonable conditions for conducting the sale, including language similar to: “Those desiring to bid and purchase the property will need to demonstrate their ability to pay their bid immediately by cashier’s check made payable to the order of the undersigned trustee. No third-party cashier’s checks will be accepted.”
If a trustee accepts cash for the bid, the trustee must report the receipt of U.S. currency in the amount of $10,000 or more to the IRS on IRS Form 8300. Instructions for completing IRS Form 8300 are found in IRS Publication 1544 (rev. Sept. 2014).
Residential Real Property Sales: A trustee or substitute trustee conducting a residential real property foreclosure may contract with an attorney to advise the trustee or substitute trustee and to administer or perform any of the trustee’s or substitute trustee’s functions or responsibilities under the deed of trust and chapter 51 of the Texas Property Code. Tex. Bus. & Com. Code § 22.003. The trustee or substitute trustee may also contract with an auction company to arrange, manage, sponsor, or advertise a residential real property foreclosure sale. Tex. Bus. & Com. Code § 22.003.
A winning bidder at a sale, other than the foreclosing mortgagee or mortgage servicer, shall provide the following information to the trustee or substitute trustee at the time the trustee or substitute trustee completes the sale:
(1)the name, address, telephone number, and e-mail address of the bidder and of each individual tendering or who will tender the sale price for the winning bid;
(2)if the bidder is acting on behalf of another individual or organization, the name, address, telephone number, and e-mail address of the individual or organization and the name of a contact person for the organization;
(3)the name and address of any person to be identified as the grantee in a trustee’s or substitute trustee’s deed;
(4)the purchaser’s tax identification number;
(5)a government-issued photo identification to confirm the identity of each individual tendering funds for the winning bid; and
(6)any other information reasonably needed to complete the trustee’s or substitute trustee’s duties and functions concerning the sale.
Tex. Bus. & Com. Code § 22.004(a).
If a winning bidder required to provide information under section 22.004(a) fails or refuses to provide the information, the trustee or substitute trustee may decline to complete the transaction or deliver a deed. Tex. Bus. & Com. Code § 22.004(b).
The trustee or substitute trustee must:
(1)provide the winning bidder with a receipt for the sale proceeds tendered; and
(2)except when prohibited by law, within a reasonable time:
(A)deliver the deed to the winning bidder; or
(B)file the deed for recording.
Tex. Bus. & Com. Code § 22.005.
The trustee or substitute trustee must ensure that funds received at the sale are maintained in a separate account until distributed. Tex. Bus. & Com. Code § 22.006(a). The trustee or substitute trustee shall cause to be maintained a written record of deposits to and disbursements from the account. Tex. Bus. & Com. Code § 22.006(a). The trustee or substitute trustee shall make reasonable attempts to identify and locate the persons entitled to all or any part of the sale proceeds. Tex. Bus. & Com. Code § 22.006(b).
In connection with the sale and related postsale actions to identify persons with legal claims to sale proceeds, determine the priority of any claims, and distribute proceeds to pay claims, a trustee or substitute trustee may receive:
(1)reasonable actual costs incurred, including costs for evidence of title;
(2)a reasonable trustee’s or substitute trustee’s fee; and
(3)reasonable trustee’s or substitute trustee’s attorney’s fees
Tex. Bus. & Com. Code § 22.006(c).
A fee described by section 22.006(c):
(1)is considered earned at the time of the sale;
(2)may be paid from sale proceeds in excess of the payoff of the lien being foreclosed; and
(3)is conclusively presumed to be reasonable if the fee:
(A)is not more than the lesser of 2.5 percent of the sale proceeds or $5,000, for a trustee’s or substitute trustee’s fee; or
(B)is not more than 1.5 percent of the sale proceeds, for trustee’s or substitute trustee’s attorney’s fees incurred to identify persons with legal claims to sale proceeds and determine the priority of the claims.
Tex. Bus. & Com. Code § 22.006(d).
A trustee or substitute trustee who prevails in a suit based on a claim that relates to the sale and that is found by a court to be groundless in fact or in law is entitled to recover reasonable attorney’s fees necessary to defend against the claim, which may be paid from the excess sale proceeds, if any. Tex. Bus. & Com. Code § 22.006(e). Nothing in section 22.006 of the Business and Commerce Code precludes the filing of an interpleader action or the depositing of funds in a court registry. Tex. Bus. & Com. Code § 22.006(f).
At the time of sale, the mortgagee can apply a credit bid in an amount equal to or less than the amount owed on the debt, including fees and costs, corporate advances, and expenses of collection, to include attorney’s fees allowed by the loan agreement. Habitat, Inc. v. McKanna, 523 S.W.2d 787 (Tex. App.—Eastland 1974, no writ). Cash for the mortgagee’s bid is not required because it would be “an idle ceremony” for the trustee to receive the bid price and then return it to the mortgagee. Intertex, Inc. v. Cowden, 728 S.W.2d 813, 816 (Tex. App.—Houston [1st Dist.] 1986, no writ) (citing Thomason v. Pacific Mutual Life Insurance Co. of California, 74 S.W.2d 162 (Tex. App.—El Paso 1934, writ ref’d)).
If acceptable arrangements have been made with the trustee before the sale, it may not be necessary for a bidder to attend the sale, and the sale may be on credit even if the security instrument requires cash. Merrimac Properties, Inc. v. Combined Financial Corp., No. 10-02-00298-CV, 2004 WL 1126307, at *1 (Tex. App.—Waco May 19, 2004, pet. denied) (mem. op.).
One bid is acceptable for two separate tracts of land, so long as the mortgagee apportions the bid price fairly between each individual tract. See Provident National Assurance Co. v. Stephens, 910 S.W.2d 926 (Tex. 1995).
Purchasers of foreclosure property buy at their peril. Henke v. First Southern Properties, Inc., 586 S.W.2d 617, 620 (Tex. App.—Waco 1979, writ ref’d n.r.e.). All warranties of title in a trustee’s deed come from the borrower, not the mortgagee. In re Niland, 825 F.2d 801 (5th Cir. 1987); Sandel v. Burney, 714 S.W.2d 40, 41 (Tex. App.—San Antonio 1986, no writ); Diversified, Inc. v. Walker, 702 S.W.2d 717, 723 (Tex. App.—Houston [1st Dist.] 1985, writ ref’d n.r.e.).
A purchaser at a foreclosure sale acquires the foreclosed property “as is” without any expressed or implied warranties, except as to warranties of title, at the purchaser’s own risk. Tex. Prop. Code § 51.009(1). For a definition of “as is,” see Bynum v. Prudential Residential Services, Ltd. Partnership, 129 S.W.3d 781, 788–89 (Tex. App.—Houston [1st Dist.] 2004, pet. denied).
For the purposes of the Texas Deceptive Trade Practices–Consumer Protection Act, a foreclosure sale purchaser is not a consumer. Tex. Prop. Code § 51.009(2).
§ 11.23“Chilled” Foreclosure Bid
“Chilling the bid” refers to instances where the acts of the mortgagee or trustee prevented an orderly disposition of the secured property or deterred third parties from bidding under a theory that the wrong committed resembles that of conversion. Pentad Joint Venture v. First National Bank of La Grange, 797 S.W.2d 92, 96 (Tex. App.—Austin 1990, writ denied).
Over time, the “chilling the bid” cause of action has evolved so that it only arises when the mortgagee or trustee’s deliberate and affirmative acts interfered with the bidding process and were the cause of the property being sold for a grossly inadequate price. See, e.g., Ashton v. BAC Home Loans Servicing LP, No. 4:13-cv-810, 2013 WL 3807756, at *2 (S.D. Tex. July 19, 2013); Veldekens v. GE HFS Holdings Inc., No. H-06-3296, 2008 WL 4425363, at *22 (S.D. Tex. Sept. 24, 2008). The fact that the property was sold for inadequate consideration alone does not render the foreclosure sale void. Tarrant Savings Ass’n v. Lucky Homes, Inc., 390 S.W.2d 473, 475 (Tex. 1965).
In a trustee’s deed, a foreclosure sale purchaser only obtains title to property the trustee had authority to convey. First Southern Properties, Inc. v. Vallone, 533 S.W.2d 339, 341 (Tex. 1976); American Savings & Loan Ass’n of Houston v. Musick, 531 S.W.2d 581 (Tex. 1976). A trustee’s deed serves as a prima facie source of common title in a trespass to try title lawsuit. See Temple Lumber Co. v. Arnold, 14 S.W.2d 926 (Tex. App.—Beaumont 1929, writ dism’d w.o.j.).
Since the deed of trust signed by the borrower or mortgagor is simply a contract that allows the encumbered property to serve as security for payment of the debt, neither the mortgagee or trustee has title to the property, only a lien. Slay v. Gose, 233 S.W. 348, 349 (Tex. App.—Fort Worth 1921, no writ). Therefore, a trustee’s deed does not convey title from the trustee or the mortgagee at a foreclosure sale because neither had title to the property. A trustee’s deed merely transfers title from the mortgagor to the foreclosure sale purchaser. As a result, all warranties contained in a trustee’s deed come from the mortgagor. Sandel v. Burney, 714 S.W.2d 40, 41 (Tex. App.—San Antonio 1986, no writ). For the proposition that “there is no precedent in the law that would support any theory of warranty on the part of a noteholder” running to the purchaser at a void foreclosure sale, see In re Niland, 825 F.2d 801, 811 (5th Cir. 1987) (quoting Diversified, Inc. v. Walker, 702 S.W.2d 717, 723 (Tex. App.—Houston [1st Dist.] 1985, writ ref’d n.r.e.)).
A mortgagee who acquires title by a trustee’s deed that proves to be irregular or void as to the mortgagor may retain possession of the property in any suit by the mortgagor, or one holding under the mortgagor, until the underlying debt is paid. Jasper State Bank v. Braswell, 111 S.W.2d 1079, 1083 (Tex. 1938).
A bidder who pays cash at a foreclosure sale obtains equitable title to the property, and failure to deliver or record a trustee’s deed does not divest the foreclosure sale purchaser of title. Peterson v. Black, 980 S.W.2d 818, 822 (Tex. App.—San Antonio 1998, no pet.); Pioneer Building & Loan Ass’n v. Cowan, 123 S.W.2d 726 (Tex. App.—Waco 1938, writ dism’d judgm’t cor.).
If a trustee’s deed contains facts related to the conduct of the foreclosure sale, such recitals are prima facie evidence of the facts stated. Adams v. Zellner, 183 S.W. 1143, 1144 (Tex. 1916); Birdwell v. Kidd, 240 S.W.2d 488, 491 (Tex. App.—Texarkana 1951, no writ). However, a challenge to any of the recitals in the trustee’s deed must be brought within two years after the deed was recorded. Tex. Civ. Prac. & Rem. Code § 16.033(a)(7).
After a foreclosure sale, the trustee must distribute the sale proceeds in accordance with the terms of the loan agreement. Under standard deed of trust forms, after paying the trustee’s fees, attorney’s fees, and the amount due to the mortgagee, any excess proceeds remaining must be paid to inferior lienholders in the order of lien priority. Excess proceeds always flow down to inferior lienholders in the chain of title, never up to superior lienholders. Conversion Properties, L.L.C. v. Kessler, 994 S.W.2d 810, 813 (Tex. App.—Dallas 1999, pet. denied). Accordingly, excess proceeds from a junior lien foreclosure are not applied to satisfy a senior lien, and the successful bidder takes subject to all superior liens. Conversion Properties, L.L.C., 994 S.W.2d at 813. If no inferior liens encumber the foreclosed property, the surplus proceeds belong to the mortgagor. Grant v. U.S. Department of Veterans’ Affairs, 827 F. Supp. 418 (S.D. Tex. 1993).
A helpful roadmap on how a Texas trustee should distribute excess proceeds is Hanley v. Pearson, 61 P.3d 29 (Ariz. Ct. App. 2003), with the caveat that the opinion was based on an analysis of Arizona statutes dealing with excess proceeds. Regrettably, there is no excess proceeds statute under Texas law that gives guidance to a trustee on how to distribute excess proceeds.
Bankruptcy may affect how the excess proceeds are distributed. In re Keener, 268 B.R. 912 (Bankr. N.D. Tex. 2001). In Keener, the bankruptcy trustee filed suit against the foreclosing bank because the bank applied $200,590 in excess proceeds to other debts owed by the borrower that were not secured by the foreclosed property. The court found the bank breached the terms of the deed of trust because the excess proceeds represented merely a change in the form of the collateral. The other debts were not secured by the foreclosed property; therefore, the excess proceeds could not be used to pay the other debts.
When distributing excess proceeds, the trustee should determine whether the alleged recipient is a person on the “Specially Designated Nationals List” who is prohibited from receiving such funds. The list can be obtained from the U.S. Department of the Treasury, Office of Foreign Assets Control at www.treasury.gov/resource-center/sanctions/SDN-List/Pages/default.aspx.
Based on the rebuttable presumption that a foreclosure sale is conducted properly and the trustee’s duties and responsibilities were performed correctly (see Roland v. Equitable Trust Co., 584 S.W.2d 883 (Tex. App.—San Antonio 1979, writ ref’d n.r.e.)), most foreclosure professionals attach an affidavit to the trustee’s deed averring the foreclosure was procedurally correct, to include the proper appointment of a trustee. This affidavit accommodates the concerns of title examiners as to whether a foreclosure was conducted properly.
In addition, if the deed of trust provides that all prerequisites to the sale are presumed performed correctly, any recitations as to the conduct of the sale in the trustee’s deed will be considered prima facie evidence of the truth of the matter stated. Cunningham v. Paschall, 135 S.W.2d 293, 296 (Tex. App.—Fort Worth 1939 writ dism’d judgm’t cor.).
A trustee does not owe a duty of good faith and fair dealing to the obligor of the debt or mortgage, even if the trustee makes mistakes in handling the foreclosure, such as misrepresenting the amount due under the note and deed of trust. See Powell v. Stacy, 117 S.W.3d 70 (Tex. App.—Fort Worth 2003, no pet.).
Dysart, Sara E. “Attorney Acting as Substitute Trustee in a Non-Judicial Foreclosure Sale.” In Advanced Real Estate Strategies Course, 2017. Austin: State Bar of Texas, 2017.