Remedial Action in Texas: Foreclosure and Recent Litigation

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1 Remedial Action in Texas: Foreclosure and Recent Litigation Kari Robinson John Barnes Kat Statman Baker Donelson Offices 2

2 Non-judicial Foreclosure by Power of Sale Notice of Default Requirements Liens secured by Borrower's residence written notice of default by certified mail Borrower must be given 20 days to cure by Texas statute; most residential deeds of trust require creditor to give Borrower 30 days to cure default military rights disclosure 3 Non-judicial Foreclosure by Power of Sale (continued) Other Notice of Default Considerations Must include notice of intent to accelerate if mortgagee intends to accelerate the maturity of the debt It's unclear whether the 20 day cure period requirement also applies to commercial loans. Safest course for commercial loans is to provide a notice of default with intent to accelerate and at least a 20 day cure period before acceleration 4

3 Non-judicial Foreclosure by Power of Sale (continued) Notice of Intent to Accelerate and Notice of Acceleration Both notices must be "clear and unequivocal" Notice of Acceleration of Debt Once the debt has been accelerated, creditor must inform Borrower that acceleration has occurred Best practice is to provide separate notices of acceleration and foreclosure sale 5 Non-judicial Foreclosure by Power of Sale (continued) Notice of Sale Requirements Statutory Requirements Must give notice 21 days before sale Posted at the County Courthouse and filed in the office of the county clerk, as well as any additional requirements in the Deed of Trust or loan documents Notice of Sale must include the time and location of the sale The Notice of Servicemember Rights language in Tex. Prop. Code (i) 6

4 Non-judicial Foreclosure by Power of Sale (continued) Notice of Sale Requirements Statutory Requirements Must give notice 21 days before sale Posted at the County Courthouse and filed in the office of the county clerk, as well as any additional requirements in the Deed of Trust or loan documents Notice of Sale must include the time and location of the sale The Notice of Servicemember Rights language in Tex. Prop. Code (i) Notice of Sale must be mailed to: Each Borrower obligated to pay the debt Best practice is to notify any guarantor 7 Non-judicial Foreclosure by Power of Sale (continued) Sale must occur on the first Tuesday of the month between 10 am and 4 pm at the designated location Timing: Uncontested foreclosures completed days after notice of acceleration 8

5 Judicial Foreclosure Seldom used except: litigious borrowers title issues to avoid running of statute of limitations on foreclosure to foreclose Texas home equity liens 9 Foreclosure of Texas Home Equity Loans Foreclosure only after obtaining court order or by judicial foreclosure Rule 736 Proceeding -- Expedited Foreclosure Only issue is whether creditor is entitled to foreclose Borrower can contest: Borrower did not sign loan agreement; not obligated to pay; amount of default; incorrect/incomplete copies of loan documents attached; or payment 10

6 Foreclosure of Texas Home Equity Loans (continued) Borrower cannot assert independent claims for relief Hearing required if Borrower files response Order permits creditor to sell property "under applicable law and the terms of the lien" -- i.e., by public sale BUT, if Borrower files a lawsuit, court will dismiss the 736 proceeding and vacate any order permitting foreclosure. Judicial foreclosure is an option for home equity loans 11 Common Borrower Defenses to Foreclosure Defect in foreclosure process improper notice of intent to accelerate, acceleration or sale noncompliance with Texas statutes or the deed of trust No default or allegations of accounting errors misapplication or rejection of payments unauthorized establishment of escrow account/charges to escrow account unauthorized fees/ charges 12

7 Common Borrower Defenses to Foreclosure (continued) Failure to honor or offer a loan modification CFPB rules require the lender to attempt a workout before foreclosing and prohibit "dual-tracking" of loss mitigation efforts and foreclosure proceedings Lack of standing/authority to enforce note or deed of trust Note not properly transferred to the lender or was not held by the lender on the date that the foreclosure proceedings were initiated. The security instrument was not properly assigned, or was assigned after the date that foreclosure proceedings were begun. 13 Common Borrower Defenses to Foreclosure (continued) Texas Deceptive Trade Practices - Consumer Protection Act (DTPA) Debt Collection Claims -- Texas Debt Collection and FDCPA Real Estate Settlement Procedures Act (RESPA) Suit to Quiet Title / Trespass to Try Title Expiration of 4 year statute of limitation to foreclose lien Lien becomes void 4 years after acceleration 14

8 Creditor Strategies/Arguments Removal to federal court Motion to dismiss where appropriate Produce original note (along w/ any endorsements/allonges)/prove Creditor is the legal holder No requirement to produce original note but doing so simply disposes of numerous Borrower theories, such as alleged defects in chain of title, standing, alleged defects with the assignment. 15 Creditor Strategies/Arguments (continued) Legal arguments to defeat common Borrower theories: Economic loss rule Statute of limitation bars claims Prior breach by Borrower excuses Lender's performance Statute of frauds Borrower lacks legal standing Lender is the holder of the Note, and lien follows the note Date of the assignment is not evidence of the date of transfer of the power to foreclose MERS authority to foreclose or assign the lien derives from the security instrument, and is not dependent upon any grant of authority from the originating lender or its successor(s). Abandonment of acceleration by Borrower and/or Creditor 16

9 Creditor Strategies/Arguments (continued) Equitable subrogation counterclaim (where lien is allegedly invalid) Judicial foreclosure counterclaim (where appropriate) 17 Recent Foreclosure Case Law Developments Martins v. BAC Home Loans Servicing, L.P., 722 F.3d 249 (5th Cir. 2013) - disposed of "show-me-the-note" and "split-the-note" theories commonly asserted by borrowers to challenge the mortgagee's right to foreclose. Reinagel v. Deutsche Bank National Trust Co., 735 F.3d 220 (5th Cir. 2013) - borrower can challenge the assignment on any grounds that render the assignment void, but NOT on grounds that merely render it voidable. Priester, Moran, Williams, Wood: The four-year statute of limitation applies to Borrowers' challenges to invalidate their Texas home equity liens due to loan origination violations. Borrowers must bring such claims within four years of their closing date or the claims are barred by the statute of limitations. 18

10 Deficiency Actions Infrequently pursued on residential loans. Commercial Suit for deficiency must be brought within 2 years of the foreclosure sale If fair market value exceeds the foreclosure sale price, then the borrower is entitled to an offset on the deficiency in the amount of the difference between the fair market value and the foreclosure sale price. Fair market value is determined by the finder of fact and based upon competent evidence introduced by both parties 19 Foreclosure on Personal Property Covers foreclosure of essentially any property or property right other than real property. Much looser requirements than for real property foreclosures: Governed by 9.601, et seq., of the Texas Business & Commerce Code and the terms of the parties' security agreement. Lender has a right to sell, lease, license or otherwise dispose of the collateral once they have obtained possession. Sale must be "commercially reasonable" as to time, place, manner, method and terms of sale. Creditor must give notice of the sale: 10 days or more prior to the sale for non-consumer goods transactions A "reasonable time" prior to the sale for consumer goods transactions 20

11 Foreclosure on Personal Property (continued) Debtor liable for deficiency Debtor entitled to surplus from sale, except for foreclosures of: accounts receivable chattel paper payment intangibles promissory notes 21