What to Know About the Dodd-Frank Act, the Truth in Lending Act, the Texas SAFE Act, TRID, and the Real Estate Settlement Procedures Act When Seller Financing Residential Real Estate in Texas

The Dodd-Frank Wall Street Reform and Consumer Protection Act (hereinafter “Dodd-Frank”)[1] was signed into law on July 21st, 2010 in response to the mortgage loan crisis. Dodd-Frank made sweeping changes to the Truth in Lending Act (hereinafter “TILA”). TILA was first codified in 1968, but the 2010 Dodd-Frank changes revolutionized the mortgage lending business. It was Dodd-Frank that created Registered Mortgage Loan Originators (“RMLO”s). Before Dodd-Frank, mortgage loan officers often needed no licensure to practice their trade. Mortgage loan officers, before Dodd-Frank, had no legal duty to formally verify a borrower’s ability to repay (ATR) the loan.

This article should start with a disclaimer. The Dodd-Frank Act, the Truth in Lending Act, and the Real Estate Settlement Procedures Act (hereinafter “RESPA”) involve labyrinthian complexity. These laws require an intricate knowledge of the interplay between the Acts of Congress, the various sections of the United States Code where those Acts of Congress are codified as law, the regulations promulgated by the various federal agencies tasked with implementing the Acts of Congress, and the official regulatory commentary to those regulations and laws.

To start, when Congress enacts a law that law has a public law number attached to it. That public law becomes part of an Act of Congress, which usually has a statement of purpose and some organizational structure to it. Lawyers, however, do not use catalogues of Acts of Congress to do their jobs. Instead, for convenience, these Acts of Congress are incorporated into a single book of law called the Code of Laws of the United States of America, i.e., the United States Code, or “U.S.C.” for short. So, you might be reading an article about the ability-to-repay (ATR) rules that Dodd-Frank created and you might hear those referred to as Section 129C of the Truth in Lending Act; as Title 15, Section 1639c of the United States Code (15 U.S.C. § 1639c); or as Section 1411 of Dodd-Frank. Those all refer to the same law, just different ways to reference the same law. In connection with Dodd-Frank, you will also read about Regulation X (Real Estate Settlement Procedures Act), and Regulation Z (mostly the Truth in Lending Act). Title 12, Part 1026 of the Code of Federal Regulations is also known as Regulation Z (hereinafter “Reg Z”).[2] So, if you see a citation for 12 C.F.R. § 1026, then you know that the citation comes from Regulation Z. Similarly, Title 12, Part 1024 of the Code of Federal Regulations is known as Regulation X, so, 12 C.F.R. 1024 refers to regulations related to the Real Estate Settlement Procedures Act. This article in no way purports to comprehensively explain the various laws and regulations discussed, and accordingly, do not rely on this article without undergoing a comprehensive evaluation of every law and regulation that could apply to your situation. This article generally describes the foregoing laws and regulations yet does not explain what to do in any particular situation.

Codification. The Truth in Lending Act is contained in Title I of the Consumer Credit Protection Act, as amended, found in 15 U.S.C. 1601 et. seq. The Real Estate Settlement Procedures Act of 1974, as amended, can be found in 12 U.S.C. 2601 et. seq.

To make matters more confusing, the Code of Federal Regulations contains different, yet often identical, sections of TILA and Reg Z for different agencies. So, there are, in fact, two different versions of Reg Z—one for the Federal Reserve System and one for the Consumer Financial Protection Bureau. This gets very confusing when you are doing legal research and seeing both sections being cited. Chapter II of Title 12 of the Code of Federal Regulations is titled “Federal Reserve System” while Chapter X of Title 12 of same is titled “Bureau of Consumer Financial Protection” (hereinafter the CFPB). Section 226 of Title 12 is Reg Z for the Federal Reserve System while Section 1026 of Title 12 is Reg Z for the CFPB. But, if you look at the definitions, like the definition of “creditor,” in 12 CFR 1026.2 then you will see that it is nearly identical to the definitions in 12 CFR 226.2.

The Difference Between High-Cost Loans and Higher-Priced Loans and Why it Matters. “The Home Ownership and Equity Protection Act (hereinafter “HOEPA”) was enacted in 1994 as an amendment to TILA to address abusive practices in refinances and closed-end home equity loans with high interest rates or high fees.”[3] The Dodd-Frank Act expanded HOEPA coverage to include purchase-money mortgages and home equity lines of credit. Dodd-Frank also imposed extensive new requirements for HOEPA loans, like the requirement that all HOEPA loan borrowers must complete an approved homeownership counseling program. The Dodd-Frank Act uses the term “high-cost mortgages,” in Title XIV, Subtitle C, to refer to loans subject to HOEPA. These high-cost, HOEPA loans are also referred to as “Section 32 loans” because the section of Regulation Z covering such loans is 12 C.F.R. § 1026.32. Regulation Z has another category of loans called “higher-priced mortgage loans” found in 12 C.F.R. § 1026.35. So, you could refer to those as “Section 35 loans.” A detailed analysis of the regulatory requirements for High Cost Loans compared to Higher Priced Loans, or other loans, goes beyond the scope of this article.[4] For purposes of this article, the reader need only understand that High-Cost Loans have much higher interest rates and fees than Higher-Priced Loans. High-Cost Loans also have much more burdensome rules and regulations attached. Lenders generally consider the rules and regulations for Higher-Priced Loans to be an annoyance. Lenders generally consider the rules and regulations for High-Cost Loans to be extremely cumbersome and potentially deal-breaking. High-Cost Loan deals often fall apart due to the borrower’s inability to complete all requirements, like obtaining a homeownership counseling program completion certificate and delivering it to the lender. Because doing even one High Cost Loan can break a small lender’s de minimus Dodd-Frank exemption, many seller financiers avoid High-Cost Loans like the plague.

Damages in a TILA Private Cause of Action. A private cause of action exists for TILA violations. Generally, mortgage lending damages are actual damages plus twice the amount of any “finance charge,” capped at $4,000.00. 15 U.S.C. § 1640(a)(2)(A)(i). The term “finance charge” in TILA is a term of art, defined in 12 C.F.R. § 1026.4 and 15 U.S.C. § 1605. Finance charge generally means whatever the borrower pays to get the loan, including interest, points, origination fees, etcetera. Attorney’s fees and costs are also generally recoverable by the borrower on a TILA claim. The Section 1640(a)(2)(A)(i) damages are not particularly scary due to the cap on potential liability. Lenders have something to fear, however, in the uncapped Section 1640(a)(4) damages. The (a)(4) damages are “[A]n amount equal to the sum of all finance charges and fees paid by the consumer, unless the creditor demonstrates that the failure to comply is not material.” Section (a)(4) damages only apply for violations of Section 129 of TILA (codified at 15 U.S.C. § 1639) (laundry list of TILA requirements), Section 129B(c) ¶ (1) or (2) (codified at 15 U.S.C. § 1639b(c)) (prohibition on steering incentives for mortgage originators), or Section 129C(a) (codified at 15 U.S.C. § 1639c(a)) (Ability-to-Repay requirements). The standard TILA damages (15 U.S.C. 1640(a)(1) and (a)(2)) have a class action damages cap for the statutory portion of damages.

Creditor Defenses. Borrower fraud or deception can be a defense to a TILA cause of action. 15 U.S.C. § 1640(l). Creditors cannot be liable, generally, if the violation results from a bona fide error, despite reasonable procedures designed to avoid such errors. 15 U.S.C. § 1640(c). This generally includes clerical and calculation errors, but not errors of legal judgment. Id. Good faith compliance with CFPB rules or interpretations can also be a defense. 15 U.S.C. § 1640(f).

Statute of Limitations on Truth in Lending Act Claims. TILA claims related to mortgage loan origination have a one-year statute of limitations, unless the three-year exception applies. TILA Sec. 130; 15 U.S.C. § 1640(e). The three year exception applies to TILA Sec. 129 (codified at 15 U.S.C. § 1639) (a laundry list of various TILA requirements), TILA Sec. 129B (codified at 15 U.S.C. § 1639b) (mostly the prohibition on steering incentives for mortgage originators), and TILA Sec. 129C (codified at 15 U.S.C. § 1639c) (mostly the Ability-to-Repay rules).

From the foregoing information on private causes of action damages under TILA and the statute of limitations on those damages, you probably figured out which parts of TILA lenders worry most about—Sections 129, 129B, and 129C. In other words, lender’s primary liability concerns include: (1) the ability to repay rules, (2) the steering incentives, and (3) the laundry list of TILA requirements. Each of those three concerns needs their own article. Accordingly, this article glosses over them.

The Ability-to-Repay (ATR) Rules. In a nutshell, these rules require lenders to investigate whether their borrowers have the ability to repay a loan before the lender gives the loan. Congress found that lenders gave loans to borrowers who had no hope of ever repaying the loan only to sell the loan to a securitized fund and, thus, escape liability when the borrower inevitably defaulted. Congress found that putting such bad debt into securities that retirement funds purchased put the American public’s nest eggs in jeopardy. The ATR rules are supposed to address this problem. Now, doing ATR, generally, means checking the borrower’s income, assets, credit, expenses, and ability to repay the loan. Lenders must do this now or face a private cause of action under TILA.

Steering Incentives. “Before the financial crisis, many mortgage borrowers were steered towards risky and high-cost loans because it meant more money for the loan originator,” said CFPB Director Richard Cordray. “These rules will hold loan originators more accountable by banning the incentives that led so many of them to direct consumers toward disaster.”[5]

Laundry List of TILA Requirements. These rules regulate everything from balloon payments to late fees to negative amortization and everything in between. The rules also cover what disclosures the borrowers must receive and when the borrowers must receive them. Note that several of these rules apply only to high-cost mortgages.

Mortgage Note Buyers/Assignees. Mortgage note buyers care greatly about the statute of limitations on TILA claims. Even badly originated loans with subpar paperwork can become marketable after enough time passes. In the mortgage loan buying industry, sometimes referred to as the secondary market, this passage of time is referred to sometimes as “seasoning.” Prospective note buyers look favorably on the purchase of seasoned notes not just because the passage of time can cure origination deficiencies, but also because a solid payment history in the initial years demonstrates the borrower’s ability-to-repay better than any form of pre-origination underwriting. Mortgage underwriting generally refers to the process of measuring risk exposure from the lender’s standpoint, including analysis of the borrower’s ability-to-repay the loan. If you do a large volume of owner-financing and hope to resell notes or packages of notes into the secondary market, then paying attention to assignee liability is of critical importance. Assignees never totally escape exposure due to limitations because, under 15 U.S.C. § 1640(k), the borrower can always raise a § 1639b(c) (steering incentives) or § 1639c(a) (ability-to-repay) claim, regardless of limitations. However, borrowers can only raise a claim under § 1640(k) that would normally be barred by limitations “as a matter of defense by recoupment or set off” in a creditor’s or assignee’s “judicial or nonjudicial foreclosure . . . or any other action to collect the debt.” In other words, the borrower cannot file a private cause of action that survived limitations due to § 1640(k) against the lender. The borrower can only use such a claim to offset the amount owed to the lender in a foreclosure or other suit by the lender against the borrower.

Assignee Liability. Assignees of mortgage loans are generally only liable for TILA violations when “the violation for which such action or proceeding is brought is apparent on the face of the disclosure statement.” 15 U.S.C. § 1641(a), (e). Under § 1641(c), assignees always take the mortgage subject to rescission claims under § 1635. Assignees of HOEPA High-Cost loans (TILA § 103(bb)) (15 U.S.C. § 1602(bb)) are “subject to all claims and defenses” that the original creditor is subject to “unless the . . . assignee demonstrates . . . that a reasonable person exercising ordinary due diligence, could not determine” that the loan was a High-Cost Mortgage. 15 U.S.C. § 1641(d)(1). Any person who assigns a high-cost loan “shall include a prominent notice of the potential liability.” 15 U.S.C. § 1641(d)(4).

Rescission Claims Under 15 U.S.C. § 1635. Borrowers have, under 15 U.S.C. § 1635, “an unconditional right to rescind for three days, after which they may rescind only if the lender failed to satisfy the Act’s disclosure requirements. But this conditional right to rescind does not last forever. Even if a lender never makes the required disclosures, the ‘right of rescission shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever comes first.’ § 1635(f).” Jesinoski v. Countrywide Home Loans, Inc., 135 S. Ct. 790, 792 (2015). The borrower does not need to file suit to rescind. Id. The borrower can rescind merely by notifying the creditor of the borrower’s intention to rescind. Id.

Does Dodd-Frank Even Apply to Me? The private causes of action available under TILA apply only to “any creditor who fails to comply . . . .” 15 U.S.C. § 1640(a) (emphasis added). So, if you are not a “creditor,” as defined by the Code, then you can escape liability. The definition of “creditor” is found in 15 U.S.C. § 1602(g) (formerly 1602(f)); 12 C.F.R. § 1026.2(a)(17). Note that Section 1602(g) of the U.S. Code appears to currently refer to high-cost loans as “subsection (aa)” loans, but subsection (aa) was changed to (bb) apparently without updating Section 1602(g).[6] A person is a “creditor” for Reg Z purposes when:

  1. A person (1) “regularly extends” consumer credit . . . and (2) is the person “to whom the obligation is initially payable.”
  2. A person “regularly extends” consumer credit if it extended credit . . . “more than 5 times for transactions secured by a dwelling” in “the preceding calendar year,” or a person “regularly extends” consumer credit if, in any 12-month period, the person “originates more than one” high-cost loan, i.e., Section 32 loan or “one or more such credit extensions through a mortgage broker.”

12 C.F.R. § 1026.2(a)(17).

So, basically, Dodd-Frank applies if you do more than five owner finance deals annually, or you do two high-cost loans in a year or one high cost loan through a broker.

The creditor definition applies only to the “person to whom the debt arising from the consumer credit transaction is initially payable . . . .,” which has been interpreted as not applying to mortgage brokers even when the broker was a creditor in an unrelated transaction. Cetto v. LaSalle Bank Nat. Ass’n, 518 F.3d 263, 269 (4th Cir. 2008). Attorneys are also generally not creditors under the TILA definition. Mauro v. Countrywide Home Loans, Inc., 727 F. Supp. 2d 145, 157 (E.D.N.Y. 2010).

Seller-Finance Exemptions for the Truth-in-Lending Act. There are two Reg Z exceptions that specifically apply to seller finance. First, anyone who seller finances three or fewer properties in any 12-month period who is not a developer and who does fully amortizing loans with good faith ATR and meets the adjustable rate requirements is “not a loan originator.” 12 CFR 1026.36(a)(4). Second, anyone who provides seller-financing for only one property in any 12-month period is “not a loan originator” when the person is not a developer, meets the adjustable rate requirements, and “[t]he financing has a repayment schedule that does not result in negative amortization.” 12 CFR 1026.36(a)(5). So, basically, if you only do one seller-finance deal in a year then you do not have to do ATR. Note that the seller-finance exemptions to “loan originator” status only relate to the loan originator rules. Status as a “creditor” to which a TILA private cause of action can apply is different from status as a “loan originator” to which the loan originator rules apply.

What is the SAFE Act and What are Registered Mortgage Loan Originators (RMLOs)? The Secure and Fair Enforcement for Mortgage Licensing Act (hereinafter the “SAFE Act”) went into effect on July 30th, 2008. This federal law required all states to pass mortgage licensing laws meeting or exceeding federal standards. Texas passed the Texas Secure & Fair Enforcement for Mortgage Licensing Act (hereinafter the “Texas Safe Act” or “T-Safe”) in 2009 in response to the federal SAFE Act.[7] The SAFE Act gave rise to the Nationwide Mortgage Licensing System and Registry (hereinafter the “NMLS”). The NMLS is a database for licensure to conduct mortgage lending business. A licensee in Texas under the NMLS is commonly referred to as a Registered Mortgage Loan Originator (“RMLO”). Generally, to become an RMLO requires education, testing, and a background check.

When Do I Need an RMLO to Do an Owner-Financed Sale of Residential Real Estate? Usually, when you seller-finance “no more than five residential mortgage loans” in “any 12-consecutive-month period” then you are exempt from T-Safe. Tex. Fin. Code § 180.003(a)(5), (6); Tex. Fin. Code § 156.202(a-1)(3). If you are exempt and do not have to use an RMLO, then you should seriously consider using an RMLO anyways, just to make sure that you comply with the myriad other laws that may apply even if T-Safe does not. Under Tex. Fin. Code § 156.201(a), “A person may not act in the capacity of, engage in the business of, or advertise or hold that person out as engaging in or conducting the business of a residential mortgage loan company in this state unless the person holds an active residential mortgage loan company license, is registered under Section 156.2012, or is exempt under Section 156.202.” Essentially, if you “engage in business as a residential mortgage loan originator with respect to a dwelling located in [Texas],”[8] then you need to have a Texas RMLO license registered with the NMLS. Attorneys are exempt from RMLO registration, but only when they negotiate the terms of a residential mortgage loan on behalf of a client as an ancillary matter unless the attorney takes “a residential loan application,” and “offers or negotiates the terms of a residential mortgage loan.” Tex. Fin. Code § 180.003(a)(3). You can also offer or negotiate the terms of a residential mortgage loan “with or on behalf of an immediate family member” without having to become an RMLO. Tex. Fin Code § 180.003(a)(2). In sum, if you do more than five owner-finance deals in a year, then you have to use an RMLO. Even if you use an RMLO, you should avoid taking applications and negotiating the loan terms with the borrowers—let the RMLO do that. Tex. Fin. Code § 180.002(19)(A) (defining an RMLO as an individual that “takes a residential mortgage loan application” or “offers or negotiates the terms of a residential mortgage loan”).

Private Civil Causes of Action for T-Safe Violations. The government has a plethora of options for enforcement of T-Safe violations. Mortgage applicants, however, are limited to the statutorily authorized private civil cause of action, under T-Safe, for “recovery of actual monetary damages and reasonable attorney’s fees and court costs” together with “an action to enjoin a violation.” Tex. Fin. Code § 156.402.

When Does the Real Estate Settlement Procedures Act (RESPA) Apply? The Real Estate Settlement Procedures Act was enacted in 1974 and, like many statutes, got a makeover from the Dodd-Frank Act in 2010. RESPA was originally administered by the Department of Housing and Urban Development (HUD), but Dodd-Frank turned RESPA administration over to the Consumer Financial Protection Bureau (CFPB). The CFPB promptly replaced the HUD-1 Statements and Good Faith Estimates (GFEs) that everyone had become accustomed to seeing at nearly every real estate closing with the descriptively-named Closing Disclosure and Loan Estimate. While RESPA primarily governs the closing disclosures and loan estimates used at most real estate closings, RESPA also, in 12 U.S.C. § 2605, regulates mortgage loan servicers, particularly servicers of “federally related mortgage loans.” 12 U.S.C. § 2605. A “federally related mortgage loan” is defined at 12 U.S.C. § 2602(1); 12 C.F.R. 1024.2. Federally-related mortgage loans mostly consist of loans for residential property that are insured by the federal government or originated by an entity regulated by the federal government but can also consist of loans by any creditor (including seller-financiers) that makes or invests in residential real estate loans aggregating more than $1,000,000.00 per year. 12 C.F.R. § 1024.2(1)(ii)(D). A mortgage broker can originate a seller-financed loan without the loan becoming a “federally related loan” if the loan is not intended for assignment to an entity that originates federally related loans. 12 C.F.R. § 1024.2(1)(ii)(E).

RESPA Exemptions. Business purpose loans, temporary financing (like certain construction loans), vacant land loans, and some loan modifications where a new note is not required are all exempt from RESPA coverage. 12 C.F.R. § 1024.5(b).

Private Causes of Action Under the Real Estate Settlement Procedures Act (RESPA). Private causes of action exist only for certain categories of RESPA violations. Section 6 of RESPA (12 U.S.C. § 2605) (rules regarding mortgage loan servicing and qualified written requests for information from borrowers) allows a private action to recover actual damages and “any additional damages, as the court may allow, in the case of a pattern or practice of noncompliance . . . in an amount not to exceed $2,000” and costs and attorneys fees. 12 U.S.C. § 2605(f). The circuit courts are split over whether Section 10 of RESPA (12 U.S.C. § 2609) (limiting lender requirements for advance escrow deposits) creates a private cause of action. The Fifth Circuit, which governs the State of Texas, subscribes to the majority view that no private cause of action exists for violations of Section 10 of RESPA. State of La. v. Litton Mortg. Co., 50 F.3d 1298, 1301 (5th Cir. 1995). An express private cause of action exists for violations of Section 8 of RESPA (12 U.S.C. § 2607) (Prohibition against kickbacks and unearned fees), including recovery of “three times the amount of any charge paid for such settlement service” and “court costs of the action together with reasonable attorneys fees.” 12 U.S.C. § 2607(d)(2), (5). Section 9 of RESPA (12 U.S.C. § 2608) prohibits sellers from telling the buyer which title company to purchase title insurance from and provides a private cause of action to buyers of “three times all charges made for such title insurance.” 12 U.S.C. § 2608(b). Limitations on RESPA private causes of action are one year for section 2607 or 2608 violations and three years for section 2605 violations. 12 U.S.C. § 2614. While private causes of action under RESPA are limited to certain sections of RESPA, the government has broad authority to enforce RESPA.

What is the TILA-RESPA Integrated Disclosure Rule (TRID)? TRID is a rule created by the Consumer Financial Protection Bureau, pursuant to Dodd-Frank, to combine existing disclosure requirements, implement new Dodd-Frank disclosure requirements, and guide entities making the transition to the new disclosures. TRID essentially created and governs, together with amendments to Reg Z and Reg X, the Closing Disclosure and the Loan Estimate. Most of the rules regarding the use of these forms are part of TRID. TRID can be found in the Federal Register at 78 FR 79730. TRID is very long and not easily summarized. Accordingly, a summary of TRID goes beyond the scope of this article. TRID is supposed to simplify and clarify real estate closings for borrowers. TRID requires that the Loan Estimate be delivered or placed in the mail no later than the third business day after receiving the consumer’s application and that the Closing Disclosure be provided to the consumer at least three business days prior to consummation of the transaction. TRID applies to “creditors” as defined by Reg Z, so persons making five or fewer mortgages in a year are generally exempt, though RESPA would still apply to them if the deal involves a “federally related mortgage loan.”

What is a Qualified Mortgage (QM)? Qualified Mortgage loans (QM loans) are presumed to comply with the ability-to-repay rules. Accordingly, the QM loan rules create a safe harbor for lenders. If lenders generate QM loans, then generally, such lenders have no need to fear ATR-related TILA lawsuits. The QM rules are generally found at 12 C.F.R. § 1026.43(e) (Reg. Z) and 15 U.S.C. § 1639c. Generally, QM loans cannot have an interest-only period, negative amortization, balloon payments, or terms longer than thirty years, among other things. Checking a borrower’s debt-to-income ratio (DTI) is particularly important for small creditors hoping to generate QM loans. Generally, higher-priced loans (as defined in 12 C.F.R. § 1026.43(b)(4)) receive only a rebuttable presumption of ATR compliance while non-higher-priced loans receive a conclusive presumption of compliance—a true safe harbor. A comprehensive explanation of the QM loan rules goes beyond the scope of this article. Hire a competent RMLO to help you generate QM loans.

Appraisal Rules. Appraisal requirements are in 15 U.S.C. § 1639e and 12 C.F.R. § 1026.35. They are generally not required for QM loans. 15 U.S.C. § 1639c.

Credit Checks. Credit checks are part of the ability to repay rule. 15 U.S.C. 1639c(a). Credit checks are not necessarily required if the lender uses other reasonably reliable third-party sources like rental payment history or public utility payments. 12 C.F.R. § 1026.43 requires that third-party records be used to verify ability to repay. Official interpretation 1026.43(c)(3)-7 states that “To verify credit history, a creditor may, for example, look to credit reports from credit bureaus or to reasonably reliable third-party records that evidence nontraditional credit references, such as evidence of rental payment history or public utility payments.”

Pre-Loan Counseling and Unintentional HOEPA Violations. The pre-loan counseling requirements are found in 15 U.S.C. § 1639(u). The Section 1640(a)(4) damages can apply to the failure to meet the counseling requirement, so even though counseling certificates are likely the easiest HOEPA rule to ignore, they are pretty important. Creditors and assignees in high-cost mortgages can, generally, cure violations of Section 129 of the Dodd-Frank Act by the procedures in 12 C.F.R. § 1026.31(h) if the creditor acted in good faith or the violation was unintentional.

Links to the Laws (Please Note That These May Not be the Most Up to Date Versions of the Laws):
The Dodd-Frank Act
The Truth in Lending Act
The Real Estate Settlement Procedures Act

[1] https://www.gpo.gov/fdsys/pkg/BILLS-111hr4173enr/pdf/BILLS-111hr4173enr.pdf.

[2] https://www.ecfr.gov/cgi-bin/text-idx?c=ecfr&tpl=/ecfrbrowse/Title12/12cfr1024_main_02.tpl; https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/code-federal-regulations/.

[3] Small Entity Compliance Guide – 2013 Home Ownership and Equity Protection Act (HOEPA) Rule, Consumer Financial Protection Bureau (May 2nd, 2013) https://files.consumerfinance.gov/f/201305_compliance-guide_home-ownership-and-equity-protection-act-rule.pdf.

[4] https://www.scotsmanguide.com/Residential/Articles/2014/11/High-Cost-vs–Higher-Priced-Mortgages/ (list of differences between high-cost and higher-priced loans).

[5] CFPB Issuing Rules to Prevent Loan Originators from Steering Consumers into Risky Mortgages, CFPB Newsroom Press Release (Jan. 18, 2013) (https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-rules-to-prevent-loan-originators-from-steering-consumers-into-risky-mortgages/)

[6] DODD–FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT, PL 111-203, July 21, 2010, 124 Stat 1376 (Sec. 1100A. Amendments to the Truth in Lending Act provides that “The Truth in Lending Act (15 U.S.C. 1601 et seq.) is amended— (1) in section 103 (15 U.S.C. 1602)—<< 15 USCA § 1602 >> (A) by redesignating subsections (b) through (bb) as subsections (c) through (cc), respectively; and << 15 USCA § 1602 >> (B) by inserting after subsection (a) the following: “(b) BUREAU.—The term ‘Bureau’ means the Bureau of Consumer Financial Protection.”) (So apparently, a new subsection (b) was added to define the Consumer Financial Protection Bureau and all other sections were moved, so (f) became (g) and (aa) became (bb), but Congress seems to have forgotten to change the reference to high-cost loans in 1602(g) (formerly 1602(f)) to (bb) from (aa)).

[7] See Texas Finance Code, Title 3, Subtitle E, Chapter 180, Subchapter A. Additionally, Texas has the “Residential Mortgage Loan Company Licensing and Registration Act” located at Texas Finance Code, Title 3, Subtitle E, Chapter 156, Subchapter A.

[8] Tex. Fin Code § 180.051(a).

Copyright, Ian Ghrist, 2018, All Rights Reserved. Unauthorized reproduction strictly prohibited.

Disclaimer: This document is for informational purposes only. Do not rely on any part of this document as legal advice. Instead, seek out the advice of a licensed attorney with regard to the particular facts and circumstances of your legal matter. Also, this information may be out-of-date or wrong and is not intended to be comprehensive or to address any potential or specific factual or legal scenario.

Texas Residential Construction Liability Act (RCLA) Notice, Settlement, and Litigation Procedures

Disputes regarding residential construction defects require the use of special procedures. Homeowners and developers must understand and utilize the procedures in the Texas Residential Construction Liability Act (“RCLA”) (Tex. Prop. Code §§ 27.001 to 27.007), particularly the pre-litigation notice and settlement offer procedures.

The definition of a “construction defect” (found in Tex. Prop. Code § 27.001(4)) that the RCLA applies to is so broad that it “need not necessarily involve defective construction or repair.” Timmerman v. Dale, 397 S.W.3d 327, 331 (Tex. App.—Dallas 2013).

In a normal breach of contract or Deceptive Trade Practices Act (“DTPA”) case, the plaintiff can recover for the injuries that the plaintiff suffered, but in an RCLA case, the plaintiff can recover only the damages items on the list in Tex. Prop. Code § 27.004(g). Timmerman, 397 S.W.3d at 331.

The contractor who fails to make a reasonable settlement offer after receiving an RCLA notice “loses the benefit of all limitations on damages and defenses to liability provided for in section 27.004, including both the limitation . . . on the types of damages recoverable . . . and the limitation . . . on the amount of damages recoverable . . . .” Perry Homes v. Alwattari, 33 S.W.3d 376, 384 (Tex. App. 2000); Tex. Prop. Code § 27.004(f) (“If a contractor fails to make a reasonable offer under Subsection (b), the limitations on damages provided for in Subsection (e) shall not apply.”).

The damages categories allowed by the RCLA include the following:

“(1) the reasonable cost of repairs necessary to cure any construction defect;

(2) the reasonable and necessary cost for the replacement or repair of any damaged goods in the residence;

(3) reasonable and necessary engineering and consulting fees;

(4) the reasonable expenses of temporary housing reasonably necessary during the repair period;

(5) the reduction in current market value, if any, after the construction defect is repaired if the construction defect is a structural failure; and

(6) reasonable and necessary attorney’s fees.”

Tex. Prop. Code Ann. § 27.004.

Under breach of contract, the homeowner generally must demonstrate that either the warranty of good and workmanlike construction or the warranty of habitability has been breached. “A homebuilder impliedly warrants that a new house has been constructed in a good and workmanlike manner and is suitable for human habitation.” Yost v. Jered Custom Homes, 399 S.W.3d 653, 662 (Tex. App.—Dallas 2013). The Texas Supreme Court has held that homeowners cannot waive or disclaim the warranty of good and workmanlike manner of performance. The Melody Homes decision largely relied upon Tex. Bus. & Com. Code Ann. § 17.42, which provides that consumers generally cannot waive provisions of the DTPA, including the breach of warranty provisions (Tex. Bus. & Com. Code § 17.50(a)(2)). While the warranty cannot be disclaimed outright, it can be superseded by a contract that fills gaps in the warranty. Gonzales v. Sw. Olshan Found. Repair Co., LLC, 400 S.W.3d 52, 59 (Tex. 2013). To supercede the implied warranty, an express warranty must “specifically describe the manner, performance, or quality of the services.” Id.

In a DTPA suit, the homeowner needs only to meet the “producing cause” standard. Metro Allied Ins. Agency, Inc. v. Lin, 304 S.W.3d 830, 834 (Tex. 2009). “Producing cause” means only cause-in-fact, whereas, the normal “proximate cause” of damages standard requires both cause-in-fact and “foreseeability.” Blue Star Operating Co. v. Tetra Techs., Inc., 119 S.W.3d 916, 920 (Tex. App. 2003). Accordingly, a residential construction defect case is easier to win on a DTPA theory than another theory because the plaintiff does not have to show that the contractor should have anticipated the damages. “Foreseeability requires that the actor, as a person of ordinary intelligence, would have anticipated the danger that his negligent act created for others.”

Notice and Settlement Procedure, Residential Construction Liability Act

Action Timing
Written notice by certified mail, return receipt requested, to the contractor, at the contractor’s last known address, specifying in reasonable detail the construction defects that are the subject of the complaint. Tex. Prop. Code § 27.004. Sixty days preceding the date a claimant seeking from a contractor damages or other relief arising from a construction defect initiates an action. Tex. Prop. Code § 27.004(a).
Claimant shall provide to the contractor any evidence that depicts the nature and cause of the defect and the nature and extent of repairs necessary to remedy the defect, including expert reports, photographs, and videotapes, if discoverable under T.R.C.P. 192. On the request of the contractor. Id.
The contractor shall be given a reasonable opportunity to inspect the property to determine the nature and cause of the defect and the nature and extent of repairs necessary to remedy the defect. Id. During the 35-day period after the contractor has received the written notice, upon the written request of the contractor. Id.
Contractor may make a written offer of settlement to the claimant. The offer must be sent to the claimant at the claimant’s last known address or to the claimant’s attorney by certified mail, return receipt requested. The offer may include either an agreement to repair or have repaired partially or totally at the contractor’s expense or at a reduced rate any construction defect and shall describe in reasonable detail the kind of repairs to be made. Tex. Prop. Code § 27.004(b). Not later than the 45th day after the date the contractor receives the pre-suit notice. Tex. Prop. Code § 27.004(b).


An offer not accepted before the 25th day after the date the offer is received by the claimant is considered rejected. Tex. Prop. Code § 27.004(i).

Any repairs in the proposed settlement Shall be made not later than the 45th day after the date the contracter receives written notice of acceptance of the settlement offer, unless completion is delayed by the claimant or by other events beyond the control of the contractor. Id.
If the claimant considers the settlement offer to be unreasonable then the claimant shall advise the contractor in writing and in reasonable detail of the reasons why the claimant considers the offer unreasonable. Id.(1). On or before the 25th day after the date the claimant receives the offer. Id.(1).
The contractor may make a supplemental written offer of settlement to the claimant by sending the offer to the claimant or the claimant’s attorney. Id.(2). Not later than the 10th day after the date the contractor receives notice of why the claimant considers the initial offer unreasonable. Id.(2).

Copyright 2018, Ian Ghrist, All Rights Reserved.

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.

Common Community Property Issues in Texas Real Estate Law

When buying and selling real property in Texas, a working knowledge of Texas marital property law can be helpful. Texas is one of nine of the United States using a community property system for marital property. The rest of the states have laws regarding equitable distribution. The equitable distribution laws govern how property is distributed to the spouses upon divorce. In states that do not have a community property system, all property of each spouse is treated as separate property, subject to equitable distribution upon divorce.

Community Property

In Texas, “property, other than separate property, acquired by either spouse during marriage” is community property. Tex. Fam. Code Ann. § 3.002. In Texas, just about any property acquired by either spouse during the marriage becomes community property owned by both spouses. Each spouse owns the community property jointly with the other spouse. In the case of real property acquired by the spouses during the marriage, Texas community property law allows for one spouse to own property jointly with the other as community property even when one spouse is left completely off of the deeds and other instruments in the chain-of-title. These unrecorded community property interests can cause some of the most pernicious Texas marital property issues that drive title attorneys wild. All community property that the spouses acquire during marriage is often referred to as the “community estate,” while the separate property of each spouse is referred to as that spouse’s “separate estate.”

Separate Property

Generally, separate property is property owned prior to the marriage or acquired during the marriage by gift or inheritance. In the event of a dissolution of marriage, a court cannot divest a spouse of his or her separate property. Eggemeyer v. Eggemeyer, 554 S.W.2d 137 (Tex. 1977); Leighton v. Leighton, 921 S.W.2d 365 (Tex. App.—Houston [1st Dist.] 1996); McElwee v. McElwee, 911 S.W.2d 182 (Tex. App.—Houston [1st Dist.] 1995, writ denied).

Economic Contribution or Reimbursement Claims—Typically Arising When One Spouse Buys Real Estate Prior to Marriage With a Loan, and Then Pays the Loan Off During the Marriage

Real property acquired before the marriage is separate property even if the property is refinanced during the marriage. In re Marriage of Jordan, 264 S.W.3d 850, 856 (Tex. App. 2008), overruled on other grounds by Matter of Marriage of Ramsey & Echols, 487 S.W.3d 762 (Tex. App. 2016). A refinance may give rise to a claim for economic contribution or reimbursement of any community funds paid toward the refinanced debt, but this contribution claim does not affect the characterization of the property as separate property. Id.; also see Tex. Fam. Code § 3.404. Property purchased before marriage remains separate property even when part of the unpaid purchase price is paid during marriage from community funds because the status of property as being either separate or community is determined at the time of its acquisition, and such status is fixed by the facts of its acquisition. Villarreal v. Villarreal, 618 S.W.2d 99 (Tex. Civ. App.—Corpus Christi 1981, no writ). The proceeds of the sale of separate property remain the separate property of the spouse whose property was sold. Scott v. Scott, 805 S.W.2d 835 (Tex. App.—Waco 1991, writ denied).

There is consensus among the courts of appeals that advances for interest expense, taxes, or insurance on property owned by either of the separate estates is offset by any benefit conferred on the community from use of the property. § 14.9.Establishing and measuring the right of reimbursement for funds advanced, 38 Tex. Prac., Marital Property And Homesteads § 14.9 (aggregating voluminous caselaw on the subject). This consensus appears to have been more-or-less codified in the 2009 reimbursement statute. Tex. Fam. Code Ann. § 3.402(c). Caselaw subsequent to the 2009 reimbursement statute acknowledges that the new statute continues the rule that benefits to the community estate must be recognized and offset where the community estate seeks reimbursement for interest, taxes, or insurance. Barras v. Barras, 396 S.W.3d 154, 177 n. 17 (Tex. App.—Houston 2013). “An equitable right of reimbursement is created where a marital estate advances moneys to pay expenses of another marital estate. This right of reimbursement is generally measured by the amount of the funds advanced. However, where moneys are advanced to benefit property owned by another estate and the property benefited is also used by the advancing estate, a right of offset for the benefit from such use may be created against the advancing estate. This offset right is most often asserted successfully where the advancing estate uses property rent-free for which it advances moneys to pay taxes and interest.” § 14.8.Introduction to the right of reimbursement for funds advanced, 38 Tex. Prac., Marital Property And Homesteads § 14.8. Furthermore, a reimbursement claim does not give the claimant a legal proprietary interest in the separate property, but rather merely a right of reimbursement. Id.; Marburger v. Seminole Pipeline Co., 957 S.W.2d 82, 139 O.G.R. 618 (Tex. App.—Houston [14th Dist.] 1997, pet. denied); Tex. Fam. Code Ann. § 3.404.

Rental Income

Income from separate property accruing during marriage is community property. In re Marriage of Cigainero, 305 S.W.3d 798, 802 (Ct. App.—Texarkana 2010). Accordingly, where a mortgage loan used for purchase of separate property prior to marriage is paid down using income accumulated during the marriage, the community estate may be entitled to reimbursement for those payments as the payments did not come from separate property. Id.


Separate property commingled with community property remains separate property as long as its identity can be traced. Jones v. Jones, 890 S.W.2d 471 (Tex. App.—Corpus Christi 1994, writ denied). However, where separate property has become so commingled with community property as to defy segregation and identification, the entire property is presumed to be community property. Estate of Hanau v. Hanau, 730 S.W.2d 663 (Tex. 1987); Gutierrez v. Gutierrez, 791 S.W.2d 659 (Tex. App.—San Antonio 1990, no writ). Thus, as long as the separate funds can be traced, they may be deposited in a joint account without losing their character as separate property. Celso v. Celso, 864 S.W.2d 652 (Tex. App.—Tyler 1993, no writ); Welder v. Welder, 794 S.W.2d 420 (Tex. App.—Corpus Christi 1990, no writ). § 8:217. Commingled property, 2 Tex. Prac. Guide Family Law § 8:217.

Personal Liability

With regard to personal liability, like credit card and other unsecured debt, a person is liable for debts incurred by such person’s spouse only where (1) one spouse acts as agent for the other, or (2) the debt was for necessaries. Tex. Fam. Code Ann. § 3.201. Moreover, a spouse does not act as agent for the other spouse solely because of the marriage relationship. Id.

Copyright 2018, Ian Ghrist, All Rights Reserved.

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.

Overview of the Bankruptcy Process for Real Estate Lenders

The bankruptcy process is much more complex for lenders than it is for landlords. To understand bankruptcy essentials for lenders, it helps to understand some basic concepts. There are three main types of bankruptcies that can be filed: (1) Chapter 7, (2) Chapter 13, and (3) Chapter 11. Chapter 7 bankruptcies are liquidation bankruptcies. In a liquidation bankruptcy, all of the debtor’s non-exempt assets will be sold off and the bankruptcy court will grant the debtor a discharge of all remaining unsecured debt. Liquidation is generally the simplest and easiest bankruptcy, but in the United States, it is rarely available for wage-earners. Congress created wage-earner consumer bankruptcy repayment plans in order to ensure that people who earn income are not able to run up substantial debt and then discharge it without making an attempt to pay the debt off using their disposable income. Congress adopted wage-earner plans with Chapter XIII in the Chandler Act of 1938, which became the modern-day Chapter 13 in the Bankruptcy Reform Act of 1978. In a Chapter 13 wage-earner plan, the debtor must devote the debtor’s disposable income toward the repayment of unsecured debts over the course of the next three to five years of the debtor’s life before receiving a discharge of remaining debts. Chapter 11 bankruptcies are more complicated. Chapter 11 is generally used in business bankruptcies rather than in consumer bankruptcies.

In a typical bankruptcy, the bankruptcy begins with the debtor filing a new bankruptcy case. The debtor’s law firm will send notice of the bankruptcy filing to all creditors. Soon after the case is filed, the debtor will file financial schedules. These schedules will list all of the debtor’s assets and liabilities. The debtor will also file a proposed bankruptcy plan. The plan will address how each creditor will be paid in the bankruptcy.

On the day that the debtor files a bankruptcy case, an automatic stay of all collections activities by creditors goes into effect. This “automatic stay” is the equivalent of a federal court order directed to all creditors telling them to stop their collections efforts, including foreclosure on collateral. Creditors must comply with the automatic stay or face serious penalties.

Real estate lenders often hire bankruptcy attorneys for the following purposes: (1) objecting to court confirmation of a debtor’s bankruptcy plan when the debtor’s treatment of the secured creditor’s claim in the plan is wrong or unfair, and (2) filing motions for relief from the automatic stay so that the creditor can foreclose on the creditor’s collateral. This article is primarily focused on providing information about these two issues for which a creditor will likely seek legal counsel.

Objections to Plan Confirmation

In a Chapter 13 wage-earner bankruptcy, the debtor who files bankruptcy is responsible for filing a proposed bankruptcy plan. The plan will state how the debtor proposes to pay his creditors over the next three to five years. The Chapter 13 trustee will review this plan to determine whether it complies with the bankruptcy rules, but the creditors must also review the plan to make sure that the plan treats the creditors fairly and correctly under the law. If the creditor’s treatment in the plan is wrong, then the creditor needs to file a written objection to the plan in the bankruptcy court. The creditor’s objection will then be taken up by the Court at the plan confirmation hearing. If the creditor fails to object before the plan confirmation hearing occurs, then the creditor might be stuck with wrong or unfair bankruptcy treatment because the bankruptcy courts are loathe to change the plan after it has been confirmed, at least on a creditor’s motion. The trustee, on the other hand, can and frequently does ask for plan modifications throughout the bankruptcy process.

The debtor bears the burden of proof on plan confirmation hearings. In re Colston, 539 B.R. 738, 746 (Bankr. W.D. Va. 2015) (“The debtor bears the burden of proof at confirmation, including as to good faith.”). Accordingly, the creditor can object without having to prosecute a motion on the objection. However, the creditor’s failure to object may bind the creditor even where the debtor’s plan should not have been approved unless the debtor proposed the plan with fraudulent intent, a substantially higher standard than mere good faith. Reasons to object to a plan include good faith, valuation, treatment of a particular claim, lack of adequate protection, and feasibility, among other reasons. “A debtor bears the burden of proof on the issue of valuation under 11 USC § 506(a).” Weichey v. NexTier Bank, N.A. (In re Weichey), 405 B.R. 158, 164 (Bankr. W.D. Pa. 2009); also see In re Finnegan, 358 B.R. 644, 649 (Bankr. M.D. Pa. 2006).

Term of Plan. The bankrupt debtor may not propose a plan for payments over a period of three years, unless the Court, for cause, approves a longer period, but the court may not approve a period that is longer than five years. In re Hussain, 250 B.R. 502, 508 (Bankr. D.N.J. 2000).

Loans on the Debtor’s Principal Residence May Not be Modified in Bankruptcy. Under 11 USC § 1322(b)(2), a Chapter 13 bankruptcy plan may “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence.” Real estate investors with an owner-financed, residential portfolio should take particular notice of this provision. The creditor on a residential mortgage should receive its payments even between the filing date and the plan confirmation date. Perez v. Peake, 373 B.R. 468, 487 (S.D. Tex. 2007). Under the Nobelman case, the debtor cannot bifurcate secured and unsecured portions of the holder of a principal residence lien. Collier on Bankruptcy P 1322.06 (16th 2017); Nobelman v. Am. Sav. Bank, 508 U.S. 324, 332, 113 S. Ct. 2106, 2111 (1993). Accordingly, such lien cannot be modified unless the lien is “completely undersecured” or “wholly unsecured,” which becomes an issue with second liens on principal residences. McDonald v. Master Fin., Inc. (In re McDonald), 205 F.3d 606, 610 (3d Cir. 2000). See the section below on “lien stripping” for more information on this issue.

Entitlement to Payment in Equal Monthly Installments Rather Than Pro Rata. Under 11 USC § 1325(a)(5)(B)(iii), the Chapter 13 plan must provide for payments to secured creditors in “equal monthly amounts.” Sometimes, debtors will list payments to the secured creditor as “Pro-Rata” in the plan. This amorphous term generally means that payments will be made to the creditor by priority pro rata with the creditor’s interest. Knowing exactly how payments will be made under pro rata treatment is difficult. The creditor may need to call the trustee’s office to ask how the trustee will apply payments under pro rata treatment. When reading a bankruptcy plan, the starting month for payment typically means the month following the case filing date, not the month following the plan confirmation date, unless otherwise specified.

What If I Fail to Object to Plan Confirmation? “The provisions of a confirmed plan bind the debtor and each creditor . . . .” 11 USC § 1327(a). There are lots of exceptions now to the common law rule that liens pass through bankruptcy unaffected. Johnson v. Home State Bank, 501 U.S. 78, 84 (1991) (“[A] bankruptcy discharge extinguishes only one mode of enforcing a claim—namely, an action against the debtor in personam—while leaving intact another—namely, an action against the debtor in rem.”); Farrey v. Sanderfoot, 500 U.S. 291, 297 (1991) (“Ordinarily, liens and other secured interests survive bankruptcy.”); also see 11 USC § 506(d)(2). If the creditor fails to object to the debtor’s treatment of the creditor in the plan, then the creditor probably loses the objection even if the objection would have succeeded. See In re Patterson, 107 B.R. 576, 579 (Bankr. S.D. Ohio 1989). But, there are limits. For example, “A secured creditor is . . . not bound by a plan which purports to reduce its claim where no objection [to the creditor’s secured claim] has been filed.” In re Howard, 972 F.2d 639, 641 (5th Cir. 1992). If the debtor tries to “challenge the amount of a secured claim either by asserting a counterclaim or offset against it or by disputing the amount or validity of the lien” then the debtor “must file an objection to the creditor’s claim in order to put the creditor on notice that it must participate in the bankruptcy proceedings.” Id. The debtor cannot dispute the amount or validity of the creditor’s claim solely by plan confirmation even where the creditor fails to raise a meritorious objection to the plan. On the other hand, “where the plan treats the secured claim in a fair and equitable manner, providing for full payment of the debt,” then the creditor probably waives objections to plan confirmation by failing to raise them prior to confirmation. In re Pence, 905 F.2d 1107, 1110 (7th Cir. 1990). To revoke the plan, the creditor must show that the debtor had “fraudulent intent” and the motion to revoke the plan must be brought as an adversary proceeding. 11 U.S.C.S. § 1330; USCS Bankruptcy R 7001. So, to confirm the plan, the debtor need only show good faith (11 USC § 1325(a)(3)), but to revoke the plan, the creditor must show fraud (11 USC § 1330). In Pence, the debtor proposed to give property different from the creditor’s collateral to the creditor to satisfy the creditor’s claim. The Court allowed this when the creditor failed to object to plan confirmation. The difference between Pence and Howard appears to be that in Pence the debtor supported the plan proposal with an appraisal supporting the debtor’s allegation that the creditor would receive full value for the creditor’s claim, even though such allegation turned out to be false, but was not made with fraudulent intent on the debtor’s part. Also see https://www.abi.org/abi-journal/chapter-13-plan-confirmation-its-finalmaybe for a reconciliation of caselaw. The bankruptcy code provides for modification of plans after confirmation, generally due to changed circumstances, but not on the motion of a secured creditor. 11 USC § 1329. Also see In re Dominique, 368 B.R. 913, 919 (Bankr. S.D. Fla. 2007) (saying that wrongful modifications through the plan cannot result in a discharge).

Cure of Pre-Petition Arrearage. The debtor can pay off pre-bankruptcy arrearage over a “reasonable time,” typically six to twelve months. 11 U.S.C.S. § 1322(b)(5) (the plan can “provide for the curing of any default within a reasonable time . . . .”). The debtor’s cure prevents acceleration of the debt and can be made even on a principal residence. 8-1322 Collier on Bankruptcy P 1322.09 (16th 2017).  “A long-term debt dealt with by the chapter 13 plan in the manner authorized under section 1322(b)(5) is excepted from any discharge granted under section 1328, and the creditor’s lien remains intact, except to the extent it may have been declared void pursuant to section 506(d).” Id. This section can be used to cure post-petition defaults as well as pre-petition defaults, so the debtor can propose a modified plan that would cure postpetition mortgage payments that the debtor falls behind on during bankruptcy.  In re Mendoza, 111 F.3d 1264, 37 C.B.C.2d 1691 (5th Cir. 1997); In re McCollum, 17 C.B.C.2d 431, 76 B.R. 797 (Bankr. D. Or. 1987); In re Simpkins, 6 C.B.C.2d 1081, 16 B.R. 95 (Bankr. E.D. Tenn. 1982); Green Tree Acceptance v. Hoggle (In re Hoggle), 12 F.3d 1008, 1010 n.3 (11th Cir. 1994). A debt cured under § 1322(b)(5) is excepted from discharge under § 1328 and the creditor’s lien remains intact, unless the lien has been declared void under § 506(d). 8-1322 Collier on Bankruptcy P 1322.09 (16th 2017); 11 U.S.C. § 1328(a)(1), (c)(1); 11 U.S.C § 506(d); see also In re Gilbert, 472 B.R. 126 (Bankr. S.D. Fla. 2012); In re McGregor, 172 B.R. 718 (Bankr. D. Mass. 1994).

Debtor Can Either Pay Secured Claim Off in the Plan Under § 1325(a)(5) or Cure Under § 1322(b)(5). If the debtor proposes a plan that provides the holders of allowed secured claims an amount not less than the allowed amount of the claim, then the debtor does not need to cure under § 1322(b)(5). In re Chappell, 984 F.2d 775, 779 (7th Cir. 1993). “The Bankruptcy Code does not authorize a chapter 13 debtor to cure defaults and simultaneously modify secured claims. Instead, the Code permits a chapter 13 debtor to propose a plan that utilizes one or the other of these two options.” In re Hussain, 250 B.R. 502, 507 (Bankr. D.N.J. 2000). A “Debtor has two choices for treating the secured mortgage debts in his chapter 13. First, Debtor may modify the rights of the Lenders by reducing the interest rates from the original contract rate, but in order to do so, Debtor must provide for full payment of the allowed secured claims within the life of his chapter 13 plan. The other alternative is for Debtor to cure all pre-petition defaults through his five year plan and reinstate the original contracts by maintaining all future payments in accordance with the original terms of the mortgages.” Id. at 511.

What is a Reasonable Time to Cure Arrearages? Six months is probably considered a reasonable time to cure. In re Hence, 358 B.R. 294, 302 (Bankr. S.D. Tex. 2006). One court has said that “a reasonable time would ordinarily be between three and six months, and perhaps in extraordinary circumstances, nine or twelve months.” In re Hailey, 17 B.R. 167, 168 (Bankr. S.D. Fla. 1982).

Interest on Arrearages. Congress has substantially curbed charging of interest-on-interest, specifically with regard to pre-petition arrearages to be cured in the plan. In re Hence, 358 B.R. 294, 305-06 (Bankr. S.D. Tex. 2006); 11 USC § 1325(a)(5), § 1322(e) (overruling Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993)).

Acceleration After Bankruptcy. When the bankruptcy ends, the creditor should re-accelerate the debt rather than rely on the prior acceleration. Federal Nat’l Mortg. Ass’n v. Miller, 123 Misc. 2d 431, 473 N.Y.S.2d 743 (Sup. Ct. 1984); 8-1322 Collier on Bankruptcy P 1322.09 (16th 2017).

Direct Pay Versus Paid Through the Trustee. Often arrearages are paid through the trustee while post-petition payments are made directly to the creditor. 8-1322 Collier on Bankruptcy P 1322.09 (16th 2017). This can save the debtor substantial money on trustee’s percentage fees given that the mortgage is often one of the largest payments. Perez v. Peake, 373 B.R. 468, 478 (S.D. Tex. 2007) (discussing debtor’s interest in avoiding trustee’s fees as a percentage of disbursements); First Bank & Tr. v. Gross (In re Reid), 179 B.R. 504, 508 (E.D. Tex. 1995) (“The Fifth Circuit expressly permits debtors to act as disbursing agents . . . . However, the decision to permit a debtor to act as his own disbursing agent is left to the discretion of the bankruptcy judge.”).

Cram Down Versus Non-Cram-Down. Generally, the debtor’s bankruptcy plan will categorize secured claims by listing them in a “Cram-Down” section or a non-cram-down section of the plan. The cram-down claims will have the terms of the claim altered, whereas the non-cram-down claims will not have the terms of the claim altered. The purpose of listing the claims separately is to make it easy for the creditor reading the plan to figure out whether to object or not. The creditor whose claim is listed in the non-cram-down section of the plan will rarely need to object. The cram-down creditors, however, may want to object for myriad reasons because their claims have been modified by the debtor.

Till Rates on Cram Down Claims. The Till rates are also referred to as the cram down rates because they change the contract terms without the creditor’s consent. Non-primary-residence loans must be paid out at the Till rates, which are the prime rate plus 1% to 3%. Till v. SCS Credit Corp., 541 U.S. 465, 480, 124 S. Ct. 1951, 1962 (2004). If the debtor proposes zero percent, then the creditor should object. Under 11 USC § 1325(a)(5)(B)(ii), the Chapter 13 plan must, for a secured creditor, provide property to be distributed to the creditor that “has a total ‘value, as of the effective date of the plan,’ that equals or exceeds the value of the creditor’s allowed secured claim.” Till, 541 U.S.  at 474. When the Chapter 13 plan does not provide for a lump sum payment to the secured creditor, then “the amount of each installment must be calibrated to ensure that, over time, the creditor receives disbursements whose total present value equals or exceeds that of the allowed claim.” Id. at 469. Surprisingly, the Supreme Court determined that the contract rate has no bearing on this inquiry, though four justices in a plurality opinion thought that the contract rate should be presumptively be the plan rate. Id.

Lien Stripping. When a secured creditor receives a lien-stripping notice, it is time to call a creditor’s bankruptcy attorney. When a debtor alleges that a creditor is fully or partially undersecured, then the debtor may try to strip off the lien and have the lien voided altogether or may try to strip down the lien to the value of the property. Bank of Am., N.A. v. Caulkett, 135 S. Ct. 1995 (2015); 11 USC § 506(d). Depending on the jurisdiction that the case is located in, strip-off or strip-down may require the filing of an adversary action (which is like a separate lawsuit handled within the bankruptcy case involving heightened pleading and notice requirements) or merely handled through the plan confirmation process.

“A debtor bears the burden of proof on the issue of valuation under 11 USC § 506(a).” Weichey v. NexTier Bank, N.A. (In re Weichey), 405 B.R. 158, 164 (Bankr. W.D. Pa. 2009); also see In re Finnegan, 358 B.R. 644, 649 (Bankr. M.D. Pa. 2006). Moreover, mortgagees are entitled to due process before their constitutionally-protected security interests are removed. See generally Mennonite Bd. of Missions v. Adams, 462 U.S. 791, 798 (U.S. 1983); Eric S. Richards, Due Process Limitations on the Modification of Liens Through Bankruptcy Reorganization, 71 Am. Bankr. L.J. 43, 45–46, 50 (1997). When a debtor tries to void a creditor’s lien by 11 USC § 506(d), the debtor needs to give notice of its intention to do so. In re King, 290 B.R. 641, 648 (Bankr. C.D. Ill. 2003). If the creditor fails to object, then the bankruptcy court might not even make the debtor offer evidence on valuation at the plan confirmation hearing, despite the debtor’s burden of proof. Id. Debtor’s attorneys often use tax roll data for lien-stripping, but this is generally not proper or very poor valuation evidence. See Blakey v. Pierce (In re Blakey), 76 B.R. 465, 471 (Bankr. E.D. Pa. 1987) (“We note, however, that we would not admit into evidence the City’s admission, per its appraisal, that the value of the premises was $13,200 against the Mortgagee.”); also see In re Cole, 81 B.R. 326, 328-29 (Bankr. E.D. Pa. 1988) (“We are unwilling to give much, if any, weight to the City’s ‘appraisal of the premises . . . . We have even less indicia of what went into this determination than we do of Mr. Graham [an expert witness who testified regarding valuation].”). For additional authority, see 4-506 Collier on Bankruptcy P § 506.03 (16th ed.) (“[V]alue testimony by nonexperts is often viewed as unpersuasive, if not inadmissible.”). The proper way to offer valuation evidence of real estate is through an appraisal. Cf. Nationsbanc Mortgage/Federal Nat’l Mortg. Ass’n v. Williams (In re Williams), 276 B.R. 899, 909 (C.D. Ill. 1999)

Does Lien-Stripping Require an Adversary Proceeding? “Allowing the debtor to avoid a lien through the Chapter 13 plan confirmation process would . . . be contrary to the clearly expressed intent in the Code to prevent modification of rights of lien holders through a Chapter 13 plan when those parties have mortgages secured by the debtor’s principal residence.” In re Forrest, 424 B.R. 831, 834 (Bankr. N.D. Ill. 2009). Moreover, “It is the position of some courts that the avoidance of a lien envisioned by § 506 must be implemented through an adversary proceeding.” In re Nys, 2013 Bankr. LEXIS 93, 15 (Bankr. S.D. Ohio Jan. 8, 2013); see also Holderman v. Ben. Fin. I, Inc. (In re Holderman), 2011 Bankr. LEXIS 5707, 6 (Bankr. N.D. Ind. Dec. 20, 2011); Weichey v. NexTier Bank, N.A. (In re Weichey), 405 B.R. 158, 159 (Bankr. W.D. Pa. 2009) (debtors used an adversary proceeding to accomplish stripping under 11 U.S.C. § 506(a). “The majority of bankruptcy courts holds that a strip-off does not require an adversary proceeding.” Comment: Strip-Off: What is the Correct Procedure to Avoid a Wholly Unsecured Junior Mortgage?, 28 Emory Bankr. Dev. J. 463, 465 (2012). “Alternatively, the minority of bankruptcy courts holds the opposite view and requires an adversary proceeding pursuant to Rule 7001(2).” Id. As late as 2012, “no circuit courts [had] addressed the issue.” Id. at 407. The minority approach is supported by sound arguments, for example, “the plain language of Rule 7001 indicates that it applies to strip-off.” Id. at 504. Also, “Using an adversary proceeding [for lien stripping] may better address due process concerns because of the more formality of the process with a summons issued and the complaint served in accordance with F.R.B.P. 7004.” Giddens, Joel, Practical Considerations in Lien Stripping, p. 91, Third Annual Memphis Consumer Bankruptcy Conference, (American Bankruptcy Institute June 7, 2013). Lien-stripping in the Southern District of Texas does not require an adversary proceeding. Hardy Rawls Enters. LLC v. Cage (In re Moye), No. H-09-2747, 2010 U.S. Dist. LEXIS 83792, at *18 (S.D. Tex. 2010) (suggesting that the Southern District of Texas may follow the majority approach).

Filing for Relief from Stay

Secured creditors can ask the bankruptcy court to lift the automatic stay as to their collateral or to afford them “relief” from the automatic stay. This is commonly referred to as a “lift stay motion.” Secured creditors can file lift stay motions for “cause.” 11 U.S.C. § 362(d)(1). The most quintessential lift stay situation would be where a secured creditor wants to foreclose on real estate collateral, but cannot do so because the automatic stay of all collections activities in the bankruptcy case prevents this. The stay is called “automatic” because it arises automatically, without the bankruptcy court even having to sign an order, as soon as the bankruptcy case is filed. So, the creditor files a motion, in the federal bankruptcy court, to have the stay lifted so that the foreclosure can proceed in accordance with applicable state law. Foreclosure law and debtor-creditor law varies from state-to-state, but bankruptcy law is federal and bankruptcies are filed in federal court. Under the Supremacy Clause to the U.S. Constitution, the federal automatic stay of collections activities supersedes any state law to the contrary. Our founding fathers felt that the need for uniform bankruptcy law throughout the country was so important that the federal court’s bankruptcy powers come from Article 1, Section 8 of the U.S. Constitution, which are the few, original limited powers granted to the federal government.

When to File for Relief from Stay. Generally, if you have a secured debt and you are not being paid, then you will want to file for relief from the automatic stay. The reason for the general rule is that “a monthly payment to the mortgagee equal to the full contractual amount constitutes adequate protection under § 361(3) and . . . any lesser amount is inadequate protection.” In re Perez, 339 B.R. 385, 400 (Bankr. S.D. Tex. 2006) (“[I]t is incongruous to bless adequate protection payments to Chapter 13 residential lien holders in any amount less than the contractual amount required by the promissory note as the routine method to be adopted for adequate protection. To do so goes against the express intent of Congress. The only way to satisfy congressional intent is to use the flexible concept of “indubitable equivalent” and hold that making the contractual monthly payment constitutes an indubitable equivalent under 11 U.S.C. § 361(3).”). This general rule is very general, with myriad exceptions, because whether or not a motion for relief from stay will be granted is rarely clear. The stay can be lifted or modified for “cause,” and bankruptcy courts have significant discretion over what constitutes “cause.”

“Section 362(d)(1) of the Bankruptcy Code provides that the Court may lift the automatic stay for ‘cause.’ See 11 U.S.C. § 362(d)(1). However, the Bankruptcy Code does not define the term ‘cause,’ and the term is applied by the courts on a case specific basis. See Claughton v. Mixson, 33 F.3d 4, 5 (4th Cir. 1994) (“Because the Bankruptcy Code provides no definition of what constitutes ’cause,’ the courts must determine when discretionary relief is appropriate on a case-by-case basis.”) (citations omitted); Christensen v. Tucson Estates, Inc. (In re Tucson Estates, Inc.), 912 F.2d 1162, 1166 (9th Cir. 1990) (“‘Cause’ has no clear definition and is determined on a case-by-case basis.”) (citations omitted); Hudgins v. Security Bank of Whitesboro (In re Hudgins), 188 B.R. 938, 946 (Bankr. E.D. Tex.1995) (“[T]he Bankruptcy Code does not define the term ’cause.’ ‘Cause’ under § 362(d)(1) is not limited to those situations where the property of a party lacks adequate protection in the bankruptcy estate. Instead ’cause’ encompasses many different situations . . . .”) (citations omitted); In re Texas State Optical, 188 B.R. 552, 556 (Bankr. E.D. Tex. 1995) (“11 U.S.C. § 362(d)(1) provides for the modification of the automatic stay for cause. ‘Cause’ as used in § 362(d)(1) has no clear and limited definition and, therefore, is determined on a case by case basis. ‘Cause’ is an intentionally broad and flexible concept that permits the Bankruptcy Court, as a court of equity, to respond to inherently fact-sensitive situations.”) (citations omitted); cf In re Novak, 103 B.R. 403, 411-12 (Bankr. E.D.N.Y. 1989) (finding in a Chapter 12 case, debtor’s failure  [*47] to timely confirm plan is “cause” for relief from automatic stay, despite the existence of an equity cushion).” In re Futures Equity L.L.C., Nos. 00-33682-BJH-11, 00-34825-BJH-11, 00-34826-BJH-11, 2001 Bankr. LEXIS 2229, at *45-47 (Bankr. N.D. Tex. 2001).

We do, however, know some things about what constitutes cause. A lack of good faith may constitute sufficient cause to provide relief from the automatic stay. In re Haydel Props., LP, No. 16-51259-KMS, 2017 Bankr. LEXIS 842, at *6 (Bankr. S.D. Miss. 2017). Many lift stay motions generally allege a lack of good faith as grounds for relief. Also, failure to comply with the terms of the plan constitutes cause for relief from stay. In re Patterson, 107 B.R. 576, 579 (Bankr. S.D. Ohio 1989); 11 USC § 362(d)(1). If the creditor obtains the trustee’s record, showing the debtor to be in arrears, then that constitutes cause for relief from stay. Id. If the plan makes provision for payment of the creditor’s claim, then issues of lack of adequate protection are res judicata as of confirmation of the plan. Patterson, 107 B.R. at 578. This is true even where the creditor’s adequate protection objection “probably would have succeeded.” Id. An equity cushion alone can be adequate protection. Bank R.I. v. Pawtuxet Valley Prescription & Surgical Ctr., 386 B.R. 1, 5 (D.R.I. 2008). Anything less than a ten-percent equity cushion is probably inadequate and even ten-percent has been adequate only where the debtor proposed monthly payments to cover interest accruing on the claim. Id. at 10; Also see Skelton v. Urban Tr. Bank (In re Skelton), Nos. 12-34350, 12-3184, 2013 Bankr. LEXIS 3137, at *30 (Bankr. N.D. Tex. 2013). A twenty-percent equity cushion is more likely to obviate any need to provide additional adequate protection. In re Haydel Props., LP, No. 16-51259-KMS, 2017 Bankr. LEXIS 842, at *1 (Bankr. S.D. Miss. 2017). Using cash collateral to pay administrative claims without providing additional security to the creditor may be grounds for relief from the automatic stay. In re Geijsel, 480 B.R. 238, 272 (Bankr. N.D. Tex. 2012).

Contents of an Order Modifying the Automatic Stay. Most lift stay motions result in the entry of an agreed order modifying the automatic stay rather than an order lifting the stay. The contents of such agreed orders vary, but can typically include: (1) a warning regarding the applicability of 11 USC § 109(g), (2) provisions for cure of arrearage, (3) provisions regarding tax and insurance issues, particularly on non-escrowed loans, (4) provisions regarding default on the modified stay order and automatic lifting of the stay in the event of default on the order, (5) notice provisions to the debtor or debtor’s counsel to advise of default on the order and lifting of stay, (6) provision that the order will survive a conversion of the case to another chapter of the Code, and (7) provision that the terms of the order no longer apply upon dismissal of the case, (8) provision that a non-sufficient funds check does not constitute a timely payment, (9) provision that any default on trustee payments constitutes a default on the modified stay order, and (10) provision for modifying the plan to cure arrearages and attorney’s fees related to the lift stay motion, inter alia.

Copyright 2017, Ian Ghrist, All Rights Reserved.

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.

Proposal for New Eviction Rules Regarding Notices to Vacate and Title Issues

Notice to Vacate:

The notice to vacate in Texas tends to become the most pernicious part of eviction litigation for no good reason. Courts have found that defect in notice to vacate should cause a landlord to lose an eviction suit. Geters v. Baytown Hous. Auth., 430 S.W.3d 578, 586 (Tex. App.—Houston [14th Dist.] 2014); Onabajo v. Household Fin. Corp. III, No. 03-15-00251-CV, 2016 Tex. App. LEXIS 7454, at *14 (App.—Austin July 14, 2016). Tenant’s attorneys know this and often make minor, technical, immaterial defects in the notice to vacate their case-in-chief. The litigants, including the tenants, usually have no comprehension of why this matters so much, and especially why minor issues related to the notice to vacate can affect the end result of an eviction suit.

Worse yet, the tenant can blindside the landlord with trivial complaints regarding a notice to vacate only at the de novo trial held by the county court at law after a case has been appealed from the justice court. Eviction cases, in Texas, are designed to be handled primarily through the small claims process, typically without the involvement of attorneys. Accordingly, when an attorney handles a county court at law appeal of a justice court eviction, the attorney cannot go back and fix any issues with the prior notice to vacate.

This issue furthers the image that the general public has of lawyers and judges divorcing themselves from reality and operating in a world of their own where the merits of the case do not matter, where justice is a tertiary issue, and where the focus is on unimportant and unnecessary procedural details rather than the resolution of the dispute at hand. To remedy the situation, the rules should be fixed.

One simple way to fix the problem would be to pass legislation that would (1) require defendants in an eviction suit to raise complaints regarding the form, substance, or timeliness of a notice to vacate in an eviction suit by affirmative defense, (2) require that the affirmative defense state, with specificity, the defect in form, substance, or timeliness complained of, and (3) afford the landlord an opportunity to cure any defect complained of by the tenant prior to de novo trial in the county court at law. The details of this new law could be handled in various ways. The important object to accomplish would be to ensure that the landlord can cure any technical defect in the notice to vacate without losing his or her case in the county court at law, only to start all over again back at the justice court, where the case will inevitably be appealed a second time, only to be back in the county court again three or four months later on identical issues, thus, wasting everyone’s time and wasting judicial resources. Cases where the landlord loses in the county court at law on appeal due to issues with the notice to vacate only delay the inevitable and this delay causes substantial and unnecessary cost, attorney’s fees, and time. Justice and the reasonably prompt resolution of disputes are frustrated when these issues result in dismissal of suit, rather than some sort of cure opportunity being provided to the landlord.

No eviction suit tried de novo in the county court at law on appeal from the justice court should result in a judgment in favor of the tenant where the only grounds for the tenant to prevail are that some defect exists in the notice to vacate. By the time that the case goes to trial in the county court at law on appeal, the tenant has been occupying the property for several months after the notice to vacate was sent, thus, clearly getting far more three day’s notice that they need to vacate the premises. Also, at this point, the tenant clearly has notice that the landlord wants the tenant to vacate the premises because the parties have been litigating that exact issue all the way to an appeal. Instead of dismissal or judgment for the tenant, the landlord should be given an opportunity to cure any defect identified by the tenant in the tenant’s pleadings, and the case should be reset for trial after the cure period has ended. Furthermore, the tenant should be obligated to raise specifically the defect complained of, and not be able to blindside the landlord with the issue at the county court at law after failing to raise the issue in the justice court or in the pleadings.

The law on this should be similar to DTPA (“Deceptive Trade Practices Act”) notices where the remedy is to abate the case while the notice defect is cured. The remedy should not be dismissal of the case or judgment for the tenant. Neither of those results bears any proportionality whatsoever to the harm of a deficient notice to vacate. If a notice to vacate is deficient, then the landlord should have to cure the defect and the tenant should get a few extra days in the property while the defect is cured. The remedy of making the landlord and tenant start the entire eviction lawsuit process all over again from scratch is just nonsensical.

Title Issues:

When the question of entitlement to immediate possession of the premises depends on resolution of a title dispute, the justice of the peace courts (and county courts at law on appeal from those justice courts) lack jurisdiction. When the justice court lacks jurisdiction, the case gets moved to another court, typically a District Court. See our blog article on “Overview of the Eviction Suit Process in Texas” for more information.

When justice court eviction suit is moved to a district court due to a title issue, the parties should not be deprived of their right to a speedy determination on the right to immediate possession. In district court, a non-paying occupant with a barely non-frivolous title claim, or sometimes even an utterly frivolous title claim, can occupy the property for several years while the suit slowly awaits a trial setting that will just be continued multiple times before the trial finally occurs. In the meantime, the property condition deteriorates, the property taxes go unpaid, the property becomes uninsured and subject to loss due to fire or other casualty, the property gets condemned by the City, the non-occupying owners fail to maintain the property, etcetera. When a non-paying occupant knows that he will lose the property at trial, he fails to care for the property, which leads to irreparable damage. The non-paying occupant is invariably judgment-proof or he would be paying for use of the property. Instead, the District Court should have authority to make a speedy determination as to the right to immediate possession and enforce it by appropriate pre-trial orders. In the event that a justice court cannot issue a determination on the issue of possession, then the party whose request for possession has been moved to district court should be able to set a pre-trial motion for interlocutory relief on the issue of possession, and at such hearing, the district court should also have authority to enter appropriate rent orders. For example, if a co-tenant owning 50% of the subject property seeks either possession or pro rata rent due to an ouster, then a justice court will likely refuse to hear the matter because the ouster is arguably a matter of title. When the non-occupying co-tenant re-files that possessory suit in district court, he should be able to set a motion for interlocutory relief on the issue of possession. The district court should set the matter for hearing within sixty (60) days of the filing of the motion, unless the filing party consents to a continuance. At the hearing, if the district court does not award possession to the party filing the motion, then the district court should have the authority to compel the party occupying the property to pay pro rata rent into the court’s registry, or to the party not in possession, pending final trial and authority to compel the occupant to pay the property taxes, keep the property insured, and adequately maintain the property pending trial. The current situation where occupants can use a frivolous or barely non-frivolous title dispute as an excuse to live rent-free in property for years at a time is inappropriate.

Copyright 2017, Ian Ghrist, All Rights Reserved.

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.

Amending Pleadings in the County Court at Law on Appeal from Small Claims Court

When a small claims case is appealed from the Justice Court (aka the Small Claims Court) to the County Court at Law, the parties tend to get serious about the litigation. Often, attorneys do not get involved until the case has been appealed to the County Court at Law from the Small Claims Court. The attorney who takes on a small claims appeal often finds that the pro se pleadings have numerous errors or deficiencies, most of which may be harmless in small claims court where the rules of evidence and procedure do not technically apply, but which may cause serious problems in the County Court at Law where the procedural rules can win or lose a case. There are, however, serious limits on what the attorney can do, on appeal, to fix these issues.

Generally, the pleadings can be amended on appeal, but new grounds for recovery cannot be added. Lost Creek Ventures, LLC v. Pilgrim, No. 01-15-00375-CV, 2016 Tex. App. LEXIS 6974, at *21-23 (App.—Dallas June 30, 2016); Richard v. Taylor, 886 S.W.2d 848, 851 (Tex. App.—Beaumont 1994); Carnegie Homes & Constr. LLC v. Turk, No. 14-16-00260-CV, 2017 Tex. App. LEXIS 8607, at *7-8 (App.—Houston [14th Dist.] Sep. 7, 2017). The rule has been stated as “new matters may be plead, but no new grounds of recovery may be added.” Merrikh v. Hernandez, NO. 01-98-00111-CV, 1999 Tex. App. LEXIS 9153, at *6-7 (App.—Houston [1st Dist.] Dec. 9, 1999). The boundaries of this general rule are somewhat unclear right now because the rule used to be found in Tex. R. Civ. P. 574a, which was repealed in 2013. How the law will change, if at all, based on the repeal of Tex. R. Civ. P. 574a, remains unclear. Generally, the county court’s appellate jurisdiction is confined to the limits of the justice court’s jurisdiction. Kendziorski v. Saunders, 191 S.W.3d 395, 406 (Tex. App.—Austin 2006, no pet.). However, this jurisdictional limit does not apply to amounts “sustained as a result of the passage of time.” Id. at 409.

Where the general rule is violated and a litigant brings claims in the county court at law that go beyond the limits of the small claims court, the proper remedy is not to dismiss the claims, but rather to sever them. Richard v. Taylor, 886 S.W.2d 848, 851 (Tex. App.—Beaumont 1994). If a party was not a party in the justice court, then the party is not a proper party to the appeal in the county court and claims involving such party should be severed from the justice court appeal. Merrikh v. Hernandez, NO. 01-98-00111-CV, 1999 Tex. App. LEXIS 9153, at *6-7 (App.—Houston [1st Dist.] Dec. 9, 1999).

Copyright 2017, Ian Ghrist, All Rights Reserved.

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.

Pitfalls of Buying Occupied Property

The more savvy real estate investors tend to have a hard rule against buying occupied property unless the occupant signed a written lease agreement, the seller had a detailed payment ledger, and there is a transferable security deposit. Even then, best practice would be to also personally ask the tenant whether the tenant claims any interest in the property other than a leasehold. The buyer should also possibly put the request in writing or get the tenant to sign a waiver or release of any title claims. Real estate wholesalers often think that they can get a steal of a deal by offering to evict a non-paying occupant for a beleaguered seller. However, this road often leads to problems bigger than the buyer anticipates.

The problems arise from claims that the occupant may have to the property. If you look at Schedule B to your owner’s title policy from your title insurance company of choice, then you will probably find language similar to the following: “We do not cover loss, costs, attorney’s fees and expenses resulting from . . . [t]he following matters and all terms of the documents creating or offering evidence of the matters (we must insert matters or delete this exception): . . . Rights of parties in possession.” So, your title company will not cover any claims raised by anyone who is in possession of the property at the time that you purchase the property. Bet you wish you knew that when you bought your title insurance? But alas, most people do not read their policy, would not understand it even if they did read it, and their escrow officer or title agent probably put little to no effort into explaining what the policy does and does not cover. Knowledge is power and if you know what types of title disputes you cannot insure against, then you can take steps to protect yourself from those types of disputes.

To understand what you need to do to protect yourself since your title company will not protect you, the best case to review is Madison v. Gordon, 39 S.W.3d 604, 606 (Tex. 2001): “One purchasing land may be charged with constructive notice of an occupant’s claims. This implied-notice doctrine applies if a court determines that the purchaser has a duty to ascertain the rights of a third-party possessor. See Collum v. Sanger Bros., 98 Tex. 162, 82 S.W. 459, 460 (Tex. 1904); American Surety Co., 82 S.W.2d at 183. When this duty arises, the purchaser is charged with notice of all the occupant’s claims the purchaser might have reasonably discovered on proper inquiry. Dixon v. Cargill, 104 S.W.2d 101, 102 (Tex. Civ. App.–Eastland 1937, writ ref’d); see also Flack, 226 S.W.2d at 632. The duty arises, however, only if the possession is visible, open, exclusive, and unequivocal.” Madison, 39 S.W.3d 604. The form of constructive notice described here is known as “inquiry notice,” which is notice of claims that one could discover through reasonable inquiry made to the occupant of the property.

Generally, a bona fide purchaser of real property for value (“BFP”) will acquire the property free of any unrecorded claims. Texas has codified BFP doctrine at Tex. Prop. Code § 13.001.

Madison is a fascinating case in the Texas Supreme Court where the Court of Appeals found that the occupancy of a guy who “resided on the property, had possession of the premises, and collected rents on the property before and after [the BFP’s] purchase” of the property defeated the BFP’s claim to the property due to his occupancy. Gordon v. Madison, 9 S.W.3d 476, 480 (Tex. App.—Houston [1st Dist.] 2000). The Court of Appeals found that “even minimal inquiry by [the BFP] would have made her aware of Gordon’s claim, either by Gordon himself or the tenants who were paying rent. A purchaser who fails to make reasonable inquiry is charged with notice of all claims and facts that the inquiry would have disclosed . . . . Gordon’s residence on the property, his possession of the premises, and his past and continuing collection of rents established constructive notice to [the BFP] as a matter of law. We therefore conclude that Gordon disproved [the BFP’s] affirmative defense of good faith purchaser status as a matter of law . . . .” Id. Amazingly, the Texas Supreme Court reversed the Court of Appeals because the Supreme Court found that Gordon’s possession of the property was not exclusive or unequivocal. Madison v. Gordon, 39 S.W.3d 604, 607 (Tex. 2001). In reversing the Court of Appeals and rendering judgment in favor of the BFP, the Supreme Court seemed to assign great weight to the fact that the property was a multi-unit rental property. Accordingly, Gordon’s occupancy was “compatible with [the record title holder’s] assurances of ownership” because “[a]s a rental property, one would expect occupants on the property.” Id. Seemingly, the mere fact that a property is a rental property is enough to defeat an occupant’s inquiry notice claim, even where the occupant is residing in the property and collecting rents from the other occupants. In Madison, the occupant’s possession was “‘ambiguous or equivocal possession which may [have] appeared subservient or attributable to’ [the owner of record].” Id.; Strong v. Strong, 128 Tex. 470, 479, 98 S.W.2d 346, 350 (1936).

Equitable Title. Counter-intuitively, the State of Texas gives buyers under an executory contract for purchase of real property an ownership interest in the property called “equitable title.” See Johnson v. Wood, 138 Tex. 106, 157 S.W.2d 146 (1941). So, in Texas, if you sign a contract as a buyer, or even just an option agreement, or a lease-option, then you arguably have “equitable title,” which you can convert to official, legal title by suing on the contract within the limitations period (generally four years from contract execution date). See New York & T. Land Co. v. Hyland, 8 Tex. Civ. App. 601, 604 (Tex. Civ. App. Austin 1894). So, non-real estate attorneys might assume that anyone without a deed to property cannot be the owner of that property.  Life would be easier if that were true.

In conclusion, the primary concerns for the buyer of occupied property are whether the occupant has an option to purchase the property; an executory contract to purchase the property, i.e., a contract to buy the property that remains open because the deadlines have not passed yet or payments remain to be made, or for whatever reason, the right to purchase the property may possibly still exist; or any other unrecorded claim of ownership to or interest in the subject property. The savy buyer needs to worry about every potential claim of an occupant, regardless of whether the claim is valid or not. Even an occupant who has clearly defaulted on an executory contract can claim equitable title through “substantial performance” (See 18-270 Dorsaneo, Texas Litigation Guide § 270.22 (2017); O.W. Grun Roofing & Constr. Co. v. Cope, 529 S.W.2d 258, 261–262 (Tex. Civ. App.—San Antonio 1975, no writ) or through application of the contract-for-deed regulations (see Subchapter D, Chapter 5 of the Texas Property Code).

The reason that the buyer needs to worry about invalid claims as well as valid claims is that the presence of any claim, whether valid or not, can deprive the Justice of the Peace Courts of jurisdiction over an eviction suit. See Espinoza v. Lopez, 468 S.W.3d 692, 696-97 (Tex. App.—Houston [14th Dist.] 2015, no pet.). An eviction, from start to finish, in a Texas Justice of the Peace Court (“JP Court”) can end in under sixty days, easily. The owner of property seeking to evict an occupant in JP Court generally does not even need the help of an attorney. If, however, a title dispute exists, even a title dispute where the occupant has little chance of success on the merits, then the JP Court lacks jurisdiction and will dismiss the eviction suit.

At this point, the owner of the property will need to turn to higher courts to have the occupant evicted. In those higher courts, either a county court at law or a district court, the case will probably have a Level Two Discovery Control Plan (See Tex. R. Civ. P. 190.3), which means that there will be a nine (9) month long discovery period followed by a trial that may be reset multiple times. The owner will be lucky to have the occupant evicted within a year. In the meantime, the judgment-proof, deadbeat occupant will simply occupy the property for free unless the record owner can get the occupant evicted before trial through an injunction. Pre-trial injunctions, however, are very hard to get and are not granted easily. Most importantly, the time and effort, from an attorney’s fees standpoint, between getting an occupant evicted in a district court versus a JP Court is vast. Many attorneys will handle JP Court evictions for a relatively small flat fee or the record owner can handle the JP Court eviction themselves. In a district court, however, the owner definitely needs an attorney to ensure compliance with the Texas Rules of Evidence and Procedure and the attorney will probably demand a substantial retainer with an hourly billing arrangement because quoting a flat fee for a district court lawsuit is extremely difficult due to the extreme open-endedness of district court litigation where the parties can bring all manner of counter and cross-claims and argue over nearly every bit of minutia. Also, predicting the amount of pre-trial hearings, depositions, discovery, legal research, briefing, factual research, mediation, and other time-consuming matters in district court is nigh impossible in most instances.

The prudent buyer will take every possible step to avoid getting into a situation where an occupant in the property to be purchased may have any sort of claim against the property. This means making adequate inquiry and obtaining adequate assurances from the seller that the seller has good and marketable title that is superior to and consistent with any of the occupant’s claims.


Copyright 2017, Ian Ghrist, All Rights Reserved.

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.

How to Deal With a Lender That Does not Provide a Payoff Quote or Lien Release

Dealing with lenders that are slow or unresponsive to requests for payoff quotes and lien releases can be one of the most frustrating and obnoxious parts of a real estate transaction. Borrowers have several laws to rely upon to induce and incentivize their lenders to provide payoff statements and lien releases in a timely and reasonable manner.

Texas State Law. Under Section 349.003 of the Texas Finance Code, a person who fails to perform a requirement imposed upon that person by Subtitle B of Title 4 of the Texas Finance Code “is liable to the obligor for an amount that does not exceed an amount computed under one, but not both, of the following:

(1)  three times the actual economic loss to the obligor that results from the violation; or

(2)  if the violation was material and the violation induced the obligor to enter into a transaction that the obligor would not have entered if the violation had not occurred, twice the interest or time price differential contracted for, charged, or received, not to exceed:

(A)  $2,000 in a transaction in which the amount financed does not exceed $5,000; or

(B)  $4,000 in a transaction in which the amount financed exceeds $5,000.”

Also, anyone liable under this statute is liable for “reasonable attorney’s fees set by the court.” Tex. Fin. Code § 349.003(b).

Section 343.106 of the Texas Finance Code provides that the Texas Finance Commission shall promulgate rules related to payoff statement requests. The Texas Finance Commission promulgated such rules in Chapter 155 of Part 8 of Title 7 of the Texas Administrative Code.

Under 7 T.A.C. § 155.2, payoff statement requests should be in writing, in accordance with lender designations, and should include, at a minimum, the name of the mortgagor, the physical address of the collateral, and the proposed closing date of the loan. Upon receipt of a proper payoff request, the mortgage servicer must deliver a payoff statement by the “eighth business day after the date the request is received unless federal law requires a shorter response time.” 7 T.A.C. § 155.3.

Actual damages for failure to provide a payoff statement need to be proven up by something more than mere speculation or conjucture and must be arrived at “by reference to some fairly definite standard, established experience, or direct inference from known facts.” Household Fin. Corp. III v. DTND Sierra Invs., LLC, No. 04-13-00033-CV, 2013 Tex. App. LEXIS 13649, at *20 (App.—San Antonio Nov. 6, 2013). This can be a tricky part of getting damages for a wrongful refusal to provide a payoff statement. The owner of property can testify to the value of the owner’s property, but must explain the basis for the owner’s valuation and the basis cannot be speculative or conjectural. Id. at *31.

A mortgagee’s refusal to provide a payoff quote is not an affirmative misrepresentation of the amount of the debt under Section 392.304(a)(8) or (19) of the Texas Finance Code, i.e., the Texas Fair Debt Collection Practices Act. Verdin v. Fannie Mae, 540 Fed. Appx. 253, 2013 U.S. App. LEXIS 16982 (5th Cir. Tex. 2013, no pet. h.).

Federal Law. Under 15 U.S.C. § 1639g, “A creditor or servicer of a home loan shall send an accurate payoff balance within a reasonable time, but in no case more than 7 business days, after the receipt of a written request for such balance from or on behalf of the borrower.” The aggrieved borrower under 15 U.S.C. § 1639g can get damages under 15 U.S.C. § 1640(a)(1)–(3), but not (a)(4). So, actual damages plus statutory damages in the range, and attorney’s fees and court costs, but not “an amount equal to the sum of all finance charges and fees paid by the consumer.”

Title Company Affidavit as Release of Lien. Under Section 12.017 of the Texas Property Code, a title company can, in accord with the statute, file an affidavit as a release of lien if the mortgagee fails to provide a timely release of lien following the provision of a payoff statement that was complied with.

Criminal Law. Under 15 U.S.C. § 1611, anyone who willingly and knowingly fails to provide information that is required to be disclosed “shall be fined not more than $5,000.00 or imprisoned not more than one year, or both.” This is a criminal statute. Getting a federal law enforcement official or prosecutor interested in this is probably not very easy unless the circumstances are extremely egregious.

Under Tex. Penal Code § 32.49, the refusal to release a fraudulent lien, as described by Tex. Gov’t Code § 51.901(c), upon request can be a Class A misdemeanor. Also see Bowles v. State, No. 01-04-00801-CV, 2006 Tex. App. LEXIS 7341, at *2 (App.—Houston [1st Dist.] Aug. 17, 2006).

A fraudulent lien can give rise to civil liability of the greater of $10,000.00 or actual damages, plus court costs, attorney’s fees, and exemplary damages, but refusal or failure to provide a lien release following a payoff may not qualify as a fraudulent lien for purposes of Tex. Civ. Prac. & Rem. Code § 12.002 because the lien was not fraudulent when filed. However, the statute does prohibit making, presenting or “use” of a document with knowledge that the document is a fraudulent lien or claim, so there may be scenarios where the statute could be applicable to the refusal or failure to provide a lien release. Tex. Civ. Prac. & Rem. Code § 12.002.

Refusing to release a lien can also be considered slander of title. Tarrant Bank v. Miller, 833 S.W.2d 666, 667 (Tex. App.—Eastland 1992).

The lender’s failure to provide the payoff statement or release of lien is also going to be a plain old breach of contract claim. The wrongful lien also clouds title, so the borrower could file a suit to quiet title under the declaratory judgment statute and get attorney’s fees for prosecution of a declaratory judgments action.

Suit to Remove Cloud on Title in the Form of Unreleased Lien Not a Trespass to Try Title Suit. Attorney’s fees are not generally available in a trespass to try title case. Trespass to try title cases involve possession of property. Skalak v. Book, No. 03-11-00595-CV, 2012 Tex. App. LEXIS 8226, at *22 (App.—Austin Sep. 26, 2012). Non-possessory suits, like a suit to remove a cloud upon title caused by an unreleased lien, would accordingly likely qualify for recovery of attorney’s fees under the Texas Uniform Declaratory Judgments Act.

Copyright 2017, Ian Ghrist, All Rights Reserved.

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.

Foreclosures in Texas

Texas allows nonjudicial foreclosure under a power of sale granted by a deed of trust for most real estate loans. Nonjudicial foreclosure is not available in Texas for certain loan types, like home equity loans and property tax loans. When nonjudicial foreclosure is unavailable, the foreclosure must be done through either judicial foreclosure or an Expedited Foreclosure Proceeding under Texas Rule of Civil Procedure 736. In a judicial foreclosure, a lawsuit must be filed, and the plaintiff’s petition in the lawsuit must ask the Court to grant an order for foreclosure. This is the slowest and most cumbersome method of foreclosure because the case will likely not go to trial for several months or years.

To expedite the process, some loans, like home equity loans under Article XVI Section 50(a)(6) of the Texas Constitution, or reverse mortgages under Article XVI Section 50(a)(7), can be foreclosed in an Expedited Foreclosure Proceeding under Rules 735 and 736 of the Texas Rules of Civil Procedure. The Expedited Foreclosure Proceeding is also known as a Quasi-Judicial Foreclosure because the proceeding bears little resemblance to an actual lawsuit. For example, personal service on the respondent is not required. Instead, all the petitioner needs to do under Rule 736 is mail the application for foreclosure to “each party who, according to the records of the holder of the debt is obligated to pay the debt.” Tex. R. Civ. P. 736(2)(A). Also, no discovery is allowed, the issues that can be raised are strictly limited, and the Court must hold a final hearing on the application within ten business days after a request for hearing by either party. Tex. R. Civ. P. 736(6), (7).

The nonjudicial foreclosure process is governed by Section 51.002 of the Texas Property Code entitled “Sale of Real Property Under Contract Lien.” Generally, the process involves filing a notice of sale with the county clerk’s office and posting it at the courthouse door. Then, on the first Tuesday of the following month, the property is sold at a live auction on the courthouse steps. The trustee conducting the sale will typically open the bidding with a credit bid on behalf of the noteholder. While the trustee may credit bid for the mortgagee, the “trustee is only responsible to the mortgagee in the mortgagee’s capacity as a creditor interested in satisfying the debt out of the proceeds of the sale; he is not responsible to the mortgagee in the capacity as a purchaser seeking to purchase the property for less than its fair value in opposition to the mortgagor’s interest.” Bonilla v. Roberson, 918 S.W.2d 17, 22 (Tex. App.—Corpus Christi 1996). The noteholder’s bid is referred to as a “credit bid” because the noteholder does not actually need to pay for the bid. The noteholder can bid up to the amount owed to the noteholder without needing to pay out-of-pocket since the funds would go to itself. If the credit bid wins the auction, then the creditor becomes the owner of the property. The buyer at the sale should be prepared to pay in certified funds on the spot. The purchaser at the sale acquires the property “as is,” without warranties, and at the purchaser’s own risk. Tex. Prop. Code § 51.009. Also, the purchaser cannot be considered a “consumer” for purposes of consumer-protection laws like the Texas Deceptive Trade Practices Act. Tex. Prop. Code § 51.009.

Grounds for a Wrongful Foreclosure Suit. Failure to send notice of sale as per Tex. Prop. Code § 51.002 is sufficient reason for a trial court to set aside a foreclosure sale and hold the sale to be void. Shearer v. Allied Live Oak Bank, 758 S.W.2d 940, 942 (Tex. App.—Corpus Christi 1988); Houston First American Sav. v. Musick, 650 S.W.2d 764, 768 (Tex. 1983); WTFO, Inc. v. Braithwaite, 899 S.W.2d 709, 720–721 (Tex. App.—Dallas 1995, no writ). Junior lienholders are generally not entitled to receive notice of non-judicial foreclosure sale in Texas. Elbar Invs., Inc. v. Wilkinson, No. 14-99-00297-CV, 2003 Tex. App. LEXIS 8182, at *6 (App.—Houston [14th Dist.] Sep. 23, 2003). Some mistakes, like sending foreclosure notices to the wrong address, can be grounds for undoing the foreclosure sale. Mills v. Haggard, 58 S.W.3d 164, 166 (Tex. App.—Waco 2001) (foreclosure sale set aside because loan servicing company had debtor’s new address, yet notices went to debtor’s old address and debtor did not receive them). The foreclosure notices must go to the debtor’s last known address. Tex. Prop. Code § 51.002(e); Tex. Prop. Code § 51.0001(2) (defining “last known address”). Other mistakes, like calculating the amounts due incorrectly, may be insufficient grounds for rescinding the foreclosure sale. Powell v. Stacy, 117 S.W.3d 70, 75–76 (Tex. App.—Fort Worth 2003, no pet.). The terms of the deed of trust must be strictly followed in the conduct of the sale and notices in connection with the sale. Univ. Sav. Asso. v. Springwoods Shopping Ctr., 644 S.W.2d 705, 706 (Tex. 1982).

Effect of Grossly Inadequate Price on Wrongful Foreclosure Suit. Failure to send the required residential notice to cure invalidates a subsequent notice of sale, particularly when the property is sold for a grossly inadequate price. Mills v. Haggard, 58 S.W.3d 164, 167 (Tex. App.—Waco 2001). “[T]he rule is well established that mere inadequacy of consideration is not grounds for setting aside a trustee’s sale if the sale was legally and fairly made. Tarrant Savings Association v. Lucky Homes, Inc., 390 S.W.2d 473 (Tex. 1965). There must be evidence of irregularity, though slight, which irregularity must have caused or contributed to cause the property to be sold for a grossly inadequate price. Sparkman v. McWhirter, 263 S.W.2d 832, 837 (Tex. Civ. App.—Dallas 1953, writ ref’d).” Am. Sav. & Loan Ass’n v. Musick, 531 S.W.2d 581, 587 (Tex. 1975); Also see Diversified Developers, Inc. v. Tex. First Mortg. Reit, 592 S.W.2d 43, 45 (Tex. Civ. App.—Beaumont 1979). For example, when properties were sold in bulk instead of individually and the individual sale may have resulted in repayment of the debt, the bulk sale constituted an irregularity that could have caused a grossly inadequate price and the foreclosure sale was void. Stanglin v. Keda Dev. Corp., 713 S.W.2d 94, 95 (Tex. 1986).

Acceleration of the Underlying Indebtedness on the Promissory Note. Many creditors do not fully understand the importance of the acceleration clause in the note and deed of trust. A typical promissory note provides for installment payments over time. Those payments are not due until the payment obligation matures by the passing of the payment due date. When a promissory note is accelerated, all of the remaining payments mature immediately. Unless a note has accelerated or matured, the creditor cannot demand payment for the full remaining principal balance due on the note. Instead, the creditor can only demand payment for the installments that have matured. The statute of limitations on the debt begins to run upon each installment as the installment matures. Tex. Civ. Prac. & Rem. Code § 16.035(a), (b). The statute of limitations does not run on the remaining balance of the note until the note matures or is accelerated. Hammann v. H.J. McMullen & Co., 122 Tex. 476, 62 S.W.2d 59, 61 (1933); Burney v. Citigroup Global Markets Realty Corp., 244 S.W.3d 900, 903–04 (Tex. App.—Dallas 2007, no pet.); Tex. Civ. Prac. & Rem. Code § 16.035(e) (limitations, in Texas, do not start running until acceleration or final maturity of the note). The creditor can, however, abandon or rescind acceleration any time, unilaterally, by notice. Tex. Civ. Prac. & Rem. Code § 16.038. Until Tex. Civ. Prac. & Rem. Code § 16.038 was enacted in 2015, there was some confusion about whether the statute of limitations could be reset by unilateral action of the creditor. Leonard v. Ocwen Loan Servicing, L.L.C., 616 F. App’x 677, 678 (5th Cir. 2015); Callan v. Deutsche Bank, 93 F. Supp. 3d 725, 727 (S.D. Tex. 2015). In the context of foreclosures, acceleration is eminently important because every creditor wants to credit bid at the foreclosure auction. If the loan is not matured or accelerated, then the creditor is, at least arguably (depending on the terms of the note and deed of trust, conduct of the parties, and other circumstances), barred from credit bidding the full remaining balance due on the note at the foreclosure auction. Accordingly, best practice for creditors is to always treat the acceleration process as a very important prerequisite to foreclosure.

Accepting the Arrearage to Cure Default Before Foreclosure. Many creditors are willing to accept the arrearage rather than the accelerated balance, plus attorney’s fees, before the foreclosure sale to reinstate the loan. Some Government-Sponsored Enterprises (GSEs) loan documents require the creditor to give various cure options to the borrowers. While the creditor, upon acceleration, may foreclose unless the entire note is paid off in full, the creditor can also waive acceleration and reinstate the loan. Lots of caselaw exists regarding waiver of acceleration or loan workouts and other negotiations with the borrowers. Best practice would be to put any agreements with or offers to the borrower in writing and to make those offers or agreements as clear as possible. If, for example, the borrower raises half of the funds necessary to cure the arrearage and promises to raise the remaining funds within thirty (30) days, and the lender is willing to accept the arrearage in lieu of the accelerated balance, but is willing to delay the foreclosure sale by only one month, then an agreement to delay the sale by one month in exchange for half of the arrearage now and to accept the remaining arrearage to cure default if paid within thirty (30) days, without waiving acceleration, should be put into writing to avoid any confusion. In a wrongful foreclosure lawsuit, clarity and simplicity tend to help the lender. Confusion and complexity open the door for the debtor to make all manner of equitable arguments regarding waiver or estoppel or other legal theories for avoiding the terms of the promissory note, deed of trust, and acceleration notices. When negotiating, the creditor should make clear to the debtor that the negotiations do not result in waiver of acceleration. Still, the creditor should work with the borrower. The creditor should not ignore the borrower or refuse to negotiate solely because the creditor is worried about miscommunications or equitable arguments subsequently raised by the borrower. The creditor who refuses to negotiate a default cure option with the borrower puts itself at greater risk of lawsuits than the creditor who negotiates default cure in good faith.

The Twenty (20) Day Cure Letter. Section 51.002(d) of the Texas Property Code states that “Notwithstanding any agreement to the contrary, the mortgage servicer of the debt shall serve a debtor in default under a deed of trust or other contract lien on real property used as the debtor’s residence with written notice by certified mail stating that the debtor is in default under the deed of trust or other contract lien and giving the debtor at least 20 days to cure the default before notice of sale can be given under Subsection (b).” The Subsection (b) notice is the public notice of sale that must be posted at the courthouse door and filed in the county clerk’s office. The twenty-day cure letter is a requirement that is separate and apart from any requirement to give notice of intent to accelerate and notice of acceleration. The twenty-day cure letter can, however, be combined with the acceleration notices.

Doing Acceleration the Right Way. Notice of intent to accelerate must be unequivocal, and even stating that failure to cure breach “may result in acceleration” is insufficient. Ogden v. Gibraltar Sav. Ass’n, 640 S.W.2d 232, 234 (Tex. 1982). The notices must not only state that the account is in default, but also demand payment for the delinquent installments. Tamplen v. Bryeans, 640 S.W.2d 421, 422 (Tex. App.—Waco 1982, writ ref’d n.r.e.). A proper acceleration notice should contain language tantamount to advising the debtor that the “entire debt [is] immediately due and payable.” EMC Mortg. Corp. v. Window Box Ass’n, 264 S.W.3d 331, 337 (Tex. App.—Waco 2008). While the creditor’s best practice is always to give written notices, oral notice can still be effective. Dillard v. Freeland, 714 S.W.2d 378, 380 (Tex. App.—Corpus Christi 1986). Also, acceleration can be accomplished without written notice of acceleration if the creditor takes “some unequivocal action, such as filing suit, which indicates the entire debt is due.” Burney v. Citigroup Global Mkts. Realty Corp., 244 S.W.3d 900, 903 (Tex. App.—Dallas 2008). Even a notice of a trustee’s sale may be sufficient to constitute notice of acceleration if preceded by the required notice of intent to accelerate. Id. at 904.

Waiver of Acceleration Notice Clauses Not Always Effective. “The exercise of the power of acceleration is a harsh remedy and deserves close scrutiny.” Vaughan v. Crown Plumbing & Sewer Serv., Inc., 523 S.W.2d 72, 75 (Tex. Civ. App.—Houston [1st Dist.] 1975). In a case where the deed of trust provided that the entire indebtedness may, upon default, “be immediately matured and become due and payable without demand or notice of any character,” the Court held that the creditor still needed to give notice of intent to accelerate. Bodiford v. Parker, 651 S.W.2d 338, 339 (Tex. App.—Fort Worth 1983). In Shumway v. Horizon Credit Corp., 801 S.W.2d 890 (Tex. 1991), the Texas Supreme Court reached a similar result, holding that when indebtedness could be accelerated “without prior notice or demand,” notice of acceleration was waived, but notice of intent to accelerate was not waived. “Where the holder of a promissory note has the option to accelerate maturity of the note upon the maker’s default, equity demands notice be given of the intent to exercise the option.” Ogden v. Gibraltar Sav. Asso., 640 S.W.2d 232, 233 (Tex. 1982). Best practice for creditors is to always give notice of intent to accelerate and notice of acceleration regardless of what the deed of trust or other instruments say. Giving the debtor an opportunity to cure default before acceleration is particularly important. Abraham v. Ryland Mortg. Co., 995 S.W.2d 890, 894 (Tex. App.—El Paso 1999); Allen Sales & Servicenter, Inc. v. Ryan, 525 S.W.2d 863, 866 (Tex. 1975).

Issues Arising in Wrongful Foreclosure Suits. In a wrongful foreclosure suit, the debtor can elect one or the other, but not both, of the following remedies: “(1) set aside the void trustee’s deed; or (2) recover damages in the amount of the value of the property less indebtedness.” Diversified, Inc. v. Gibraltar Sav. Asso., 762 S.W.2d 620, 623 (Tex. App.—Houston [14th Dist.] 1988). If the debtor elects to recover monetary damages, then the debtor can only do so if “(1) title to the property has passed to a third party; or (2) the property has been appropriated to the use and benefit of the mortgagee.” Peterson v. Black, 980 S.W.2d 818, 823 (Tex. App.—San Antonio 1998); John Hancock Mut. Life Ins. Co. v. Howard, 85 S.W.2d 986, 988 (Tex. Civ. App.—Waco 1935). If the debtor does not leave the premises, then the debtor has not suffered any compensable damages. Id. If a foreclosure sale is void, then the purchaser bid “at his peril” and may not recover damages for lost profits. Id.

Borrower in Wrongful Foreclosure Suit Must Tender Amounts Due and Owing. When a borrower files a wrongful foreclosure lawsuit seeking rescission of the sale, the borrower must tender all amounts due and owing into the Court’s registry, and not merely plead that he will make a tender. Lambert v. First Nat’l Bank of Bowie, 993 S.W.2d 833, 835 (Tex. App.—Fort Worth 1999); French v. May, 484 S.W.2d 420, 426 (Tex. Civ. App.—Corpus Christi 1972) (“A mere offer to pay does not constitute a valid tender; it is required that the tenderer have the money present and ready, and produce and actually offer it to the other party. The tenderer must relinquish control over the funds for sufficient time and under such circumstances as to enable the tenderee without special effort on his part to acquire possession.”). “Tender of whatever sum is owed on the mortgage debt is a condition precedent to the mortgagor’s recovery of title from a mortgagee who is in possession and claims title under a void foreclosure sale.” Fillion v. David Silvers Co., 709 S.W.2d 240, 246 (Tex. App.—Houston [14th Dist.] 1986).

Purchaser’s Liability and Remedies in Wrongful Foreclosure Suit. The foreclosed-upon mortgagor, as a prerequisite to obtaining relief, may need to tender the winning bid to the purchaser at the sale. “A foreclosure sale to a good faith purchaser . . . will only be set aside if the one claiming equitable title tenders the amount of the bid.” Goswami v. Metropolitan Sav. & Loan Ass’n, 713 S.W.2d 127, 130 (Tex. App.—Dallas 1986), rev’d on other grounds, 751 S.W.2d 487 (Tex. 1988); Bracken v. Haid & Kyle, Inc., 589 S.W.2d 501, 502 (Tex. Civ. App.—Dallas 1979), but see Tex. Prop. Code § 51.009(1) (enacted in 2003, effective in 2004); Henke v. First S. Properties, Inc., 586 S.W.2d 617, 620 (Tex. Civ. App.—Waco 1979) (“the doctrine of good faith purchaser for value without notice does not apply to a purchaser at a void foreclosure sale”); Diversified, Inc. v. Walker, 702 S.W.2d 717, 723 (Tex. App.—Houston [1st Dist.] 1985) (“Purchasers of land from a substitute trustee’s sale are not relieved from the necessity of inquiring whether the trustee had been empowered to sell.”). If the foreclosure sale is later deemed void by a Court, then the purchaser does not generally have the benefits of being a good faith purchaser for value because the purchaser bids “at his peril.” Henke, 586 S.W.2d at 620–21; Tex. Prop. Code § 51.009(1). If the sale is declared void, then the purchaser may be subrogated to the debt and lien of the foreclosing mortgagee. In re Niland, 825 F.2d 801, 813 (5th Cir. 1987).

Wraparound Note Foreclosures. When foreclosing a wraparound note, there is an implied covenant obligating the trustee to apply the proceeds to the underlying note. Summers v. Consol. Capital Special Trust, 783 S.W.2d 580, 583 (Tex. 1989).

Deficiency Judgments. If there is a deficiency on the note after the foreclosure sale, then the debtor has a statutory right to a fair market value determination and an offset against the deficiency. Tex. Prop. Code §§ 51.003, 51.004, 51.005. Section 51.003 of the Texas Property Code is, however, waivable in the loan documents. Moayedi v. Interstate 35/Chisam Rd., L.P., 438 S.W.3d 1, 8 (Tex. 2014). There are no deficiency judgments in Texas on home equity loans and the lender cannot get attorney’s fees as a personal judgment against the debtor if the debtor litigates the foreclosure. Erickson v. Wells Fargo Bank NA (In re Erickson), 2012 U.S. Dist. LEXIS 136501, *38-39 (W.D. Tex. Sept. 24, 2012); Tex. Const. Art. XVI, § 50(a)(6)(C) (no recourse for personal liability on home equity loan unless owner obtained credit by actual fraud). Deficiency suits have a two-year statute of limitations, starting on the date of the foreclosure. Tex. Prop. Code § 51.003(a).

The Dodd-Frank/RESPA 120-Day Foreclosure Cooling Period. Under 12 C.F.R. § 1024.41(f)(i), a mortgage loan servicer should not “make the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process unless . . . A borrower’s mortgage loan obligation is more than 120 days delinquent.” The Real Estate Settlement Procedures Act (RESPA), represented in Regulation X (Reg X), amended the Dodd-Frank Act to include regulations on mortgage loan servicers. Most of Reg X does not apply to small servicers as defined by 12 C.F.R. 1026.41(e)(4), but according to 12 C.F.R. § 1024.41(j), the foreclosure waiting period still applies to small servicers. This rule only applies to a “mortgage loan that is secured by a property that is the borrower’s principal residence.” Reg X, 12 C.F.R. § 1024.30(c)(2), 1024.31 (excluding open-end lines of credit). The Consumer Financial Protection Bureau (CFPB) relied on Government-Sponsored Enterprises (GSEs) and National Mortgage Settlement rules in enacting this provision, but the CFPB’s reliance on these rules makes little sense for small servicers. 78 FR 10696, 10833. Failure to comply with this rule is probably not grounds for recission of the foreclosure sale, but there is no caselaw in Texas on this that the author could find as of May 2017. This rule is enforceable “pursuant to section 6(f) of RESPA (12 U.S.C. § 2605(f)).” 12 C.F.R. § 1024.41(a). Section 2605(f) provides for actual damages or statutory damages of no more than $2,000 if there is “a pattern or practice of noncompliance with the requirements of this section,” plus attorney’s fees. There is no provision for unwinding of a foreclosure sale conducted in violation of this rule, nor is there a statutory provision allowing for the foreclosure sale to be delayed, stayed, restrained, or abated. Under Comment 41(f), Supplement I to § 1024.41(d), the “first notice or filing” for nonjudicial foreclosure in Texas would be the “earliest document required to be recorded or published to initiate the foreclosure process,” which would be the notice of sale in Tex. Prop. Code § 51.002(b). 78 FR 10696, 10833; https://www.consumerfinance.gov/eregulations/1024-Subpart-C-Interp/2015-18239#1024-41-d-Interp-4; 78 FR 60381; CFPB Agncy/Docket No. DFPB-2013-0018. Reg X only applies to mortgage loans as defined in 12 C.F.R. § 1024.31, which defines mortgage loans as “any federally related” loan as defined in 12 C.F.R. § 1024.2, which defines “federally related” mortgage loans generally as loans by federally-regulated institutions or loans destined for sale to a GSE, but also as loans by a “‘creditor,’ as defined in section 103(g) of the Consumer Credit Protection Act (15 U.S.C. 1602(g)), that makes or invests in residential real estate loans aggregating more than $1,000,000 per year.” Consequently, some seller-financed notes would not be subject to this rule. 79 FR 74176, 74245. Most of the time, the acceleration process does not start until the borrower is sixty (60) days delinquent, and consequently, another sixty (60) days will pass while the note is being accelerated, which means that the notice of sale will be filed within the 120-Day Rule guideline regardless of whether Reg X applies or not. In many instances, this rule is pointless and would not result in any actual damages given that the rule exists so that “borrowers will have more time to submit loss mitigation applications before a servicer initiates the foreclosure process.” 78 FR 10696, 10803. Seller-finance noteholders do not have to have, and rarely do have, any particular loss mitigation procedures in place. The regulations never should have been drafted so broad that a “federally related” mortgage could be a seller-finance note because there is nothing federal about seller-finance, but we are stuck with what we have for now in terms of badly-drafted CFPB rules. Small businesses in general are probably extremely underrepresented in the rulemaking process as the CFPB tends to summarily dismiss their concerns. Because they are small creditors, they tend to be represented by trade organizations that are not organized or incentivized as effectively as the advocates for large creditors. The CFPB does not appear to go out of its way to ensure that small creditor’s interests are accounted for regardless of whether they are adequately represented. Ultimately, this hurts the consumers by forcing all creditors into a one-size-fits-all model designed solely for large financial institutions and wholly inappropriate for seller-finance.

Notice of Sale to the Internal Revenue Service (IRS). This is potentially the most important component of a nonjudicial foreclosure sale in Texas, while also being the most easily-overlooked component. IRS tax liens arise under federal law, which means that these federal liens can supersede state lien laws. For example, “Under the Supremacy Clause of the United States Constitution, the IRS may obtain a valid federal tax lien and enforce its lien against a Texas homestead.” Benchmark Bank v. Crowder, 919 S.W.2d 657, 660 (Tex. 1996); U.S. Const. art. VI, cl. 2. However, federal IRS liens can be discharged by foreclosure if proper notice of the foreclosure sale is given to the IRS. 26 U.S.C. § 7425 (April 2017); 26 C.F.R. § 301.7425-3 (April 2017); 26 C.F.R. § 400.4-1(a) (April 2017); IRS Publication 786, with IRS Form 14497. The notice should be in writing, to the correct place, and not less than twenty-five (25) calendar days prior to the sale. Id. The lien notice is generally required when the Notice of Federal Tax Lien has been filed more than thirty (30) days prior to the sale. Id. If the property is sold with the IRS lien, then the seller may consider rescinding the sale, if possible (see Tex. Prop. Code § 51.016), and redoing it, or looking at IRS Publication 783, which is an application to discharge the IRS lien.

Rescission of Nonjudicial Foreclosure Sales. Texas House Bill 2066 (84th Leg. (R) effective Sept. 1, 2015) (codified in Tex. Prop. Code § 51.016) created procedures for a foreclosure trustee to rescind foreclosure sales in certain situations. The rules generally allow the trustee to rescind the sale up to sixty (60) days after the date of sale if the statutory requirements of sale were not met, the default leading to the sale was cured before the sale, or for various other reasons. Before the 2015 law, the foreclosure trustee’s authority ended with the sale and the trustee could not rescind the sale without the mortgagor’s agreement. Bonilla v. Roberson, 918 S.W.2d 17, 22 (Tex. App.—Corpus Christi 1996).

Lawsuit Protections for Foreclosure Trustees. Under Section 51.007 of the Texas Property Code, a foreclosure trustee can be dismissed as a party from a wrongful foreclosure suit if “the trustee was named as a party solely in the capacity as a trustee under a deed of trust.” The trustee must file a verified denial. Id. The other parties must file a verified response within thirty (30) days of the trustee’s verified denial. Id. If a trustee is dismissed pursuant to this section of the property code, however, the dismissal is without prejudice. Id. at (c). Also, a foreclosure trustee may not be “held to the obligations of a fiduciary of the mortgagor or mortgagee” and may not be “assigned a duty . . . other than to exercise the power of sale in accordance with the terms of the security instrument.” Tex. Prop. Code § 51.0074. Issues arising under Tex. Prop. Code § 51.007 tend to be litigated in context of disputes regarding federal diversity jurisdiction because the trustee is going to be a resident of the same state as the plaintiff in a wrongful foreclosure suit.

Copyright 2017, Ian Ghrist, All Rights Reserved.

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.

Overview of the Bankruptcy Process for Landlords

Bankruptcy law is federal and bankruptcies are filed and litigated in federal court. Texas landlords who are accustomed to waltzing down to their local justice of the peace court to evict their tenants can be shocked and intimidated by the complexity and difficulty of dealing with a tenant who files for federal bankruptcy protection. As soon as that federal bankruptcy petition is filed, the Texas state courts no longer have jurisdiction to hear an eviction suit until either the bankruptcy stay is lifted or the bankruptcy case is dismissed. Many landlords handle simple evictions in Texas without an attorney, but generally no landlord should try to handle a bankruptcy case, or perform any collections activities against a tenant in bankruptcy, without an attorney.

Generally No Automatic Stay if Eviction Judgment Obtained Before Bankruptcy Filing Date. Generally, if the landlord obtains the eviction judgment, on residential property, before the bankruptcy filing date, then the eviction can proceed. 11 U.S.C. 362(b)(22) and (l). In Texas, the tenant cannot file a non-bankruptcy cure certificate under 11 U.S.C. 632(l), and so, the bankruptcy stay should not apply if the eviction judgment occurred before the filing of the bankruptcy petition.

Property endangerment or illegal use of controlled substances. Under 11 U.S.C. 362(b)(23), the landlord can file a certification that the tenant has endangered the property or used controlled substances on the property and the stay does not apply fifteen (15) days after the date that the certification is filed. 11 U.S.C. 362(b)(23), (m). If the debtor files an objection to the certification, then the stay does apply, but the Court must set the objection for hearing within ten (10) days from the tenant’s objection. 11 U.S.C. 362(m)(2)(B).

My Tenant Filed Bankruptcy, Now What? If none of the above rules apply, then the landlord needs to find out whether the tenant will assume or reject the lease. Outside of Chapter 7 (liquidation bankruptcy), the tenant can choose to assume or reject the lease up till the plan confirmation date. 11 U.S.C. § 365(d)(2). In Chapter 7, residential leases are deemed rejected after sixty (60) days of the filing of the bankruptcy petition. 11 U.S.C. § 365(d)(1). For nonresidential property, the deadline is the earlier of the confirmation date or 120 days from the bankruptcy filing date. 11 U.S.C. § 365(d)(4). If the tenant wants to assume the lease, then the tenant can do so regardless of ipso facto clauses, which attempt to draft around the bankruptcy rules. 11 U.S.C. § 365(b)(2). The tenant who wants to assume the lease must cure any default, other than unenforceable ipso facto defaults. 11 U.S.C. 365(b). The tenant may also need to compensate the landlord for any losses due to the default and provide adequate assurance that the lease will be performed in the future. Id. The tenant’s cure must be “prompt.” 11 U.S.C. § 365(b)(1)(A). The landlord’s idea of “prompt” and the bankruptcy court’s idea of “prompt” are probably different. In re Yokley, 99 B.R. 394 (Bankr. M.D. Tenn. 1989) (cure of pre-petition default on residential lease in Chapter 13 bankruptcy plan over a two-year period was not “prompt” when debtor failed to show any special circumstances that would justify a two-year cure period); In re Flugel, 197 B.R. 92, 97 (Bankr. S.D. Cal. 1996) (summarized caselaw on what length of time can be considered “prompt”). In at least one case “prompt” cure meant an immediate payment. In re Lafayette Radio Electronics Corp., 9 B.R. 993 (Bkrtcy.E.D.N.Y.1981); also see In re Urbanco, Inc., 122 B.R. 513, 519 (Bankr. W.D. Mich. 1991) (commencing monthly payments towards pre-petition arrearage six months later held not prompt enough). The landlord can file a motion to compel assumption or rejection of contract. See 1-15 Collier Consumer Bankruptcy Practice Guide p. 15.03 for more information.

Post-Petition Rent. The tenant is required to pay post-petition rent under 11 U.S.C. § 365(d)(3). If the tenant fails to pay post-petition rent, then the landlord should file a motion to lift stay or a motion to compel rejection of the lease. Section 365(d)(2) of the Bankruptcy Code allows the court, on the request of any party to the lease, to request that the lease be assumed or rejected within a “specified period of time,” probably ten (10) days from the date of the court’s order on the motion. On a motion to compel rejection of lease, the landlord should show breach (either pre-petition or post-petition, preferably both), undue delay by debtor in deciding to assume or reject, and prejudice to landlord caused by the delay. In re Physician Health Corp., 262 B.R. 290, 295 (Bankr. D. Del. 2001).

The Landlord Can Ask the Court to Give the Trustee a Deadline to Assume or Reject the Lease. “In a case under chapter 9, 11, 12, or 13 of this title, the trustee may assume or reject an executory contract or unexpired lease of residential real property or of personal property of the debtor at any time before the confirmation of a plan but the court, on the request of any party to such contract or lease, may order the trustee to determine within a specified period of time whether to assume or reject such contract or lease.” 11 U.S.C. § 365(d)(2).

Copyright 2017, Ian Ghrist, All Rights Reserved.

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.