It is a myth that lawyers have magical power to reverse a foreclosure sale by making a phone call to the lender. Foreclosure is the most powerful and final remedy contained in the Texas Property Code, and undoing a foreclosure is not an easy thing to do. It is far easier to stop a pending foreclosure sale than it is to undo one that has already occurred.
In particular, if the property has been sold to third-party buyer (i.e., not the lender – a bona fide purchaser or "BFP" who was the highest bidder at the sale) then the former homeowner´s remedy will usually be limited to monetary damages – not getting the property back. The law views a BFP – a third-party buyer who followed the rules of sale without actual or constructive notice that there was an issue with the foreclosure – as being entitled to a level of protection superior to that of an allegedly aggrieved borrower.
The cruel fact for borrowers is that wrongful foreclosure suits face an uphill climb from the beginning. The very first question that a district judge will ask in a wrongful foreclosure suit is: Why didn´t you file suit and apply for a TRO to stop the foreclosure in the first place? Is that fair? You decide. It is, however, undoubtedly the bias of Texas judges – whether you like it or not. If you want the judge on your side, the plaintiff should be prepared with a good answer to that question. Here´s a clue as to what is not a good answer: "Well, I called the lender and they didn´t call me back." For better or for worse, a fundamental rule of real estate law in Texas is that important agreements affecting real property must be in a signed writing. Phone calls mean nothing in this business. Even emails are of dubious utility unless they clearly evidence an agreement between the parties.
Prolonged Negotiations for a Modification
Clients often report that they were engaged in prolonged negotiations to modify their existing loan prior to the foreclosure sale. Of course, these communications are almost always conducted by phone and there is no signed written agreement binding the lender to stop the foreclosure. Unfortunately, phone calls have no legal effect in this business and, in the absence of a signed reinstatement agreement, pending modification negotiations are not grounds for a wrongful foreclosure suit.
Do lenders pursue this strategy intentionally, so as to make it appear that they are willing to be reasonable, when in fact it is in their interest to foreclose instead? Opinions vary.
Can the borrower get his property back?
Maybe, if the lender was the buyer at the foreclosure sale. However, as noted above, a post-sale wrongful foreclosure suit will not usually result in getting the property back if it was sold to a BFP. Having said that, there are two instances where Texas borrowers have a "right of redemption:"
(1) in cases where the property was sold for unpaid taxes, there is a 2 year redemption period for homestead property and 6 months for non-homestead property; and
(2) if a homeowners association forecloses an assessment lien, Prop. Code Sec. 209.011 provides that the homeowner may redeem the property until no "later than the 180th day after the date the association mails written notice of the sale to the owner and the lienholder under Sec. 209.101." A lienholder also has a right of redemption in these circumstances "before 90 days after the date the association mails written notice . . . and only if the lot owner has not previously redeemed." Note that an HOA is not permitted to foreclose on a homeowner if its lien is solely for fines assessed by the association or attorney´s fees. These provisions are part of the Texas Residential Property Owners Protection Act designed to reign in the once (and continuing) arbitrary power of HOA´s (Chapter 209 of the Code).
Wrongful Foreclosure Suits
Even if the property is not recoverable, it may be worthwhile to seek a money judgment against the lender – particularly if some sort of fraud can be proven, which would open the door to exemplary (treble) damages plus attorney´s fees. A wrongful foreclosure suit should be filed in the state district court of the county in which the property is located.
The suit should be filed quickly so that notice of the suit (called a "notice of lis pendens") can be filed in the real property records, giving constructive notice of the dispute to all concerned. Why is this necessary? Because the real property records are separate from the district court records – indeed, they are on a separate computer and different rules apply.
If the buyer has not already received a trustee´s deed, the borrower should request that the court enjoin the lender from delivering such a deed until the litigation is resolved.
If the lender was the successful bidder, a properly filed lis pendens may effectively prevent the lender from transferring the property to a BFP. The reason is that the existence of a filed lis pendens means that the potential buyer can no longer have the status of a BFP under the law – because notice of the suit has legally been given. Swift and expert action is required here to trap the property in the hands of the lender and keep it there until the lawsuit can determine the validity of the foreclosure.
There must be some credible grounds for a wrongful foreclosure suit. These are examples taken from recent petitions:
Plaintiff asserts that the subject foreclosure was wrongful in that proper notice of default and right to cure was not given as required by Texas Property Code Sec. 51.002. There was a defect in the foreclosure notices sent by Defendant as follows: [insert specifics]
Plaintiff asserts that the subject foreclosure was wrongful in that it was not conducted in accordance with Texas Property Code Sec. 51.002 and/or the Deed of Trust. There was a defect in the foreclosure sale as follows: [insert specifics].
Defendant made a self-serving bid for the Property at the foreclosure sale which was artificially and fraudulently low and unrelated to market value, having been calculated with the intent of minimizing the Property acquisition cost and maximizing the amount of any alleged deficiency.
Plaintiff asserts that the subject foreclosure was wrongful in that Defendant is not the owner and holder of the subject indebtedness and cannot produce documentation that it is the legal owner and holder of the note. Plaintiff further asserts that affidavits and/or other key foreclosure documents were fraudulently signed by lender or lender's agents without personal knowledge.
Plaintiff asserts that the subject foreclosure was wrongful in that Plaintiff was not in default under the Loan Documents.
You read that last one correctly. Some borrowers have been foreclosed upon when they were not in default – and they can prove it, since their payments were automatically debited electronically!
Predictions Concerning the Lawsuit
Based on this firm´s experience, a plaintiff can realistically expect the following in a wrongful foreclosure lawsuit:
(1) The lender will not rush to settle. Lenders pay high fees to large litigation firms to fight tooth and nail to avoid doing the right thing.
Required Foreclosure Notices
(2) Written discovery from the plaintiff (which should have been attached to the Original Petition) will be nearly entirely objected to by lender´s counsel, so as to make the responses essentially useless to the plaintiff´s case. A deposition of a representative of the lender will therefore be required.
(3) The case will likely be removed by lender´s counsel from state court to U.S. District Court, where judges may be more conservative and lenders can use federal rule 12(b)(6) as a basis for a motion to dismiss the case. This rule permits dismissal if the borrower´s complaint fails "to state a claim upon which relief can be granted" – which happens more often than one might think. A change of courts can also create complications for the attorney representing the borrower, who may be accustomed to practicing in state rather than federal court. The attorney may be an experienced state court lawyer, but may not even be licensed in federal court. This is common.
Lack of adequate and proper notice is probably the most common basis for a wrongful foreclosure suit. What foreclosure notices are required? The answer to this question often involves placing the deed of trust side-by-side with the Property Code in order to determine what specific requirements exist. Usually, two certified mail notices to the borrower are required, the first being a "Notice of Default and Intent to Accelerate" which gives formal notice of the default and affords an opportunity for the borrower to cure it (a minimum of 20 days for a Texas homestead). If the deed of trust is on the FNMA form, 30 days´ notice must be given.
The second required notice is a notice of acceleration – basically stating that the debtor failed to timely cure the default, and therefore the note is declared to be immediately due and payable. It is common for lawyers to include in this second letter a Notice of Trustee´s Sale which states the time and place of the anticipated sale – which must be at least 21 days before the anticipated sale.
Lenders are required to send notices to the last known address of the borrower that the lender has in its file.
For more detail, see our companion article The Foreclosure Process in Texas.
Requirements of the Foreclosure Sale
As to the foreclosure sale itself, these are governed by Sec. 51.002 et seq. of the Texas Property Code and are held on the first Tuesday of each month between the hours of 10:00 a.m. and 4:00 p.m. at the courthouse of the county in which the property is located. There is no required "script" that must be read by the trustee, but certain minimum formalities must be observed for a valid sale. The trustee may set certain rules for payment of bids but must do so before the sale commences.
Note that the sale must have taken place during the three-hour time period stated in the notice of foreclosure. See our companion article on The Foreclosure Process in Texas.
The Foreclosure Sales Price
There is actually no requirement that the sales price be fair. A sale cannot be set aside because the consideration paid is allegedly inadequate because it is less than market value (Sauceda v. GMAC Mortg. Corp., 268 S.W.3d 135, 139 [Tex. App. – Corpus Christi 2008, no pet.]). To prevail in a suit based on inadequate sale price, three elements must be proven: (1) grossly inadequate consideration; (2) defective foreclosure notices or sale; and (3) a causal connection between the defect and the inadequate consideration. The bottom line is that if the notices and sale were correctly done, then the sale will be valid even though the sales price was lower than market value.
So what can the borrower do if the lender bid an artificially low price and took the property? Consider an action under Prop. Code Sec. 51.004 which provides that a borrower "may bring an action in the district court in the county in which the real property is located for a determination of the fair market value of the real property as of the date of the foreclosure sale." This relates to one of the causes of action given as an example above. If the court finds that the fair market value is greater than the sale price, then the borrower is entitled to an offset against any deficiency claimed by the lender. Why is this important? Firstly and obviously, it reduces the amount of the deficiency judgment; and secondly, it may reduce the amount of "deemed income" for which the IRS might send the borrower a bill (if the property was not homestead).
The Case of the Missing File
Alleging that the lender´s file is defective is now a popular cause of action, particularly after the recent media coverage of the extent of defects in lenders´ files nationwide. We always add this cause of action. Why? You never know when the lender might have a defective (incomplete) or even missing file! The plaintiff should include Requests for Production along with the Original Petition demanding that relevant documentation be produced.
Continuing to Reside in the Property
After foreclosure, the new owner of the property (who may or may not be the lender) can be expected to promptly initiate eviction (forcible detainer) proceedings in the Justice Court precinct where the property is located. One was formerly able to ask the District Court to enjoin (stop) the eviction process by means of a temporary restraining order; unfortunately, the law has changed, and this is no longer the case. A borrower in these circumstances can expect that the eviction process will go forward, notwithstanding that a wrongful foreclosure case is pending in District Court. The borrower should make preparations to move.
Evictions can be prolonged by an appeal from Justice Court to County Court, which results in the court´s file being sent downtown where it will be assigned a new case number and the process will start over. For more information, see our companion article Evictions in Texas.
In cases where the borrower is allowed to remain in the property pending outcome of the District Court case, the borrower should expect to continue to make payments, perhaps into the District Clerk´s Trust Fund. After all, no one gets to live for free.
Any District Court lawsuit involving injunctive relief is an expensive undertaking, and that includes suits for wrongful foreclosure. While it may (but not always) be possible to recover fees and costs against a lender, a borrower must be prepared to pay an initial retainer in the range of $5,000 plus costs of $500. As a rule, lawyers will be reluctant to take this sort of case on a contingency, particularly if the relief sought by the client is the recovery of the property rather than monetary damages.
If in doubt about whether or not a foreclosure is going to occur, file suit and get a temporary restraining order to stop it. "Wait and see" is the worst possible strategy, since it is always more difficult to remedy the situation after a foreclosure sale has occurred. However, if the sale has already occurred, all hope is not lost. If the foreclosure was truly wrongful, monetary damages may be available, even if the property itself cannot be recovered.
Information in this article is proved for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. Although we will respect your confidentiality, this firm does not represent you unless and until it is retained and agrees in writing to do so.
THIS DOCUMENT IS NOT INTENDED TO BE USED, NOR CAN IT BE RELIED UPON, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING PENALTIES IMPOSED UNDER UNITED STATE FEDERAL TAX LAWS. THIS DOCUMENT DOES NOT CONSTITUTE DOES NOT CONSTITUTE A TAX OPINION OR OTHER ADVICE TO WHICH CIRCULAR 230 IS RELATED.
Copyright © 2011 by David J. Willis. All rights reserved worldwide. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his websites, http://www.LoneStarLandLaw.com, http://www.TexasSeriesLLC.com, and http://www.TexasAssetProtection.com.