In In re AMRCO, Inc., Case No. 13-11086 (Bankr. W.D. Tex. July 26, 2013), the Bankruptcy Court for the Western District of Texas recently invalidated a pre-bankruptcy foreclosure sale that concluded minutes before a chapter 11 petition was filed, based on the Deed of Trust‘s Trustee’s failure to strictly comply with the foreclosure requirements under the Texas Property Code. The new ruling is in line with a recent holding by the Fort Worth Court of Appeals that was based on similar facts.
In April 2012, Shoal Creek Capital, LLC loaned AMRCO, Inc. $175,000 and, in return, received a real estate lien note, secured by a duly-recorded Deed of Trust on an undeveloped lot in Austin, Texas. The property was essentially AMRCO’s sole asset.
After AMRCO defaulted on the loan, Shoal Creek declared a default and initiated foreclosure proceedings. The foreclosure sale was held on June 4, 2013. Minutes after the sale had concluded, AMRCO filed bankruptcy in an attempt to invalidate the sale. The Bankruptcy Court agreed with AMRCO, based on a notice provision in Chapter 51 of the Texas Property Code that Shoal Creek had failed to meet.
Under Texas law, a secured lender is not required to commence a lawsuit to foreclose on real property. If the real property is not a homestead, the secured lender can foreclose without court intervention upon giving the borrower 21 days’ notice of a proposed foreclosure sale. See Tex. Prop. Code § 51.002(b). The notice must contain sufficient information regarding the time and location where the sale will be conducted. See id. The notice must be provided by:
- posting it in the courthouse doors of the county where the property is located;
- filing it with the county clerk of such courthouse;
- mailing it, by certified mail, on each debtor who is obligated to pay the underlying debt.
See id. In addition, the foreclosure sale must be conducted as a public auction that is to be held on the first Tuesday of every month and must take place at the county courthouse where the property is located . See id § 51.002(a). As a result, the notice of the foreclosure sale must be given at least 21 days before the first Tuesday of every month. The trustee appointed under a Deed of Trust (i.e., the governing security document) is generally given the power to sell the property at the duly-noticed foreclosure sale. See id. § 51.0074.
Chapter 51 of the Property Code also contains other requirements to foreclosure, depending on the circumstances surrounding the borrower, lender, or trustee. There are also additional state and federal requirements relating to the loan documentation (depending on the property, borrower and lender involved) that may prevent a foreclosure sale after judicial intervention. But, assuming all loan documentation is in order, the foreclosure process is fairly straightforward.
If in Doubt, Provide More Notice
In AMRCO’s case, while the loan documentation was in order, there was a small glitch relating to the notice of foreclosure sale provided by the then-existing trustee. Section 51.0075(e) of the Property Code, which was added in 2005, provides that name and street address for a trustee or substitute trustee must be disclosed in the original notice of foreclosure provided to the borrower and posted on the courthouse steps. In AMRCO’s case, the address of the substitute trustee was not provided in the foreclosure sale notice, even though the substitute trustee was essentially the original trustee. How could this happen?
The original trustee named in the Deed of Trust, Jeremy Adam Kruger, PC, had since moved to a new law firm, Kruger Carson PLLC, which had been appointed the substitute trustee. Substitute trustees are not uncommon in foreclosure proceedings. In fact, Chapter 51 of the Property Code contains minimal requirements for the appointment of a substitute trustee. While Jeremy Adam Kruger, PC’s address was disclosed in the notice of sale and while Kruger Carson’s address was the same as its predecessor, Kruger Carson’s address was not disclosed in the foreclosure sale notice. Oops!
Shoal Creek argued that this minor defect should not invalidate the sale for several reasons. First, the Deed of Trust, which was attached to the foreclosure sale note, listed the address of the original trustee (Jeremy Adam Kruger, PC), which address was the same as the substitute trustee. Thus, Shoal Creek argued that the substitute trustee’s address was effectively disclosed–even though not explicitly–in the Deed of Trust.
Shoal Creek next argued that the substitute trustee’s address was disclosed in a separate, duly-recorded Appointment of Substitute Trustee, which was dated on the same date as the notice of foreclosure. According to Shoal Creek, this duly-recorded appointment provided sufficient constructive notice to all parties in interest, including AMRCO.
Finally, Shoal Creek argued that the address of the substitute trustee was disclosed in the actual envelope in which the notice of foreclosure was sent to AMRCO. Taken together, Shoal Creek maintained that all of its notices were in substantial compliance with the statutory requirements under the Texas Property Code. The Bankruptcy Court even found that under the circumstances, as a practical matter, neither AMRCO nor any potential bidder at the foreclosure sale could complain about being able to locate the substitute trustee.
Ultimately, however, the Bankruptcy Court disagreed with Shoal Creek and voided the foreclosure sale, in light of the intervening bankruptcy, based on the holding by a Texas Court of Appeals in the recent case of G4 Trust v. Consolidated Gasoline, Inc., 2011 WL 3835656 (Tex. Civ. App.–Fort Worth Aug. 31, 2011).
G4 Trust Case
In G4, the trustee under the Deed of Trust provided a notice of foreclosure sale that did not include his street address, even though the foreclosure sale notice included a cover letter that contained a good post-office address for the trustee’s place of business.
Although the trial court found that the notice substantially complied with the Texas Property Code, the Fort Worth Court of Appeals reversed the trial court’s ruling, holding that the foreclosure notice did not comply with section 51.0075(e) of the Property Code, which required the street address–not post office address–of the trustee to appear in the actual notice of foreclosure sale. While this requirement was added in 2005 and while the Deed of Trust in question predated this amendment, the Court of Appeals still found that the new provision applied because of the enabling language in the Deed of Trust that stated:
. . . Trustee shall give notice of sale including the time, terms and place of sale and a description of the Property to be sold as required by the applicable law in effect at the time of the proposed sale.
As a result, the Court of Appeals held that the Deed of Trust incorporated the newer amendment to the foreclosure laws in its noticing requirements, and the trustee failed to comply with the new section 51.0075(e), which invalidated the foreclosure sale. In doing so, the Court of Appeals relied on a line of cases from the Texas Supreme Court and lower appellate courts, holding that trustees must strictly comply with the terms set out in a deed of trust in order for a foreclosure sale to be valid. See, e.g., Univ. Sav. Ass’n v. Springwoods Shopping Ctr., 644 S.W.2d 705, 706 (Tex. 1982); Myriad Props., Inc. v. LaSalle Bank Nat’l Ass’n, 252 S.W.3d 605, 615 (Tex. App.–Austin 2008).
Both the Bankruptcy Court and the Fort Worth Court of Appeals seem to give little weight to the recent holding in Kourosh Hemyari v. Stephens, 355 S.W.3d 623 (Tex. 2011), where the Texas Supreme Court upheld a foreclosure sale despite minor defects in the governing loan documents. In that case, the Texas Supreme Court refused to invalidate a foreclosure sale on the basis that the signee of a Deed of Trust and a substitute trustee’s deed was identified on the signature line of both documents only by his name and not by his capacity as a general partner of the corporate entities for which he was signing the documents. The Texas Supreme Court found that “the mistake was so obvious from the face of the deed as to be harmless.” Id. at 628.
In distinguishing that case, the Bankruptcy Court focused on the fact that, according to the Texas Supreme Court, the defect in Kourosh Hemyari did not “truly” involve a failure to comply with the deed of trust terms, but rather inconsistencies in the deed of trust itself. In AMRCO‘s case, however, the Bankruptcy Court found that the minor defect resulted in a failure to comply with the actual terms of the deed of trust.
Even though such terms were less than clear and required the retroactive application of a new law that was not in place when the Deed of Trust in question was executed and even though the Bankruptcy Court found that AMRCO and it’s owner were well aware of the identity and street address of the substitute trustee, as well as the time and location of the foreclosure sale, the Bankruptcy Court relied on a state court of appeal’s recent decision as governing law to invalidate the foreclosure sale. This holding illustrates the power of a bankruptcy court to re-characterize property rights based on recent interpretations of state law. Lenders beware.
- Foreclosure or Bankruptcy – Which Option is Worse? (lexingtonlaw.com)
- How Do Foreclosures & Short Sales Affect How You Price Your house? (teamtudisco.com)
- Filing Bankruptcy Won’t Always Stop Foreclosure on your Home, But for Many, it’s the Best Option. (savingnspending.com)