Preforeclosure Title Concerns
To conduct a foreclosure, the chain of title of a property should be examined to identify any recorded instrument that affects title. The failure to do a thorough title search can be expensive. For example, a mortgagee who acquires a property at a foreclosure sale for its debt may be responsible for a federal tax lien that could have been removed as a cloud on title if the lien had been identified in a preforeclosure title search and a timely notice sent to the IRS before the foreclosure sale under 26 C.F.R. § 301.7425–2.
The best practice is to review copies of all the documents recorded in the chain of title and not depend on an abstractor’s run sheet. The cost difference for the actual title documents, as opposed to a run sheet, may be significant, but most investors and government-sponsored enterprises will pay the costs for obtaining copies of the actual documents in the chain of title. Therefore, it is not worth the risk to depend on a run sheet to prosecute a foreclosure.
Federal and state tax liens as well as other federal and state statutory liens, receiverships, lawsuits, lis pendens, and probate proceedings are just some of the title issues that will affect how a foreclosure must be prosecuted.
It should be noted that when it comes to title issues related to real property, state law applies unless there is a clear and manifest intent that federal law preempts state law. See In re Robertson, 203 F.3d 855 (5th Cir. 2000); In re T.F. Stone Co., 72 F.3d 466 (5th Cir. 1995).
This chapter identifies title-related matters that can affect foreclosure and provides a short overview of each title-related issue. See G. Roland Love, Involuntary Liens, in Real Estate Law 101 Course, State Bar of Texas (2018).
Texas Property Code section 12.0012, codified in 2015, allows statutory foreclosure notices and other foreclosure-related documents to be attached to a trustee’s or substitute trustee’s deed or affidavit and recorded in the real property records. See Tex. Prop. Code § 12.0012. At the discretion of the foreclosure professional, if Property Code section 12.0012 is used, a permanent record will be created in the chain of title of the documents used to initiate and conduct a foreclosure. This eliminates future frustration and laborious document searches, phone calls, and other inquiries from interested persons—especially title companies—seeking assurances that critical foreclosure-related documents were prepared, mailed, and filed correctly. Section 12.0012(a) provides that any foreclosure document filed in accordance with subsection (b) is proof of the information stated and proof of service by mail. See Tex. Prop. Code § 12.0012(a). The downside to section 12.0012 is that foreclosure documents are now permanent records and open for public review.
If there is any indication that a Texas tax lien exists in the chain of title, a copy of the lien should be obtained to determine its priority and enforceability. Except for IRS liens, ad valorem tax liens are superior to preexisting liens regardless of the date a prior lien was recorded. See Tex. Tax Code §§ 32.04–.06.
Because the Texas Tax Code does not define the term owner, in a title search it cannot be presumed that the person who holds legal title is the “owner” for tax purposes. The Texas Supreme Court noted in Realty Trust Co. v. Craddock, 112 S.W.2d 440, 443 (Tex. 1938), that the meaning of the term owner is not the same under all circumstances. Therefore, to find tax liens, a title search should be conducted using the record owner, the apparent owner (or a person in possession of the property), or an equitable title holder, who will be considered the taxable owner over a party with a contingent interest. Childress County v. State, 92 S.W.2d 1011, 1015 (Tex. 1936); Travis County Appraisal District v. Signature Flight Support Corp., 140 S.W.3d 833 (Tex. App.—Austin 2004, no pet.).
If property taxes are not escrowed, a mortgagee must be aware of property tax lien loans, also known as transferred tax liens, originated under Texas Tax Code sections 32.06 and 32.065, which are superior to previously recorded liens, including purchase money liens. If the deed of trust evidencing a property tax loan is not obtained and examined, many out-of-state mortgagees assume a property tax loan deed of trust is extinguished when a first lien that was recorded in the land title records forecloses. This is incorrect.
Property tax lien loans are created when an investor—called a transferee—pays a borrower’s delinquent tax bill and receives a certified statement of payment from the taxing authority. See Tex. Tax Code § 32.06(b). The taxpayer then signs a note and deed of trust in favor of the investor for the taxes and penalties paid to the taxing authority, as well as transaction and closing costs. The property tax loan deed of trust encumbering the property has the same superior lien status as a taxing authority’s ad valorem tax lien. If the investor forecloses its property tax loan deed of trust, the foreclosure extinguishes all liens against the borrower’s property, including purchase money liens.
See chapter 25 in this manual, which discusses the foreclosure of property tax loan liens in greater detail.
§ 4.2:3Foreclosure of Ad Valorem Tax Liens
Taxing authorities must foreclose delinquent ad valorem tax liens by judicial foreclosure, and all lienholders must be made a party in the delinquent tax suit; otherwise, the judgment against the nonparty lienholder is void. Murphee Property Holdings, Ltd. v. Sunbelt Savings Ass’n of Texas, 817 S.W.2d 850 (Tex. App.—Houston [1st Dist.] 1991, no writ).
See chapter 24 in this manual, which discusses foreclosure of ad valorem tax liens in more detail.
To challenge a tax sale, a mortgagee may seek a restricted appeal. See Quaestor Investments Inc. v. State of Chiapas, 997 S.W.2d 226 (Tex. 1999), abrogated by Ex parte E.H., 602 S.W.3d 486 (Tex. 2020); Texaco Inc. v. Central Power & Light Co., 925 S.W.2d 586 (Tex. 1996). However, a restricted appeal must be filed within six months of the date the judgment was signed. Tex. Civ. Prac. & Rem. Code § 51.013.
The terms of most deeds of trusts permit a mortgagee to pay a mortgagor’s taxes to preserve and protect the mortgagee’s interest in the mortgaged property. In this instance, the mortgagee is not a volunteer and is subrogated to the rights of the taxing authority. Vista Development Joint Venture II v. Pacific Mutual Life Insurance Co., 822 S.W.2d 305 (Tex. App.—Houston [1st Dist.] 1992, writ denied); Smart v. Tower Land & Investment Co., 582 S.W.2d 543 (Tex. App.—Dallas 1979), rev’d on other grounds, 597 S.W.2d 333 (Tex. 1980) (holding that a mortgagee who purchases the property with delinquent taxes owed by the mortgagor remaining unpaid will be considered to have purchased with reference to the tax liability).
Special rules apply to federal tax liens, but they are foreclosed subject to state law and are extinguished under state law. United States v. Brosnan, 363 U.S. 237 (1960); Rust v. Johnson, 597 F.2d 174 (9th Cir. 1979). However, the priority of an IRS lien is determined by federal law. Aquilino v. United States, 363 U.S. 509 (1960). Congress has enacted specific rules that substantially supersede the federal common law of Brosnan, although the statutes, like Brosnan, adopt many state procedures. See, e.g., 26 U.S.C. §§ 6323, 6325, 7425. Both Brosnan and the relevant statutes are concerned with the power of the states to divest a junior tax lien. Although Congress has given some subsequent liens superpriority over federal liens, if the tax lien is properly filed and is senior under federal law, it may not be extinguished by a state procedure enforcing a junior claim on the property unless the United States consents. See Berlin v. United States, 535 F. Supp. 298, 300–01 (E.D.N.Y. 1982); W. Plumb, Federal Tax Liens 285 (3d ed. 1972). See also Rodriguez v. Escambron Development Corp., 740 F.2d 92 (1st Cir. 1984); United States v. Fernandez, 82-1 U.S.T.C. P 9212 (D.P.R. 1981); United States v. Del Valle & Del Valle, Inc., 532 F. Supp. 337 (D.P.R. 1981); Hotchkiss v. Starke, 75-2 U.S.T.C. P 9807 (N.D.N.Y. 1975); United States v. Wells Fargo Bank, N.A., No. 2:11-CV-00535-RCJ, 2013 WL 6506732 (D. Nev. Dec. 11, 2013).
The basic rules for determining federal tax lien priority are found in 26 U.S.C. § 6323, which also addresses the subordination of federal tax liens to certain perfected liens and security interests and the rights of bona fide purchasers. 26 U.S.C. § 6323(b) provides that even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid in the following circumstances:
(6) Real property tax and special assessment liens—With respect to real property, as against a holder of a lien upon such property, if such lien is entitled under local law to priority over security interests in such property which are prior in time, and such lien secures payment of—
(A)a tax of general application levied by any taxing authority based upon the value of such property;
(B)a special assessment imposed directly upon such property by any taxing authority, if such assessment is imposed for the purpose of defraying the cost of any public improvement; or
(C)charges for utilities or public services furnished to such property by the United States, a State or political subdivision thereof, or an instrumentality of any one or more of the foregoing.
(7) Residential property subject to a mechanic’s lien for certain repairs and improvements—With respect to real property subject to a lien for repair or improvement of a personal residence (containing not more than four dwelling units) occupied by the owner of such residence, as against a mechanic’s lienor, but only if the contract price on the contract with the owner is not more than $5,000.
See also Tex. Bus. & Com. Code §§ 9.301, 9.312; C.I.R. v. Stern, 357 U.S. 39 (1958); United States v. City of New Britain, Conn., 347 U.S. 81 (1954).
Whenever an issue of priority arises between an IRS and conventional lien, the various factual scenarios presented in Dietrich Industries, Inc. v. United States, 988 F.2d 568 (5th Cir. 1993), should be reviewed to determine whether a subrogation argument can be made to establish lien priority over an IRS lien under certain circumstances. See also United States v. Clifford, No. 3-92-CV-0833-P, 1993 WL 306669 (N.D. Tex. Apr. 29, 1993), which approved the Dietrich holding.
The name of the taxpayer affected by a tax lien must be disclosed with reasonable preciseness on the tax lien notice, but the misspelling of a taxpayer’s name through the transposition of two letters has been held immaterial. See Richter’s Loan Co. v. United States, 235 F.2d 753 (5th Cir. 1956). However, the wrong middle initial for an individual (see Continental Investments v. United States, 142 F. Supp. 542 (W.D. Tenn. 1953)), and the omission of the first initial of a corporation (see United States v. Ruby Luggage Corp., 142 F. Supp. 701 (S.D.N.Y. 1954)), have been held material. Filing a tax lien against a taxpayer under a name used before marriage is not effective against a lienholder with a conventional lien who has a claim against the taxpayer under the taxpayer’s married name. See United States v. Clark, 81-1 U.S.T.C. P 9406 (S.D. Fla. 1981).
If the IRS files a lien against a single person while the person is single, the IRS does not have to refile the lien if the taxpayer marries and takes a new name. See Pioneer National Title Insurance Co. v. United States, 81-2 U.S.T.C. P 9482 (D.N.J. 1981).
§ 4.3:3Taxpayer’s Interest in Property
The Internal Revenue Code creates a lien in favor of the United States on all real or personal property belonging to a person who neglects, fails, or refuses to pay any tax for which that individual is liable. 26 U.S.C. § 6321. The tax lien attaches to both property belonging to the taxpayer on the assessment date and to any property acquired by the taxpayer after the assessment date, for as long as the tax lien remains in effect. United States v. McDermott, 507 U.S. 447, 448 (1993) (citing Glass City Bank v. United States, 326 U.S. 265) (1945)); 26 U.S.C. § 6322.
Federal law governs the United States’ rights to enforce a tax lien, but the nature and extent of the taxpayer’s interest in the property is determined by state law. See Aquilino v. United States, 363 U.S. 509 (1960); United States v. Bess, 357 U.S. 51 (1958), superseded on other grounds by 26 U.S.C. § 6332(b) (federal law does not create property rights but merely attaches consequences, federally defined, to rights created under state law) (citing Fidelity & Deposit Co. v. New York City Housing Authority, 241 F.2d 142, 144 (2d Cir. 1957)). Even the slightest interest under state law may be sufficient for an IRS lien to attach. For example, in United States v. Creamer Industries, Inc., 349 F.2d 625 (5th Cir. 1965), a taxpayer sold real property to a bona fide purchaser by a deed recorded before the filing of a tax lien. A corrective deed that added property that was inadvertently omitted from the original deed executed at closing was filed after a tax lien. The federal tax lien was held to attach to the omitted property. Creamer Industries, 349 F.2d at 628.
The failure to record a divorce decree granting an interest in real property to the wife before an IRS lien was filed against the husband resulted in the attachment of the IRS lien against the wife’s interest in the real property, even though the divorce was final before the tax lien was assessed. The Fifth Circuit held that the IRS was entitled to the benefits of the Texas recording statutes just as any other good-faith creditor, and the failure to timely record the divorce decree was sufficient to support a tax lien on the property. Prewitt v. United States, 792 F.2d 1353, 1355–56 (5th Cir. 1986).
Until an IRS lien is filed of record in the real property records, bona fide third parties may acquire an interest in the taxpayer’s property free of the tax lien. 26 U.S.C. § 6323(a); see also Sgro v. United States, 609 F.2d 1259 (7th Cir. 1979).
State law determines the nature of the legal interest the taxpayer has in the property sought to be reached by the federal tax lien under United States Code title 26, section 6321. Under Texas law, a partner’s interest in the partnership is his share of the profits and surplus, and a partner’s rights in specific partnership property are not subject to attachment or execution, except for partnership claims. See Tex. Bus. Orgs. Code § 154.002. The tax lien against an individual partner will therefore not attach to specific partnership property. See Rev. Rul. 73-24, 1973-1 C.B. 602; Economy Plumbing & Heating Co. v. United States, 456 F.2d 713 (Ct. Cl. 1972); United States v. Woodard, 444 F.2d 752 (10th Cir. 1971); United States v. Balanovski, 236 F.2d 298 (2d Cir. 1956); United States v. Worley, 213 F.2d 509 (6th Cir. 1954). Contra Lidberg v. United States, 375 F. Supp. 631 (D. Minn. 1974); Adams v. United States, 328 F. Supp. 228 (D. Neb. 1971).
The separate interests of tenants in common are subject to a federal tax lien. For example, a lien attaches to a delinquent taxpayer’s interest in a time-sharing condominium unit and related areas but not to the interest of any other owners in the time share or the condominium itself. See Rev. Rul. 79-55, 1979-1 C.B. 400.
A tax lien will attach to the interest of a joint tenant in property. United States v. Kocher, 468 F.2d 503, 506–07 (2d Cir. 1972); United States v. Trilling, 328 F.2d 699, 702 (7th Cir. 1964). On the death of a joint tenant, the tax lien will follow a transfer of the joint-tenancy interest, but the lien will be extinguished if the interest is extinguished—not transferred—on death. See United States v. Bess, 357 U.S. 51 (1958) (superseded on other grounds); see also Hedlund v. Brellenthin, 520 F. Supp. 81 (W.D. Wash. 1981) (lien extinguished when interest extinguished by the cancellation of real estate contract).
If only one spouse is liable for a tax debt, an IRS lien does not attach to the separate property or one-half community property interest of the other spouse. If the property is sold at a tax sale, the nondelinquent spouse’s interest in the property may be compensated from the sales proceeds. United States v. Rodgers, 461 U.S. 677 (1983); Broday v. United States, 455 F.2d 1097 (5th Cir. 1972).
Federal tax liens attach to and are effective against homestead interests created under state law. A nondelinquent taxpayer’s homestead right under state law does not prevent the levy on and sale of the homestead to pay federal taxes owed by the taxpayer’s spouse. The nondelinquent taxpayer is entitled to receive compensation for the taxpayer’s separate homestead interest from the sale proceeds. United States v. Rodgers, 461 U.S. 677 (1983).
A tax lien attaches to a tenant’s leasehold estate, notwithstanding that the terms of the lease may provide that the landlord must consent to transfers of interests in the leasehold estate. See Carolina Apartment Investors “A” v. United States, 77-1 U.S.T.C. P 9262 (E.D. Cal. 1977).
§ 4.3:10Twenty-Five-Day Notice
Proper notice must be sent to the IRS before any foreclosure sale. An inferior IRS lien will survive a foreclosure sale and continue to encumber the foreclosed property if the mortgagee failed to provide the IRS with the required notice and information at least twenty-five days before the foreclosure sale. 26 C.F.R. §§ 301.7425–2(b), 301.7425–3(d); 26 U.S.C.A. § 7425(c)(1).
Notice of a foreclosure sale to the IRS must be given in accordance with its regulations in writing and by registered or certified mail, or by personal service, not less than twenty-five days before the sale. 26 U.S.C. § 7425(b)(1), (c)(1).
The sender of an IRS foreclosure notice must ensure that the U.S. Postal Service postmarks the envelope at least twenty-five days before the foreclosure sale. 26 C.F.R. § 301.7502–1. Postmarked dates made by an in-house mailing machine are not acceptable. The date of sale is not included in the twenty-five-day calculation. 26 C.F.R. § 301.7425–2.
If notice is not properly given to the IRS, the IRS lien continues to encumber the property after the foreclosure sale, even though the IRS lien may have been recorded after the lien that was foreclosed.
Preparing the Notice: The procedures for preparing the notice to the IRS are found in IRS Publication 786, “Instructions for Preparing a Notice of Nonjudicial Sale of Property and Application for Consent to Sale,” and IRS Publication 4235, “Collection Advisory Group Numbers and Addresses.” According to Publication 786, the application or notice should be addressed to the “Collection Advisory Group Manager” for the area in which the notice of federal tax lien was filed. Publication 786 then instructs the reader to use Publication 4235, which lists the addresses for the Collection Advisory offices, to determine where to mail the notice. For more information, see 26 C.F.R. § 301.7425–3(a)(1) and Internal Revenue Bulletin 2007-36 (T.D. 9344). See form 4-1 in this chapter for instructions for preparing a notice of nonjudicial sale of property and application for consent to sale, form 4-2 for the notice of nonjudicial sale, and form 4-3 for the application for consent to sale of property free of the federal tax lien. See Appendix A in this manual for the current IRS Collection Advisory Group addresses and the Texas counties that are assigned to each group. See also the IRS’s website (www.irs.gov) to obtain copies of all the IRS publications.
§ 4.3:11Postponement of Foreclosure Sale
If notice of a scheduled sale has been timely given to the IRS, the mortgagee is “required to give notice of the postponement to the IRS in the same manner as is required under local law concerning other secured creditors.” 26 C.F.R. § 301.7425–3(a)(2)(i). Texas Property Code section 51.002 does not require notice of postponement to other secured creditors for a real property foreclosure sale, but when dealing with the IRS, it may be a good practice to notify the IRS of the postponement of a sale.
§ 4.3:12IRS Right of Redemption
A preforeclosure notice to the IRS does not extinguish the IRS lien; rather, the IRS has the right to redeem the property for the foreclosure sale price for a period of 120 days after the date of the foreclosure sale. See 26 U.S.C. § 7425(d)(1) and Treasury Regulations 26 C.F.R § 301.7425–4. If the IRS does not redeem, the purchaser at the foreclosure sale takes the property free of the IRS lien.
Tendering the amount necessary to pay off the tax lien after the foreclosure does not void the government’s right of redemption. The IRS may reject the tender and enforce its redemption right. See Olympic Federal Savings & Loan Ass’n v. Regan, 648 F.2d 1218 (9th Cir. 1981).
To redeem the property from the purchaser at the foreclosure sale, the federal government must pay the sum of the actual amount paid at the foreclosure sale, plus the following:
1.6 percent interest from the date of sale;
2.an amount equal to the excess of the purchaser’s maintenance expenses since the sale date over income realized by the purchaser since the sale date;
3.a reasonable rent value under certain defined circumstances; and
4.if applicable, amounts paid to senior lienholders after the foreclosure.
See 26 C.F.R. § 301.7425–4(b).
The federal government does not pay any costs or expenses incurred before foreclosure except to the extent these costs were part of a valid bid price. 26 C.F.R. § 301.7425–4(b)(2).
If the mortgagee buys the property at foreclosure for less than the full amount of the debt, the redemption price does not include any deficiency. See Equity Mortgage Corp. v. Loftus, 504 F.2d 1071 (4th Cir. 1974); Republic Bank v. United States, 527 F. Supp. 415 (W.D. La. 1981).
See form 4-4 in this chapter for instructions for preparing the application requesting the United States to release its right to redeem property secured by a federal tax lien (IRS Publication 487) and form 4-5 for a form letter requesting a waiver of the right of redemption.
§ 4.3:13Certificates of Discharge
If a mortgagee or the purchaser at a foreclosure sale believes there is no equity in property encumbered by an IRS lien, an application for a certificate of discharge of the federal tax lien may be filed with the IRS. See form 4-6 in this manual for instructions for applying for the certificate of discharge (IRS Publication 783). If the IRS determines that there is no equity in the property and issues a certificate of discharge, the federal tax lien no longer encumbers the property. See 26 C.F.R. § 301.6325–1(b).
§ 4.3:14Certificates of Release
The IRS may issue a certificate of release of an IRS lien if an appropriate bond is furnished. 26 C.F.R. § 301.6325–1(a)(2).
§ 4.3:15Statute of Limitations
The statute of limitations bars the enforcement of an IRS tax lien ten years from the date the taxes were assessed—not from the date the IRS lien was filed in the real property records. See 26 U.S.C. § 6502.
§ 4.4Unreleased Liens in Chain of Title
Because of sloppy loan origination and closing practices, it is common to find that a mortgagee never bothered to file a release of a lien that was paid off at closing, even though the mortgagee could be liable for damages for failing to prepare and file a release of lien. See Bayless v. Strahan, 182 S.W.2d 262 (Tex. App.—Amarillo 1944, writ ref’d).
If a loan was paid off at a closing conducted at a title company, the title company may file a release of the lien using the procedure found in Texas Property Code section 12.017. However, because the proper distribution of the closing proceeds releases the title company from any liability if the mortgagee fails to file a release, the procedure in section 12.017 is rarely used. See FCLT Loans, L.P. v. United Commerce Center, Inc., 76 S.W.3d 58 (Tex. App.—Eastland 2002, no pet.).
If a release that should have been prepared and filed cannot be obtained, sometimes a HUD-1 settlement statement can be used as proof that a lien was paid off because the HUD-1 was signed under penalty of perjury. In addition, because a title company must keep a copy of the check used to pay off a prior lien for three years, a canceled check from the title guaranty file could be used as proof of the payoff of an unreleased lien.
Municipalities can impose utility liens for “delinquent bills for municipal utility service to the property,” and these municipal liens can be superior to other liens, which include previously recorded judgment liens and any lien recorded after the municipal lien. See Tex. Loc. Gov’t Code § 552.0025(d). However, a municipal utility lien is inferior to a “bona fide mortgage” if the mortgage was recorded before the recording of the municipality’s lien. Tex. Loc. Gov’t Code § 552.0025(h). A municipality’s lien is perfected by recording a notice in the real property records of the county where the property is located that contains a legal description of the property and the utility’s account number for the delinquent charges. Tex. Loc. Gov’t Code § 552.0025(g). The lien may include additional fees and costs for penalties, interest, and collection costs.
A municipality cannot enforce a municipal or utility lien against a homestead because municipal liens are not listed as permissible liens against a homestead in Tex. Const. art. XVI, § 50.
Two liens that often cause confusion arise under Texas Labor Code chapter 61 related to nonpayment of wage claims and Texas Labor Code chapter 213 dealing with an overpayment of unemployment compensation. These liens are easily distinguishable because the standard lien form used by the state of Texas clearly states the particular Texas Labor Code provision that gives rise to the lien.
Liens arising from unemployment compensation claims are assessed and collected under Texas Labor Code sections 213.031 through 213.036. See Tex. Lab. Code §§ 213.031–.036. Once the notice of levy is filed, the notice is effective against all property rights of the delinquent taxpayer. This lien is not superior to preexisting liens. See Tex. Lab. Code § 213.059.
Wage claim liens arising under Labor Code chapter 61, however, are superior to all other liens encumbering the property except for ad valorem taxes. Tex. Lab. Code § 61.0825.
The purpose of an abstract of judgment is to create a lien based on a judgment and provide notice of the lien. Citicorp Real Estate, Inc. v. Banque Arabe Internationale D’Investissement, 747 S.W.2d 926, 928–30 (Tex. App.—Dallas 1988, writ denied). A judgment lien is perfected by obtaining and filing an abstract of judgment in accordance with Texas Property Code chapter 52.
The required content of an abstract of judgment is set out in section 52.003 of the Texas Property Code. See Tex. Prop. Code § 52.003; see also Gordon v. West Houston Trees, Ltd., 352 S.W.3d 32 (Tex. App.—Houston [1st Dist.] 2011, no pet.); Gary E. Patterson & Associates, P.C. v. Holub, 264 S.W.3d 180 (Tex. App.—Houston [1st Dist.] 2008, pet. denied). An abstract must name only the defendant(s) against whom the judgment was rendered and not necessarily all defendants named in the suit. See Tex. Prop. Code § 52.004(b)(2); In re Herman, 315 B.R. 399 (Bankr. E.D. Tex. 2004) (distinguishing a number of older cases decided under former Tex. Rev. Civ. Stat. art. 5447, a predecessor to section 52.003).
§ 4.7:2Creditor Responsible for Abstract
It is the judgment creditor’s responsibility to make sure the judgment is abstracted correctly following section 52.004 of the Texas Property Code. See Tex. Prop. Code § 52.004; In re Davis, 174 B.R. 223, 226 (Bankr. N.D. Tex. 1994); Citicorp Real Estate, Inc. v. Banque Arabe Internationale D’Investissement, 747 S.W.2d 926, 928–30 (Tex. App.—Dallas 1988, writ denied). See also Caruso v. Shropshire, 954 S.W.2d 115, 117 (Tex. App.—San Antonio 1997, no pet.), where the failure to list fifty-three judgment plaintiffs on the abstract was found to be a material omission under the statute, and accordingly, the judgment lien against the defendant did not come into effect upon recording.
An abstract of judgment can be released without the judgment creditor’s consent if the creditor cannot be located using the provisions in Tex. Civ. Prac. & Rem. Code § 31.008. The judgment debtor must pay the amount of the judgment into the registry of the court, prepare a recordable release, and send notice to the judgment creditor in accordance with section 31.008(b). See Tex. Civ. Prac. & Rem. Code § 31.008(a), (b). If the judgment creditor is located, the money deposited into the registry of the court is paid to the judgment creditor. If the judgment creditor cannot be located, the funds are escheated to the state of Texas in accordance with chapter 72 of the Texas Property Code. Once the provisions of section 31.008 are fulfilled, the judge or clerk executes a release of the judgment.
Under the Uniform Enforcement of Foreign Judgment Act (UEFJA), codified at Tex. Civ. Prac. & Rem. Code §§ 35.001–.008, a foreign judgment in the chain of title has the same effect and is subject to the same procedures, defenses, and proceedings for reopening, vacating, staying, enforcing, or satisfying a judgment as a judgment of the court in which the foreign judgment is filed. Tex. Civ. Prac. & Rem. Code § 35.003(c); see McCoy v. Knobler, 260 S.W.3d 179 (Tex. App.—Dallas 2008, no pet.); Karstetter v. Voss, 184 S.W.3d 396, 401 (Tex. App.—Dallas 2006, no pet.).
Under the UEFJA, an authenticated copy of the judgment may be filed with the clerk of any state court of competent jurisdiction. Tex. Civ. Prac. & Rem. Code § 35.003(a). The clerk is required to treat the foreign judgment as a judgment that was rendered in Texas. Tex. Civ. Prac. & Rem. Code § 35.003(b); see also Walnut Equipment Leasing Co. v. Wu, 920 S.W.2d 285, 286 (Tex. 1996). The burden of proof then shifts to the judgment debtor to prove that the judgment should not be given full force and effect. Mitchim v. Mitchim, 518 S.W.2d 362, 364 (Tex. 1975).
If a judgment debtor raises the issue that the court does not have personal jurisdiction based on due process of law, the court then has two options—either enforce the judgment or declare the order void due to want of jurisdiction. See Markham v. Diversified Land & Exploration Co., 973 S.W. 2d 437, 439 (Tex. App.—Austin 1998, pet. denied); Trinity Capital Corp. v. Briones, 847 S.W.2d 324, 326–27 (Tex. App.—El Paso 1993, no writ).
To enforce a foreign judgment using a common law cause of action, see Lawrence Systems Inc. v. Superior Feeders, Inc., 880 S.W.2d 203, 206 (Tex. App.—Amarillo 1994, writ denied).
§ 4.8Constitutional Mechanic’s and Materialman’s Liens
Section 37 of article XVI of the Texas Constitution provides that an original contractor may have a silent but superior constitutional mechanic’s and materialman’s lien. See Tex. Const. art. XVI, § 37. The lien is self-executing (that is, the lien is automatically created without the necessity of either a written agreement or the recording of a notice of lien claim), but is only valid if the lien claimant had a direct contractual relationship with the owner. Hayek v. Western Steel Co., 478 S.W.2d 786, 790 (Tex. 1972), superseded on other grounds by Tex. Prop. Code § 53.101 (effective January 1, 2022); Berry v. McAdams, 55 S.W. 1112 (Tex. 1900). However, a constitutional mechanic’s and materialman’s lien does not have lien priority over any person without actual or constructive knowledge of the lien. Detering Co. v. Green, 989 S.W.2d 479, 481 (Tex. App.—Houston [1st Dist.] 1999, no pet.); Irving Lumber Co. v. Alltex Mortgage Co., 446 S.W.2d 64, 72 (Tex. App.—Dallas 1969), aff’d, 468 S.W.2d 341 (Tex. 1971).
For an excellent discussion of constitutional mechanic’s and materialman’s liens, see Ralph M. Parsons Co. v. South Coast Supply Co. (In re A & M Operating Company Inc.), 182 B.R. 997 (E.D. Tex. 1995), aff’d, 84 F.3d 433 (5th Cir. 1996).
§ 4.9Statutory Mechanic’s and Materialman’s Liens
Special rules apply for the perfection of a statutory mechanic’s and materialman’s lien against the homestead and require substantial compliance by those who furnished labor or materials. See Tex. Prop. Code ch. 53. See Thomas J. Walthall, Jr., Texas Mechanic’s Liens and Construction Payment Issues, in Real Estate Law 101, State Bar of Texas (2018).
Architects, engineers, surveyors, and landscapers who have written contracts with the original owner also have mechanic’s and materialman’s lien rights. Tex. Prop. Code § 53.021(3), (4).
The statute of limitations for enforcing a statutory mechanic’s and materialman’s lien is one year after the last day a lien affidavit may be filed under Property Code section 53.052. This period may be extended up to one year if before the expiration of the limitations period, the claimant enters into a written agreement with the then-current record owner of the property to extend the limitations period. See Tex. Prop. Code § 53.158.
Texas Property Code section 53.157 outlines the procedures for discharging a mechanic’s and materialman’s lien. See Tex. Prop. Code § 53.157. If a mechanic’s and materialman’s lien is waived, it cannot be revived. Collinsville Manufacturing Co. v. Street, 196 S.W. 284, 287 (Tex. App.—Amarillo 1917, no writ).
Texas Property Code sections 53.160 and 53.161 set the motion and bond requirements to remove an invalid or unenforceable lien. See Tex. Prop. Code §§ 53.160, 53.161.
If a patently fraudulent mechanic’s and materialman’s lien clouds title to the property, lien expungement should be considered. See Tex. Gov’t Code §§ 51.901–.905. This type of lien is usually filed by a Republic of Texas adherent or as part of a foreclosure rescue scam. See section 4.21 below for additional discussion. See J. Paulo Flores, Mechanic’s and Constitutional Liens, in Soaking Up Some CLE, State Bar of Texas (2013).
§ 4.9:3Foreclosure of Mechanic’s and Materialman’s Lien
If the mechanic’s and materialman’s lien security instrument does not contain a power of sale, the mechanic’s and materialman’s lien cannot be foreclosed nonjudicially but must be enforced by a judicial foreclosure sale. See Tex. Prop. Code § 53.154.
Because many construction contracts contain arbitration clauses, the Texas Supreme Court case upholding an arbiter’s findings that a mechanic’s and materialman’s lien was valid should be reviewed. See CVN Group, Inc. v. Delgado, 95 S.W.3d 234 (Tex. 2002).
§ 4.9:5Vendor, Purchase-Money, Mechanic’s and Materialman’s Liens
Vendor and purchase-money liens have priority over subsequently recorded mechanic’s and materialman’s liens. However, if the mechanic’s and materialman’s lien is secured by removables, i.e., any improvements that can be removed from the structure without material damage, the lienholder can obtain a judicial order to repossess the removables from the property. First National Bank in Dallas v. Whirlpool Corp., 517 S.W.2d 262 (Tex. 1974), is the seminal case that discusses removables in a mechanic’s and materialman’s lien context. Also see Summerville v. King, 83 S.W. 680 (Tex. 1904); Exchange Savings & Loan Ass’n v. Monocrete Proprietary Ltd., 629 S.W.2d 34 (Tex. 1982); and Hoarel Sign Co. v. Dominion Equity Corp., 910 S.W.2d 140 (Tex. App.—Amarillo 1995, writ denied).
Generally, a fact question exists as to what constitutes a removable and can be repossessed by judicial order. The Whirlpool case established a three-pronged test to determine what is removable “where the improvements made can be removed without material injury to the land and pre-existing improvements, or to the improvements removed.” First National Bank in Dallas v. Whirlpool Corp., 517 S.W.2d 262, 269 (Tex. 1974). The supreme court added two additional elements to the removable test in Exchange Savings & Loan Ass’n v. Monocrete Pty. Ltd., 629 S.W.2d 34, 37 (Tex. 1982): the “nature of the improvements sought to be removed and the probabilities of post-removal damage to the existing structure.” The court held that concrete roof tile could not be removed as a matter of law.
Examples of removables that can be repossessed by judicial order are—
1.garbage disposals and dishwashers (Whirlpool Corp., 517 S.W.2d 262) and windows and doors (First Continental Real Estate Investment Trust v. Continental Steel Co., 569 S.W.2d 42 (Tex. App.—Fort Worth 1978, no writ));
2.carpets, appliances, smoke detectors, burglar alarms, light fixtures, and door locks (Richard H. Sikes, Inc. v. L & N Consultants, Inc., 586 S.W.2d 950 (Tex. App.—Waco 1979, writ ref’d n.r.e.)); and
3.pumps, compressors, air conditioning and heating systems, fans, toilets, basins, light fixtures, wall switches, electrical control panels, hardware, and cabinets (In re Orah Wall Financial Corp., 84 B.R. 442 (Bankr. W.D. Tex. 1986); Houk Air Conditioning, Inc. v. Mortgage & Trust, Inc., 517 S.W.2d 593 (Tex. App.—Waco 1974, no writ)).
The test to determine whether an improvement is a removable is found in Exchange Savings & Loan Ass’n, 629 S.W.2d 34, and refined in In re Orah Wall Financial Corp., 84 B.R. 442.
Instead of paying off a removables lien claim, before foreclosure, a mortgagee should consider demanding that the lien claimant repossess the removables from the property. Otherwise, if the mortgagee forecloses and attempts to sell the property as a real estate owned property, the mortgagee must ensure the earnest money contract does not include “removables” as part of the real estate owned sales contract because a mechanic’s and materialman’s removable lien claimant could remove the removables before the real estate owned sale closes. See Thomas J. Walthall, Jr., Mechanic’s Lien “Removables”: Representing the Contractor in Default Situations, in Advanced Real Estate Law, State Bar of Texas (2009).
§ 4.10Property Owners’ Association Liens
The foreclosure of liens held by a property owners’ association (POA) or homeowners’ association (HOA) to secure payments of assessments established by restrictive covenants is governed by Texas Property Code sections 209.009 through 209.011. See Tex. Prop. Code §§ 209.009–.011. Under section 209.009, a POA may not foreclose a POA’s assessment lien if the debt securing the lien consists solely of (1) fines assessed by the POA, (2) attorney’s fees incurred by the POA solely associated with fines assessed by the POA, or (3) amounts added to the owner’s account as an assessment under section 209.005(i) or 209.0057(b–4). Tex. Prop. Code § 209.009.
Beginning in 2011, significant changes were made to the general scheme of lien assessments and enforcement of a POA lien. See Tex. Prop. Code §§ 209.0062–.0064; 209.0091–.0094. Unless waived by the property owner under section 209.0092(c), a POA lien must be enforced by either judicial foreclosure, if there is no power of sale language in the POA’s recorded dedicatory instruments, or by a court order obtained under Texas Rules of Civil Procedure 735 and 736 before the encumbered property can be sold at a nonjudicial foreclosure sale if the POA declaration contains express power-of-sale language. See Tex. R. Civ. P. 735, 736.
Junior liens are extinguished on the foreclosure of a superior deed-of-trust lien, except to the extent that junior lienholders have claims on excess foreclosure sale proceeds. Mortgage & Trust, Inc. v. Bonner & Co., 572 S.W.2d 344, 352 (Tex. App.—Corpus Christi–Edinburg 1978, writ ref’d n.r.e.). There is no obligation to give notice of foreclosure sale to the holder of a second-lien deed of trust (TMS Mortgage, Inc. v. Golias, 102 S.W.3d 768, 771 (Tex. App.—Beaumont 2003, no pet.)), nor is there a right of redemption after foreclosure (Hampshire v. Greeves, 143 S.W. 147 (Tex. 1912); Scott v. Dorothy B. Schneider Estate Trust, 783 S.W.2d 26, 28 (Tex. App.—Austin 1990, no writ)).
Priority is generally determined by the date of filing, but there are exceptions, such as ad valorem, IRS, and property tax liens. The lien positions may also be affected by subordination or subrogation agreements filed in the real property records.
§ 4.12Leases Superior to Deed of Trust
A lease on a portion of the mortgaged property (for example, apartment tenant, office tenant, or laundry lease) executed before the deed of trust was recorded is superior to it and not extinguished by foreclosure, unless the lease has been subordinated by its terms. F. Groos & Co. v. Chittim, 100 S.W. 1006, 1010 (Tex. App. 1907, no writ). The rule is that when a lienholder takes a lien in good faith and for valuable consideration, and without notice of outstanding claims or equities, a purchaser at the lien foreclosure sale, regardless of the knowledge or notice the purchaser has, takes good title from the bona fide mortgagee. Moran v. Adler, 570 S.W.2d 883, 885 (Tex. 1978); see also Gainesville Oil & Gas Co. v. Farm Credit Bank of Texas, 847 S.W.2d 655 (Tex. App.—Texarkana 1993, no writ) (oil and gas lease with producing well subsequent to deed of trust extinguished by foreclosure sale irrespective of knowledge of foreclosure sale purchaser as to existence of well). The purchaser at the foreclosure sale becomes the new landlord.
§ 4.13Leases as Junior Encumbrances
A lease is a conveyance of real property for a term of years with the owner of the fee having a remainder interest. A lease entered into after a deed of trust has been impressed upon the fee estate is a junior encumbrance upon the estate subject to the senior encumbrance deed of trust. B.F. Avery & Sons’ Plow Co. v. Kennerly, 12 S.W.2d 140 (Tex. Comm’n. App. 1929, judgm’t adopted); Restatement (Second) Property: Landlord & Tenant § 4.1 (1977). Foreclosure of a senior encumbrance on real property (such as a first lien deed of trust) extinguishes a junior encumbrance (such as a lease entered into after the date of the senior encumbrance). However, the postforeclosure conduct of the buyer at the foreclosure sale and the tenant may create, by implication, a new lease between the buyer and the tenant based upon the terms of the extinguished lease.
§ 4.14Affirmation of Leases After Foreclosure
In the case of United General Insurance Agency of Midland, Inc. v. American National Insurance Co., 740 S.W.2d 885 (Tex. App.—El Paso 1987, no writ), the tenant, after foreclosure of a paramount deed of trust, refused to pay rent and brought a declaratory judgment action to declare that the foreclosure extinguished the lease. The court of appeals held that the lease had been extinguished but used some unfortunate language in describing what happens if the landlord and tenant treat the lease as continuing. The court said “the sale under foreclosure gives the right to the purchaser to either terminate the lease or continue it in force with the tenant’s consent, but does not of necessity terminate the lease.” United General Insurance Agency, 740 S.W.2d at 887. The opinion seems to say that the foreclosure of the paramount deed of trust extinguishes the junior lease, but not entirely, because the lease does not necessarily die. The lease might be brought back to life by the postforeclosure conduct of the buyer and the tenant; sort of a zombie lease. This language led to an unfortunate series of cases where the courts wrestled with concepts such as ratification and a renewal of the lease. See, Robert Harms Bliss, Affirmation of Leases After Foreclosure, The Bernard O. Dow Leasing Institute, University of Texas School of Law (2012).
In ICM Mortgage Corp. v. Jacob, 902 S.W.2d 527 (Tex. App.—El Paso 1994, writ denied), the court held in unequivocal terms that the foreclosure terminates the lease and disapproved the language in United General Insurance Agency, stating that the foreclosure “does not of necessity terminate the lease.” The case of Twelve Oaks Tower I, Ltd. v. Premier Allergy, Inc., 938 S.W.2d 102 (Tex. App.—Houston [14th Dist.] 1996, no writ), addressed affirmation of lease after foreclosure and held that the postforeclosure of the purchaser and the tenant, by implication, can create a new lease (not a ratification of the terminated lease) based upon the same terms as the old lease. Twelve Oaks Tower, 938 S.W.2d at 110. Whether the parties have entered into a new lease depends upon the conduct after foreclosure.
The lease, as a junior encumbrance, is terminated by the foreclosure. The tenant becomes either a tenant at sufferance or a tenant at will. ICM Mortgage Corp., 902 S.W.2d at 530. However, the purchaser and the former tenant may, by their postforeclosure conduct, enter into a new lease based upon the terms of the old lease. Twelve Oaks Tower, 938 S.W.2d at 110. In Peterson v. NCNB National Bank, 838 S.W.2d 263 (Tex. App.—Dallas 1992, no writ), the court held that a tenant’s payment of four consecutive monthly rent payments in response to a letter from the foreclosure purchaser requesting rent under the original lease and with knowledge of the foreclosure sale was sufficient to constitute an implied agreement reaffirming the lease notwithstanding the foreclosure sale. But see FDIC v. Inducto-Bend, Inc., 753 F. Supp. 651, 654 (S.D. Tex. 1991) (holding that mortgagee/foreclosure sale purchaser’s acceptance of rent from a tenant, without more, did not ratify lease but merely represented payment of rent by a tenant at sufferance).
If the deed of trust is prior to a lease that the mortgagee wishes to retain and there is neither an attornment agreement between the mortgagee and tenant nor a provision in the lease binding the tenant to continue the lease after a foreclosure, the mortgagee may consider unilaterally subordinating the deed of trust to the lease or leases. This approach has some support in court decisions holding that in a judicial foreclosure in which a tenant is not made a party to the proceeding there is no termination of the lease. In B.F. Avery & Sons’ Plow Co. v. Kennerly, 12 S.W.2d 140 (Tex. Comm’n App. 1929, judgm’t adopted), the court stated, “It is true that lessee, not being a party to the foreclosure proceeding, was not bound by the decree rendered therein.” See also McDonald v. Miller, 39 S.W. 89 (Tex. 1897); Alford v. Carver, 72 S.W. 869 (Tex. App. 1903, no writ); contra Yarbrough v. John Deere Industrial Equipment Co., 526 S.W.2d 188 (Tex. App.—Dallas 1975, no writ).
A mortgagee who elects to continue a subordinate lease after foreclosure or who unilaterally subordinates its lien before foreclosure or who accepts a deed in lieu of foreclosure may become liable to the tenant on the mortgagor’s landlord-lease covenants. In an analogous situation, the court in Amco Trust, Inc. v. Naylor, 317 S.W.2d 47 (Tex. 1958), considered the question of the liability of a leasehold mortgagee for the tenant’s rent obligation. The court held that merely by taking possession of the mortgaged property after default and before foreclosure the mortgagee did not become liable for the tenant’s covenants, because it had not become an assignee of the tenant (foreclosed) or otherwise assumed the lease. See Amco Trust, Inc., 317 S.W.2d at 51. Apparently the court would have held the mortgagee liable for the rent if the mortgagee had foreclosed on the mortgagor’s leasehold estate. See Annotation, Liability of Mortgagee or Lienholder of a Lease with Respect to Rents or Covenants Therein, 73 A.L.R.2d 1118 (1960). See form 15-5 in this manual for a letter to a tenant by the successful bidder at the foreclosure sale accepting the tenant’s lease and form 15-6 for a letter giving notice that although rent may be accepted by the bidder, such action is not to constitute an acceptance of the lease.
§ 4.15Security Deposit under Lease
The Texas Property Code exempts a “real estate mortgage lienholder who acquires title by foreclosure” from liability for the return of a residential tenant’s security deposit. Tex. Prop. Code § 92.105(c). The tenant’s only recourse is against the mortgagor (the prior owner/landlord). However, there is no express exemption for persons other than the real estate mortgage lienholder who purchase at the foreclosure sale. Presumably, subordinate leases are terminated by the foreclosure, and a purchaser at the foreclosure sale does not assume liability for the return of security deposits received by the mortgagor under a residential lease that is terminated by foreclosure. There does not appear to be any strong policy reason to grant a preferential position to a real estate mortgage lienholder who purchases at the foreclosure sale over any other purchaser at the sale. If the foreclosure sale purchaser impliedly continues a subordinate lease by accepting rent from the tenant, as opposed to terminating the lease, the purchaser may have assumed liability for the return of the security deposit even though the purchaser did not receive it in the foreclosure. If the foreclosure sale purchaser on a residential project assumes that it is not liable for the security deposit and consequently fails either to return a security deposit or to provide a written statement of any deductions therefrom on or before thirty days after the premises are surrendered, that purchaser may be presumed to have acted in bad faith, if subsequently determined to be liable for the security deposit. See Tex. Prop. Code § 92.109(d). A purchaser who wrongfully withholds a security deposit is liable for an amount equal to the sum of $100, three times the portion of the deposits wrongfully withheld, and the tenant’s reasonable attorney’s fees in a suit to recover the deposit. Tex. Prop. Code § 92.109(a). Also, the purchaser may find that it has forfeited its right “to bring suit against the tenant for damages to the premises.” Tex. Prop. Code § 92.109(b).
In Consolidated Capital Special Trust v. Summers, 737 S.W.2d 327, 333 (Tex. App.—Houston [14th Dist.] 1987), rev’d, 783 S.W.2d 580 (Tex. 1989), the court of appeals refused to award the security deposits to the foreclosing lender apparently because Property Code section 92.105(c) exempts the foreclosing lender from successor-owner liability for the return of security deposits, the lender was not entitled to the deposits. The court of appeals also noted that the notice of foreclosure sale did not list security deposits as part of the mortgaged property being sold. The appellate court’s holding in this regard is consistent with its holding that the lender was also not entitled to preforeclosure rent because it had not undertaken any preforeclosure affirmative action to impound the rent. The supreme court reversed the decision, saying, “As to rents, it is difficult to imagine what [the lender] could have done beyond foreclosing on the property, purchasing it at the sale and promptly taking possession of it.” Summers, 783 S.W.2d at 583. As to prepaid rent (for example, monthly rent paid on the first day of the month for the ensuing month as opposed to in arrears), the supreme court adopted an apportionment rule. The supreme court held the foreclosure sale purchaser was entitled to obtain a judgment against the mortgagor as a matter of law for the rent collected before foreclosure and attributable to a time after the foreclosure. Summers, 783 S.W.2d at 583. The supreme court did not discuss the disposition of security deposits, noting that the lender had abandoned its claim for security deposits. But see Skyland Developers, Inc. v. Sky Harbor Associates, 586 S.W.2d 564 (Tex. App.—Corpus Christi–Edinburg 1979, no writ) (construing postsale-term cash-flow reservation by the seller as failing to retain security deposits). The supreme court in Consolidated Capital was not adjudicating the rights and liabilities between the new landlord and tenants. The apportionment rule was announced in a case in which the mortgagee-purchaser sued for rent relating to the postforeclosure period and therefore elected to treat the leases as surviving foreclosure. It would follow from the supreme court’s holding that the new landlord would be required in situations governed by the apportionment rule to give the tenant credit for rent prepaid to the mortgagor before foreclosure, whether or not the new landlord was able to realize on its judgment for rent.
A lis pendens is a “notice, recorded in the chain of title to real property . . . to warn all persons that certain real property is the subject matter of litigation.” Countrywide Home Loans, Inc. v. Howard, 240 S.W.3d 1, 4 (Tex. App.—Austin 2007, pet. denied) (quoting Black’s Law Dictionary 942–43 (7th ed. 1999)).
A lis pendens is appropriate if the lawsuit supporting it concerns a direct interest in the property. See Tex. Prop. Code §§ 12.007, 13.004; Tex. Civ. Prac. & Rem. Code § 125.002; In re Collins, 172 S.W.3d 287, 293 (Tex. App.—Fort Worth 2005, no pet.). If a lawsuit only concerns a collateral interest in the property, a lis pendens is not appropriate. Flores v. Huberman, 915 S.W.2d 477, 478 (Tex. 1995).
A person is deemed to have knowledge of an easement if a reasonable inspection of the premises would have put the person on notice. Fender v. Schaded, 420 S.W.2d 468, 473 (Tex. App.—Tyler 1967, writ ref’d n.r.e.). If a mortgagor grants an easement after the execution of a deed of trust, foreclosure of the deed of trust will extinguish all rights under the easement. Motel Enterprises, Inc. v. Nobani, 784 S.W.2d 545, 547 (Tex. App.—Houston [1st Dist.] 1990, no writ) (citing Hampshire v. Greeves, 143 S.W.147, 150 (Tex. 1912)).
The foreclosure sale extinguishes subordinate burdening easements. See Cousins v. Sperry, 139 S.W.2d 665, 667 (Tex. App.—Beaumont 1940, no writ) (foreclosure sale terminated access right-of-way granted by mortgagor to adjoining landowner subsequent to filing of mortgage). See generally Annotation, Foreclosure of Mortgage or Trust Deed as Affecting Easement Claimed In, On, Over, or Under Property, 46 A.L.R.2d 1197 (1956).
The mortgaged property may have the benefit of valuable rights, interests, easements, and protective covenants granted after the lien of the deed of trust that the mortgagee would want to preserve. The foreclosure sale, however, may extinguish these subordinate rights, interests, easements, and covenants unless the trustee and the beneficiary take steps before the foreclosure sale to preserve them. If the mortgagee has not expressly ratified subsequent-in-time restrictive covenants imposed on the mortgaged property or subordinated its lien thereto, purchasers from the mortgagor may claim that the foreclosure sale extinguished such restrictions. See Rembert v. Wood, 41 S.W. 525 (Tex. App. 1897, writ ref’d) (judicial foreclosure in which mortgagee took no steps to preserve valuable water and access easement). In holding that the foreclosure extinguished the easement, the court stated:
[W]hen Mrs. Rembert foreclosed her mortgage, in order to have preserved her water rights or easement in the premises sold, she should have set them up in her pleadings, and had the decree of foreclosure to show that the estate ordered to be sold was burdened with such easement, and had the property sold subject to it. Failing in this, she is estopped from asserting such a claim, because, when she sold under her mortgage, she, having this water right and being a party to the suit, sold not only all the estate which the mortgagor, Hamlin, had in the property at the date of the mortgage, but also all the estate which her testator had therein, or acquired afterwards, up to the date of foreclosure; and the purchaser at such sale gets the title as it existed at the time the mortgage was executed, unless it is foreclosed subject to subsequent incumbrances.
Rembert, 41 S.W. at 527.
In Nobani, the court remanded the case for determination of a fact issue about whether the purchaser at foreclosure sale had ratified a subordinate easement. The trustee’s deed that conveyed property “subject to any and all . . . easements . . . to the extent, and only to the extent, that the same may still be in force and effect” did not constitute a ratification of the junior easement. Nobani, 784 S.W.2d at 547.
A property subject to a receivership proceeding cannot be foreclosed without a court order. Texas Trunk Railway Co. v. Lewis, 16 S.W. 647 (Tex. 1891); Cline v. Cline, 323 S.W.2d 276 (Tex. App.—Houston [1st Dist.] 1959, writ ref’d n.r.e.). A receivership, however, does not extinguish the mortgagee’s security interest; it simply preserves the status quo. First Southern Properties, Inc. v. Vallone, 533 S.W.2d 339 (Tex. 1976).
Rules of equity govern all matters relating to the appointment, powers, duties, and liabilities of a receiver as well as the receivership powers of the court. See Tex. Civ. Prac. & Rem. Code ch. 64; Tex. R. Civ. P. 695; 695a. A receiver who performs any act without court approval may be held personally liable. See Kansas City, M. & O. Railway Co. of Texas v. Weaver, 191 S.W. 591 (Tex. App.—El Paso 1917, writ ref’d).
Receiverships arising because of marital property disputes are governed by Texas Family Code sections 6.502 and 6.709. See Tex. Fam. Code §§ 6.502, 6.709. If a borrower is involved in an acrimonious divorce, the divorce court docket sheet should be reviewed for a receivership. Although a mortgagee is entitled to notice of a receivership, receivers in divorce cases often fail to give notice of the receivership and also fail to file a lis pendens in the real property records. See North Side Bank v. Wachendorfer, 585 S.W.2d 789 (Tex. App.—Houston [1st Dist.] 1979, no writ). Consequently, most mortgagees never know a receivership exists and that the property is in custodia legis.
Mineral interest receiverships are governed by sections 64.091 and 64.092 of the Texas Civil Practice and Remedies Code. See Tex. Civ. Prac. & Rem. Code §§ 64.091, 64.092; see generally Jones v. Colle, 727 S.W.2d 262 (Tex. 1987).
Upon the sale of a receivership asset, a superior lien is entitled to be paid in full before receivership fees are paid, unless the lienholder asked for or consented to the receivership. Chase Manhattan Bank v. Bowles, 52 S.W.3d 871 (Tex. App.—Waco 2001, no pet.). Any objections to receivership fees and expenses must be made in the trial court to preserve an objection on appeal. Jocson v. Crabb, 133 S.W.3d 268 (Tex. 2004).
If there appears to be no equity in the receivership encumbered property, the mortgagee should consider vacating the receivership. Couch Mortgage Co. v. Roberts, 544 S.W.2d 944 (Tex. App.—Houston [1st Dist.] 1976, writ dism’d); Best Investment Co. v. Whirley, 536 S.W.2d 578 (Tex. App.—Dallas 1976, no writ); King Land & Cattle Corp. v. Fikes, 414 S.W.2d 521 (Tex. App.—Fort Worth 1967, writ ref’d n.r.e.).
A borrower’s failure to pay taxes and keep the property insured are not grounds for a receivership. Ferguson v. Dickenson, 138 S.W. 221 (Tex. App.—Fort Worth 1911, no writ). See sections 3.4:2 and 6.7:10 in this manual for additional discussion.
§ 4.19Temporary Restraining Orders and Injunctions
If a temporary restraining order or injunction is entered by a court to prevent foreclosure, a mortgagee forecloses at its own risk. The elements required to support a temporary restraining order are found in PILF Investments v. Arlitt, 940 S.W.2d 255, 258–59 (Tex. App.—San Antonio 1997, no writ); see also Tex. Civ. Prac. & Rem. Code ch. 65; Tex. R. Civ. P. 680–693a; Town of Palm Valley v. Johnson, 87 S.W.3d 110 (Tex. 2011); Golden Rule Insurance Co. v. Harper, 925 S.W.2d 649 (Tex. 1996).
Generally, borrowers use the “irreparable injury to real property” under Tex. R. Civ. P. 680 as grounds for a temporary restraining order. However, if the purpose of the temporary restraining order is merely for delay, damages may be awarded against the applicant. Swoboda v. Wilshire Credit Corp., 975 S.W.2d 770 (Tex. App.—Corpus Christi–Edinburg 1998), disapproved on other grounds by Holy Cross Church of God in Christ v. Wolf, 44 S.W.3d 562, 570 (Tex. 2001).
A person seeking a temporary restraining order must verify the petition by affidavit and present a plan and intelligible statement of the grounds for relief. Tex. R. Civ. P. 682; Atkinson v. Arnold, 893 S.W.2d 294, 297 (Tex. App.—Texarkana 1995); Ex parte Rodriguez, 568 S.W.2d 894 (Tex. App.—Fort Worth 1978, no writ).
The maxim “he who seeks equity must do equity” applies to temporary restraining orders and injunctions. See Ginther-Davis Center, Ltd. v. Houston National Bank, 600 S.W.2d 856, 864–65 (Tex. App.—Houston [1st Dist.] 1980, writ ref’d n.r.e.).
If a trial court’s order granting a temporary injunction does not include a mandatory trial setting as required by Texas Rule of Civil Procedure 683, the trial court’s temporary injunction is void and must be dissolved. Escoe v. City of Sherman, No. 05-06-01385-CV, 2007 WL 2110348 (Tex. App.—Dallas July 24, 2007, no pet.) (mem. op.).
See also section 10.23 in this manual.
When a mortgagor dies, title to the decedent’s interest in the mortgaged property is immediately vested in the mortgagor’s devisees and heirs. See Tex. Est. Code §§ 101.001(a), 201.001, 201.002, 201.003. If a probate proceeding is opened, title of all real and personal property of the decedent vests in the probate estate subject to the custody and control of the personal representative.
As a practical matter, a deceased mortgagor file is not a default problem but rather a title problem. If the mortgagee forecloses before resolving the title issue caused by the mortgagor’s death, the mortgagee is faced with both litigation and title challenges complicated by the fact that the note and security instrument were extinguished by the foreclosure.
Since a dependent administration can be opened at any time within four years of the mortgagor’s death, title companies are hesitant to issue a title policy if a mortgagee foreclosed within four years of the mortgagor’s death. If a dependent administration is opened after a decedent’s property is foreclosed, the personal representative can force the foreclosed property back into the probate estate and sue the mortgagee for conversion. American Savings & Loan Ass’n of Houston v. Jones, 482 S.W.2d 62 (Tex. App.—Houston [14th Dist.] 1972, writ ref’d n.r.e.).
See chapter 26 in this manual for a more thorough discussion of deceased mortgagor foreclosure issues.
A recent proliferation of specious liens and claims have been filed to thwart foreclosures and evictions. For convenience sake, these claims are typically referred to as Republic of Texas claims. Because of the fanatical behavior of borrowers who use common-law liens, bogus lien releases, and numerous weird and nonsensical documents filed in the chain of title to stymie foreclosure, many title insurance underwriters refuse to insure a foreclosure with Republic of Texas claims because of the litigation risk unless the lender judicially forecloses.
Whenever faced with a Republic of Texas issue, the provisions in Texas Government Code sections 51.901 through 51.905 may be used to expunge any instrument that clouds title or purports to be a UCC filing. See Tex. Gov’t Code §§ 51.901–.905. However, the nuances connected with using sections 51.901 through 51.905 should be studied in light of In re Purported Judgment Lien Against Barcroft, 58 S.W.3d 799 (Tex. App.—Texarkana 2001) (case remanded because trial court’s order expunging bogus lien failed to follow Government Code section 51.902).
Though the claims made by Republic of Texas adherents are without merit, lenders can spend years in protracted litigation trying to foreclose and obtain title and possession of the secured property. The best defense against these zealots is to (1) remove the case to federal court and counterclaim for a judicial foreclosure suit with Tex. Gov’t Code §§ 51.901–.905 and Tex. Civ. Prac. & Rem. Code §§ 12.001–.007 allegations to remove the bogus liens and UCC filings; (2) request a permanent injunction to prevent further specious document harassment by the Republic of Texas zealot; and (3) request for a writ of possession from the district court to evict any occupant of the property under Tex. R. Civ. P. 310.
See chapter 10 in this manual for typical borrower allegations and a mortgagee’s defenses in litigation.
General tax liens under title 2 of the Texas Tax Code, such as liens from sales, use, and excise taxes; hotel occupancy taxes; gross receipts taxes; severance taxes; and inheritance taxes have priority over deed-of-trust liens only if notice of the general tax lien was recorded before the deed of trust was recorded. The Code provides:
(a)No lien created by this title is effective against a person listed in subsection (b) of this section who acquires a lien, title, or other right or interest in property before the filing, recording, and indexing of the lien:
(1)on real property, in the county where the property is located; or
(2)on personal property, in the county where the taxpayer resided at the time the tax became due and payable or in the county where the taxpayer filed the report.
(b)This section applies to a bona fide purchaser, mortgagee, holder of a deed of trust, judgment creditor, or any other person who acquired the lien, title or right, or interest in the property for bona fide consideration.
Franchise tax liens can encumber real property owned by corporate and business taxpayers. Lien priority is determined by the date the lien was filed in the real property records by the state of Texas and continues until the lien is paid. See Tex. Tax Code § 113.105.
If a mortgagor is a corporation, a title search should be conducted in the county where the real property is located as well as in the county where the mortgagor’s principal place of business is located for a franchise tax lien. To be safe, a certificate of good standing should be obtained from the Texas Comptroller of Public Accounts stating the corporation’s franchise tax status.
§ 4.24Medicaid Estate Recovery Program Liens
A common misconception is that the Texas Department of Aging and Disability Service under the Medicaid Estate Recovery Program can encumber a mortgagor’s real property for Medicaid benefits. Though the department can file a claim for Medicaid benefits with the estate of a person who died on or after March 1, 2005, and who received Medicaid funds after March 1, 2005, the claim is filed in a decedent’s probate estate as a class 7 claim and not as a real property lien. See 1 Tex. Admin. Code ch. 373.
§ 4.25Tax Lien on Manufactured Home
If a manufactured home is attached to real property, a recorded ad valorem tax lien can be imposed against a manufactured home. See Tex. Tax Code §§ 25.08(d); 32.014. See chapter 29 in this manual.
§ 4.26Paving, Water System, and Sewer System Assessments and Weed Liens
Cities in Texas can impose liens against property for (1) street improvements, including all costs of constructing, reconstructing, repairing, and realigning curbs, gutters, and sidewalks (Tex. Transp. Code ch. 313), and (2) the costs of expanding water and sewer systems (Tex. Loc. Gov’t Code §§ 552.065–.069). Except for ad valorem tax liens, Transportation Code liens are superior to any other lien from the date the municipality ordered the improvement. See Tex. Transp. Code § 313.054. Cities also have first and prior liens superior to all other liens, except ad valorem liens, for the city’s cost of abating certain health hazards and other objectionable or unsightly matters, such as removing stagnant water, trash, or weeds. See Tex. Health & Safety Code §§ 342.001–.008.
Texas Tax Code section 34.04(a) allows the Texas Attorney General’s Office (as a Title IV-D state agency) to file a petition in the court that orders a tax foreclosure sale to set out a child support claim against any excess proceeds resulting from a tax foreclosure sale. The claim must be filed before the second anniversary of the date of the tax foreclosure sale. See Tex. Tax Code § 34.04(a).
The Texas Constitution specifically permits owelty liens against Texas homesteads, which typically arise during a divorce. See Tex. Const. art. XVI, § 50(a)(3). An owelty lien enables a divorcing spouse to mortgage not only the community half interest the spouse owns, but also the undivided one-half interest in the homestead owned by the other spouse. Consequently, an owelty lien encumbers the “entirety” of the property. An owelty lien is transferred to the lender in the owelty deed in essentially the same manner a vender’s lien is reserved to the lender in a warranty deed.
§ 4.29Registration of Environmental Liens
Texas’s adoption of the Uniform Federal Lien Registration Act (Tex. Prop. Code § 14.001–.007) mandates that federal environmental liens must be filed in the county clerk’s office of the county in which the land is located. See Tex. Prop. Code § 14.002(b). Section 361.194 of the Texas Health and Safety Code grants a lien in favor of the state for remediation costs of environmental problems. See Tex. Health & Safety Code § 361.194(a). The lien attaches to the real property in question at the time of the filing of an affidavit with the county clerk by the Texas Commission on Environmental Quality, but it does not have superpriority, nor does it relate back to a time before the date on which the affidavit is recorded. See Tex. Health & Safety Code § 361.194(b). The lien may be foreclosed only by court judgment, and a suit for cost recovery must be initiated no later than one year from the completion of all remediation action. See Tex. Health & Safety Code § 361.194(f), (j).
A mortgagee’s interest in its collateral may be affected by the illegal activities on or tied to the mortgaged property. More than 140 different federal forfeiture statutes and several Texas statutes allow the government to forfeit a defendant’s interest in property. See Stefan D. Cassella, Criminal Forfeiture Procedure in 2011: An Annual Survey of Developments in the Case Law, 47 Crim. Law Bull. 593 (2011); Dee Edgeworth, Asset Forfeiture: Practice and Procedure in State and Federal Courts (2004).
Drug Abuse Prevention and Control Act: Pursuant to the Drug Abuse Prevention and Control Act, the federal government may forfeit any property, including mortgaged real property, used to facilitate the commission of a federal drug trafficking crime that is punishable by more than one year in prison. Additionally, mortgaged property may be forfeited if it is acquired in exchange for an illegal substance or if it constitutes the proceeds of an illegal drug transaction. See 21 U.S.C. § 881(a)(6) (traceable proceeds), § 881(a)(7) (properties facilitating).
Forfeiture proceedings under the Controlled Substances Act are an in rem proceeding in which the defendant is the “property,” including the lien of the lienholder, not the owner or the lienholder itself.
§ 4.31Texas Drug Forfeiture Statute
Under the Texas Drug Forfeiture Statute, an owner’s interest in real property, including a lienholder’s lien, may not be forfeited if the owner (lienholder) acquires its ownership interest, security interest, or lien interest before a lis pendens notice is filed in the appropriate public records, and the owner did not know, or should not reasonably have known, of the act or omission giving rise to the forfeiture or that it was likely to occur at or before the time of acquiring the ownership interest, security interest, or lien interest. See Tex. Code Crim. Proc. art. 59.02(c).
§ 4.32Racketeer Influenced and Corrupt Organizations Act
A person who violates the Racketeer Influenced and Corrupt Organizations Act (RICO) is subject to criminal forfeiture of any property (including real property) constituting, or derived from, any proceeds that the person obtained, directly or indirectly, in violation of the Act. See 18 U.S.C. § 1963(a), (b). Section 1963(c) provides protection from forfeiture for “a bona fide purchaser for value of such property who at the time of purchase was reasonably without cause to believe that the property was subject to forfeiture.” See 18 U.S.C. § 1963(c). Like the term owner in the Drug Abuse Prevention and Control Act, “purchaser” can include anyone (a “transferee” of the criminal defendant) who acquires an interest in the property, such as a secured lender, who at the time of purchase was “reasonably without cause to believe that the property was subject to forfeiture” under RICO. See United States v. Reckmeyer, 628 F. Supp. 616, 621–22 (E.D. Va. 1986), aff’d on other grounds, 786 F.2d 1216 (4th Cir. 1986); see also Shelden v. United States, 19 Cl. Ct. 247 (1990), vacated upon reconsideration, 26 Cl. Ct. 375 (1992), rev’d, 7 F.3d 1022 (Fed. Cir. 1993) (although order of forfeiture eventually vacated in RICO criminal enterprises forfeiture proceeding, United States Claims Court held that effect of forfeiture proceeding preventing mortgagee from foreclosing for two years, during which mortgaged property sustained severe, preventable, and permanent damage, resulted in condemnation of property right cognizable under Fifth Amendment).
For additional reading helpful in understanding this topic, see Brad A. Chapman & Kenneth W. Pearson, Comment, The Drug War and Real Estate Forfeiture Under 21 U.S.C. § 881: The “Innocent” Lienholder’s Rights, 21 Tex. Tech. L. Rev. 2127 (1990); and David F.B. Smith, Mortgage Lenders Beware: The Threat to Real Estate Financing Caused by Flawed Protection for Mortgage Lenders in Federal Forfeiture Actions Involving Real Property, 25 Real Prop. Prob. & Tr. J. 481 (Fall 1990).
On receiving a request to foreclose, the attorney should immediately determine if the lender has title insurance. The warranty of title in the deed of trust and the subsequent foreclosure trustee’s deed are of little comfort to a foreclosing lender absent mortgagee title insurance. Coverage under a loan policy—formerly known as a mortgagee’s title policy—continues in the foreclosing lender as if it had an owner’s title policy, until the foreclosing lender sells the property.
Before proceeding with a foreclosure sale, it is imperative to secure a title report, abstractor’s certificate, or other endorsement reflecting the current status of title and listing all the encumbrances of record against the mortgaged property since the date of the closing.
This report must cover the status of all ad valorem taxes, tax suits or foreclosure sales, recorded mechanic’s liens, filed federal tax liens, condominium or subdivision assessments, franchise tax liens, prior lien foreclosure notices, abstracts of judgment, notices of bankruptcy, receiverships, and divorce proceedings. See form 4-7 in this chapter for a letter to the title company requesting a title search.
If an attorney intends to rely on a title company certificate without conducting an independent review of record title, the attorney should obtain the client’s informed consent for such limited search. See form 4-8 for a checklist for pre-foreclosure title search and tax lien search, form 4-9 for a letter to taxing jurisdictions, and form 4-10 for a letter to a UCC search service.
The best practice is to obtain and carefully review all the documents in the chain of title. Because Fannie Mae, Freddie Mac, VA, HUD, and most investors will pay for a title search that includes copies of all the documents in the chain of title, cost should not be a factor.
§ 4.35Locating Successor of a Defunct Mortgagee
A good Internet source for tracking successors to no-longer-existing lenders is the home page of the National Information Center (NIC) of the Federal Reserve and its “Institutional Search” tab. The NIC is a depository of financial data and institutional characteristics collected by the Federal Reserve System. It may be accessed at the Federal Financial Institutions Examination Council website at www.ffiec.gov/NPW. Another useful tool for showing entity history is at the Federal Deposit Insurance Corporation website at https://banks.data.fdic.gov/bankfind-suite/bankfind.
Brown, Clinton F. “Probate and Bankruptcy.” In Advanced Property Owners Association Law Course, 2020. Austin: State Bar of Texas, 2020.
Flores, J. Paulo. “Mechanic’s and Constitutional Liens.” In Soaking Up Some CLE Course, 2013. Austin: State Bar of Texas, 2013.
Love, G. Roland. “Involuntary Liens.” In Real Estate Law 101 Course, 2018. Austin: State Bar of Texas, 2018.
Pendleton, Emily. “Chapter 7—Creation and Enforcement of Liens.” In Collections & Creditors’ Rights Course, 2022. Austin: State Bar of Texas, 2022.
Tamborello, Gus G. “Creditor Claims in Probate: Road Map for the Creditor’s Attorney.” In Collections & Creditors’ Rights Course, 2022. Austin: State Bar of Texas, 2022.
Walthall, Thomas J., Jr. “Mechanic’s Lien ‘Removables’: Representing the Contractor in Default Situations.” In Advanced Real Estate Law Course, 2009. Austin: State Bar of Texas, 2009.
_____. “Texas Mechanic’s Liens and Construction Payment Issues.” In Real Estate Law 101 Course, 2018. Austin: State Bar of Texas, 2018.