Consequences of Wrongful Foreclosure
The basic legal remedies available to the mortgagor for a mortgagee’s wrongful foreclosure are (1) damages in the amount of the mortgagor’s lost equity in the property and (2) setting aside the foreclosure sale, through either equitable relief or trespass to try title. See Reyna v. State National Bank, 911 S.W.2d 851, 855–56 (Tex. App.—Fort Worth 1995, writ denied). These are alternative remedies, as a fundamental principal of Texas law is that “[a] party who has lost property through a wrongful foreclosure is entitled to either the property or its value, but not both.” Durkay v. Madco Oil Co., 862 S.W.2d 14, 21 (Tex. App.—Corpus Christi–Edinburg 1993, writ denied); see also Saenz v. JPMorgan Chase Bank, N.A., No. 7:13-CV-156, 2013 WL 3280214, at *2 (S.D. Tex. Jun. 27, 2013).
A number of Texas courts have held that if the foreclosure sale is invalid (for example, in a case in which the debt was not properly matured or due) and the mortgaged property has not been resold by the purchaser at the foreclosure sale to a bona fide purchaser for value (see section 16.6 below), the mortgagor’s proper remedy is a suit to set aside the sale (rescission). League City State Bank v. Mares, 427 S.W.2d 336, 340 (Tex. App.—Houston [14th Dist.] 1968, writ ref’d n.r.e.); Lucky Homes, Inc. v. Tarrant Savings Ass’n, 379 S.W.2d 386 (Tex. App.—Fort Worth 1964), rev’d on other grounds, 390 S.W.2d 473 (Tex. 1965); Black v. Burd, 255 S.W.2d 553 (Tex. App.—Fort Worth 1953, writ ref’d n.r.e.); John Hancock Mutual Life Insurance Co. v. Howard, 85 S.W.2d 986 (Tex. App.—Waco 1935, writ ref’d). However, other Texas cases have generally supported the proposition that the mortgagor may elect to seek damages in lieu of rescission: Diversified, Inc. v. Gibraltar Savings Ass’n, 762 S.W.2d 620, 623 (Tex. App.—Houston [14th Dist.] 1988, writ denied); Owens v. Grimes, 539 S.W.2d 387, 390 (Tex. App.—Tyler 1976, writ ref’d n.r.e.); and Houston Sash & Door Co. v. Davidson, 509 S.W.2d 690, 692 (Tex. App.—Beaumont 1974, writ ref’d n.r.e.).
Depending on the nature of the irregularity in the collection and the foreclosure proceeding, the mortgagee may also be liable for a variety of statutory damages, exemplary damages, payment of the mortgagor’s attorney’s fees and costs of suit, and civil and criminal penalties for violating state and federal statutes relating to debt collection and foreclosure. This chapter does not attempt to discuss the damages claims that may arise out of violations of these other state and federal statutes. See generally chapters 7 and 8 in this manual concerning the process of making demand for collection of a debt in accordance with the loan documents and applicable law; chapter 10 concerning common borrower challenges to the foreclosure process; and chapters 11, 12 and 14 concerning the conducting of the foreclosure process.
§ 16.2Elements of Wrongful Foreclosure
The elements of a claim for wrongful foreclosure are (1) a defect in the foreclosure sale proceedings, (2) a grossly inadequate selling price, and (3) a causal connection between the defect and the grossly inadequate selling price. Sauceda v. GMAC Mortgage Corp., 268 S.W.3d 135, 139 (Tex. App.—Corpus Christi–Edinburg 2008, no pet.). But see Editors’ Note in section 10.3:2.
§ 16.2:1Defect in Foreclosure Sale Proceedings
A debtor may recover damages for common-law wrongful foreclosure only if the mortgagee either (1) fails to comply with statutory or contractual terms of the foreclosure action or (2) complies with such terms yet takes affirmative action that detrimentally affects the fairness of the foreclosure process. First State Bank v. Keilman, 851 S.W.2d 914, 921–22 (Tex. App.—Austin 1993, writ denied). Thus, if a defect or irregularity occurs in the foreclosure process that either deters third parties from bidding or adversely affects the amount the third parties would bid, then a debtor has a claim against the mortgagee for damages resulting from the unfair sale. Pentad Joint Venture v. First National Bank, 797 S.W.2d 92, 96 (Tex. App.—Austin 1990, writ denied). A mortgagee has a duty to avoid affirmatively deterring prospective bidders by acts or statements made before or during a foreclosure sale. Keilman, 851 S.W.2d at 921.
§ 16.2:2Grossly Inadequate Selling Price
Mere inadequacy of consideration paid for the property at foreclosure (that is, the winning bid is significantly below the then fair market value of the property) does not of itself render a foreclosure sale void if the sale was otherwise conducted legally and fairly. Tarrant Savings Ass’n v. Lucky Homes, Inc., 390 S.W.2d 473, 475 (Tex. 1965). However, Texas courts have held that a grossly inadequate sales price can be so low as “[t]o shock a correct mind, and thereby raise a presumption that fraud attended the purchase.” FDIC v. Blanton, 918 F.2d 524, 531 (5th Cir.1990) (quoting Richardson v. Kent, 47 S.W.2d 420, 425 (Tex. App.¾Dallas 1932, no writ)).
§ 16.2:3Causal Relationship between Defect and Sales Price
To recover damages for a wrongful foreclosure (as opposed to merely setting aside the foreclosure sale), the holding in American Savings & Loan Ass’n of Houston v. Musick, 531 S.W.2d 581 (Tex. 1975), requires that in general there must be a defect or irregularity in the foreclosure process that causes or contributes to the collateral property being sold for a grossly inadequate price. Mere inadequacy of the consideration paid for the property at foreclosure will not render a foreclosure sale invalid if the sale is otherwise legal and proper. Musick, 531 S.W.2d at 587. The exception to this rule is that when there is a deliberate chilling or defect in the foreclosure process, the mortgagor has an action for damages (measured by the difference in the foreclosure sales price and the then market value of the property) regardless of whether the sales price was grossly inadequate. See Charter National Bank—Houston v. Stevens, 781 S.W.2d 368 (Tex. App.¾Houston [14th Dist.] 1989, writ denied).
In University Savings Ass’n v. Springwoods Shopping Center, 644 S.W.2d 705 (Tex. 1982), the plaintiffs sought damages and not rescission of a foreclosure sale where the mortgagee had failed to record the appointment of the substitute trustee before posting and foreclosing as required by the deed of trust. The plaintiffs had received actual notice of the substitution and conceded that “no prejudice or harm resulted from the failure to comply with the recordation provision in the deed of trust.” University Savings, 644 S.W.2d at 706. The Texas Supreme Court found that although the irregularity in the sale in question was such as would make the sale void, damages were not recoverable under the circumstances of this case because there was no harm or prejudice to the mortgagor. University Savings, 644 S.W.2d at 706. See Editors’ Note in section 10.3:2.
§ 16.2:4Loss of Possession Required
Under Texas law, a claim for wrongful foreclosure is premised upon the mortgagor’s loss in possession of the property. Thomas v. EMC Mortgage Corp., No. 4:10-CV-861-A, 2011 WL 5880988, at *6 (N.D. Tex. Nov. 23, 2011) (holding that under Texas law, loss of possession is required to state a claim for wrongful foreclosure); Peoples v. BAC Home Loans Servicing, L.P., No. 4:10-CV-489-A, 2011 WL 1107211, at *4 (N.D. Tex. Mar. 25, 2011) (same). Recovery under a claim for wrongful foreclosure is based on the theory that the wrong committed resembles that of a conversion of personal property. Owens v. Grimes, 539 S.W.2d 387, 390 (Tex. App.—Tyler 1975, pet. denied); John Hancock Mutual Life Insurance Co. v. Howard, 85 S.W.2d 986, 988 (Tex. App.—Waco 1935, writ ref’d). “Individuals never losing possession of the property cannot recover on a theory of wrongful foreclosure.” Baker v. Countrywide Home Loans, Inc., No. 3:08-CV-916, 2009 WL 1810336, at *4 (N.D. Tex. Jun. 24, 2009) (citing Peterson v. Black, 980 S.W.2d 818, 823 (Tex. App.—San Antonio 1998, no pet.)). A mortgagor has sustained no compensable damage when his possession remains undisturbed. Peterson, 980 S.W.2d at 823.
§ 16.2:5No Cause of Action for Attempted Wrongful Foreclosure
Texas does not recognize attempted wrongful foreclosure as a cause of action. See Port City State Bank v. Leyco Construction Co., 561 S.W.2d 546, 547 (Tex. App.—Beaumont 1977, no writ). This is because the basis of recovery in a wrongful foreclosure action is the mortgagor’s lost possession of property. Motten v. Chase Home Finance, 831 F. Supp. 2d 988, 1007 (S.D. Tex. 2011).
For a mortgagor to recover damages for wrongful foreclosure, the mortgagor must show that he has suffered a loss or material injury as the result of an irregularity in the foreclosure sale. Wells Fargo Bank, N.A. v. Robinson, 391 S.W.3d 590, 594 (Tex. App.—Dallas, 2012) (citing University Savings Ass’n v. Springwoods Shopping Center, 644 S.W.2d 705, 706 (Tex. 1983); Gainesville Oil & Gas Co. v. Farm Credit Bank of Texas, 847 S.W.2d 655, 659 (Tex. App.—Texarkana 1993, no writ)). In general, this is shown where the actions of the lender or noteholder have caused the property to be sold for a grossly inadequate price. See American Savings & Loan Ass’n of Houston v. Musick, 531 S.W.2d 581, 587 (Tex. 1975). In such a case, the damages are measured by the difference between the market value of the land and the remaining balance on the outstanding mortgage debt. See John Hancock Mutual Life Insurance Co. v. Howard, 85 S.W.2d 986, 988–89 (Tex. App.—Waco 1935, writ ref’d) and section 16.3:1 below. Stated another way, the measure of damages for wrongful foreclosure is the mortgagor’s lost equity in the property foreclosed. Farrell v. Hunt, 714 S.W.2d 298, 299 (Tex. 1986); C&K Investments v. Fiesta Group, Inc., 248 S.W.3d 234, 254 (Tex. App.—Houston [1st Dist.] 2007, no pet.).
§ 16.3:1Measure of Actual Damages
The measure of actual damages for a wrongful foreclosure is the mortgagor’s equity in the mortgaged property, which is the excess of the fair market value of the mortgaged property over the balance owed on the secured debt at the time of the foreclosure sale. Farrell v. Hunt, 714 S.W.2d 298, 299 (Tex. 1986); Durkay v. Madco Oil Co., 862 S.W.2d 14, 21 (Tex. App.—Corpus Christi–Edinburg 1993, writ denied); Burnett v. Manufacturer’s Hanover Trust Co., 593 S.W.2d 755, 756 (Tex. App.—Dallas 1979, writ ref’d n.r.e.); League City State Bank v. Mares, 427 S.W.2d 336, 340 (Tex. App.—Houston [14th Dist.] 1968, writ ref’d n.r.e.).
If the secured debt exceeds the fair market value, the mortgagor is entitled to have the full fair market value of the collateral, rather than just the foreclosure sale proceeds, credited to the debt. Maupin v. Chaney, 163 S.W.2d 380, 382–83 (Tex. 1942); Peterson v. Black, 980 S.W.2d 818, 823 (Tex. App.—San Antonio 1998, no pet.); Williamson v. Tucker, 615 S.W.2d 881, 891 (Tex. App.—Dallas 1981, writ ref’d n.r.e.).
In the past, Texas courts have held that in some circumstances, exemplary damages are available for a wrongful foreclosure. See Nolan v. Bettis, 577 S.W.2d 551, 555–56 (Tex. App.—Austin 1979, writ ref’d n.r.e.); Hayner v. Chittim, 228 S.W. 279, 281–82 (Tex. App.—San Antonio 1921, no writ). However, in International Bank, N.A. v. Morales, 736 S.W.2d 622 (Tex. 1987), in a personal property foreclosure where the secured party’s failure to give notice of disposition of personal property resulted in commercially unreasonable disposition, the Texas Supreme Court stated, “Breach of the covenant gives rise to a cause of action sounding in contract for which punitive damages may not be awarded. Before a plaintiff may receive exemplary damages on breach of an implied covenant, a finding of an independent tort with accompanying actual damages must be obtained.” Morales, 736 S.W.2d at 624.
There is no obvious reason why the Morales opinion should be restricted to personal property foreclosures, and the Morales opinion was cited and followed in a relatively recent case involving a real property foreclosure. In UMLIC VP LLC v. T&M Sales & Environmental Systems, Inc., 176 S.W.3d 595, 610 (Tex. App.—Corpus Christi–Edinburg 2005, pet. denied), the court overturned the trial court’s award of $2,500,000 in exemplary damages and determined that the mortgagor was entitled only to actual damages of $1,148.99 (the difference between fair market value of property and unpaid debt) because of the mortgagee’s wrongful foreclosure. (The mortgagee admitted that it had foreclosed on property without giving mortgagor notice.) The court refused to find that the mortgagee’s breach of the contractual obligation to give notice of foreclosure also constituted a tort, and thus the loss of business reputation suffered by the mortgagor was an economic damage and limited by the actual damages and for which exemplary damages do not lie. UMLIC, 176 S.W.3d at 614–15. Similarly, the court found that there were no grounds for an award of mental anguish damages. UMLIC, 176 S.W.3d at 615–16.
§ 16.3:3Proving Fair Market Value of Property
The mortgagor claiming damages in a wrongful foreclosure action has the burden of proof to establish the fair market value of the foreclosed property at the time of sale. The case of Gainesville Oil & Gas Co. v. Farm Credit Bank of Texas, 847 S.W.2d 655 (Tex. App.—Texarkana 1993, no writ) illustrates the need to have expert testimony about the fair market value of the property at the time of the foreclosure sale. In that case, testimony that property contained a producing oil well with $500,000 in reserves under a lease subordinate to a foreclosed lien at the time of foreclosure on a $28,000 debt was held not to be competent testimony about the fair market value of the mortgaged property. Gainesville Oil & Gas Co., 847 S.W.2d at 662–63.
A claim for damages can be waived by the conduct of the mortgagor. See, for example, Cannan v. Green Oaks Apartments, 758 S.W.2d 753, 755 (Tex. 1988) (per curiam), where the court held that a cause of action for damages does not lie for a prior void foreclosure sale (which was conducted in violation of a temporary restraining order) if the mortgagor does not contest a subsequent foreclosure by the same mortgagee.
§ 16.4Remedy of Rescission to Recover Title
If there is a defect in the foreclosure process, instead of pursuing damages a mortgagor may seek to have the foreclosure sale equitably rescinded and the foreclosure sale deed canceled. The effect of rescission is to return the parties to the status quo ante, with both the debt and lien revived. See Shearer v. Allied Live Oak Bank, 758 S.W.2d 940 (Tex. App.—Corpus Christi–Edinburg 1988, writ denied), where the court held:
Because the foreclosure sale was void, this debt is revived and considered outstanding.
Because the foreclosure sale of the real property was set aside, both parties assumed their original positions as debtor and creditor. Therefore, we hold that the trial court did not err in finding the bank’s lien on the real property to be valid.
Shearer, 758 S.W.2d at 943.
Payment of Debt as Condition to Rescission: Since rescission is an equitable remedy, the mortgagor seeking rescission must do equity itself: “In order to set aside the foreclosure sale, however, the mortgagor must tender the amount owed on the mortgage. Setting aside a trustee sale is an equitable remedy which requires the mortgagor to make a valid tender of the amount due to receive equity.” Galvan v. Centex Home Equity Co., L.L.C., No. 04–06–00820–CV, 2008 WL 441773, at *4 (Tex. App.—San Antonio Feb. 20, 2008, no pet.) (mem. op.) (citing Lambert v. First National Bank of Bowie, 993 S.W.2d 833, 835 (Tex. App.—Fort Worth 1999, pet. denied); Fillion v. David Silvers Co., 709 S.W.2d 240, 246 (Tex. App.—Houston [14th Dist.] 1986, writ ref’d n.r.e.)). Consequently, a mortgagor must come to the court with clean hands to seek the equitable remedy of setting aside the foreclosure sale. See Truly v. Austin, 744 S.W.2d 934, 938 (Tex. 1988). Under application of this maxim, before a plaintiff would be entitled to equitable relief, the plaintiff must do equity and tender the amount due and owing under the promissory note. White v. BAC Home Loans Servicing, LP, No. 3:09-CV-2484-G, 2010 WL 4352711, at *5 (N.D. Tex. Nov. 2, 2010) (“to the extent [plaintiff] seeks equitable relief to avoid foreclosure, he cannot state a claim for such relief because he has not tendered the amount due on the loan”); Fillion, 709 S.W.2d at 246 (“a necessary prerequisite to the . . . recovery of title . . . is tender of whatever amount is owed on the note”); Grella v. Berry, 647 S.W.2d 15, 18 (Tex. App.— Houston 1982, no writ) (“In a suit seeking equitable relief to avoid foreclosure, where the appellants allege they can pay the full amount of the note, we are of the opinion that the appellants must affirmatively demonstrate their ability to pay the full amount due on the note if they are to obtain equity.”).
In Fillion, the court held not only that the defaulting mortgagor was required to tender the secured debt but also that the tender was required to be “an unconditional offer by a debtor or obligor to pay another, in current coin of the realm, a sum on a specified debt or obligation.” Fillion, 709 S.W.2d at 246 (quoting Baucum v. Great American Insurance Co. of New York, 370 S.W.2d 863, 866 (Tex. 1963)); see also Pachter v. Woodman, 534 S.W.2d 940, 945–46 (Tex. App.—Tyler 1976), rev’d on other grounds, 547 S.W.2d 954 (Tex. 1977); Phillips v. Latham, 523 S.W.2d 19, 24–25 (Tex. App.—Dallas 1975, writ ref’d n.r.e.) (mortgagor need pay purchaser at sale only fair market value of mortgaged property, not full amount of sale proceeds); Price v. Reeves, 91 S.W.2d 862, 865 (Tex. App.—Fort Worth 1936, writ dism’d).
Because a mortgagor who lacks assets to pay the debt before foreclosure is rarely in a better financial situation after the foreclosure, rescission is often not a practical remedy for the mortgagor. If, however, the property has increased significantly in value after the foreclosure sale, an attack on a wrongful foreclosure sale by the mortgagor may be more feasible.
§ 16.5Remedy of Action to Quiet Title
As an alternative to rescission, if the defect in the foreclosure sale is of such a degree that the sale is determined by the court to be void as opposed to voidable, the mortgagor may sue to regain title and possession of the mortgaged property under the legal remedy known as a trespass-to-try-title action. Slaughter v. Qualls, 162 S.W.2d 671, 674–75 (Tex. 1942); Henke v. First Southern Properties, Inc., 586 S.W.2d 617, 620 (Tex. App.—Waco 1979, writ ref’d n.r.e.).
§ 16.5:1Elements of Trespass to Try Title
To prevail in a trespass-to-try-title action, a “plaintiff must usually (1) prove a regular chain of conveyances from the sovereign, (2) establish superior title out of a common source, (3) prove title by limitations, or (4) prove title by prior possession coupled with proof that possession was not abandoned.” Martin v. Amerman, 133 S.W.3d 262, 265 (Tex. 2004) (citations omitted). An adverse claim, to constitute a cloud on the title removable by the court, must be one that is valid on its face but is proved by extrinsic evidence to be invalid or unenforceable. Sadler v. Duvall, 815 S.W.2d 285, 293, n.2 (Tex. App.— Texarkana 1991, writ denied). Note, however, a trespass to try title action is unavailable where a mortgagee’s interest in the property is valid and enforceable and the purchaser at the foreclosure sale is a bona fide purchaser. Sgroe v. Wells Fargo Bank, N.A., 941 F. Supp. 2d 731, 751 (E.D. Tex. 2013).
§ 16.5:2Tender of Debt Not Required
Although Texas courts have found tender of the unpaid debt to be a necessary condition for a rescission action to recover title based on the principle that a party seeking an equitable remedy must do equity (as discussed in section 16.4 above), there does not appear to be, at this time, any authority that such tender is a necessary condition for an action to quiet title under Texas law on a trespass to try title action. Warren v. Bank of America, N.A., No. 3:11-CV-3603-M, 2012 WL 3020075, at *3 (N.D. Tex. Jun. 19, 2012) (citing Giles v. Bank of America, N.A., 2012 WL 1038581, at *4 (W.D. Tex. Mar. 27, 2012)).
§ 16.6Effect of Subsequent Sale of Collateral on Mortgagor’s Recovery
In a rescission suit by the mortgagor, the purchaser at a foreclosure sale is not able to claim the protection of being a good-faith purchaser for value without notice of any defect in the sale. Bidders at foreclosure sales do so at their own peril. Henke v. First Southern Properties, Inc., 586 S.W.2d 617, 620 (Tex. App.—Waco 1979, writ ref’d n.r.e.). However, a good-faith purchaser for value from the purchaser at the foreclosure sale takes title free of foreclosure sale defects unknown to the subsequent purchaser. White v. Lakewood Bank & Trust Co., 438 S.W.2d 129, 134 (Tex. App.—Dallas 1969, no writ); Slaughter v. Qualls, 149 S.W.2d 651 (Tex. App.—Amarillo 1941), aff’d, 162 S.W.2d 671 (Tex. 1942). The rationale is that the mortgagor, by executing the deed of trust, puts the trustee in the position to “create the appearance of good title in the original purchaser at the trustee’s sale.” Phillips v. Latham, 523 S.W.2d 19, 24 (Tex. App.—Dallas 1975, writ ref’d n.r.e.). Thus, the subsequent purchaser, if a good-faith purchaser for value, acquires good title not on the theory that good title actually passes by the foreclosure sale deed but rather by estoppel against the mortgagor for having executed the deed of trust in the first place. The mortgagor has the burden to prove that the subsequent purchaser is not an innocent purchaser. See Connor v. Lane, 355 S.W.2d 223, 224 (Tex. App.—Waco 1962, no writ). A sale to a subsequent purchaser with notice of the defect in the sale is void. Slaughter, 149 S.W.2d at 657.
See the discussion regarding the statute of limitations in section 10.26 in this manual.
A suit for damages must be filed within four years of the wrongful foreclosure. Tex. Civ. Prac. & Rem. Code § 16.004(a); Gonzales v. Lockwood Lumber Co., 668 S.W.2d 813, 815 (Tex. App.—Houston [14th Dist.] 1984, writ ref’d n.r.e.). A wrongful foreclosure “cause of action for any deficiency exists on the date of foreclosure.” Trunkhill Capital, Inc. v. Jansma, 905 S.W.2d 464, 468 (Tex. App.—Waco 1995, writ denied).
A suit for rescission must be filed within four years of the foreclosure sale. Tex. Civ. Prac. & Rem. Code § 16.051.
The mortgagor may bring an action in trespass to try title at any time before the applicable adverse possession statute of limitations has matured in the purchaser. See Tex. Civ. Prac. & Rem. Code §§ 16.021–.037. Section 16.025 provides for a five-year limitations period, provided the possessor has paid ad valorem taxes on the property and claims the property under deed or deeds duly recorded. See Tex. Civ. Prac. & Rem. Code § 16.025. Section 16.026 provides for a ten-year limitations period of continuous possession. See Tex. Civ. Prac. & Rem. Code § 16.026.
The statute of limitations for attorney malpractice in representing a foreclosing lender is tolled until all appeals are exhausted in a wrongful foreclosure suit of the mortgagor. Gulf Coast Investment Corp. v. Brown, 821 S.W.2d 159, 160 (Tex. 1991) (attorney accused of failing to send notice of intent to accelerate a note before the foreclosure sale). See also Hughes v. Mahaney & Higgins, 821 S.W.2d 154, 156 (Tex. 1991); Aduddell v. Parkhill, 821 S.W.2d 158 (Tex. 1991), overruled on other grounds, Underkofler v. Vanasek, 53 S.W.3d 343 (Tex. 2001). The discovery rule applies to malpractice claims in the foreclosure context so that the limitations statute begins to run only when the facts establishing a cause of action are discovered or should have been, in the exercise of reasonable care and diligence, discovered by the plaintiff. Independent Life & Accident Insurance Co. v. Childs, Fortenbach, Beck & Guyton, 756 S.W.2d 54, 55 (Tex. App.—Texarkana 1988, no writ).
A settlement reached in a suit by a maker for wrongful foreclosure against the mortgagee, wherein the mortgagee had assigned its malpractice claim against its attorney and had stipulated that it had wrongfully failed to send notice of acceleration to the maker, did not constitute collateral estoppel in the suit against the attorney. See Phillips v. Allums, 882 S.W.2d 71, 74–75 (Tex. App.—Houston [14th Dist.] 1994, writ denied).