Conducting the Sale
Prior to conducting a nonjudicial foreclosure sale, the trustee or substitute trustee must confirm compliance with Tex. Prop. Code § 51.002 and the deed of trust. The trustee or substitute trustee should verify that the loan is in default, late payments have not been accepted, reinstatement has not been granted, forbearance promises have not been made, all or a part of the mortgaged property has not been released from the lien of the deed of trust, all required notices of default have been delivered, and whether the lender has taken any action that could result in the loan not being in default.
Avoid a Void Foreclosure: Noncompliance with the statute and deed of trust will result in a void foreclosure sale, as opposed to an irregularity in the foreclosure sale resulting in a grossly inadequate sale price which may result in a voidable foreclosure sale. The following are cases where Texas courts have found a foreclosure sale to be void: Wesley v. Amerigo, No. 10-05-00041-CV, 2006 WL 22213, at *3 (Tex. App.—Waco Jan. 4, 2006, no pet.) (mem. op.) (foreclosure sale by subordinate lienholder void when held after foreclosure by senior lienholder); Chale Garza Investments, Inc. v. Madaria, 931 S.W.2d 597, 600 (Tex. App.—San Antonio 1996, writ denied) (no power of sale after lien is released); Oles v. Curl, 65 S.W.3d 129, 131 (Tex. App.—Amarillo 2001, no pet.) (foreclosure sale void when held in violation of automatic stay); Diversified, Inc. v. Walker, 702 S.W.2d 717, 721 (Tex. App.—Houston [1st Dist.] 1988, writ denied) (foreclosure sale void when trustee’s conditions and limitations not fulfilled); Henke v. First Southern Properties, Inc., 586 S.W.2d 617, 618 (Tex. App.—Waco 1979, writ ref’d n.r.e.) (foreclosure sale void when mortgagor made past-due payments in reliance on mortgagee’s agreement to reinstate loan).
In Slaughter v. Qualls, 162 S.W.2d 671 (Tex. 1942), the court set out the general rules of law applicable to a void foreclosure sale, including (1) the application of the statutes of limitations, (2) the effect upon title, and (3) rights of third-party purchasers from foreclosure sale grantees.
§ 14.1:1Statutes of Limitations
A challenge to a void deed is not subject to the four-year statute of limitations. In a trespass to try title lawsuit, the land can be recovered without setting aside the void deed, and the statute of limitations governing actions for the recovery of land applies. See Slaughter v. Qualls, 162 S.W.2d 671, 674 (Tex. 1942). In other words, parties can claim title to land under the adverse possession statutes without setting aside the void deed. Tex. Civ. Prac. & Rem. Code §§ 16.024–.028. A challenge to a voidable deed is subject to the four-year statute of limitations. Tex. Civ. Prac. & Rem. Code § 16.051. A void deed is neither title nor color of title for purposes of three-year statute of limitations. Tex. Civ. Prac. & Rem. Code § 16.024; see Field Measurement Service, Inc. v. Ives, 609 S.W.2d 615, 620–21 (Tex. App.—Corpus Christi–Edinburg 1980, writ ref’d n.r.e.).
Whether a deed is void or voidable is based on its effect upon title at the time it is executed and delivered. If a deed is void, it passes no title and confers no right. If a deed is voidable, it passes title subject to being judicially set aside upon proof that that the sale was improper. See Slaughter v. Qualls, 162 S.W.2d 671, 674 (Tex. 1942).
§ 14.1:3Third-Party Purchasers from Foreclosure Sale Grantee
Good-faith purchasers from grantees of a void trustee’s deed may acquire good title as against the mortgagor by bona fide purchasers for value, not because the grantee has good title, and not because title actually passed, but on the theory that mortgagor’s execution of the deed of trust made it possible for the trustee to create the appearance of good title in the grantee who sells to a good-faith purchaser for value. See Slaughter v. Qualls, 162 S.W.2d 671, 674 (Tex. 1942).
Section 51.002 of the Texas Property Code sets forth minimum requirements for the sale. See section 12.4 in this manual for a discussion of the requirements that must be set out in the notice and information regarding the place and time of the foreclosure sale.
The deed of trust names a trustee to execute the power of sale contained therein and usually gives the beneficiary the right to appoint a substitute trustee. The Texas Property Code provides that “a mortgagee may appoint or may authorize a mortgage servicer to appoint a substitute trustee or substitute trustees to succeed to all title, power, and duties of the original trustee.” Tex. Prop. Code § 51.0075(c). Tex. Prop. Code § 51.0074 sets out the duties of the trustee.
A sale by a person other than the designated trustee or the properly appointed substitute trustee is void. See Slaughter v. Qualls, 162 S.W.2d 671, 675 (Tex. 1942). The power to appoint a substitute trustee must strictly comply with the terms of the deed of trust and is not delegable. See Sullivan v. Hardin, 102 S.W.2d 1110, 1113 (Tex. App.—Amarillo 1937, no writ).
The sale will not be invalid solely because the trustee is also the holder of the secured indebtedness or because the trustee has some direct or indirect interest in the outcome of the sale. See Tarrant Savings Ass’n v. Lucky Homes, Inc., 390 S.W.2d 473, 476 (Tex. 1965); Valley International Properties v. Ray, 586 S.W.2d 898, 902 (Tex. App.—Corpus Christi–Edinburg 1979, no writ). A trustee, however, may not purchase the property for his own personal benefit absent express authorization in the deed of trust. For example, the trustee may not purchase the property through his spouse or a corporation controlled or dominated by the trustee. See Southern Trust & Mortgage Co. v. Daniel, 184 S.W.2d 465, 466–67 (Tex. 1944); Casa Monte Co. v. Ward, 342 S.W.2d 812, 813 (Tex. App.—Austin 1961, no writ).
When the trustee enters the bid for the mortgagee, the trustee is acting as the agent of the mortgagee. In McClure v. Casa Claire Apartments, 560 S.W.2d 457, 461–62 (Tex. App.—Beaumont 1977, no writ), the trustee entered a bid on behalf of the lender in the amount of $2,235,077.00, which resulted in an overbid of $186,590.14. The court held that the mortgagee was equitably estopped from rescinding the sale because it failed to give notice to the mortgagor of its unilateral mistake of overbidding several months after sale incident to the lawsuit. McClure, 560 S.W.2d at 462. The trustee performed two roles at the time of sale: (1) as trustee, the trustee is required to accept the highest bid made; and (2) as agent of the mortgagee, the trustee has apparent authority to enter a bid for the mortgagee. McClure, 560 S.W.2d at 462.
Texas Property Code section 51.002 refers to the sale as a “public sale at auction.” Tex. Prop. Code § 51.002(a). The mortgagee is required to hold a fair sale, which means that the mortgagee must not take affirmative steps to negatively affect the sale price at foreclosure. See Pentad Joint Venture v. First National Bank of La Grange, 797 S.W.2d 92, 96 (Tex. App.—Austin 1990, writ denied).
Unlike a personal property foreclosure under the Uniform Commercial Code, a real property foreclosure under a deed of trust need not be “commercially reasonable,” and the failure to conduct a commercially reasonable foreclosure sale of real property is not actionable. Huddleston v. Texas Commerce Bank–Dallas, 756 S.W.2d 343, 346 (Tex. App.—Dallas 1988, writ denied). “[A] mortgagee owes but one duty to the mortgagor, to conduct the sale properly.” RTC v. Westridge Court Joint Venture, 815 S.W.2d 327, 332 (Tex. App.—Houston [1st Dist.] 1991, writ denied).
The same principle is applicable to the trustee. The trustee does not owe a fiduciary duty or a duty of good faith and fair dealing to the borrower. Tex. Prop. Code § 51.0074(b)(2); see also FDIC v. Myers, 955 F.2d 348, 350 (5th Cir. 1992) (citing University Savings Ass’n v. Springwoods Shopping Center, 644 S.W.2d 705 (Tex. 1923); English v. Fischer, 660 S.W.2d 521 (Tex. 1983); and FDIC v. Coleman, 795 S.W.2d 706 (Tex. 1990)). Accordingly, the lack of effort by the trustee to obtain fair market value is not grounds for relief in an action for a deficiency judgment; the trustee is obligated only to comply with the terms of the deed of trust. Myers, 955 F.2d at 350.
See section 11.20 in this manual, which describes the duties and responsibilities placed on a trustee conducting a public sale of residential real property pursuant to Texas Business and Commerce Code chapter 22.
Texas Property Code section 51.002 does not specify what the trustee must say at the auction. “A trustee or substitute trustee may set reasonable conditions for conducting the public sale if the conditions are announced before bidding is opened for the first sale of the day conducted by the trustee or substitute trustee.” Tex. Prop. Code § 51.0075(a). It is recommended that a trustee prepare and read a script before the first sale the trustee conducts that day that describes how typical foreclosure-related issues will be handled, for example, bankruptcy, receivership, reinstatement, and excess proceeds. To avoid complaints that the trustee is chilling the bidding, the trustee should speak loudly enough to be heard at a reasonable distance. Usually the trustee reads a copy of the public notice and opens the auction for bids. The attorney for the mortgagee is often the trustee who conducts the foreclosure sale and enters the bid for the mortgagee.
See form 14-1 in this chapter for a form employing a local agent, often the attorney conducting the sale, to act as a bidder, form 14-2 for a foreclosure sale transcript for the trustee to use in conducting the sale, form 14-3 for an attendance registration form, and form 13-2 for a bid calculation worksheet. A transcript is useful to ensure that proper procedures are followed in case there are multiple bidders or the sale is questioned at a later date. Some trustees have court reporters record the proceeding or have it tape-recorded or videotaped. Form 14-2 also documents the information required by Tex. Bus. & Com. Code § 22.004 if the sale is for residential real property under a power of sale.
§ 14.4:2Open-Beach Disclosures
The Open Beach Act provides that purchasers of property located seaward of the Gulf Intracoastal Waterway must be given and acknowledge receipt of a statutorily prescribed notice. Tex. Nat. Res. Code § 61.025. The Texas attorney general has opined that this notice requirement is applicable to foreclosure sales. Tex. Att’y Gen. Op. No. JM-834 (1987). This disclosure should be in a separate written statement, the receipt of which is acknowledged by each bidder at the foreclosure sale before bidding. See the discussion at section 12.4:10 in this manual.
To Highest Bidder for Cash: Although Texas Property Code section 51.002 does not provide that the sale be for cash, most deeds of trust require that the sale be to the “highest bidder for cash.” This contractual requirement has been upheld. See Kirkman v. Amarillo Savings Ass’n, 483 S.W.2d 302, 308–09 (Tex. App.—Amarillo 1972, writ ref’d n.r.e.). Pursuant to Texas Property Code section 51.0075(f), the purchase price for a foreclosure sale is “due and payable without delay on acceptance of the bid or within such reasonable time as may be agreed upon by the purchaser and trustee.” Tex. Prop. Code § 51.0075(f).
A prospective bidder must be prepared to tender cash at the sale if cash is required by the deed of trust and the trustee. The trustee is not required to accept a credit bid but may extend credit to selected buyers. Valley International Properties v. Ray, 586 S.W.2d 898, 901 (Tex. App.—Corpus Christi–Edinburg 1979, no writ); French v. May, 484 S.W.2d 420, 425 (Tex. App.—Corpus Christi–Edinburg 1972, writ ref’d n.r.e.). Absent a contractual requirement for cash, cashier’s checks are acceptable. Wertz v. Richardson Heights Bank & Trust, 495 S.W.2d 572, 574 (Tex. 1973); Humble National Bank v. DCV, Inc., 933 S.W.2d 224, 237–38 (Tex. App.—Houston [14th Dist.] 1996, writ denied).
Reasonable Conditions: Tex. Prop. Code § 51.0075(a) provides that “[a] trustee or substitute trustee can set reasonable conditions for conducting the sale if the conditions are announced before bidding is open for the first sale of the day held by the trustee or substitute trustee.” Tex. Prop. Code § 51.0075(a). Form 14-2 in this chapter, “Foreclosure Sale Transcript,” should be carefully reviewed and used by the trustee because it sets out reasonable conditions of the sale and disclaimers by the trustee.
Time to Produce Cash: Tex. Prop. Code § 51.0075(f) states that the “trustee or substitute trustee” may set reasonable conditions for conducting the public sale. There are no Texas cases since 2009 construing this provision, specifically, whether the sale may be adjourned to permit the bidder a reasonable time to deliver the successful bid amount. The public policy against chilling bidding and for maximizing the foreclosure bid price, the practical challenge of carrying a large amount of cash or even cash in the exact amount of the winning bid, and the public policy reflected in section 51.0075(a) support construing “acceptance of the bid” in section 51.0075(f) as permitting the trustee to adjourning the sale to allow a reasonable time to produce cash. In Kirkman, the trustee’s sale was recessed from 11:15 a.m. to 2:00 p.m. to permit the bidder to produce cash for his bid. The court upheld the validity of a sale to the second-highest bidder (which happened to be the creditor), because the highest bidder failed to produce his cash bid within the reasonable time set by the trustee. Kirkman, 483 S.W.2d at 308. At the time the original sale was recessed, the creditor and the high bidder were the only two bidders present. In First Texas Service Corp. v. McDonald, 762 S.W.2d 935 (Tex. App.—Fort Worth 1988, writ denied), overruled on other grounds, Kitchen v. Frusher, 181 S.W.3d 467 (Tex. App.—Fort Worth 2005, no pet.), the court upheld the jury’s findings that the trustee failed to wait a reasonable time for the highest bidder to produce cash and that the bidder did produce cash within a reasonable time. In that case, the trustee told the bidder that he would remain at the courthouse to accept the bid for “approximately forty-five minutes.” The court held that such an agreement was not governed by the statute of frauds. McDonald, 762 S.W.2d at 941; see also Tex. Bus. & Com. Code § 26.01.
The court approved the following definition of “reasonable time”:
“Reasonable time” means such time that a person of reasonable prudence and diligence would have needed under all the circumstances to perform the act contemplated; you are further instructed that the foreclosure sale had to be concluded sometime between 10:00 a.m. and 4:00 p.m. on the date in question.
McDonald, 762 S.W.2d at 939 (quoting trial court’s definition).
Postponements: The sale may be postponed for numerous reasons, usually by reposting the mortgaged property by the deadline for the next available sale. See form 14-4 in this chapter for a notice of reposted foreclosure sale. Repeated postponements should be avoided. If a sale is repeatedly posted and rescheduled, the mortgagor may be lulled into believing the sale will not be held. A consumer could argue that repeated postings indicate the mortgagee is using the posting process to harass the consumer into paying the debt. The trustee’s failure to announce the postponement might be seen as evidence of chilling the bidding, particularly if a potential bidder had come to the sale or the sale had been postponed repeatedly. In Charter National Bank—Houston v. Stevens, 781 S.W.2d 368 (Tex. App.—Houston [14th Dist.] 1989, writ denied), a bank officer’s behavior was found to have chilled the bidding. The property had been posted for sale and the sale canceled three times. When the property was posted a fourth time, a potential bidder contacted the bank. The bank officer promised to call the potential bidder if the sale was to be held. The bank officer did not call, the sale was held, and the potential bidder did not attend. The mortgagor recovered the difference between the amount of the unpaid indebtedness and the fair market value of the property. The court held that the mortgagor need not prove that irregularities resulted in a grossly inadequate price because the facts showed bid chilling rather than technical irregularities and the suit was for damages rather than rescission. Stevens, 781 S.W.2d at 374–75.
Practice Note: The safest practice is for the trustee to appear at the appointed time and announce the postponement of the sale, inquire whether anyone is present who desires to bid on the mortgaged property, take the names of everyone who is interested in bidding, write “postponed until further notice” on the posted and filed notices, and then again follow the noticing procedure. See form 14-5 for a notice of postponement of foreclosure sale.
All bidders at the sale must be given notice of the time at which the sale will reconvene if the highest bidder does not produce cash within the time permitted by the trustee. Mitchell v. Texas Commerce Bank-Irving, 680 S.W.2d 681, 683 (Tex. App.—Fort Worth 1984, writ ref’d n.r.e.). If the highest bidder does not produce the cash, the failure of the trustee to have notified all bidders of the time of the reconvened sale necessitates reposting the mortgaged property for a sale in a later month. Intertex, Inc. v. Cowden, 728 S.W.2d 813, 817–18 (Tex. App.—Houston [1st Dist.] 1986, writ ref’d n.r.e.); Clearman v. Graham, 4 S.W.2d 581, 582–83 (Tex. App.—Austin 1928, writ dism’d). See form 14-6 in this chapter for a notice of recess of foreclosure sale to be posted on the notice board and filed with the county clerk.
The mortgagee may bid at the sale and apply the amount of the bid as a credit to the secured debt owed the mortgagee without producing cash at the sale. See Thomason v. Pacific Mutual Life Insurance Co. of California, 74 S.W.2d 162, 164 (Tex. App.—El Paso 1934, writ ref’d). The mortgagee may bid even if the mortgagee is the trustee conducting the sale, as long as no fraud or unfairness is involved. Tarrant Savings Ass’n v. Lucky Homes, Inc., 390 S.W.2d 473, 476 (Tex. 1965). The mortgagee may also bid through an agent. Valley International Properties v. Ray, 586 S.W.2d 898, 902 (Tex. App.—Corpus Christi–Edinburg 1979, no writ).
The mortgagee and the trustee are obligated not to discourage bidding by acts or statements made before or during the sale.
The mortgagee is under no duty to take affirmative action beyond that required by statute or deed of trust to ensure a “fair” sale. Pentad Joint Venture v. First National Bank of La Grange, 797 S.W.2d 92, 96 (Tex. App.—Austin 1990, writ denied). The foreclosure of real property under a deed of trust does not have to be a “commercially reasonable” sale, and failure to conduct a commercially reasonable foreclosure is not actionable. Pentad, 797 S.W.2d at 97; see also Huddleston v. Texas Commerce Bank–Dallas, 756 S.W.2d 343, 347 (Tex. App.—Dallas 1988, writ denied).
The type of conduct a court will hold to be chilling is not predictable. Actions were held to constitute “chilling the bidding” in Gainesville Oil & Gas Co. v. Farm Credit Bank of Texas, 847 S.W.2d 655, 660–61 (Tex. App.—Texarkana 1993, no writ) (conflicting communications with the mortgagor about whether or at what time a scheduled foreclosure sale will be held can be the basis for chilling the bidding by encouraging the mortgagor not to attend); and Charter National Bank—Houston v. Stevens, 781 S.W.2d 368, 374–75 (Tex. App.—Houston [14th Dist.] 1989, writ denied) (bank officer’s failure to call potential bidder as promised was found to have chilled the bid). However, actions were held not to constitute “chilling the bidding” in the following cases: Pentad, 797 S.W.2d at 96–97 (mortgagee’s failure to disclose to the mortgagor that the mortgagee intends to bid less than the fair market value of the collateral at the foreclosure sale is not a defect or irregularity that would invalidate a sale); Teas v. Republic National Bank, 460 S.W.2d 233, 243 (Tex. App.—Dallas 1970, writ ref’d n.r.e.) (endorser’s discussion with mortgagee to repurchase the property before the foreclosure sale was held not to have chilled bids); First State Bank v. Keilman, 851 S.W.2d 914, 922–24 (Tex. App.—Austin 1993, writ denied) (advertising time, place, and terms of sale only by following posting requirements of Tex. Prop. Code § 51.002 without further placing ads in local newspaper; trustee’s refusal to wait for unspecified time period to allow mortgagor to go to newspaper to verify advertisement; and including in the posted notice UCC-type disclaimers as to merchantability, fitness for purpose, and quality, even though these disclaimers were not contained in the deed of trust, did not constitute chilling the bidding); Flato Bros. v. Builders Loan Co., 457 S.W.2d 154, 157 (Tex. App.—Dallas 1970, no writ) (mortgagee’s bid resulting in a deficiency, contrary to the mortgagee’s promise to enter a full credit bid, was not grounds to set the sale aside as there was no fraudulent intent by the mortgagee).
Discrepancy in Legal Description: In Myrad Properties, Inc. v. LaSalle Bank N.A., 300 S.W.3d 746 (Tex. 2009), the notice of substitute trustee’s sale omitted one of two apartment complexes in its definition of the real property secured by the deed of trust. At the sale, the trustee read aloud the description of only one of the complexes and subsequently executed and recorded a foreclosure sale deed for only one of the complexes. Myrad, 300 S.W.3d at 748–49. The court of appeals found that the notice provided adequate notice of sale of both complexes and that the foreclosure sale foreclosed the mortgagee’s lien on both complexes. Myrad, 300 S.W.3d at 749. The court of appeals based its holding in part on the fact that the notice of foreclosure sale included a statement that the mortgagee could proceed against both real and personal property described in the deed of trust:
The Deed of Trust may encumber both real and personal property. Notice is hereby given of Holder’s election to proceed against and sell both the real property and any personal property described in the Deed of Trust in accordance with the Holder’s rights and remedies under the Deed of Trust and Section 9.604 of the Texas Business and Commerce Code.
Myrad Properties, Inc. v. LaSalle Bank N.A., 252 S.W.3d 605, 616, (Tex. App.—Austin 2008), rev’d by 300 S.W.3d 746 (Tex. 2009). The court of appeals noted that the notice of foreclosure sale did not fail to provide any notice that both complexes would be sold but, rather, contained an internal inconsistency regarding what property would be sold. Myrad, 252 S.W.3d at 617.
The Texas Supreme Court reversed and rendered the holding of the court of appeals. The supreme court held that a correction deed that purports “to convey additional, separate properties not described in the original deed” is void as a matter of law, as a correction deed is appropriate in only limited circumstances to correct defects and imperfections in the original deed. Myrad, 300 S.W.3d at 750–51. The supreme court went on, however, to equitably rescind the original trustee’s deed for mutual mistake of the trustee and the mortgagee (but not of the borrower). While the supreme court based this rescission on the borrower’s failure to present contrary evidence in the lower courts, the supreme court also noted “[w]e are not blind to the equities of this dispute[,]” and indeed the effect of the court’s decision in voiding the correction deed and rescinding the original trustee’s deed was to restore the status quo ante foreclosure and allow the lender to reforeclose on the deed of trust. Myrad, 300 S.W.3d at 752–53.
The legislature amended the Texas Property Code by adding sections 5.028 through 5.031 to set out the rules for the correction of conveyance instruments. See the discussion of this statute at section 14.11 below.
§ 14.6:1Conspiracy against Junior Lienholders
A senior lienholder is not permitted to conspire with the mortgagor against a junior lienholder to prevent the junior lienholder from discovering the time of sale or to conduct the sale at an unusual time to stifle and prevent bidding. See Chandler v. Orgain, 302 S.W.2d 953, 956 (Tex. App.—Fort Worth 1957, no writ).
§ 14.6:2Mortgagor’s Attempts to Secure Refinancing or Sale
The mortgagee is not required to postpone the foreclosure sale if the mortgagor is in negotiations with another lender to refinance the debt. Sparkman v. McWhirter, 263 S.W.2d 832, 837 (Tex. App.—Dallas 1953, writ ref’d). The mortgagee’s sending notice of the foreclosure sale to prospects that were negotiating to purchase the property from the mortgagor and advertising the sale in the newspaper—a means not specified in the deed of trust for advertising the sale—did not constitute tortious interference with the contract. Allied Capital Corp. v. Cravens, 67 S.W.3d 486, 491–92 (Tex. App.—Corpus Christi–Edinburg 2002, no pet.).
§ 14.7Sale in Parcels or as Whole
Most deeds of trust contain an express provision directing the trustee to sell “all of the property as an entirety or in such parcels as the Trustee acting may elect.” The Texas Real Estate Forms Manual’s form 8-1, “Deed of Trust,” states: “If directed by Lender to foreclose this lien, Trustee will . . . sell and convey all or part of the Property ‘AS IS’ to the highest bidder for cash with a general warranty binding Grantor.” 1 State Bar of Texas, Texas Real Estate Forms Manual, ch. 8, form 8-1 (2022 ed.).
The court in Bellah v. First National Bank of Hereford, 474 S.W.2d 785 (Tex. App.—Eastland 1971, writ ref’d n.r.e.), upheld a sale of the property as an entirety and not in parcels. At the sale, the trustee stated that he was ready to sell in parcels if that was desired, but no request was made to conduct the sale in that manner. The court found no evidence of any damage caused by selling as a whole rather than in parcels. Bellah, 474 S.W.2d at 788; see also Hunt v. Jefferson Savings & Loan Ass’n, 756 S.W.2d 762, 764 (Tex. App.—Dallas 1988, writ denied) (involved five contemporaneous deeds of trust resulting in five separate foreclosure sales).
In another case involving a challenge to a judicially directed execution sale (not a nonjudicial foreclosure sale), the Texas Supreme Court found that the sale of the property as a whole, as opposed to in parcels, was wrongful because the fair market value of each of the parcels was in excess of the foreclosed debt. Stanglin v. Keda Development Corp., 713 S.W.2d 94 (Tex. 1986). The court stated: “It is reasonable to infer that any of the tracts, if sold separately or in combination with one other tract, would have satisfied the judgment. This is some evidence that the bulk sale caused or contributed to cause the grossly inadequate consideration.” Stanglin, 713 S.W.2d at 95. The holding in this case creates a fact question in every case where there is a question of whether to sell individually or in separate parcels.
The Texas Supreme Court addressed the propriety of entering a single bid on a foreclosure sale held as a single sale on a multiple-parcel shopping center in Provident National Assurance Co. v. Stephens, 910 S.W.2d 926 (Tex. 1995). See section 17.8:1 in this manual for a detailed discussion of that case.
§ 14.8Consideration Received at Sale
The issue of whether the bid at the foreclosure sale is adequate arises in a postforeclosure attack on the sale as wrongful, as a fraudulent transfer, or as a defense to a deficiency suit brought by the mortgagee or other obligee. See chapter 13 in this manual for a general discussion of a bid strategy and evaluation.
§ 14.8:1Adequate Consideration
The long-standing rule in Texas on real property foreclosure sales is that mere inadequacy of consideration bid at the foreclosure sale is not enough to render a foreclosure sale wrongful if the sale is otherwise legal and proper. American Savings & Loan Ass’n of Houston v. Musick, 531 S.W.2d 581, 587 (Tex. 1975); see also NCNB Texas National Bank v. Johnson, 11 F.3d 1260, 1267 (5th Cir. 1994); Savers Federal Savings & Loan Ass’n v. Reetz, 888 F.2d 1497, 1507–08 n.14 (5th Cir. 1989); Greater Southwest Office Park, Ltd. v. Texas Commerce Bank N.A., 786 S.W.2d 386, 390 (Tex. App.—Houston [1st Dist.] 1990, writ denied).
§ 14.8:2Grossly Inadequate Consideration Coupled with Irregularity
The general rule is that mere inadequacy of consideration does not render a foreclosure sale void if the sale is conducted in accordance with Texas Property Code section 51.002 and the terms of the deed of trust. See Tarrant Savings Ass’n v. Lucky Homes, Inc., 390 S.W.2d 473, 475 (Tex. 1965). The Texas Supreme Court in American Savings & Loan Ass’n of Houston v. Musick, 531 S.W.2d 581, 587 (Tex. 1975) added the requirement that there must be a causal connection between the grossly inadequate price and the irregularity of the sale. See Forestier v. San Antonio Savings Ass’n, 564 S.W.2d 160, 165 (Tex. App.—El Paso 1978, writ ref’d n.r.e.).
“Grossly inadequate consideration” has been defined as “a consideration so far short of the real value of the property as to shock a correct mind, and thereby raise a presumption that fraud attended the purchase.” Richardson v. Kent, 47 S.W.2d 420, 425 (Tex. App.—Dallas 1932, no writ). However, “[g]ross inadequacy of consideration alone is not . . . sufficient to set aside a Trustee’s Sale.” Crow v. Davis, 435 S.W.2d 176, 178 (Tex. App.—Waco 1968, writ ref’d n.r.e.).
Cases Where Irregularity Found to Contribute to Grossly Inadequate Sale Price: The courts found that an irregularity contributed to grossly inadequate consideration being bid at the sale in the following cases: Gainesville Oil & Gas Co. v. Farm Credit Bank of Texas, 847 S.W.2d 655, 661 (Tex. App.—Texarkana 1993, no writ) (misrepresentation by lender’s officer that oil and gas lease would not be included in sale); Jinkins v. Chambers, 622 S.W.2d 614, 617 (Tex. App.—Tyler 1981, no writ) (mortgagee accepted late payments just before scheduled foreclosure sale, thereby giving false impression that sale would not go forward); Collum v. DeLoughter, 535 S.W.2d 390, 392–93 (Tex. App.—Texarkana 1976, writ ref’d n.r.e.) (lot and block number inverted in notice of sale, notice sent by regular mail only, and debtor not allowed to designate order of sale of multiple tracts); Crow v. Heath, 516 S.W.2d 225, 228 (Tex. App.—Corpus Christi–Edinburg 1974, writ ref’d n.r.e.) (failure to give notice of intention to accelerate); Davis, 435 S.W.2d at 176 (bid price .007 percent of value, deed of trust had erroneous property description, and mortgagors did not have notice of sale); and Gandy v. Cameron State Bank, 2 S.W.2d 971, 973 (Tex. App.—Austin 1927, writ ref’d) (bid price 20 percent of fair market value coupled with attempted simultaneous judicial and nonjudicial foreclosure sales).
Cases Where Irregularity Found Not to Contribute to Grossly Inadequate Sale Price: The courts declined to set aside the foreclosure sale in the following cases: Musick, 531 S.W.2d at 587–88 (irregularities in appointment of substitute trustee, alterations in deed of trust and note, lack of personal notice, and conflict of interest of party); Tarrant Savings Ass’n, 390 S.W.2d at 476 (employee of mortgagee as purchaser at sale); Terra XXI, Ltd. v. Harmon, 279 S.W.3d 781, 788 (Tex. App.—Amarillo 2007, pet. denied) (no evidence presented to demonstrate that irregularity in property description caused or contributed to lower bid, fewer bids, or grossly inadequate price); First State Bank v. Keilman, 851 S.W.2d 914, 922–24 (Tex. App.—Austin 1993, writ denied) (failure to (1) advertise in newspaper as required by deed of trust, but posted notice as required by Property Code; (2) include property’s street address in notice; and (3) wait for mortgagor to attend sale); Diversified Developers, Inc. v. Texas First Mortgage REIT, 592 S.W.2d 43, 44–45 (Tex. App.—Beaumont 1979, writ ref’d n.r.e.) (notice erroneously listed property previously released in addition to sale property, but trustee explained error at time of sale); Bering v. Republic Bank, 581 S.W.2d 806, 808 (Tex. App.—Corpus Christi–Edinburg 1979, writ ref’d n.r.e.) (trustee refused to delay sale several hours at mortgagor’s request for it to obtain funds to bid at sale); Forestier, 564 S.W.2d at 163 (dissolution of the restraining order allowing foreclosure to go forward not known to one of the mortgagors); Purnell v. Follett, 555 S.W.2d 761, 764–66 (Tex. App.—Houston [14th Dist.] 1977, no writ) (failure to give notice of acceleration); Koehler v. Pioneer American Insurance Co., 425 S.W.2d 889, 891–92 (Tex. App.—Fort Worth 1968, no writ) (irregularities in posting and conflict of interest of trustee); Sparkman v. McWhirter, 263 S.W.2d 832, 837–38 (Tex. App.—Dallas 1953, writ ref’d) (failure to record power of attorney from substitute trustee to attorney-in-fact and pending negotiations for renewal of indebtedness); and Richardson, 47 S.W.2d at 425 (sales price of more than 50 percent of property value is not grossly inadequate as matter of law).
Fact Issues: The issues of whether an irregularity existed, a grossly inadequate consideration was paid, and the irregularity and the grossly inadequate bid were causally connected are fact issues. No assurances can be afforded a successful bidder at a foreclosure sale if an irregularity existed and a dispute in value arises. See FLR Corp. v. Blodgett, 541 S.W.2d 209, 215 (Tex. App.—El Paso 1976, writ ref’d n.r.e.).
§ 14.8:3Bids Less Than “Reasonably Equivalent Value” and Review of Bankruptcy
If a mortgagor files a petition in bankruptcy, section 548 of the Bankruptcy Reform Act permits a foreclosure sale to be set aside as a fraudulent transfer of the mortgagor’s property if the mortgagor received less than a “reasonably equivalent value.” 11 U.S.C. § 548(a)(1)(B)(i).
The U.S. Supreme Court in BFP v. RTC, 511 U.S. 531 (1994), held that “reasonably equivalent value” at a foreclosure sale, for purposes of section 548, means “the price in fact received at the foreclosure sale, so long as all the requirements of the State’s foreclosure laws have been complied with.” BFP, 511 U.S. at 545 (overturning long-standing 70-percent-of-fair-market-value guideline announced in the Fifth Circuit in Durrett v. Washington National Insurance Co., 621 F.2d 201, 203–04 (5th Cir. 1980)). See section 13.3:1 in this manual for further discussion of BFP v. RTC.
§ 14.8:4Texas Fraudulent Conveyance Statute
The Texas Uniform Fraudulent Transfer Act (codified at Tex. Bus. & Com. Code §§ 24.001–.013) provides a safe harbor concerning regularly conducted, noncollusive foreclosure sales under deeds of trust. The statute provides that—
a person gives a reasonably equivalent value if the person acquires an interest of the debtor in an asset pursuant to a regularly conducted, noncollusive foreclosure sale or execution of a power of sale for the acquisition or disposition of the interest of the debtor upon default under a mortgage, deed of trust, or security agreement.
Tex. Bus. & Com. Code § 24.004(b).
For other dispositions of assets, the statute provides that if a transfer is made while the debtor is insolvent, or if the debtor becomes insolvent as a result of the transfer and the debtor makes the transfer “without receiving a reasonably equivalent value in exchange for the transfer,” the conveyance will be deemed a fraudulent conveyance as to the present creditors of the debtor. Tex. Bus. & Com. Code § 24.005(a)(2).
A debtor is insolvent under the statute if the sum of the debtor’s obligations is greater than all his assets at a fair valuation. A debtor who is generally unable to pay debts as they become due is presumed to be insolvent. Tex. Bus. & Com. Code § 24.003(a), (b).
“Reasonably equivalent value” is defined to include the range of values for which the debtor would have willfully sold the assets in an arm’s-length transaction. Tex. Bus. & Com. Code § 24.004(d).
A foreclosure sale may be set aside as a fraudulent conveyance under the Texas Uniform Fraudulent Transfer Act by a junior lien creditor if at the time of the foreclosure sale the debtor was insolvent, the purchaser at the sale is an “insider” as defined in the statute for an antecedent debt, and the insider had reasonable cause to believe that the debtor was insolvent. See Tex. Bus. & Com. Code § 24.006(b); United States v. Shepherd, 834 F. Supp. 175 (N.D. Tex. 1993), rev’d on other grounds, 23 F.3d 923 (5th Cir. 1994). An “insider” is defined as including (1) a relative of the debtor or of a general partner of the debtor; (2) a partnership in which the debtor is a general partner; (3) a general partner in such a partnership; or (4) a corporation of which the debtor is a director, officer, or person in control. Tex. Bus. & Com. Code § 24.002(7)(A); see also 28 U.S.C. § 3301(5); In re Holloway, 955 F.2d 1008, 1010 (5th Cir. 1992); J. Michael Putman, M.D.P.A., Money Purchase Pension Plan v. Stephenson, 805 S.W.2d 16, 18 (Tex. App.—Dallas 1991, no writ); 2 Collier on Bankruptcy § 101(31) at 101-87 (Alan N. Resnick & Henry J. Sommer eds., 15th ed. 1991).
A mortgagee has been compelled to pay the mortgagor cash because the mortgagee mistakenly bid more than the balance owed on the secured indebtedness. See McClure v. Casa Claire Apartments, 560 S.W.2d 457, 461–62 (Tex. App.—Beaumont 1977, no writ) (mortgagee failed to give notice to mortgagor of its unilateral mistake of overbidding until sued, three months after sale; court held mortgagee equitably estopped from rescinding sale). See section 14.3 above for additional discussion on McClure.
§ 14.9Personal Property Foreclosure Sales
Unlike real property foreclosure sales, personal property foreclosure sales are not conducted by a trustee appointed by the debtor and directed to act by the secured party. Section 9.610 of the Texas Business and Commerce Code provides that “[a]fter default, a secured party may sell, lease, license, or otherwise dispose of any or all of the collateral.” Tex. Bus. & Com. Code § 9.610(a).
Texas Business and Commerce Code section 9.611(b) requires reasonable notification of the time and place of any public sale or reasonable notification of the time after which any private sale or other intended disposition is to be made. See Tex. Bus. & Com. Code § 9.611(b); see also Wright v. Interfirst Bank Tyler, 746 S.W.2d 874, 877 (Tex. App.—Tyler 1988, no writ) (notice of public sale not notice of private sale). Texas Business and Commerce Code sections 9.611–.614 set forth requirements concerning the timeliness, contents, and form of notification of a proposed disposition of the collateral. Section 9.611 requires that the secured party send “an authenticated notification of disposition” unless the collateral is perishable, threatens to decline speedily in value, or is of the type customarily sold on a recognized market. See Tex. Bus. & Com. Code § 9.611(c), (d).
Contrary to the procedure for nonjudicial foreclosures pursuant to deeds of trust, the Business and Commerce Code provides for giving notice of sale to junior lienholders, except in the case of consumer goods. Tex. Bus. & Com. Code § 9.611(c).
§ 14.9:2Commercially Reasonable Sale and Bid Price
Texas Business and Commerce Code section 9.610(b) requires that every aspect of the secured party’s disposition of the personal property in foreclosure of its security interest be “commercially reasonable,” including the method, manner, time, place, and other terms. Tex. Bus. & Com. Code § 9.610(b). The Texas Business and Commerce Code does not define “commercially reasonable.” Whether the secured party’s disposition of personal property is “commercially reasonable” is a question of fact for determination by the trier of fact. See Siboney Corp. v. Chicago Pneumatic Tool Co., 572 S.W.2d 4 (Tex. App.—Houston [1st Dist.] 1978, writ ref’d n.r.e.). The price bid at the foreclosure sale alone does not determine whether the sale is commercially reasonable. Siboney Corp., 572 S.W.2d at 8.
Section 9.627 provides that the sale is commercially reasonable if the collateral is sold in a recognized market at the price current in that market. See Tex. Bus. & Com. Code § 9.627(b)(2).
In Daniell v. Citizens Bank, 754 S.W.2d 407, 409–10 (Tex. App.—Corpus Christi–Edinburg 1988, no writ), the court placed the burden on the creditor to prove notice of sale and commercially reasonable disposition of collateral. The court in Huddleston v. Texas Commerce Bank–Dallas, 756 S.W.2d 343, 347 (Tex. App.—Dallas 1988, writ denied), refused to require the mortgagee to prove that its deed-of-trust foreclosure sale on real property was conducted in a commercially reasonable manner, citing former Texas Business and Commerce Code section 9.104(10), which excludes from chapter 9 the “creation or transfer of an interest in or lien on real estate.” (Former section 9.104(10) has been amended and is recodified at Tex. Bus. & Com. Code § 9.109(d)(11).)
§ 14.9:3Retention of Collateral in Satisfaction of Debt
Texas Business and Commerce Code section 9.620 provides for various situations in which the secured party may retain the collateral in satisfaction of the secured debt. See Tex. Bus. & Com. Code § 9.620.
§ 14.9:4Deficiencies in Personal Property Foreclosures
In Tanenbaum v. Economics Laboratory, 628 S.W.2d 769 (Tex. 1982), the Texas Supreme Court established that in personal property foreclosure cases the secured party is entitled to obtain a deficiency judgment against the debtor only if the disposition of the collateral was commercially reasonable and after advance notification to the debtor, if required by former Texas Business and Commerce Code section 9.504. The court stated: “Then and only then is [the secured party] entitled to sue for a deficiency.” Tanenbaum, 628 S.W.2d at 771. In Tanenbaum, the debtor was not given notice of the foreclosure disposition of the collateral. The court held that the secured party’s failure to give the debtor notice of the intended disposition was an election to accept the collateral in full satisfaction of the secured debt under former section 9.505. Tanenbaum, 628 S.W.2d at 771–72. Tanenbaum overruled prior cases’ holdings that failure to give notice under former section 9.504 merely created a rebuttable presumption that the value of the collateral equaled the secured debt. Before Tanenbaum, this presumption could be overcome and did not bar recovery of a deficiency. See Roylex, Inc. v. E.F. Johnson Co., 617 S.W.2d 760, 762 (Tex. App.—Houston [14th Dist.] 1981, no writ), disapproved of by Tanenbaum, 628 S.W.2d at 771. However, Tanenbaum has been legislatively overturned as to nonconsumer transactions with the adoption of section 9.626 of the Business and Commerce Code. See Tex. Bus. & Com. Code § 9.626. Tanenbaum seems to have continued effect only as to consumer transactions involving personal property, as Texas courts have not adopted the Tanenbaum rule for real property foreclosures. The court in Van Brunt v. BancTexas Quorum, N.A., 804 S.W.2d 117, 122 (Tex. App.—Dallas 1990, no writ), held that the penalty enunciated in Tanenbaum would not be extended to bar suit for a deficiency existing after a real property foreclosure sale, even though the creditor had previously held a defective personal property sale. The Business and Commerce Code foreclosure sale requirement of “commercial reasonableness” does not apply to real property foreclosure sales. See Savers Federal Savings & Loan Ass’n v. Reetz, 888 F.2d 1497, 1507–08 n.14 (5th Cir. 1989).
In Knights of Columbus Credit Union v. Stock, 814 S.W.2d 427 (Tex. App.—Dallas 1991, writ denied), the court was unwilling to extend the Tanenbaum rule to bar suit on two of three notes even though it found that the notice of disposition of personal property securing a third note was defective and all three loans were cross- collateralized. “Cross-collateralization does not magically transform three separate loans into one loan. We determine that the adverse consequences of the insufficient notice should logically affect only [the single loan].” Knights of Columbus Credit Union, 814 S.W.2d at 431–32.
A deficiency suit may still be maintained against a guarantor, even though the deficiency suit would be barred against the note maker after a personal property foreclosure sale if the guaranty agreement contains an enforceable waiver as to the particular defect in the foreclosure sale procedures.
Waiver of Duty to Preserve Collateral: In FDIC v. Nobles, 901 F.2d 477, 480 (5th Cir. 1990), the court upheld a guaranty that waived the lender’s duty to preserve the collateral.
Waiver of Commercially Reasonable Disposition: In United States v. Terrey, 554 F.2d 685, 692–93 (5th Cir. 1977), the court found that a guarantor did not waive his commercial reasonableness defense despite giving the lender full power to dispose of the collateral, where the guaranty expressly incorporated Texas law.
§ 14.9:6Description of Collateral
Cheniere Energy, Inc. v. Parallax Enterprises, LLC, 585 S.W.3d 70 (Tex. App.—Houston [14th Dist.] 2019, pet. dismissed), addressed the issue of whether the debtor’s equity interest in the investment company is included as part of the collateral subject to a security interest when the collateral is defined by “[a]ll other tangible and intangible property and assets of such Loan Party.” The debtor’s equity interest would have fallen within the UCC’s definition of “general intangibles,” but the security interest did not list general intangibles. It used the term “intangible property,” which is not a term defined in the UCC. See Cheniere, 585 S.W.3d at 79–80.
§ 14.10Warranties and Title Delivered at Sale
At the conclusion of the foreclosure sale, the trustee conveys title to the mortgaged property by executing and delivering a deed. See the foreclosure sale deed at form 14-7 in this chapter and the foreclosure sale bill of sale at form 14-8. See also 2 State Bar of Texas, Texas Real Estate Forms Manual, ch. 14, form 14-16 (Trustee’s Deed [with Bill of Sale]) (2022 ed.), for an alternative form for a trustee’s deed. A trustee’s deed transfers only such title as the trustee had authority to convey at the time the trustee’s deed was executed. Diversified, Inc. v. Walker, 702 S.W.2d 717, 721 (Tex. App.—Houston [1st Dist.] 1985, writ ref’d n.r.e.).
§ 14.10:1Delivery of Trustee’s Deed
The trustee is not required to execute and deliver the foreclosure sale deed concurrently with the payment of the bid at the sale, because the purchaser obtains equitable title pending execution and delivery of the deed. Kirkman v. Amarillo Savings Ass’n, 483 S.W.2d 302, 308–09 (Tex. App.—Amarillo 1972, writ ref’d n.r.e.) (citing Pioneer Building & Loan Ass’n v. Cowan, 123 S.W.2d 726 (Tex. App.—Waco 1938, writ dism’d judgm’t cor.)). But a bidder should not be required to produce cash in a substantial amount to an unbonded, unknown trustee without the trustee’s delivery of the deed. See First Federal Savings & Loan Ass’n v. Sharp, 347 S.W.2d 337 (Tex. App.—Dallas 1961), aff’d, 359 S.W.2d 902 (Tex. 1962).
For a public sale of residential real property under a power of sale in a security instrument, the trustee or substitute trustee must provide the winning bidder with a receipt for the sale proceeds tendered and, except when prohibited by law, within a reasonable time, deliver the deed to the winning bidder or file the deed for recording. Tex. Bus. & Com. Code § 22.005.
§ 14.10:2Position of Foreclosure Sale Purchaser
The purchaser of real property at a deed-of-trust foreclosure sale succeeds to the position of the mortgagee. Thus, if the mortgagee took the lien in good faith for valuable consideration without notice of the equitable claims of third parties, the purchaser at the sale, regardless of its knowledge or notice of the equitable claims, takes title free of such claims. Moran v. Adler, 570 S.W.2d 883, 885 (Tex. 1978) (citations omitted); Gwin v. Griffith, 394 S.W.2d 191, 197 (Tex. App.—Corpus Christi–Edinburg 1965, no writ); Ebner v. Nall, 127 S.W.2d 506, 507 (Tex. App.—Beaumont 1939, writ dism’d judgm’t cor.); Lyday v. Federal Land Bank, 103 S.W.2d 441, 442 (Tex. App.—Texarkana 1937, writ dism’d). The exception to this rule is that no title passes to the purchaser if the foreclosure sale was void because of the trustee’s lack of authority to conduct the sale. Phillips v. Latham, 523 S.W.2d 19, 24 (Tex. App.—Dallas 1975, writ ref’d n.r.e.).
The claimant of equitable title seeking to set aside the trustee’s deed to a foreclosure sale purchaser has the burden of proving that the mortgagee had knowledge or notice of the equitable claim. Dillard v. Broyles, 633 S.W.2d 636, 644 (Tex. App.—Corpus Christi–Edinburg 1982, writ ref’d n.r.e.); Gwin, 394 S.W.2d at 197; Connor v. Lane, 355 S.W.2d 223, 224 (Tex. App.—Waco 1962, no writ).
§ 14.10:3Warranties of Title Binding Mortgagor
Most deeds of trust provide that the trustee is to convey title to the mortgaged property pursuant to the foreclosure sale “with a general warranty binding the grantor”—the mortgagor. The Texas Real Estate Forms Manual’s current form for deed of trust provides for a general warranty binding the grantor. The deed of trust states that “Grantor warrants and agrees to defend the title to the Property, subject to the Other Exceptions to Conveyance and Warranty.” 1 State Bar of Texas, Texas Real Estate Forms Manual ch. 8, form 8-1 (2022 ed.).
This form of deed of trust also states:
If directed by Lender to foreclose this lien, Trustee will…
D.2. sell and convey all or part of the Property “AS IS” to the highest bidder for cash with a general warranty binding Grantor, subject to the Prior Lien and to the Other Exceptions to Conveyance and Warranty and without representation or warranty, express or implied, by Trustee;…
The warranty of title contained in the deed of trust and the subsequent foreclosure sale deed warrants title from the mortgagor, not the mortgagee or the trustee, to the foreclosure sale purchaser. See Sandel v. Burney, 714 S.W.2d 40, 41 (Tex. App.—San Antonio 1986, no writ); see also In re Niland, 825 F.2d 801 (5th Cir. 1987) (refusing to find mortgagee had warranted to purchaser at foreclosure sale that deed of trust granted valid lien on mortgaged property).
Sometimes the mortgagor negotiates an amendment to the deed of trust to incorporate a schedule of exceptions to the general warranty of title, to limit the warranty to a “special” warranty of title as opposed to a general warranty of title, or to limit the warranty by broad categories of potential interests (for example, “any and all restrictive covenants of record”). A breach of the mortgagor’s warranty of title discovered after the foreclosure sale may be of little practical value to the purchaser at the sale because the mortgagor is likely to be insolvent. A foreclosure sale deed with warranty of title affords the purchaser the benefits of the cases and statutes that recognize certain rights of claimants holding title under a warranty deed, such as the adverse-possession statutes and in after-acquired title situations.
An issue might be raised when drafting a foreclosure sale deed with warranties of title binding on the mortgagor where the mortgagor is a Chapter 7 bankruptcy debtor. The foreclosure sale notice and deed should recite that the sale is being held pursuant to a bankruptcy court order. The trustee or substitute trustee should point out to the bidders at the sale that it is being conducted pursuant to a bankruptcy court order.
§ 14.10:4Foreclosure Sale Purchaser Neither Consumer Nor Bona Fide Purchaser for Value
Not a Consumer: Section 51.009 of the Texas Property Code provides the following:
A purchaser at a sale of real property under Section 51.002:
(1)acquires the foreclosed property “as is” without any expressed or implied warranties, except as to warranties of title, and at the purchaser’s own risk; and
(2)is not a consumer.
Not a Bona Fide Purchaser for Value: A foreclosure sale purchaser purchases at its peril and without recourse against the trustee or the mortgagee. See Diversified, Inc. v. Walker, 702 S.W.2d 717, 723–24 (Tex. App.—Houston [1st Dist.] 1985, writ ref’d n.r.e.) (citations omitted) (holding that purchaser at void foreclosure sale not entitled to damages against foreclosing lender for purchaser’s loss of benefit of bargain (no lost profits recovery)). Supporting this finding is Peterson v. Black, 980 S.W.2d 818, 823 (Tex. App.—San Antonio 1998, no pet.) (finding mortgagor could not, as matter of law, recover damages for loss of opportunity to do business (property management) with potential purchaser allegedly prevented from purchasing mortgaged property at foreclosure sale). See also Sandel v. Burney, 714 S.W.2d 40, 41; Bowman v. Oakley, 212 S.W. 549, 552 (Tex. App.—Fort Worth 1919, writ ref’d).
Inadvertent Warranties: Caution is urged for the trustee and the mortgagee to avoid the possibility of a disgruntled purchaser making a claim against the trustee and the mortgagee for oral or written representations and warranties made in the notice of foreclosure sale, in the foreclosure proceeding, in response to presale inquiries, and in the foreclosure sale deed. Most notices of foreclosure sale and foreclosure sale deeds contain express representations concerning the mortgagor’s default and the giving of proper notice of sale. The attorney for the mortgagee may execute an affidavit attached to the foreclosure sale deed concerning the due mailing and posting of the notice of foreclosure sale or may provide to a prospective bidder copies of the mailed notices of foreclosure sale and current federal tax lien searches and notices to the Internal Revenue Service of the sale. These representations when made to the successful bidder might set up the opportunity for recourse for a defective notice to the IRS or the attorney’s failure to detect a properly filed IRS lien. Such claims would be based on representations made by the attorney acting for the mortgagee or trustee, or the mortgagee or trustee, to the successful bidder, not the warranty of title in the trustee’s deed. See Sandel, 714 S.W.2d at 41 (Tex. App.—San Antonio 1986, no writ) (warranty contained in the trustee’s deed does not bind mortgagee or trustee but binds only the mortgagor).
Practice Note: Make sure that all statements made in the notice of sale, trustee’s deed, affidavits attached to the deed, and other communications with the bidders general and the successful bidder are accurate. Statements set in form 14-2, “Foreclosure Sale Transcript,” provide appropriate disclaimers and limitations on trustees’ representations.
The court in First State Bank v. Keilman, 851 S.W.2d 914, 924 (Tex. App.—Austin 1993, writ denied), held that the inclusion in the posted notice of foreclosure sale of a disclaimer of the UCC warranties of merchantability, fitness for a particular purpose, workmanship, or quality, although not contained in the deed of trust, was not as a matter of law a defect or irregularity that would give rise to a cause of action for damages and did not chill the bidding.
The foreclosure sale deed at form 14-7 in this chapter contains a disclaimer by the trustee or the mortgagee that neither of them is making any UCC warranties or warranties as to title or lien priority.
2 State Bar of Texas, Texas Real Estate Forms Manual, ch. 14, form 14-16 (Trustee’s Deed [with Bill of Sale]) (2022 ed.), includes the following as applicable:
Trustee has not made, and does not make, any representation, express or implied, with respect to the personal property, and the personal property is sold to buyer “as is, where is, with all faults.” There is no warranty relating to title, possession, quiet enjoyment, or the like in this disposition of personal property.
§ 14.11Reforeclosure and Correcting Defective Trustee’s Deed
In the past, Texas cases have held that a corrective trustee’s foreclosure sale deed may be executed to correct erroneous recitals in a previously filed trustee’s deed. For example, Adams v. First National Bank upheld a correction deed filed to correct the erroneous recital that the default on the loan was failure to pay timely installments, as opposed to violation of the due-on-sale clause. Adams v. First National Bank, 154 S.W.3d 859, 871 (Tex. App.—Dallas 2005, no pet.). Such prior case law is affected by Texas Property Code sections 5.027 through 5.031, enacted in 2011, which categorized corrections as “material” or “nonmaterial” and set out the procedure to make such corrections. Texas Property Code section 5.027(b) states a correction instrument cannot be used to correct a trustee’s deed unless the conveyance otherwise complies with all the requirements of chapter 51. Tex. Prop. Code § 5.027(b).
See form 14-9 in this chapter, to be used for an “immaterial correction” of a trustee’s deed when the foreclosure sale complied with all the requirements of chapter 51 of the Texas Property Code.
Tex. Prop. Code § 5.029(a) states that “the parties to the original transaction … may execute a correction instrument to make a material correction to the recorded original instrument of conveyance, including a correction to: (1) add … (C) land to a conveyance that correctly conveys other land; (2) remove land from a conveyance that correctly conveys other land.…”
See section 14.6 above for a discussion of Myrad Properties, Inc. v. LaSalle Bank N.A., 252 S.W.3d 605 (Tex. App.—Austin 2008, reversed and rendered), where the court upheld the validity of a correction substitute trustee’s deed that added a legal description of a second property that was described in the deed of trust but not set out in the notice of sale or announced by the substitute trustee at the foreclosure sale.
The result in Myrad would be different after the 2009 enactment of Tex. Prop. Code §§ 5.027–.031. Assuming that the trustee’s sale complied with chapter 51 of the Texas Property Code, the correction substitute trustee’s deed which added a second property description (adding land) is a “material correction” requiring the execution by all parties to the transaction, i.e., the mortgagor, the mortgagee, and the purchaser at the foreclosure sale.
§ 14.11:1Revival of Interests Extinguished at Foreclosure
After the foreclosure sale, the purchaser may determine that the sale extinguished a valuable interest appurtenant to the mortgaged property that was subordinate to the lien of the deed of trust. Whether the trustee and the purchaser without the joinder of the mortgagor can change the foreclosure sale deed after the sale or rescind the sale in an attempt to preserve the extinguished subordinate interest has not been definitively resolved, but the case law is generally against such a proposition. See generally Joe T. Garcia’s Enterprises v. Snadon, 751 S.W.2d 914 (Tex. App.—Dallas 1988, writ denied).
Where the grantor has divested himself of title, although by mistake he has not conveyed the title in the way in which he intended, he may not by a subsequent conveyance correct his mistake, there being no title remaining in him to convey except where the conveyance has been rescinded or canceled by a mutual consent of the parties.
Joe T. Garcia’s Enterprises, 751 S.W.2d at 916 (quoting 26 C.J.S. Deeds § 31 (1956)).
In Bonilla v. Roberson, 918 S.W.2d 17, 21–22 (Tex. App.—Corpus Christi–Edinburg 1996, no writ), the court found that after a foreclosure sale where the lender purchased the mortgaged property and a deed was delivered to the mortgagee, the trustee and mortgagee could not nonjudicially set aside the sale, file a rescission deed, and reforeclose at a lesser bid price because of the discovery after foreclosure that the mortgagor had extensively damaged the property before foreclosure (water heaters, toilets, bathtubs, gas stoves, and refrigerators discovered missing after sale). The court also found that the mortgagee bid more than the note balance, resulting in a surplus bid. Bonilla, 918 S.W.2d at 22–23. The court in Peterson v. Black, 980 S.W.2d 818, 822 (Tex. App.—San Antonio 1998, no pet.), found that no condition existed that would permit the trustee and mortgagee to rescind the sale because the sale was validly held, and the following provision did not authorize them to unilaterally set aside the sale: “[I]f any sale hereunder is not completed or is defective in the opinion of the beneficiary, such sale shall not exhaust the power of sale hereunder and beneficiary shall have the right to have a subsequent sale or sales to be made by the trustee or by any other successor or substitute trustee.”
§ 14.11:2Correction of Bid Amount
A fact issue is raised as to the actual bid at a foreclosure sale if a correction deed is filed after the sale revising the amount stated as the bid in the recorded trustee’s deed. Buccaneer’s Cove, Inc. v. Mainland Bank, 831 S.W.2d 582, 584 (Tex. App.—Corpus Christi–Edinburg 1992, no writ).
In Beneficial Standard Life Insurance Co. v. Trinity National Bank, 763 S.W.2d 52, 55–56 (Tex. App.—Dallas 1988, writ denied), the court declined to follow the judgment entered in a reformation suit between the foreclosing first lienholder and its substitute trustee. In a separate court action, the foreclosure sale bid had been reformed and reduced by the amount of casualty insurance proceeds overlooked by the foreclosing lender, who was unaware of the casualty loss.
If the statutes referenced above do not apply, a party can look to the court to reform a conveyance document. Reformation is an equitable remedy that a court may grant to correct a written document so that it conforms to the parties’ true intent. Litigation involving title to real property is one of the most common areas for invoking the remedy of reformation and generally arises in an action for a declaratory judgment. Note, however, that a reformation action is subject to a four-year statute of limitations which runs from the date the cause of action accrues—from the date the mistake was discovered or, in the exercise of reasonable diligence, should have been discovered. See Tex. Civ. Prac. & Rem. Code § 16.051.
Mistake Apparent on Face of the Deed: The Texas Supreme Court ruled that “[p]lainly obvious and material omissions in an unambiguous deed charge parties with irrebuttable notice for limitations purposes.” Cosgrove v. Cade, 468 S.W.3d 32, 34 (Tex. 2015). The court also held that Tex. Prop. Code § 13.002 imposes notice of a deed’s existence not just to third parties but also the parties to the instrument. “A grantor who signs an unambiguous deed is presumed as a matter of law to have immediate knowledge of material omissions.” Cosgrove, 468 S.W.3d at 34–35.
§ 14.12Recording Trustee’s Deed
Failure to record the trustee’s deed does not mean that the sale is not complete or that title has not passed to the successful bidder; rather, equitable title passes to the buyer. Peterson v. Black, 980 S.W.2d 818, 822 (Tex. App.—San Antonio 1998, no pet.); Pioneer Building & Loan Ass’n v. Cowan, 123 S.W.2d 726, 730 (Tex. App.—Waco 1938, writ dism’d judgm’t cor.). The purpose for recording the trustee’s deed is to protect the grantee under the Texas recording statutes. Tex. Prop. Code ch. 13.
Bona Fide Purchasers and Creditors for Value: A “deed of trust is void as to a creditor or to a subsequent purchaser for a valuable consideration without notice unless the [deed] has been acknowledged, sworn to, or proved and filed of record as required by law.” Tex. Prop. Code § 13.001(a).
Binding on Parties and Those with Knowledge: “The unrecorded [deed] is binding on a party to the [deed], on the party’s heirs, and on a subsequent purchaser who does not pay a valuable consideration or who has notice of the [deed].” Tex. Prop. Code § 13.001(b). See McCracken v. Sullivan, 221 S.W. 336, 338 (Tex. App.—San Antonio 1920, no writ).
§ 14.13Procedure for Trustee or Substitute Trustee to Be Dismissed from Suit
Texas Property Code section 51.007 provides a procedure whereby a trustee or a substitute trustee under a deed of trust, contract lien, or security instrument can seek dismissal from a suit or proceeding where it is named solely in its capacity as trustee or substitute trustee and is not a necessary party. See Tex. Prop. Code § 51.007. Dismissal of the trustee or substitute trustee does not prejudice a party’s right to seek injunctive relief to prevent the trustee from proceeding with a foreclosure sale. Tex. Prop. Code § 51.007(e). Section 51.007 does not apply in a proceeding where the trustee is a necessary party. Terra XXI, Ltd. v. Harmon, 279 S.W.3d 781 (Tex. App.—Amarillo 2007, pet. denied) (motion for summary judgment by trustee as to validity of foreclosure sale).
§ 14.14Rescissions of Foreclosure Sale
Just as parties may enter into a contract, they may also rescind the contract. The effect of the agreement to rescind depends on the intent of the parties at the time the agreement was made. Rescission is an equitable remedy that operates to extinguish a contract that is legally valid but must be set aside due to fraud, mistake, or for some other reason to avoid unjust enrichment. Martin v. Cadle Co., 133 S.W.3d 897, 903 (Tex. App.—Dallas 2004, pet. denied). Usually, the parties’ intent when they rescind the foreclosure sale is to be returned to the status quo that existed before the foreclosure sale. The most efficient and practical way to rescind a foreclosure sale is by agreement. However, there are times when it is necessary to seek court assistance to accomplish a rescission.
§ 14.14:1Rescissions by Agreement
Although the law is not entirely settled in Texas, the prudent practitioner should avoid seeking a unilateral rescission in most circumstances. In Bonilla v. Roberson, 918 S.W.2d 17 (Tex. App.—Corpus Christi–Edinburg 1996, no writ), a mortgagee attempted to rescind a foreclosure sale by advising the substitute trustee to file a cancellation deed. The court held that the cancellation deed had no effect and stated that when a party with a property interest wishes to challenge a sale’s validity, the proper action is to bring a cause of action to set aside the sale and cancel the trustee’s deed. Bonilla, 918 S.W.2d at 21–22. The party cannot simply ask the substitute trustee to cancel the deed obtained at the foreclosure sale. An agreement to cancel a foreclosure sale would have to include the mortgagee, the mortgagor, and the purchaser at the foreclosure sale. If all parties agree, the most effective and efficient way to rescind a foreclosure sale is by agreement. See form 14-10 in this chapter.
Generally, title issues are determined by a trespass to try title action. However, with a rescission of a foreclosure sale, the conflict is not who has title to the land but whether or not the mortgagee or trustee had the right to conduct the foreclosure sale. In this situation, a declaratory judgment is an effective alternative to obtain a judicial rescission.
The purpose of a declaratory action is to establish existing rights, status, or other legal relationships. City of El Paso v. Heinrich, 284 S.W.3d 366, 370 (Tex. 2009). In 2004, the Texas Supreme Court stated that the Declaratory Judgments Act “provides an efficient vehicle for parties to seek a declaration of rights under certain instruments.” Martin v. Amerman, 133 S.W.3d 262, 265 (Tex. 2004). Texas Civil Practice and Remedies Code section 37.004(a) provides that a person under a deed, written contract, or other writing constituting a contract may have determined any question of validity arising under the instrument. Tex. Civ. Prac. & Rem. Code § 37.004(a). The trial court is duty-bound to declare the rights of the parties as to those matters and has limited discretion to refuse a declaratory judgment, and it may do so only where judgment would not remove the uncertainty giving rise to the proceedings. SpawGlass Construction Corp. v. City of Houston, 974 S.W.2d 876, 878 (Tex. App.—Houston 1998, pet. denied).
The question generally asked in a rescission of a foreclosure sale is: did the substitute trustee have the right to conduct a nonjudicial foreclosure sale under the power of sale included in the underlying deed of trust? Whether a trustee’s deed at foreclosure sale is void or voidable depends on its effect upon the title at the time it was executed and delivered. Diversified, Inc. v. Walker, 702 S.W.2d 717, 721 (Tex. App.—Houston [1st Dist.] 1985, writ ref’d n.r.e.). If the deed is a mere nullity, passing no title and conferring no rights whatsoever to the purchaser, then it is void ab initio. Diversified, 702 S.W.2d at 721. In order to correct a void sale, the parties typically execute a rescission and record it in the real property records to give notice that title did not pass to the entity or person that purchased the property at the underlying foreclosure sale. However, that is not always the case.
See section 14.1 of this chapter for general rules of law applicable to a void foreclosure sale.
If the foreclosure sale is voidable, the parties can look to a trespass to try title suit if an agreement to rescind cannot be reached. If the court grants the rescission, the parties may record a copy of the judgment together with the underlying substitute trustee’s deed in the real property records. Recording the judgment gives notice that the substitute trustee’s deed has no effect.
§ 14.14:3Rescission Incident to Residential Foreclosures
Texas Property Code section 51.016 authorizes rescission of a residential nonjudicial foreclosure sale under certain conditions and procedures. Tex. Prop. Code § 51.016(a). Time is of the essence in completing a rescission because it must be accomplished within fifteen days after the sale. See Tex. Prop. Code § 51.016(b). The parties may agree to other terms than those set forth in this statute for rescinding a foreclosure sale or pursue a suit to rescind a sale not rescinded under this statute. See Tex. Prop. Code § 51.016(m).
Biel, Frederick J. “Commercial Foreclosures: Selected Documentation and Procedural Issues.” In Advanced Real Estate Strategies Course, 2010. Austin: State Bar of Texas, 2010.
Derber, David P. “Personal Property Foreclosures.” In Advanced Real Estate Strategies Course, 2010. Austin: State Bar of Texas, 2010.
Dysart, Sara E. “Buyer at Foreclosure (New Meaning to ‘Buyer Beware’).” In Mortgage Lending Institute, 2010. Austin: University of Texas School of Law, 2010.
_______ “Attorney Acting as Substitute Trustee in a Non-Judicial Foreclosure Sale.” In Advanced Real Estate Drafting Course, 2007. Austin: State Bar of Texas, 2007.
Resnick, Alan N., and Henry J. Sommer, eds. Collier on Bankruptcy. 16th ed. New York: Matthew Bender & Co., 2011.
Weller, Philip D. “Dispositions Under Article 9 for the Real Estate Lawyer.” In Advanced Real Estate Strategies Course, 2010. Austin: State Bar of Texas, 2010.