Miscellaneous Topics
This chapter addresses a number of topics that may arise in connection with or touch upon foreclosure proceedings, but which do not necessarily fit into any of the prior chapters. The topics covered include mortgaged properties subject to receivership, the Texas Residential Foreclosure Consultant Act, the Texas Fraudulent Conveyance Act, and the Americans with Disabilities Act.
§ 37.2Mortgaged Properties in Receivership
The statutory framework for receiverships is set out at chapter 64 of the Texas Civil Practice and Remedies Code, but that statute also provides that the rules of equity are applicable to receivership proceedings. Tex. Civ. Prac. & Rem. Code § 64.004; see also Tex. R. Civ. P. 695, 695a. Thus, a receivership proceeding is an equitable quasi-in-rem proceeding. King Land & Cattle Corp. v. Fikes, 414 S.W.2d 521, 524 (Tex. App.—Fort Worth 1967, writ ref’d n.r.e.).
§ 37.2:1General Prerequisites for Receivership
A general prerequisite for a receivership is that the property in question must be in danger of being lost, removed, or materially injured. Tex. Civ. Prac. & Rem. Code § 64.001(b), (c). In a mortgage foreclosure action, this requirement is met if the mortgagor has not performed the mortgage contract and the property is probably insufficient to discharge the mortgage debt. Tex. Civ. Prac. & Rem. Code § 64.001(c)(2). However, the mortgagor’s express agreement to appointment of a receiver in the deed of trust may sustain the establishment of the receivership, even if the property is not threatened and is sufficient to discharge the debt. Riverside Properties v. Teachers Insurance & Annuity Ass’n, 590 S.W.2d 736, 738 (Tex. App.—Houston [14th Dist.] 1979, no writ). However, see Chase Manhattan Bank v. Bowles, 52 S.W.3d 871, 880–81 (Tex. App.—Waco 2001, no pet.), holding that a receivership is not necessary if no equity exists in the mortgaged property.
§ 37.2:2Appointment of Receiver
The appointment of a receiver in a foreclosure proceeding is discretionary with the court, as the statute states that the court “may” appoint a receiver in connection with an action by the mortgagee for the foreclosure of the mortgage and sale of the mortgaged property. Tex. Civ. Prac. & Rem. Code § 64.001(a)(4). See also O & G Carriers, Inc. v. Smith Energy 1986–A Partnership, 826 S.W.2d 703 (Tex. App.—Houston [1st Dist.] 1992, no writ), and the cases cited therein for the general principle of the court’s discretionary power to appoint a receiver. The cases concerning the court’s discretion to appoint a receiver specifically in a mortgage proceeding are relatively old—see, for example, Ellis v. Jefferson Standard Life Insurance Co., 78 S.W.2d 645 (Tex. App.—El Paso 1935, no writ) and McMillan v. North American Building & Loan Ass’n, 75 S.W.2d 161 (Tex. App.—Dallas 1934, no writ).
§ 37.2:3Status of Property in Receivership
The lienholder may seek appointment of a receiver even though a foreclosure has been enjoined by the mortgagor, as foreclosure and receivership are not mutually exclusive remedies. Dayton Reavis Corp. v. Rampart Capital Corp., 968 S.W.2d 529, 531–32 (Tex. App.—Waco 1998, writ dism’d w.o.j.). Property placed in receivership is held in custodia legis by the receiver, and any sale or disposition of the property must be authorized by the court in which the receivership is pending. First Southern Properties, Inc. v. Vallone, 533 S.W.2d 339, 341 (Tex. 1976); Huffmeyer v. Mann, 49 S.W.3d 554, 559–60 (Tex. App.—Corpus Christi–Edinburg 2001, no pet.); Cline v. Cline, 323 S.W.2d 276, 282 (Tex. App.—Houston [1st Dist.] 1959, writ ref’d n.r.e.). Any sale without court authorization is void. Vallone, 533 S.W.2d at 341; Huffmeyer, 49 S.W.3d at 560. Thus a mortgagor under a deed of trust cannot foreclose property held in custodia legis by a duly appointed receiver without obtaining the court’s permission. Vallone, 533 S.W.2d at 341.
Lack of knowledge of a pending receivership on the part of a mortgagee, a trustee under a deed of trust, or a purchaser at foreclosure does not alter the requirement for court approval, and it is not necessary for the receiver to file a lis pendens to protect property in custodia legis. Vallone, 533 S.W.2d at 341. However, the appointment of a receiver neither destroys no prior vested rights nor does it determine any rights as between the parties by reason of an existing contract. Vallone, 533 S.W.2d at 343. The enforcement of the third party’s rights or liens is merely suspended until the enforcement is approved by the court having custody of the property. Vallone, 533 S.W.2d at 343.
A receiver is a person appointed as “an arm or instrumentality of the court, holding possession of property for the court which appointed him.” First Southern Properties, Inc. v. Vallone, 533 S.W.2d 339, 343 (Tex. 1976) (citing Farm & Home Savings & Loan Ass’n v. Breeding, 115 S.W.2d 615 (Tex. 1938)). The receiver holds title to the property as an agent for the appointing court and is sometimes said to have a fiduciary relationship to the property of the receivership. A receiver must be disinterested, equally representing and protecting “the interests of all persons, including creditors, shareholders and others, in the property in receivership.” Security Trust Co. of Austin v. Lipscomb County, 180 S.W.2d 151, 158 (Tex. 1944).
§ 37.2:5Mortgagee’s Position in Receivership
Section 64.001 of the Texas Civil Practice and Remedies Code authorizes the court’s appointment of a receiver in an action by the mortgagee to foreclose the mortgage and sell the mortgaged property. Tex. Civ. Prac. & Rem. Code § 64.001(a)(4). The action must be brought in a suit in the county in which the mortgaged property is located. Tex. Civ. Prac. & Rem. Code § 15.011; see also Commercial Telephone Co. v. Territorial Bank & Trust Co., 86 S.W. 66, 69 (Tex. App.—Austin 1905, no writ). Additionally, a mortgagee is entitled to notice of a receivership application affecting the mortgagee’s collateral. See North Side Bank v. Wachendorfer, 585 S.W.2d 789, 792 (Tex. App.—Houston [1st Dist.] 1979, no writ). Note, however, that the mortgagee must have an interest in the property for which a receivership is sought. See Greenland v. Pryor, 360 S.W.2d 423, 425 (Tex. App.—San Antonio 1962, no writ), where a mortgagee that held a deed of trust against farm land but not the crops thereon was not entitled to appointment of a receiver over both the land and the crops produced from the land.
§ 37.2:6Mortgagee’s Priority in Receivership
As a general rule, a lienholder’s interest in property held by a receiver has priority over the cost and expenses incurred in the administration and operation of the receivership. CitiMortgage, Inc. v. Hubener, 345 S.W.3d 193, 197 (Tex. App.—Dallas 2011, no pet.); Chase Manhattan Bank v. Bowles, 52 S.W.3d 871, 880 (Tex. App.—Waco 2001, no pet.). However, a lienholder who requests the appointment of a receiver or who acquiesces in the receivership and seeks its benefits may not be entitled to priority of its lien position over the receiver’s fees and expenses. Chase Manhattan Bank, 52 S.W.3d at 880.
For additional discussion of receiverships, see Robert Allan Blackwell, The Nuts and Bolts of Texas Receiverships, in Receiverships in Texas, State Bar of Texas (2011).
§ 37.3Residential Foreclosure Consultants
Chapter 21 of the Texas Business and Commerce Code regulates the business operations of residential foreclosure consulting services. See Tex. Bus. & Com. Code ch. 21. Residential foreclosure consultants are defined as persons who make a solicitation, representation, or an offer to a homeowner to perform for compensation, or who for compensation performs, a service that the person represents will (1) prevent or postpone a foreclosure, (2) obtain a forbearance agreement from a lienholder, (3) assist the homeowner to cure the default giving rise to the foreclosure or to reinstate a delinquent mortgage, (4) obtain an extension of the homeowner’s reinstatement period, (5) obtain a waiver of the acceleration clause in a note or lien instrument, (6) assist the homeowner in obtaining a loan or advance of funds to prevent foreclosure, (7) avoid or ameliorate the impairment of a borrower’s credit rating arising from a foreclosure, (8) save the homeowner’s residence from foreclosure, or (9) assist the homeowner in obtaining excess proceeds from a foreclosure sale of the residence. See Tex. Bus. & Com. Code § 21.001(a). For purposes of the statute, a foreclosure commences with the filing of notice of sale under section 51.002(b) of the Texas Property Code or commencement of a judicial foreclosure action. Tex. Bus. & Com. Code § 21.001(b).
See section 36.6 in this manual for additional discussion.
§ 37.3:1Persons Excluded from Statute’s Coverage
There are limited exceptions to the scope of Texas Business and Commerce Code chapter 21 allowing certain enumerated persons to provide residential foreclosure consultant services and not be subject to the Act. See Tex. Bus. & Com. Code § 21.002. These exceptions expressly include attorneys licensed in Texas who are performing consulting services in connection with providing legal services to the residential homeowner, so long as the attorney (or an associate of the attorney) does not obtain, either directly or indirectly, a transfer of title to the residence in foreclosure. Tex. Bus. & Com. Code § 21.002(a)(1), (b).
§ 37.3:2Written Contract Required
All residential foreclosure consulting contracts involving compensation to the foreclosure consultant must be in writing, dated, and signed by the homeowner. Tex. Bus. & Com. Code § 21.051. The contract must contain a mandatory contractual notice provision that advises the homeowner of his right to cancel or rescind the contract at any time, without penalty of any kind. See Tex. Bus. & Com. Code § 21.052.
§ 37.3:3Restrictions on Charge or Receipt of Consideration
Unless the foreclosure consultant has provided a surety bond in accordance with Texas Finance Code chapter 393, the foreclosure consultant cannot (1) charge or receive compensation until the foreclosure consultant has “fully performed” each service that the foreclosure consultant has contracted to perform or represented that the foreclosure consultant can or will perform or (2) receive any compensation from a third party in connection with the consulting services, unless the third-party consideration is fully disclosed in writing to the homeowner. Tex. Bus. & Com. Code § 21.101.
The foreclosure consultant may not (1) take a power of attorney from the homeowner for any purpose other than to inspect documents, (2) acquire an interest (directly or indirectly) in the real or personal property of the homeowner for the purpose of securing payment of the foreclosure consultant’s compensation, or (3) take an assignment of wages to secure his compensation. Tex. Bus. & Com. Code § 21.102.
A foreclosure consultant must retain “each record and document” related to the foreclosure consulting services performed until at least the third anniversary of the date that the foreclosure consultant contract was terminated or concluded. Tex. Bus. & Com. Code § 21.103.
A violation of Texas Business and Commerce Code chapter 21 is a class C misdemeanor. Tex. Bus. & Com. Code § 21.151.
§ 37.4Texas Fraudulent Conveyance Statute
The Texas Uniform Fraudulent Transfer Act (TUFTA) (codified at Tex. Bus. & Com. Code §§ 24.001–.013) was adopted to prevent debtors from prejudicing creditors by improperly transferring assets beyond the reach of creditors. TUFTA allows creditors and bankruptcy trustees to avoid clawback transfers (1) made “with actual intent to hinder, delay, or defraud” creditors or (2) where the debtor does not receive reasonably equivalent value and the debtor was insolvent, had unreasonably small capital, or intended to incur debts it could not pay. Tex. Bus. & Com. Code §§ 24.005–.006. The latter category of transactions, which do not require proof of actual intent, are constructively fraudulent transfers. Because foreclosure sales may not necessarily realize fair market value, TUFTA includes a safe harbor for regularly conducted, noncollusive foreclosure sales. 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). Thus, the safe harbor applies to claims that a foreclosure sale is constructively fraudulent. The safe harbor has no application to sales that are actually fraudulent. Valley Ridge Roofing & Construction LLC v. Silver State Holdings, No. 19-41579-MXM, 2020 WL 7414434, at *23 (Bankr. N.D. Tex. Dec. 17, 2020) (holding that “the Texas statute gives a constructive-fraudulent-transfer defendant the presumption that it gave reasonably equivalent value for property ‘if the person acquires an interest of the debtor in an asset pursuant to a regularly conducted, noncollusive foreclosure sale…’” which “does not directly apply to this actual-fraudulent-transfer count”).
It is worth noting that the United States Bankruptcy Code includes its own fraudulent transfer provision under 11 U.S.C. § 548. Section 548 does not contain a safe harbor like that found in TUFTA. However, the U.S. Supreme Court interpreted the phrase “reasonably equivalent value” in the context of section 548 to not mean fair market value, thus providing some protection for proper foreclosure sales. BFP v. Resolution Trust Corp., 114 S. Ct. 1757, 1765 (1994) (“We deem, as the law has always deemed, that a fair and proper price, or a ‘reasonably equivalent value,’ for foreclosed property, is the price in fact received at the foreclosure sale, so long as all the requirements of the State’s foreclosure law have been complied with.”).
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). For purposes of the Act, the value of the property is determined as of the date of the transfer. In re IFS Financial Corp., 417 B.R. 419, 442 (Bankr. S.D. Tex. 2009), aff’d, 669 F.3d 255 (5th Cir. 2012); Corpus v. Arriaga, 294 S.W.3d 629, 636 (Tex. App.—Houston [1st Dist.] 2009, no pet.). The burden of proof is on the party seeking to set aside the transfer. In re Pace, 456 B.R. 253 (Bankr. W.D. Tex. 2011); In re SMTC Manufacturing of Texas, (Bankr. S.D. Tex. 2009); Hunter v. Pitcock, 346 S.W.2d 509 (Tex. App.—Fort Worth 1961, no writ).
§ 37.4:1When Is Debtor Considered Insolvent?
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. Tex. Bus. & Com. Code § 24.003(a). A debtor who is generally unable to pay debts as the debts become due is presumed to be insolvent. Tex. Bus. & Com. Code § 24.003(b).
§ 37.4:2What Is Reasonably Equivalent Value?
“Reasonably equivalent value” is defined to include the range of values for which the debtor would have sold the assets in an arm’s-length transaction. Tex. Bus. & Com. Code § 24.004(d).
§ 37.4:3Avoiding a Foreclosure Sale as a Fraudulent Transfer
As noted above, a foreclosure sale tainted by actual fraud is not protected by the statutory safe harbor. Thus, a foreclosure sale may be set aside as a fraudulent transfer by a junior lien creditor because 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). Note that the sale in question was challenged on the basis of reasonably equivalent value, which took the safe harbor out of play.
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 or relative of a general partner; (3) a general partner in such a partnership; (4) a corporation of which the debtor is a director, officer, or person in control; or (5) a managing agent or affiliate of the debtor. 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); Hahn v. Love, 321 S.W3d 517 (Tex. App.—Houston [1st Dist.] 2009, pet. denied); 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).
§ 37.5Americans with Disabilities Act
A lender contemplating foreclosing will need to determine the extent to which the collateral property will need post-foreclosure actions to bring the property into compliance with the Americans with Disabilities Act of 1990 (ADA), 42 U.S.C. §§ 12101–12213>; the federal regulations further implementing the ADA are found at 28 C.F.R. pt. 36, including technical guidelines entitled “Accessibility Guidelines for Buildings and Facilities” at appendix A to 28 C.F.R. pt. 36, the Texas Architectural Barriers Act, Tex. Gov’t Code §§ 469.001–.208, and the regulations promulgated by the Texas Department of Licensing and Regulation (TDLR) at 16 Tex. Admin. Code § 68.20, Building and Facilities Subject to Compliance with the Texas Accessibility Standards (TAS).
The ADA requires that all “public accommodations” be made readily accessible to disabled individuals. See 42 U.S.C. §§ 12181(7), 12182, 12183. The ADA’s accessibility requirements and construction or alteration compliance requirements apply to all “commercial facilities” constructed for first occupancy or altered after January 26, 1993. See 42 U.S.C. §§ 12181(2), 12183.
The owner of the property is required to remove architectural and communications barriers from public accommodations where the removal is “readily achievable.” See 42 U.S.C. §§ 12181(9), 12182(b)(2)(A)(iv). Whether a barrier removal is readily achievable is determined, in part, by the financial resources of the property owner and therefore of the lender once it becomes the owner of the property. 42 U.S.C. § 12181(9)(A), (B), (C). This raises the question: If the lender is more financially solvent than the mortgagor, will the “readily achievable” standard be more strictly applied to a foreclosing lender once the lender becomes the owner of the property?
In Texas, all commercial facilities (including offices) constructed and occupied after September 1, 1993, must comply with construction standards assuring accessibility for disabled persons. Tex. Gov’t Code § 469.003(a)(5). The TAS are the technical standards adopted by the TDLR setting forth these construction standards and are available via the Internet at www.tdlr.texas.gov/ab/abtas.htm.
Inquiries may be made to the TDLR through its website at www.tdlr.texas.gov. Compliance may be determined by an inspection of the mortgaged property by a registered accessibility specialist. See the TDLR website for a list of registered specialists.
Blackwell, Robert A. “Receiverships 101: The Nuts and Bolts of Texas Receiverships.” In Receiverships in Texas Course, 2011. Austin: State Bar of Texas, 2011.