Judicial Foreclosure
Judicial foreclosure of a lien to collect a debt secured by real estate is rarely used in the state of Texas because most loan agreements contain a power of sale allowing a trustee to nonjudicially foreclose and sell the real property securing payment of the obligor’s note. Using the power of sale to nonjudicially foreclose is generally quicker, cheaper, and better understood by the courts, borrowers, creditors, lenders, mortgagees, and other foreclosure professionals. Most lenders/creditors/mortgagees also prefer to conduct a nonjudicial foreclosure because it does not involve filing suit against the obligor(s).
Note: This chapter does not discuss the expedited quasi-judicial foreclosure process initiated under rules 735 and 736 of the Texas Rules of Civil Procedure. That process is discussed in chapters 25 (transferred tax liens or property tax loan liens), 28 (home equity and home equity lines of credit), 30 (property owners’ association liens), and 31 (reverse mortgages).
Note: Throughout this chapter, the terms creditor, lender, and mortgagee may be used interchangeably, though “mortgagee,” as defined in Tex. Prop. Code § 51.0001(4), is the preferred term for “creditor” in any foreclosure-related matter.
However, judicial foreclosure is another option to foreclose that a creditor would consider in certain circumstances. As judicial foreclosure has been made almost obsolete by the nonjudicial foreclosure process, there seems to be some confusion as to the legal principles supporting a judicial foreclosure and the processes and procedures behind its completion.
This chapter attempts to clarify those principles.
When evaluating judicial foreclosure, the mortgagee should understand that there are two separate and independent liens which may be used to encumber the real property securing payment of a note—a vendor’s lien and a deed of trust. A deed of trust can be enforced judicially or nonjudicially, but filing a lawsuit is the only means to enforce the vendor’s lien by either rescission or foreclosure of the vendor’s lien.
Vendor’s Lien: The vendor’s lien is an underutilized lien in the lender’s enforcement arsenal; however, it is little understood. The vendor’s lien, when retained in the warranty deed conveying the property, reserves superior title to the encumbered property until the purchase money debt is paid. Reservation of the vendor’s lien is also found in most standard deed of trust forms with language such as: “The note is primarily secured by the vendor’s lien retained in the deed conveying the property to the grantor, which is assigned to the lender, and the deed of trust is additional security for the loan agreement.” Consequently, whenever judicial foreclosure is considered, enforcement of the note may include foreclosure of both the vendor’s lien and the deed of trust because both liens are independent of the other.
Rule 309 of the Texas Rules of Civil Procedure is the statutory authority for judicial foreclosure in Texas, even though the rule has not been amended since 1966. See Tex. R. Civ. P. 309.
It is important for the mortgagee, when considering judicial foreclosure, that the note and lien are separate obligations and have separate remedies. See Kempner v. Comer, 11 S.W. 194, 196 (Tex. 1889). This means enforcement of the note and a security instrument are separate obligations and must be enforced by independent causes of action, even though they are intertwined in a judicial foreclosure suit. Stephens v. LPP Mortgage, Ltd., 316 S.W.3d 742 (Tex. App.—Austin 2010, pet. denied). Enforcement of the note always requires a lawsuit seeking a personal judgment against the debtor, but foreclosure of the lien securing the note can be accomplished nonjudicially or judicially. Because suit on the note and foreclosure are severable, the mortgagee can sue and obtain a judgment on the note and later file a suit to judicially foreclose or nonjudicially foreclose.
If the borrower’s debt is not paid in full by the foreclosure sale proceeds, the mortgagee must file a second suit seeking a deficiency judgment if they want to collect the difference, if any, between the foreclosure sales price and the debt owed. If the foreclosure sale was conducted nonjudicially, a deficiency suit is brought under Tex. Prop. Code § 51.003. If the property was sold pursuant to a judicial foreclosure, the deficiency suit is brought under Tex. Prop. Code § 51.004.
In a judicial foreclosure, the mortgagee can and should combine a suit on the note and foreclosure of the vendor’s lien and deed of trust. However, under old law, if the final judgment is silent and fails to order the issuance of an order of sale—even if foreclosure was requested in the pleadings—foreclosure of the secured property is not authorized. Vance v. Wilson, 382 S.W.2d 107 (Tex. 1964).
If a mortgagee obtains a judgment for only judicial foreclosure, the mortgagee cannot seek personal liability against the obligor or guarantor of the debt in a deficiency suit until the secured property is sold and the foreclosure sales proceeds applied to the debt. Walker v. Garland, 235 S.W. 1078, 1080 (Tex. Comm’n App. 1922, judgm’t adopted). Otherwise, the borrower’s or guarantor’s obligation is undeterminable.
If judicial foreclosure is chosen, it is critical that the mortgagee ensures the final judgment states the dollar amount owed by the obligor of the note. If there is no recitation of the dollar amount owed by the debtor reflected in the final judgment, when the clerk prepares the order of sale, the order of sale will be issued for collection of only court costs from the foreclosure sale proceeds. This means that, after foreclosure, the sales proceeds will be distributed first to the collection of court costs and foreclosure fees, then to inferior lienholders in order of lien priority, and then to the debtor. The mortgagee collects nothing because the foreclosure judgment and the order of sale are silent as to the amount owed to the mortgagee.
Ensuring the final judgment contains the amount owed by the debtor is almost automatically accomplished if, in the same suit, the mortgagee seeks judgment for the amount owed under the note as well as foreclosure. But if the mortgagee sues only on the note and subsequently seeks an in rem foreclosure of the secured property, the mortgagee must ensure the final foreclosure judgment orders a dollar sum certain be paid to the mortgagee.
The biggest point of confusion is whether it is possible to bring suit seeking judicial foreclosure while, at the same time, seeking nonjudicial foreclosure in the same suit or initiating nonjudicial foreclosure independently.
Older cases, such as Gandy v. Cameron State Bank, 2 S.W.2d 971 (Tex. App.—Austin 1927, writ ref’d), hold that judicial foreclosure and foreclosure under a power of sale, i.e., nonjudicial foreclosure under the terms of a deed of trust, cannot be prosecuted concurrently, and institution of a judicial foreclosure suit is deemed as an election precluding nonjudicial foreclosure at the same time. The primary issue in Gandy was whether the judicial foreclosure action was abandoned and, if so, whether nonjudicial foreclosure could be pursued.
Two recent cases add to the judicial and nonjudicial conflation of foreclosure remedies: Brown v. EMC Mortgage Corp, 326 S.W.3d 648 (Tex. App.—Dallas 2010, pet. denied) and Woodglen Homeowners Ass’n v. Odom, 452 S.W.3d 489 (Tex. App.—San Antonio 2014, no pet.). In Brown, the mortgagee pled for judicial foreclosure under Tex. R. Civ. P. 309 and obtained a judgment allowing nonjudicial foreclosure under the power of sale found in the deed of trust and Tex. Prop. Code ch. 51. In Odom, the mortgagee sought foreclosure of a homeowners association lien but failed to obtain an order of sale in the judgment in accordance with Tex. R. Civ. P. 309. In both Brown and Odom, the appellate court denied foreclosure of the property because the judgments did not contain an order of sale directing the sheriff or constable to sell the property as required by rule 309. Brown, 326 S.W.3d at 653–54; Odom, 452 S.W.3d at 490–91. Thus, if judicial foreclosure is pled under Tex. R. Civ. P. 309, the logistical means for conducting the foreclosure sale must conform to the rule.
There may be a solution to the rule 309 conundrum. Both judicial and nonjudicial foreclosures seek the same relief—sale of the secured property with the proceeds of sale applied to the debt—but the means for obtaining relief is different. Therefore, it seems a mortgagee could use the alternative cause of action pleading rule found in Tex. R. Civ. P. 48 and plead both judicial foreclosure and nonjudicial foreclosure as different alternative causes of action in the same suit. See Santiago v. Central Mortgage Co., No. 05-14-00552-CV, 2015 WL 1805048 (Tex. App.—Dallas Apr. 21, 2015, pet. denied) (mem. op.). Texas Rule of Civil Procedure 48 states that “[a] party may set forth two or more statements of a claim or defense alternatively or hypothetically” and “may also state as many separate claims or defenses as he has regardless of consistency and whether based on legal grounds or both.” The mortgagee could then rely on Santiago for the proposition that a plaintiff can seek a judgment for relief under either judicial foreclosure under Tex. R. Civ. P. 309 or nonjudicial foreclosure under the power of sale in a declaratory judgment cause. However, the pleadings must clearly delineate the two remedies sought as being alternative remedies. In addition, the mortgagee must elect in the final judgment either judicial foreclosure or nonjudicial foreclosure. It is one or the other, but not both. Depending on the judicial or nonjudicial remedy elected, the judgment must clearly conform to the logistical method of sale, i.e., either an order of sale under Tex. R. Civ. P. 309 for a judicial foreclosure or, under the provisions of the Uniform Declaratory Judgment Act, nonjudicial foreclosure by exercising the power of sale and terms and conditions found in the deed of trust and Tex. Prop. Code ch. 51.
Though Santiago allows pleading judicial and nonjudicial foreclosure as alternative remedies, it is possible Santiago can be relied on to toll the statute of limitations if nonjudicial foreclosure is elected as the final remedy in a lawsuit. Recently, a petition for review was filed in the Texas Supreme Court by challenging whether a lawsuit seeking a judgment for nonjudicial foreclosure tolls the statute of limitations. Metcalf v. Wilmington Savings Fund Society, FSB, No. 17-0449, 2017 WL 3027568 (Tex. July 12, 2017). The primary point of contention was whether the term foreclosure in Tex. Civ. Prac. & Rem. Code § 16.035(a) (which states that an action for foreclosure must be brought no later than four years after the cause of action accrues) applies only to a suit for judicial foreclosure or also to a suit seeking nonjudicial foreclosure. The petition for review was subsequently denied. Metcalf v. Wilmington Savings Fund Society, FSB, No. 03-16-00795-CV, 2017 WL 1228886 (Tex. App.—Austin Mar. 29, 2017, pet. denied) (mem. op.). In Slay v. Nationstar Mortgage, L.L.C., No. 2-09-052-CV, 2010 WL 670095, at *2–3 (Tex. App.—Fort Worth Feb. 25, 2010, pet. denied) (mem. op.), the court held filing a suit for nonjudicial foreclosure stays limitations.
A bankruptcy case, In re Gayle, 189 B.R. 914 (Bankr. S.D. Tex. 1995), addressed the unsettled question under Texas law of whether a creditor could nonjudicially foreclose on real property after obtaining a personal judgment on the obligor of the note. The court concluded that there was no double recovery for the lender if it obtained a judgment on a note and later nonjudicially foreclosed. In re Gayle, 189 B.R. at 921.
Enforcement of a debt by judicial foreclosure in either an original petition or counterclaim is an option if any of the following conditions are present:
•the security instrument does not contain a power of sale;
•loan origination or title defects must be cured;
•the statute of limitations must be tolled;
•a lien priority dispute must be resolved;
•only litigation can determine if the loan agreement is in default; or
•the borrower is litigious or a “Republic of Texas” genre disciple.
Basic principles and elements of a judicial foreclosure suit include the following:
1.The debtor’s execution and delivery of a note secured by delivery of a security agreement, i.e., vendor’s lien and deed of trust, encumbering certain described property, creates two separate legal obligations and two separate remedies. See Stephens, 316 S.W.3d 742; Miles Realty Co. v. Dodson, 8 S.W.2d 516 (Tex. App.—Amarillo 1928, writ dism’d w.o.j.).
2.In a judicial foreclosure, only the property described in the security agreement is foreclosed. See Mark v. Household Finance Corp. III, 296 S.W.3d 838 (Tex. App.—Fort Worth 2009, no pet.).
3.Before a final judgment is entered, the mortgagee must elect either judicial foreclosure or nonjudicial foreclosure, describe the mechanics of the sale elected under either Tex. R. Civ. P. 309 or the Uniform Declaratory Judgment Act, and abandon the other remedy. See Gandy, 2 S.W.2d 971.
4.In a pending suit on the note, the mortgagee can nonjudicially foreclose if the mortgagee seeks only a personal judgment on the note. See French v. May, 484 S.W.2d 420, 428 (Tex. App.—Corpus Christi–Edinburg 1972, writ ref’d n.r.e.).
5.Res judicata does not apply if the mortgagee seeks only judgment in a suit on the note and later seeks judicial foreclosure. See Stephens, 316 S.W.3d at 746.
6.Unless they were made a party to the suit, a foreclosure judgment will not cut off the rights of inferior lienholders. See McDonald v. Miller, 39 S.W. 89, 94–95 (Tex. 1897).
7.Judicial foreclosure does not have to be pled as a compulsory counterclaim to preserve the right to subsequently foreclose because the mortgagor cannot impair a mortgagee’s contractual right to choose how to enforce its lien. Kasper v. Keller, 466 S.W.2d 326 (Tex. App.—Waco 1971, writ ref’d n.r.e.).
8.If the underlying loan agreement is evidenced by an installment note, the maturity of the loan agreement must be accelerated before final judgment, which requires as a condition precedent a notice of intent to accelerate and notice of acceleration if the default is not cured. Shumway v. Horizon Credit Corp., 801 S.W.2d 890 (Tex. 1991).
If a harried lawyer or foreclosure professional has time to read only two opinions discussing recent judicial foreclosure issues, of the cases cited above, Stephens and Santiago should be read to gain a better understanding of recent judicial foreclosure issues. The primary focus of Stephens, decided in 2010, is whether res judicata cuts off foreclosure of a security agreement, but the opinion provides a thorough analysis of existing foreclosure law. Santiago, decided in 2015, gives a thorough discussion of the nature of relief given in a judicial foreclosure.
A judicial foreclosure requires a material breach of the note, the deed of trust, or both, and sale of only the real property and improvements described in the security agreement. All mortgagors of the deed of trust must be made a party in a judicial foreclosure suit, even if the mortgagor is not an obligor of the note. However, if a mortgagee has a contractual right to nonjudicially foreclose under a power of sale, it can do so without the necessity of filing a judicial foreclosure suit. Douglas v. NCNB Texas National Bank, 979 F.2d 1128, 1130 (5th Cir. 1992).
Though the statute of limitations for a suit on a note is six years (see Aguero v. Ramirez, 70 S.W.3d 372, 375 (Tex. App.—Corpus Christi–Edinburg 2002, pet. denied)), an action for judicial foreclosure must be brought within four years of the maturity of the debt. Tex. Civ. Prac. & Rem. Code § 16.035(a); Palmer v. Palmer, 831 S.W.2d 479 (Tex. App.—Texarkana 1992, no writ).
If no deed of trust or vendor’s lien secures the note, judicial foreclosure is not a remedy. The remedy is a suit on the note, and once a personal judgment is obtained against the obligor of the debt, the judgment is enforced by an execution sale of the debtor’s nonexempt property conducted by the sheriff or constable. See Mark v. Household Finance Corp. III, 296 S.W.3d 838 (Tex. App.—Fort Worth 2009, no pet.). Logistically, both a judicial foreclosure sale and an execution sale are conducted in the same manner by a sheriff or constable. See Tex. R. Civ. P. 646a–648.
The mortgagee is not required to file a compulsory counterclaim under Tex. R. Civ. P. 97(a) to preserve its right of foreclosure if the borrower files a lawsuit challenging the loan agreement. The reason is that a mortgagor cannot impair a mortgagee’s contractual right to foreclose by “the simple expedient of instituting a suit, whether groundless or meritorious, thereby . . . permitting the mortgagor to control the option as to remedies.” Kasper v. Keller, 466 S.W.2d 326, 329 (Tex. App.—Waco 1971, writ ref’d n.r.e.).
Stated another way, a borrower cannot force a lender to waive any of its debt enforcement rights or remedies by merely filing a lawsuit attacking the collectability of the debt. “Under Texas law when a borrower files an action attacking the collectability of a secured debt, the compulsory counterclaim rule does not require the secured party to counterclaim to collect the debt if he has chosen to exercise his bargained for right to pursue extra-judicial foreclosure.” Thurman v. FDIC, 889 F.2d 1441, 1444 (5th Cir. 1989).
In the event of a default under the note or the deed of trust securing the note, a mortgagee has the right to judicially foreclose or exercise its power of sale by nonjudicial foreclosure against the secured property, but the mortgagee must elect one or the other remedy. Election of remedies arises when a party has two or more inconsistent remedies and forces the party to choose one remedy and abandon the other. Coffman v. Brannen, 50 S.W.2d 913, 914 (Tex. App.—Amarillo 1937, no writ).
Even though judicial foreclosure is raised in the pleadings, a creditor may be barred from judicially foreclosing the secured property if the final judgment does not contain an order of sale for foreclosure because there is no tacit or implicit right to foreclose under a judgment. Vance v. Wilson, 382 S.W.2d 107, 109 (Tex. 1994). However, this rule might be contravened by the argument that any writ necessary to enforce an adjudicated right is always available as a matter of law, and the remedy would be an execution sale, not a judicial foreclosure sale. Swafford v. Holeman, 446 S.W.2d 75, 80 (Tex. App.—Dallas 1969, writ ref’d n.r.e.).
Though the mortgagee does not have to seek a personal judgment for the debt against the debtor in the judicial foreclosure suit, the mortgagee must seek an in rem judgment for foreclosure in the amount of the debt if the mortgagee intends to collect what is owed under the loan agreement. CVN Group, Inc. v. Delgado, 95 S.W.3d 234, 248 (Tex. 2002).
If a mortgagee sues solely on the note, it can exercise the power of sale in its deed of trust by a nonjudicial foreclosure while the suit is pending. French v. May, 484 S.W.2d 420, 428 (Tex. App.—Corpus Christi–Edinburg 1972, writ ref’d n.r.e.); Stephens v. LPP Mortgage, Ltd., 316 S.W.3d 742, 746 (Tex. App.—Austin 2010, pet. denied).
Once the mortgagee nonjudicially forecloses under the power of sale in the deed of trust, it cannot sue on the note. A deficiency judgment is the mortgagee’s only remedy for a money judgment. In re Gayle, 189 B.R. 914, 917 (Bankr. S.D. Tex. 1995) (citing FDIC v. Dye, 642 F.2d 837, 841 (5th Cir. 1981)).
A mortgagee’s petition must allege (1) execution and delivery of a note executed or assumed by the obligor; (2) the authority of the mortgagee or mortgage servicer to enforce the note and deed of trust (see Tex. Bus. & Com. Code § 3.203, 3.301; Tex. Prop. Code § 51.0025); (3) accomplishment of all the necessary conditions precedent required to enforce the note before final judgment, such as notice of intent to accelerate and acceleration of the maturity of the debt if the note is an installment note; (4) a valid vendor’s lien or deed of trust encumbering the property securing the note; (5) a legal description of the secured property; (6) the amount due in U.S. dollars under the terms of the loan agreement; and (7) a description of the uncured material breach of the terms and conditions of the note or deed of trust. See Starcrest Trust v. Berry, 926 S.W.2d 343, 350 (Tex. App.—Austin 1996, no writ). See form 20-1 in this chapter.
A petition for foreclosure also should specifically state the mortgagee is seeking a judgment for judicial foreclosure and an order of sale directing the appropriate officer to sell the encumbered property under Tex. R. Civ. P. 309 or, alternatively, nonjudicial foreclosure pursuant to the Uniform Declaratory Judgment Act under the power of sale and terms and conditions of the deed of trust. In addition, the mortgagee should seek a writ of possession under Tex. R. Civ. P. 310 from the court entering the judgment. This eliminates having to file an eviction suit in justice court, trial de novo in county court, and appeal to a court of appeals.
Attorney’s fees for a judicial foreclosure are not recoverable unless the security instrument provides for them. Jeffreys v. McGlamery, 96 S.W.2d 572, 576 (Tex. App.—Amarillo 1936, no writ). If attorney’s fees are recoverable, they must be proved by competent evidence. See Richardson v. Raby, 376 S.W.2d 422, 427–28 (Tex. App.—Tyler 1964, no writ).
In accordance with Tex. Bus. & Com. Code § 9.601(a)–(c), if the security instrument specifically encumbers personal property, foreclosure of the real property also provides for foreclosure of the personal property. See Hubbard v. Lagow, 576 S.W.2d 163, 165–66 (Tex. App.—Austin 1979, writ ref’d n.r.e.).
The plaintiff in a judicial foreclosure suit should be the mortgagee of the loan agreement as defined in Tex. Prop. Code § 51.001(4); the noteholder or transferee of the note as defined in Tex. Bus. & Com. Code §§ 3.203, 3.301; or the mortgage servicer with the authority to administer foreclosure pursuant to Tex. Prop. Code § 51.0025.
A “necessary party” determination is the key to who must be served with citation in a judicial foreclosure suit and is a person whose interest in the subject matter of the litigation is so vital that a valid decree cannot be rendered without the party’s presence. Biggs v. Southland Life Insurance Co., 150 S.W.2d 149, 150–51 (Tex. App.—Dallas 1941, no writ) (citing numerous Texas Supreme Court opinions defining “necessary party”).
It must be pointed out that most of the cases cited in this section as to who is a necessary party in a judicial foreclosure context arose in a venue dispute. As will be discussed in section 20.5 below, due to the 2006 change in the venue statute from suing all defendants in the county of their residence to suing in the county where the subject property is located, most pre-2006 opinions involving who is a necessary party may be suspect. In re Allied Chemical Mangesias Corp., 206 S.W.3d 114 (Tex. 2006).
An analysis of who may be considered a necessary party is found in Pioneer Building & Loan Ass’n v. Gray, 125 S.W.2d 284 (Tex. 1939), in which the court found the appellant was a necessary party because he had purchased the property from a widow who was a comortgagor of the secured property with her deceased husband. In another case, two parties who were jointly and severally liable on a note were necessary parties because the lender could not get full satisfaction unless both notemakers were parties. Commonwealth Bank & Trust Co. v. Heid Bros., 52 S.W.2d 74, 75 (Tex. 1940). However, in Smith v. First National Bank Groveton, 146 S.W.2d 270, 273 (Tex. App.—Galveston 1940, no writ), a guarantor was not deemed a necessary party because he held no interest in the real property and the lending bank could have full satisfaction of its note against the borrower without the joinder of the guarantor.
A foreclosure judgment will not cut off the rights of inferior lienholders unless they were made a party to the suit. McDonald v. Miller, 39 S.W. 89, 94–95 (Tex. 1897). Though decided in 1897, the Texas Supreme Court’s opinion in McDonald should be reviewed by any inferior lienholder or party with a putative redemption right in the secured property. The legal nuances and results based on the various fact situations discussed in the opinion should be carefully read.
The defendants in a judicial foreclosure suit include each obligor of the debt, each mortgagor, any person acquiring rights or interests related to the subject matter of the loan agreement, inferior lienholders, the U.S. Internal Revenue Service, the Department of Justice, or any other governmental entity with a lien encumbering the secured property. See Shaw v. Allied Finance Co., 337 S.W.2d 107, 110 (Tex. 1960).
A mortgagor who sells the secured property and has no interest or title in the secured property is a proper party but not a necessary party. Pereira v. Gulf Electric Co., 343 S.W.2d 334, 336 (Tex. App.—Waco 1960, writ ref’d n.r.e.). The murky distinction between necessary and proper party arises because a suit to foreclose a deed of trust is quasi in rem, and the judgment will be binding only on the parties to the suit and their privies. McCorkle v. Hamilton, 150 S.W.2d 439, 442 (Tex. App.—Fort Worth 1941, writ ref’d); see also Intertex, Inc. v. Kneisley, 837 S.W.2d 136, 139 (Tex. App.—Houston [14th Dist.] 1992, writ denied).
Two general principles seem to emerge when considering who is a necessary party in a judicial foreclosure context. If the suit is principally in rem, such as an action to foreclose the real property, any person claiming an interest in the res is a necessary party. If the suit is principally in personam, such as a suit on the note, any person obligated for the debt is a necessary party. See Kelly v. Lobit, 142 S.W.2d 301 (Tex. App.—Galveston 1940, no writ).
After careful consideration, if the foreclosure professional is unsure whether a person is a necessary party or a proper party, the easy answer may be to serve everyone with a putative interest in the property. See Shaw, 337 S.W.2d at 110; Weaver v. Acme Finance Co., 407 S.W.2d 227, 231–32 (Tex. App.—Corpus Christi–Edinburg 1966, no writ).
A senior lienholder to a lien sought to be judicially foreclosed is not a necessary party because the foreclosing lienholder’s lien was subject to the senior lien at the time of loan origination or by operation of law. If the United States holds a lien against the secured property, the United States must be made a party to any judicial foreclosure suit under 28 U.S.C. § 2410. The practitioner should carefully review 28 U.S.C. § 2410 to determine who must be served and how service is accomplished.
If a senior lienholder files a judicial foreclosure suit, a junior lienholder is not a necessary party but is a “proper party” because the junior lien will not be extinguished unless the junior lienholder is made a party to the senior lienholder’s judicial foreclosure suit. Vaughn v. Security National Mortgage Co., No. 14-11-00488-CV, 2012 WL 3016859, at *3 (Tex. App.—Houston [14th Dist.] July 24, 2012, no pet.) (mem. op.); Matthews v. First State Bank, 312 S.W.2d 571, 580–81 (Tex. App.—Beaumont 1958, writ ref’d n.r.e.).
A junior lienholder has standing to contest the reasonableness of attorney’s fees awarded to a senior lienholder when attorney’s fees are recoverable from proceeds received from the senior lien foreclosure sale. Farm Credit Bank v. Snyder National Bank, 802 S.W.2d 709, 714–15 (Tex. App.—Eastland 1990, writ denied). In all instances, however, the attorney’s fees award must conform to the terms of the deed of trust foreclosed. See Shutters & Insulation Inc. v. Derr, 809 S.W.2d 916, 922–23 (Tex. App.—Houston [14th Dist.] 1991, no writ).
A mortgagor who has conveyed all rights, title, and interest to a third party is not a necessary party if the mortgagor is not obligated for the debt secured by the property. Hartfield v. Greber, 207 S.W. 85, 86 (Tex. Comm’n App. 1918, judgm’t adopted); Citizens National Bank v. Cattleman’s Production Credit Ass’n, 617 S.W.2d 731, 735 (Tex. App.—Waco 1981, no writ); Loveless v. Temple Trust Co., 59 S.W.2d 883 (Tex. App.—Austin 1933, writ ref’d). However, a person who purchases property from the obligor is a necessary party if the mortgagee has notice of the conveyance. Bradford v. Knowles, 25 S.W. 1117, 1118 (Tex. 1894); Thane v. Dallas Joint Stock Land Bank, 129 S.W.2d 795, 800 (Tex. App.—Amarillo 1939, no writ); Pioneer Building & Loan Ass’n v. Gray, 126 S.W.2d 995, 996 (Tex. App.—Waco 1937, no writ).
§ 20.4:4Assignee of Leasehold Estate
In a suit to foreclose a deed of trust secured by the mortgagor’s leasehold estate, both the mortgagor, as lessee, and owner of the fee are necessary parties. National Advertising Co. v. American Bank, 622 S.W.2d 483, 485 (Tex. App.—Waco 1981, no writ).
If a tenant has no equity of redemption in the encumbered property and a personal judgment is not sought against the tenant, the tenant is not a necessary party even though the tenant may be mentioned in the foreclosure pleadings. Stroup v. Rutherford, 238 S.W.2d 612, 613 (Tex. App.—Amarillo 1951, writ ref’d). However, if the mortgagee seeks a writ of possession in the judicial foreclosure suit, the tenant must be made a party if the writ is directed at the tenant.
A party claiming an interest adverse to both mortgagor and mortgagee not related to the property may not be a necessary party in a foreclosure action. Johnson v. First National Bank of Brenham, 42 S.W.2d 870, 871–72 (Tex. App.—Waco 1931, no writ). The nonrelated adverse claim or cause of action should be severed. Weaver v. Acme Finance Co., 407 S.W.2d 227, 232–33 (Tex. App.—Corpus Christi–Edinburg 1966, no writ). However, the litigation risk for not making the person with an adverse claim a party must be considered.
The beneficiaries of a trust are not necessary parties to a judicial foreclosure suit of property held in the name of a trust if the beneficiaries had notice of the suit and the trustee-settlor provides a defense in a manner consistent with the interests of the beneficiaries. Starcrest Trust v. Berry, 926 S.W.2d 343, 355 (Tex. App.—Austin 1996, no writ). If in doubt, however, make the beneficiaries a party. The trustee of a trust is always a necessary party if property of the trust is the subject of a judicial foreclosure.
Because a partnership is not a legal entity with the capacity to be sued independently of its members, all partners—and their spouses if community property is involved—are proper and necessary parties in a judicial foreclosure suit. Rips v. Ungerman, 137 S.W.2d 87, 92 (Tex. App.—Fort Worth 1940, writ dism’d).
§ 20.4:9Trustee Named in Deed of Trust
The trustee named in a deed of trust is not a necessary party in a judicial foreclosure suit. Tex. Prop. Code § 51.007; Vela v. Shacklett, 1 S.W.2d 672, 675 (Tex. App.—San Antonio 1927), aff’d, 12 S.W.2d 1007 (Tex. 1929). If sued, a trustee should file a verified denial and claim the protections provided in Tex. Prop. Code § 51.007.
Original jurisdiction in a judicial foreclosure suit generally lies with a district court. Tex. Const. art. V, § 8; Tex. Gov’t Code §§ 24.007; 24.008. Statutory county courts generally have concurrent civil jurisdiction with district courts for cases in which the amount in controversy is greater than $500 but does not exceed $100,000. Tex. Gov’t Code § 25.0003(a). Some county courts at law in Dallas, Harris, and Tarrant counties also have concurrent jurisdiction with district courts. See Tex. Gov’t Code §§ 25.0592, 25.1032(c)(3), 25.2222(b)(7). For additional information, see Merit Management Partners I, L.P. v. Noelke, 266 S.W.3d 637 (Tex. App.—Austin 2008, no pet.), which contains a general discussion of jurisdiction in cases involving real property, and HMS Aviation v. Layale Enterprises, S.A., 149 S.W.3d 182 (Tex. App.—Fort Worth 2004, no pet.) discussing in rem jurisdiction.
Venue is generally determined under Tex. Civ. Prac. & Rem. Code § 15.002 and § 15.011. Based on the opinion in In re Allied Chemical Mangesias Corp., 206 S.W.3d 114 (Tex. 2006), it appears that pre-2006 case law requiring judicial foreclosure suits be brought in the county of the defendant’s residence or principal place of business is obsolete. In Allied Chemical, the Texas Supreme Court found the mandatory venue provision of Tex. Civ. Prac. & Rem. Code § 15.011 requires venue for judicial foreclosure suits be brought in the county where the property is located. Allied Chemical, 206 S.W.3d at 118. Following Allied Chemical, the Houston court of appeals discussed the evolution of the venue provision in Poock v. Washington Mutual Bank, F.A., No. 01-08-00415-CV, 2009 WL 2050905 (Tex. App.—Houston [1st Dist.] July 16, 2009, no pet.) (mem. op.).
When a mortgagee’s motion for summary judgment establishes a prima facie case of no irregularity or unfairness in the preforeclosure process, the burden shifts to the defendant to challenge a judgment for foreclosure. Forest Park Lanes, Ltd. v. Keith, 441 S.W.2d 920, 928–29 (Tex. App.—Fort Worth 1969, no writ).
Any action for foreclosure of real property encumbered by a security instrument must be instituted within four years after the cause of action accrues. Tex. Civ. Prac. & Rem. Code § 16.035. However, see Hoarel Sign Co. v. Dominion Equity Corp., 910 S.W.2d 140 (Tex. App.—Amarillo 1955, writ denied) with respect to “removables,” which are not considered a part of the real property. For an installment note, the cause of action accrues when the loan matures or the mortgagee exercises its option to accelerate the maturity of the debt. Holy Cross Church of God in Christ v. Wolf, 44 S.W.3d 562, 574 (Tex. 2001). Limitations, however, may be extended under Tex. Civ. Prac. & Rem. Code § 16.036, and acceleration of the maturity of the debt may be rescinded or waived under Tex. Civ. Prac. & Rem. Code § 16.038.
Attorney’s fees are recoverable by the mortgagee but only if the fees are allowed under the terms of the deed of trust or in the note. Jeffreys v. McGlamery, 96 S.W.2d 572, 576 (Tex. App.—Amarillo 1936, no writ).
A judgment for foreclosure does not pass title, and the mortgagor retains title until the property is sold at a foreclosure sale. Paddock v. Williamson, 9 S.W.2d 452, 454 (Tex. App.—Beaumont 1928, writ ref’d). Consequently, including a writ of possession cause of action under Tex. R. Civ. P. 310 should be added in any judicial foreclosure suit.
The mechanics of conducting a judicial foreclosure by a sheriff or constable is similar to an execution sale under Tex. R. Civ. P. 631 and 646a–648 and must be conducted on the first Tuesday of the month; otherwise, the sale is void. Durkay v. Madco Oil Co., 862 S.W.2d 14, 17 (Tex. App.—Corpus Christi–Edinburg 1993, writ denied). However, if the first Tuesday of the month is January 1 or July 4, the sheriff’s sale must be held on the first Wednesday of the month. Tex. Civ. Prac. & Rem. Code § 34.041. The sheriff or constable must strictly comply with notice of sale provisions of Tex. R. Civ. P. 647 and must give the defendant or the defendant’s attorney written notice of sale in accordance with Tex. R. Civ. P. 21(a), which modifies rule 647. Collum v. DeLoughter, 535 S.W.2d 390, 392 (Tex. App.—Texarkana 1976, writ ref’d n.r.e.).
A sheriff’s deed should be prepared and delivered to the purchaser at the foreclosure sale; however, a deed is not necessary to pass title. Proof of the passing of title is established by a valid judgment, a proper order of sale, and the sheriff’s return showing sale of the property to the highest bidder. Jackson v. First National Bank, 290 S.W. 276, 277 (Tex. App.—Amarillo 1927, writ dism’d w.o.j.).
A valid judgment is the prerequisite for a judicial foreclosure. The judgment must award the mortgagee a sum of money representing the debt, with attorney’s fees and court costs if authorized by contract or law, and an order for foreclosure of the property described in the security instrument. The best practice is to ensure the property sought to be foreclosed is specifically described by street address and legal description in the pleadings and the judgment.
A judgment for judicial foreclosure should state that it is enforceable under Tex. R. Civ. P. 309 so that there is no question what statutory requirements are imposed on the clerk of the court in preparing an order of sale and the sheriff or constable in conducting the sale. See form 20-2 in this chapter.
An order of sale is prepared by the clerk of the court in which the judicial foreclosure suit was filed. The order directs the sheriff or constable in the county where the property sought to be foreclosed is located, although Tex. R. Civ. P. 622 states the order can be directed to any sheriff or constable located in the state of Texas. There are old cases holding an order of sale is not void if directed to any sheriff, without regard as to whether the sheriff holds office in a county other than where the suit was filed or the property is located. See, e.g., Fitzgerald v. LeGrande, 187 S.W.2d 155, 157 (Tex. App.—El Paso 1945, no writ); De Guerra v. De Gonzalez, 232 S.W. 896, 898–99 (Tex. App.—San Antonio 1921, no writ).
Practice Tip: Most clerks of the court and sheriff and constable offices have in-house versions of judicial foreclosure forms necessary to comply with their duties and responsibilities under the law and will prefer to use their own forms. However, it is a good practice to always vet these forms.
It is critical that a foreclosure professional ensure the judgment states the amount of the debt, interest, attorney’s fees, and other costs and expenses due the mortgagee under the terms of the loan agreement; otherwise, the order of sale will contain only the costs of court reflected on the clerk’s cost sheet or docket as monies to be paid from the foreclosure sale proceeds by the sheriff or constable.
Based on old judicial foreclosure law, the mortgagee or its authorized representative must attend the foreclosure sale to tender its credit bid; however, form 20-1 in this chapter gives the mortgagee the flexibility of having its credit bid tendered by written notice to the sheriff before the sale. Many sheriff’s and constable’s offices do not recognize a mortgagee’s credit bid unless it is made in person by an authorized representative of the judgment creditor. A phone call to the sheriff’s or constable’s office before the sale is always advisable to ensure no surprises, especially whether the sheriff or constable charges a commission for conducting the sale, which is typically on a sliding scale depending on the sales price of the property.
In any dispute as to the property interest the sheriff has been authorized to sell, the order of sale is determinative. McDonald v. Powell Lumber Co., 243 S.W.2d 192 (Tex. App.—Beaumont 1951, writ ref’d); Milliken v. Coker, 90 S.W.2d 902 (Tex. App.—Fort Worth 1935), judgm’t modified on other grounds, 115 S.W.2d 620 (Tex. Comm’n App. 1938).
Generally, most sheriffs or constables conducting the sale have their own forms and procedures for handling the judicial sales process; however, counsel should review the process to ensure compliance with the law. Of particular importance and concern is how the sheriff’s or constable’s office gives notice of sale, which must be in strict compliance with Tex. R. Civ. P. 647. The potential costs and expenses arising in a judicial sale are listed in form 20-3 in this chapter.
Despite the statutory language in Tex. Prop. Code § 5.004(a) that a conveyance of real property by an office legally authorized to sell property under a court’s judgment passes absolute title to the purchaser, a sheriff’s or constable’s foreclosure deed passes only the interest held by the purchaser in the foreclosure action and does not convey fee simple title. Mosby v. Post Oak Bank, 401 S.W.3d 183, 187 n.3 (Tex. App.—Houston [14th Dist.] 2011, pet. denied).
§ 20.10Disposition of Sale Proceeds
Proceeds from a judicial foreclosure sale are applied first to the sheriff’s or constable’s cost of sale and court costs, then to the underlying debt made the subject of the suit so long as the debt is specifically described in U.S. dollars in both the judgment and order of sale, and then to inferior lienholders in order of lien priority who were parties to the suit. The balance, if any, is distributed to the obligor of the debt. Huselby v. Allison, 25 S.W.2d 1108 (Tex. App.—Amarillo 1930, writ dism’d w.o.j.). The parties to the foreclosure suit are estopped from later seeking a readjustment of the distribution of the sale proceeds. Freeman v. Klaerner, 190 S.W. 543 (Tex. App.—San Antonio 1916, no writ).
§ 20.11Deficiency Judgment after Judicial Foreclosure
If a portion of a mortgagee’s debt remains unpaid after the sales proceeds are applied, the judgment creditor can bring a separate action for a deficiency judgment against the person obligated for the debt and a guarantor, if appropriate under the guarantee. A deficiency arises when the price of the property sold at the foreclosure sale is less than the unpaid balance on the loan agreement debt. A deficiency suit must be brought within two years of the foreclosure sale date. Tex. Prop. Code § 51.003(a).
An obligor or guarantor who may be the subject of a deficiency suit has the right to bring an action in the district court in the county where the foreclosed property was located for a determination of the fair market value of the property as of the date of the foreclosure sale. Tex. Prop. Code § 51.004(b) (for obligors), § 51.005(b) (for guarantors). The suit must be brought not later than ninety days after the date of the foreclosure sale. If the suit is brought by a guarantor who did not receive actual notice of the sale, the suit must be brought not later than ninety days after the guarantor received actual notice of the sale.
Fair market value is to be determined by the finder of fact after the introduction of competent evidence of the property’s value, which may include (1) expert opinion testimony, (2) prices of comparable sales, (3) anticipated marketing time and holding costs, (4) the cost of the resale, and (5) the necessity and amount of any discount to be applied to the future sales price or the cash flow generated by the property to arrive at a fair market value as of the date of the foreclosure sale. Tex. Prop. Code §§ 51.004(b), 51.005(b).
If the mortgagee received any money from a private mortgage guaranty insurer, that sum must be credited to the amount owed by the obligor or guarantor before the mortgagee can bring an action for a deficiency judgment. Tex. Prop. Code §§ 51.004(d), 51.005(d).