The Basics of What a Foreclosure Is and How it Works

I am amazed sometimes at how often I am asked questions such as “If this mortgage loan forecloses, then when does the lender get the property back?” or “Can you please tell the lender that I want to buy the property?” Whenever the law firm posts a property for foreclosure auction, the phone will often ring and some person will be on the line wanting to try to buy the property that is being foreclosed upon from the mortgage lender. These people literally do not understand that the mortgage lender does not own the property. The mortgage lender holds a lien against the property, but the borrower on the loan owns the property itself. So, if you want to buy the property, then call the owner, not the law firm representing the mortgage holder.

Mortgage lenders on seller-financed properties sometimes ask questions like “If I start a foreclosure on this property, then when do I get my property back?” This question makes no sense because the lender may never get the property back. The person asking it probably does not understand what a foreclosure is, how a foreclosure works, or how seller-financing works.  The lender can never be assured that the lender will get the property back. It is true that the lender gets to make the opening bid at the foreclosure auction (referred to as the “credit bid”). It is true that if no one outbids the opening credit bid, then the lender will be the winning bidder and will get the property back. But, it is not true that the lender will always or inevitably get the property back. A mortgage lender has no surefire way to “get the property back.” That right does not exist. Instead, the mortgage lender has the right to auction the property off on the courthouse steps (or such other area as the County Commissioner’s Court has designated for the foreclosure auction to occur). The purpose of the auction is to sell the property to the highest bidder so that the proceeds from the auction can go towards paying down the balance owed on the mortgage loan.

Many people know the term “foreclosure,” but they do not know what it means. A “foreclosure” is a public auction. Sometimes people say, “I do not want to auction off the property, I just want to foreclose on it.” This is nonsense. A foreclosure and an auction are the same thing. A foreclosure auction is a type of auction. Every foreclosure is an auction, but not all auctions are foreclosure auctions.

Seller-finance mortgage lenders often think that foreclosures are a process for “getting their property back.” Public perception of foreclosures can be that foreclosures are a process for mortgage lenders to seize and acquire back their collateral. This public perception is faulty and inaccurate. At a foreclosure auction, the mortgage lender typically makes the opening bid. The mortgage lender can open the bidding at the amount owed on the loan without paying anything out-of-pocket to fulfil the bid. Lender’s opening credit bids are often winning bids. As a result, public perception suggests that lender’s bids are always a way to get collateral back. Public perception is flawed. The fact that many lender’s opening bids are winning bids does not mean that all lender’s opening credit bids are winning bids. To understand why many lender’s opening credit bids are winning bids, one must understand the concept of “home equity.”

The “equity” in a piece of real estate is the difference between the value of the real estate and the amount owed on mortgage liens. So, if the house is worth $200,000 and the house is encumbered by a $100,00 mortgage lien, then the owner of the house, who is also the borrower on the mortgage loan, has $100,000 in “home equity” or just “equity” in the house. Most homeowners can do basic math. If their house is getting foreclosed upon because they cannot pay a $100,000 mortgage, but the house is worth $200,000, then the homeowner will just sell the house. The mortgage will be paid off when the house sells. The homeowner will pocket $100,000. Thus, the homeowner can convert his/her home equity into cash.

Many foreclosures are initiated, but not consummated. The foreclosures that are consummated tend to be the foreclosures on the properties with very little “equity.” When there is “equity,” the homeowner is motivated to capture the equity by either (a) selling the house, (b) filing a bankruptcy case or a series of bankruptcy cases, (c) refinancing the mortgage, or (d) working out a bankruptcy-prevention payment plan and foreclosure deferral plan with the mortgage lender. All of the foregoing would result in the cancellation of the initiated foreclosure prior to the consummation of the foreclosure. Due to the foregoing, the foreclosures that are consummated tend to be the ones involving little “home equity.” The pool of buyers that haunt the monthly foreclosure auction sites know that the high equity properties are the best to purchase. The high equity properties present the least risk to the foreclosure sale buyer. The foreclosure sale buyer often cannot see the inside of the house, which makes determining an appropriate bid very difficult. Because the mortgage lender opens the foreclosure auction bidding with a credit bid, because the consummated foreclosures tend to be the foreclosures on low equity collateral, and because the foreclosure sale buyer pool tends to have very little information on the condition of the inside of the real estate that is being auctioned, among other reasons, the credit bids often prevail. However, on high equity foreclosures, the credit bid goes from being likely to prevail to being unlikely to prevail (except, possibly, for unique and difficult-to-use property like expensive property, vacant land, or unique commercial property). Some counties have a much more active foreclosure sale buyer pool than others. For the foregoing reasons, the general public may have a perception that foreclosures are a process for the mortgage lender to “get its property back,” but the truth is much more complicated. The truth is that mortgage lenders often get their collateral back when there is little equity and a high credit bid, which tends to happen often because the high equity foreclosures with low credit bids tend to not consummate as often.

Sometimes mortgage lenders will say things like “Can I bid more than my loan amount so that no one else gets my property?” The answer is yes, of course you can. All the lender needs to do is bring cash or certified funds to the foreclosure auction. The lender can bid the full amount owed on the mortgage loan without paying anything out-of-pocket. This is referred to as a “credit bid” because in a credit bid no money changes hands. The balance owed to the mortgage lender must be paid to the mortgage lender from the foreclosure auction proceeds. Accordingly, the mortgage lender can bid up to that balance without paying anything in cash out-of-pocket because the funds would simply go to the lender anyways. The law does not require the doing of a useless thing. Accordingly, the lender does not need to pay itself. If, however, the mortgage lender bids more than the balance owed on the mortgage, then the mortgage lender must pay the overage in cash or certified funds. The lender needs to raise some cash and bring the cash or certified funds to the foreclosure.

What Happens to the Foreclosure Sale Proceeds Above and Beyond the Mortgage Lender’s Credit Bid?

The foreclosure sale trustee who conducts the public foreclosure auction at the courthouse or place designated by the County Commissioner’s Court will take cash or certified funds as payment at the foreclosure auction. The bidders must pay in cash or certified funds on the spot, without delay. If a bidder wins the foreclosure auction, but does not immediately pay in cash or certified funds, then the trustee will typically verbally void the auction and immediately re-auction the property to a bidder that is prepared to pay on the spot. The trustee will usually do this up until the deadline specified in the Notice of Trustee’s Sale until a winning bidder makes good on a winning bid.

The trustee then takes the foreclosure sale proceeds and disburses them. First, the trustee will pay off the mortgage lender. If the mortgage lender has been paid in full and there are funds left over, then the trustee will search for junior lienholders, seek to confirm whether they have valid liens, and pay them using the foreclosure sale proceeds. If there are no junior lienholders to pay, then the trustee will disburse the overage funds to the borrowers on the mortgage loan, i.e., the former owners of the subject real estate.

The mortgage lender will never be paid more than what the mortgage lender is owed at a foreclosure auction. The “equity” in the house does not belong to the mortgage lien holder. If the mortgage lender bids more than the credit bid, then the mortgage lender must pay in cash or certified funds and those funds, above and beyond the credit bid, will be disbursed to the junior lienholders and/or the former owners of the property (the borrowers on the mortgage loan).

If there is a dispute as to who the foreclosure proceeds are supposed to be disbursed to, then the trustee might file a lawsuit called an “interpleader.” In an interpleader, the trustee will deposit the disputed funds into the registry of the Court, serve citations upon all interested parties, and then let those parties argue their case to the Judge as to why they should receive the funds.

How Long Does a Foreclosure Take?

Foreclosures always occur on the first Tuesday of the month unless that date would fall on a specified holiday. “If the first Tuesday of a month occurs on January 1 or July 4, a public sale under Subsection (a) must be held between 10 a.m. and 4 p.m. on the first Wednesday of the month.” Tex. Prop. Code Ann. § 51.002(a-1). In order to foreclose a property on the first Tuesday of the month, the mortgage lender must have a notice of foreclosure sale (also known as a “Notice of Trustee’s Sale”) posted and served “at least 21 days before the date of sale.” Id. at (b). So, you look at a calendar for the first Tuesday of the month, and then you count back three Tuesdays from that Tuesday. The foregoing date is your posting deadline if you want your property to be in the next monthly foreclosure auction.

On residential property, the mortgage lender must “serve . . . written notice . . . giving the debtor at least 20 days to cure the default” before the Notice of Trustee’s Sale is posted. So, on any residential foreclosure, there is a bare minimum of a 20-day cure notice, plus a 21-day posting notice. This is at least 41 days of notice that is required. The mortgage lender, however, cannot merely follow the notice provisions listed in Section 51.002 of the Texas Property Code. Instead, the mortgage lender needs to read the loan origination documents and give any additional notice that is required in those documents. Then, the lender needs to evaluate whether any consumer-protection laws would impose further notice requirements. Please see our other, more in-depth, foreclosure article here (https://ghristlaw.com/blogs/foreclosures-in-texas/) for more information about federal consumer-protection laws like Dodd-Frank or RESPA. If 12 C.F.R. § 1024.41(f)(i) applies, then the Notice of Trustee’s Sale should be posted when the “borrower’s mortgage loan obligation is more than 120 days delinquent.”

A common rule of thumb for when a seller-finance mortgage lender or servicer should transfer the file to a foreclosure law firm is to refer the file once the borrower’s mortgage loan account has been delinquent for sixty (60) days. This is not a requirement, just a commonly-used modus operandi for seller-financed mortgage loans.

As a result of the foregoing, without consideration for which consumer-protection laws apply or do not apply and not accounting for what any particular loan documents may require, a rule of thumb for many seller-financed mortgages would be for the foreclosing law firm to give a 20 day notice to cure and notice of intent to accelerate followed by a notice of acceleration. Between and after these notices, an additional 20 to 30 or so days may accrue. As a result of the foregoing, with these notices and a 60-day delinquency referral, the loan should roughly be at about the 120-day delinquency mark when it is time to go from the notice of acceleration to the posting of the Notice of Trustee’s Sale.

So, the answer to the question “How long does a foreclosure take?” is that “it depends on the facts and circumstances,” but generally the foreclosure would likely occur about 150 days after the seller-financed residential mortgage loan first became delinquent in a typical situation. Obviously, a bankruptcy or a series of bankruptcies by the borrower would greatly delay this. When bankruptcies are taken into account, the foreclosure process could take several years. In some extreme cases, over a decade.

Should I Take a Deed-in-Lieu of Foreclosure?

When it comes to taking a deed in lieu of foreclosure in Texas, the most important law that the lender mortgagee needs to be aware of is Section 51.006 of the Texas Property Code. Before reviewing Tex. Prop. Code § 51.006, however, the lender should be aware of some basic lien priority concepts. “We recognize the well-established rule that following the valid foreclosure of a senior lien, junior liens, if not satisfied from the proceeds of sale, are extinguished.” AMC Mortg. Services, Inc. v. Watts, 260 S.W.3d 582, 585 (Tex. App.—Dallas 2008, no pet.). “In a contest over rights or interests in property, the party that is first in time is first in right.” Id. As a result of the foregoing, when a seller-financed mortgage lien forecloses, the foreclosure will “extinguish” junior lienholders such as mechanic’s liens, judgment liens, or any other liens (subject to some notable exceptions) that arise after the date that the property was seller-financed. Notable exceptions include property tax liens (typically held by school districts, hospitals, and cities) and, to an extent, federal tax liens. Please see our other, less basic, article on foreclosures for more information about foreclosure’s effect on federal tax liens: https://ghristlaw.com/blogs/foreclosures-in-texas/.

Based on the foregoing, the answer to the question “Should I take a deed-in-lieu of foreclosure?” is that you should probably (a) run a title search, and (b) if the title search reveals junior liens that would be “extinguished” by a foreclosure yet would not be “extinguished” by a deed in lieu, then you should probably foreclose rather than take a deed-in-lieu so as to avoid paying junior liens that the mortgagor should be responsible for. Under Section 51.006 of the Texas Property Code, a lender who qualifies and follows the proper procedures may get a mulligan. If the rules in Tex. Prop. Code § 51.006 apply, then the lender can go ahead and foreclose so as to extinguish junior liens even after the deed-in-lieu has been taken. Please note that Section 51.006 does not give every mortgagee a mulligan on the deed-in-lieu in every situation. Instead, you need to read that law, evaluate whether it applies, and follow the procedures listed therein.

Copyright, Ian Ghrist, 2020, 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.

A Basic Primer on Usury Law in Texas

Usury Definitions

“‘Usurious interest’ means interest that exceeds the applicable maximum amount allowed by law.” Tex. Fin. Code Ann. § 301.002(a)(17). “‘Interest’ means compensation for the use, forbearance, or detention of money. The term does not include time price differential, regardless of how it is denominated. The term does not include compensation or other amounts that are determined or stated by this code or other applicable law not to constitute interest or that are permitted to be contracted for, charged, or received in addition to interest in connection with an extension of credit.” Id. at (a)(4). “‘Time price differential’ means an amount, however denominated or expressed, that is: (A) added to the price at which a seller offers to sell services or property to a purchaser for cash payable at the time of sale; and (B) paid or payable to the seller by the purchaser for the privilege of paying the offered sales price after the time of sale.” Id. at (a)(16). A contract is usurious when there is any contingency by which the lender may get more than the lawful rate of interest. Butler v. Holt Mach. Co., 741 S.W.2d 169, 176 (Tex. App.—San Antonio 1987), opinion corrected on denial of reh’g, 739 S.W.2d 958 (Tex. App.—San Antonio 1987, no writ).

Usury Rates

The usury rate in Texas is ten (10) percent a year except as otherwise provided by law. Tex. Fin. Code Ann. § 302.001. The ten percent default usury rate means virtually nothing given that rate ceilings of Subchapter A of Chapter 303 of the Texas Finance Code create an exception to the usury rate rule that, more or less, swallows the rule whole. “Except as provided by Subchapter B [mostly related to credit cards], a person may contract for, charge, or receive a rate or amount that does not exceed the applicable interest rate ceiling provided by this chapter.” Tex. Fin. Code Ann. § 303.001. “The parties to a written agreement may agree to an interest rate . . . that does not exceed the applicable weekly ceiling.” Tex. Fin. Code Ann. § 303.002. So, basically, most loans can charge the weekly ceiling, which is generally going to be substantially higher than the ten (10) percent default usury rate, rendering the default rate rarely applicable.

Where Do I Look to See What Rates I Can Charge?

The weekly rate can be found in the Texas Credit Letter, which is published weekly by the Texas Office of Consumer Credit Commissioner located at 2601 N. Lamar Blvd., Austin, Texas 78705-4207. In the April 16, 2019 Texas Credit Letter, the weekly rate ceiling was 18.00%. The Texas Credit Letter can be found online: https://occc.texas.gov/publications/interest-rates

Spreading Doctrine

“To determine whether a loan secured in any part by an interest in real property, including a lien, mortgage, or security interest, is usurious, the interest rate is computed by amortizing or spreading, using the actuarial method during the stated term of the loan, all interest at any time contracted for, charged, or received in connection with the loan.” Tex. Fin. Code Ann. § 302.101.

What constitutes “interest”?

“The court of civil appeals has improperly stressed the labels placed upon the charges by the savings and loan association as being controlling of their real nature. It has often been said that courts will look beyond the form of the transaction to its substance in determining the existence or nonexistence of usury. See, Schmid v. City Nat. Bank of Wichita Falls, 132 Tex. 115, 114 S.W.2d 854 (1938). Such a rule is to be fairly applied to both borrowers and lenders alike. Labels put on particular charges are not controlling. A charge which is in fact compensation for the use, forbearance or detention of money is, by definition, interest regardless of the label placed upon it by the lender. Art. 5069—1.01(a). On the other hand, a fee which commits the lender to make a loan at some future date does not fall within this definition. Instead, such a fee merely purchases an option which permits the borrower to enter into the loan in the future. See, e.g., Financial Federal Savings & Loan Association v. Burleigh House, Inc., 305 So.2d 59 (Fla.Dist.Ct.App.1974); D & M Development Co. v. Sherwood & Roberts, Inc., 93 Idaho 200, 457 P.2d 439 (1969); Prather, Mortgage Loans and the Usury Laws, 16 Bus.Law. 181, 188 (1960). It entitles the borrower to a distinctly separate and additional consideration apart from the lending of money. Therefore, the lender may charge extra for this consideration without violating the usury laws. Greever v. Persky, 140 Tex. 64, 165 S.W.2d 709 (1942).” Gonzales County Sav. & Loan Ass’n v. Freeman, 534 S.W.2d 903, 906 (Tex. 1976). “Whether a charge is really interest or not is generally a question for the jury. “Where there is a dispute in the evidence as to whether the charge is merely a device to conceal usury, a question of fact is raised for the jury.” Id. “[I]t has been held that a lender may not charge 11 percent for the first five years and nine percent for the second five years and claim that the total loan is at the legal rate of 10 percent.” Riverdrive Mall, Inc. v. Larwin Mortg. Inv’rs, 515 S.W.2d 5, 9 (Tex. Civ. App.—San Antonio 1974, writ ref’d n.r.e.) (emphasis added).

When Does a Usury Savings Clause Protect the Lender?

Texas law generally allows lenders to avoid liability through usury savings clauses, but only within reason. You cannot just contract for thirty percent interest and then skirt the usury violation with a savings clause. There has to be some kind of avenue for charging non-usurious interest on the contract or interpreting the contract in such a way as to avoid usury.

“A savings clause is ineffective, however, only if it is directly contrary to the explicit terms of the contract . . . . As a simple example, a creditor may not specifically contract for a 30% interest rate and then avoid the imposition of usury penalties by relying on a savings clause that declares an intention not to collect usurious interest . . . .” First State Bank v. Dorst, 843 S.W.2d 790, 793 (Tex. App.—Austin 1992, writ denied). A savings clause can “supplement and explain” the “intent of the parties.” Id. The Texas Supreme Court has indicated that a usury savings clause may cure certain contingency provisions that may or may not result in a charge of usurious interest. Nevels v. Harris, 129 Tex. 190, 198, 102 S.W.2d 1046, 1050 (1937); Smart v. Tower Land & Inv. Co., 597 S.W.2d 333, 341 (Tex. 1980).

In a complicated usury dispute, ties go to the lender. “The usury statutes are penal in nature and, accordingly, must be strictly construed in such a way as to give the lender the benefit of the doubt.” Counsel Fin. Services, L.L.C. v. Leibowitz, 13-12-00103-CV, 2013 WL 3895331, at *4 (Tex. App.—Corpus Christi July 25, 2013, pet. denied).

Copyright, Ian Ghrist, 2019, 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.

Reimbursement of Your Attorney’s Fees When You Win Your Case

The so-called “American Rule” provides that, in most of the United States—Texas included, each side to a lawsuit, Plaintiff and Defendant, must pay its own attorney’s fees. While we inherited most of our legal system from the British common law, we do not generally follow the “English Rule,” which states that the losing side pays the other side’s attorney’s fees. In Texas, however, there are countless exceptions to the American Rule. For example, attorney’s fees are recoverable from the losing side in breach of contract cases, cases involving a declaratory judgment, Uniform Fraudulent Transfers Act claims, etcetera.

What the general public rarely understands is that reimbursement of your attorney’s fees when you win your case is hardly automatic. Attorneys will rarely (probably never) accept a breach of contract case for a plaintiff and simply bill the defendant for the legal work. The reason is that when the trial ends, together with all of the appeals (if a supersedeas bond has been posted), the winning party does not actually receive payment for the legal fees. Instead, the winning party receives a monetary judgment against the losing party for the attorney’s fees. That monetary judgment can then be enforced using all of the post-judgment collections procedures that are available under Texas law. This generally means recording an abstract of judgment in counties where the judgment debtor owns real estate and filing for a writ of execution against any non-exempt property owned by the judgment debtor, but there are other collections methods as well, like garnishment, receivership, or turnover proceedings. The amount of legal work that is necessary to collect on a monetary judgment can be quite substantial and no one wants to perform all of the legal work necessary to complete a trial, only to create more post-judgment legal work for themselves, unless the prospects for recovery are high. Also, the attorney’s fees incurred in performing the post-judgment collections activities are generally non-recoverable. So, you may get a judgment for your attorney’s fees, and still have to pay your attorney to go collect on that judgment.

To make things more complex, the winning side does not receive a judgment for attorney’s fees actually “incurred.” See Sloan v. Owners Ass’n of Westfield, Inc., 167 S.W.3d 401, 405 (Tex. App. San Antonio 2005) (“The terms of the fee agreement between the [Defendant] and its counsel are irrelevant to the [Defendant’s] right to recover reasonable and necessary attorney’s fees from the [Plaintiff].”) Instead, the winning party generally receives a judgment for “reasonable and necessary” attorney’s fees, which may be completely different from the fees that the party actually incurred. Interestingly enough, the terms of the party’s contract with his or her attorney may be completely irrelevant to the amount of fees that will be awarded at trial. Moreover, an attorney representing himself or his law firm can probably recover attorney’s fees for his or her own time spent on the case. McLeod, Alexander, Powel & Apffel, P.C. v. Quarles, 894 F.2d 1482, 1488 (5th Cir. Tex. 1990).

Contingency Fees:

When an attorney accepts a case based on a contingency fee, the contingency fee may be determined by the Court to be “reasonable and necessary.” Sloan v. Owners Ass’n of Westfield, Inc., 167 S.W.3d 401 (Tex. App. San Antonio 2005). Generally, “the fact that attorney’s fees are based on a contingent fee agreement does not make the fees requested or awarded unreasonable.” Cooper v. Cochran, 288 S.W.3d 522, 537 (Tex. App. Dallas 2009).

Winning on Some Claims and Losing on Other Claims:

If you prevail on some claims for which attorney’s fees are available, yet lose on other claims, then the attorney’s fee award gets very tricky. If your attorney provides detailed, itemized billing sheets and proves those sheets up in Court, then the sheets may be enough evidence for the Judge to break out the recoverable fees from the non-recoverable fees. Even if the bill sheets do not exist because it is a contingency fee case, your attorney should “reconstruct” the work to “provide the trial court with sufficient information to allow the court to perform a meaningful review of the fee.”
Long v. Griffin, 442 S.W.3d 253, 256 (Tex. 2014).

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.

Texas Tools for Recovering Assets on Behalf of Defrauded Investors

Financial Record Requests/Subpoenas:

In my experience, the financial record request is one of the most powerful tools for finding assets on behalf of defrauded investors. Section 30.007 of the Texas Civil Practice and Remedies Code provides that these requests are governed by Section 59.006 of the Texas Finance Code. In Texas Finance Code Section 59.006, you can find many rules regarding how the process works, but the key feature of this statute, in my opinion, is the burden placement. The statute places the burden on the party resisting discovery to obtain relief from the Court. That typically means filing a motion, drafting an affidavit, setting it for hearing, filing notice of hearing, dealing with scheduling conflicts, waiting through a long docket call, arguing the motion, possibly offering testimony, and finally obtaining a ruling. That is a lot of work. Consequently, the party resisting the discovery rarely puts up as much of a fight as they will when they are simply resisting discovery responses.

Resisting traditional discovery, like a Request for Production under Tex. R. Civ. P. 196, is much easier. For the most part, your attorney will simply pick one of the innumerable form objections that exist, write it down, state what is being produced and what is not being produced, and send it to opposing counsel. Then, the burden is on opposing counsel to file a Motion to Compel Discovery Responses, set it for hearing, deal with scheduling conflicts, wait through a long docket call, argue the motion, and obtain an order. Then, once the order has been obtained, there is the inevitable subsequent battle over the scope of the order. Again, the burden is on the one wanting the discovery to prosecute this. The bank, however, does not have a dog in the fight, so to speak, so the bank will typically produce more or less exactly what the bank has been asked to produce without raising countless objections and necessitating potentially expensive and time-consuming pre-trial hearings over the matter.

I am planning on adding more sections to this post in the future. Reading an article on these tools can be helpful, but using them to achieve your goals takes some finesse.

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.

When the Statute of Limitations Begins to Run on Installment Loans

The short answer is that with installment loans, the statute of limitations begins to accrue on each installment as it comes due. Once the payments are accelerated, then the statute begins to run on the balance of the debt.

If the loan is on real estate, however, then the limitations period does not begin to run until the “maturity date of the last note, obligation, or installment.” Tex. Civ. Prac. & Rem. Code § 16.035(e). Section 16.035(e), however, does not apply when the note has been accelerated. See 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, 903–904 (Tex. App.—Dallas 2007, no pet.).

In Texas, “‘A cause of action accrues when an installment is due and unpaid.’ See Gabriel v. Alhabbal, 618 S.W.2d 894, 897 (Tex. Civ. App. — Houston [1st Dist.] 1981, writ ref’d n.r.e.); Goldfield v. Kassoff, 470 S.W.2d 216, 217 (Tex. Civ. App. — Houston [14th Dist.] 1971, no writ).” Stille v. Colborn, 740 S.W.2d 42, 44 (Tex. App. San Antonio 1987). The balance of a loan becomes due and unpaid upon acceleration. Id.

If the loan is for real estate, then the statute of limitations is four years and special provisions apply. Tex. Civ. Prac. & Rem. Code § 16.035. For example, “A sale of real property under a power of sale in a mortgage or deed of trust that creates a real property lien must be made not later than four years after the day the cause of action accrues.” Id. § 16.035(b).

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.

Contracts for Deed: Do the Volume-Dealer Penalties of Section 5.077(d) Have an “Anchoring” Requirement?

One bankruptcy court says yes. Here is an argument for the answer being no.

Under Section 5.077(d), the volume-dealer penalties apply to “A seller who conducts two or more transactions in a 12-month period under this section . . . .” One bankruptcy court has interpreted this provision as meaning that the volume-dealer penalties apply only when a second Contract for Deed has been executed within twelve-months of the Contract for Deed that is the subject of the case currently before the court. Dodson v. Perkins (In re Dodson), 2008 Bankr. LEXIS 4647, 20; 2008 WL 4621293 (Bankr. W.D. Tex. Oct. 16, 2008).

While the Dodson court concluded that Section 5.077(d) must be “anchored” to the signing of the contract being enforced, the court admitted that that court was unable to locate “any case law or other authority, nor any legislative history that would clarify the meaning of the 2005 Statute in this respect.” Id. The statute clearly states that any seller who conducts two transactions in any twelve-month period falls under Section 5.077(d). Texas Courts should not add an additional “anchoring” requirement to an otherwise straightforward statute. Furthermore, the “anchoring” requirement does not make the statute “easier to comply with and to enforce.” Id. at 22. Instead, an “anchoring” requirement would make relief under Section 5.077(d) nearly impossible to prove for many plaintiffs without expending exorbitant time and effort on investigations outside of the discovery process in order to corroborate defendants’ production or lack thereof. If the legislature wanted to add an “anchoring” requirement, then such a requirement would have been easy enough to draft. The legislature did not, however, add an “anchoring” requirement and such a requirement should not be imposed judicially.

Before the statute was amended in 2005, the $250 penalty applied to all Contract for Deed sellers. Id. at 6. The new statute carves out a very narrow niche of sellers—sellers who never conduct more than one qualifying transaction within one year—to be exempted from the harsh penalties and assessed only a nominal penalty of $100 per year. Consequently, an unsophisticated individual who owner-carries financing on his own home to a buyer, generally, will not accidentally lose that home to the harsher penalties. Meanwhile, volume dealers who own multiple properties and sell all or many of the properties by Contracts for Deed will incur the full, normal penalties that were applicable to all Contract for Deed sellers before the 2005 amendments carved out a narrow niche of sellers to exempt under Section 5.077(c). See Tex. Prop. Code § 5.077; Acts 2005, 79th Leg., ch. 978 (H.B. 1823), § 5, effective September 1, 2005.

For most plaintiffs, proving the statutory requirement of two contracts within twelve months creates enough of a hurdle without adding an even more difficult “anchoring” element.

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.