NATIONAL BUSINESS INSTITUTE

Real Property Foreclosure

Carolyn A. TaylorDominique M. Vamer

Hughes W attersAskanase, L.L.P.333 Clay, 29th Floor

Houston, Texas 77002713/759-0818

713/759-6834 (fax)ctaylor(Qhwa.comdvamer(ghwa.com

(9January 2009 Copyright claimed. All rights reserved. No portion of these materials may bereprinted or reproduced without the written consent of the author.

Carolyn A. Taylor

Carolyn A. Taylor is a partner in the Houston law firm of HughesWattersAskanase(HW A). With 29 years experience in credit union law, mortgage banking, bankruptcy andcreditors rights, Taylor manages the credit union and award winning default servicing sections ofthe firm.

Ms. Taylor was instrumental in implementing the internal policies and procedures thatenable her team to provide exemplary service. The selection of HW A to participate in theFreddie Mac Designated Counsel Program (Texas) and the Fannie Mae Retained AttorneyNetwork (Texas) pinnacle that collective team work.

A magna cum laude graduate of the University of Denver, Ms. Taylor earned her J.D.degree from Emory University (Order of the Barristers). She is certified by the Texas Board ofLegal Specialization in Consumer Bankruptcy Law (1985) and Business Bankruptcy Law (1989).

Carolyn is actively involved in national and Texas Mortgage Bankers Associations, theAmerican Legal & Financial Network (Texas), the Default Attorney Group (Texas), the HoustonChapter of Credit Unions, and Credit Unions for Kids, among other professional, industr andcommunity associations. She regularly trains, speaks, and publishes on consumer finance,mortgage banking and servicing and credit union legal issues. Carolyn Taylor can be reached at(713) 328-2804 or via email.cat~hwa.com.

HW A is a full service civil law firm with wide ranging expertise and 30 years ofexperience in the interrelated areas of credit unions, bankruptcy, business planning and strategy,consumer financial services, real estate and litigation. This wealth of resources allows HW Aattorneys to leverage their experience with other practice groups in the firm. For moreinformation on HW A, please visit www.hwa.com

Dominique M. Varner

Dominique M. Varner is a partner in the law firm of HughesWattersAskanase whereher practice is concentrated primarily in the areas of creditor's rights and consumer bankrptcylaw. She is Board Certified in Consumer Bankruptcy Law. A graduate of the University ofTexas, Ms. Varner earned her J.D. degree from South Texas College of Law in 1994, where shewas named to Order of the Lytae. She is the Immediate Past President of the Houston YoungLawyers Association. She began her leadership role with that organization in 1998, when shechaired the Arts & Entertainment Committee, a position she held for three years. She was electedto the Board of Directors in 1999 and has served in every offcer position, ending with President

for the 2006-2007 bar year. Ms. Varner is also a Fellow of, and has served as on the Board ofTrustees of the Houston Young Lawyers Foundation (HYLF) from 2000 to 2006, serving asTreasurer of that organization from 2002-2006. Ms. Varner is a Fellow of the Texas BarFoundation, and has been active on the Texas Young Lawyers Association (TYLA).

DISCLAIMER

These guidelines are intended for educational and general informational purposes only. These guidelinesare not to be relied upon or applied to any specific situation, circumstance or factual scenario, without theexpress written permission of the author and the specific review by the author of the program, situations,circumstances and/or factual scenarios to which they are to be applied.

Table of Contents

III. UPDATE: CASE LAW AND LEGISLATION 11. Federal Laws 12. State Laws 33. Recent Case Law 4IV. ALTERNATIVES TO FORECLOSURE: STEP BY STEP PROCEDUREAND LEGAL ISSUES 51. Foreclosure Notices 5

A. Notice of Default and Opportnity to Cure Defaultand of Intent to Accelerate 5(i) Cure of Default 6B. Notice of Acceleration 6(i) Effect of Acceleration 7(ii) Waiver of Acceleration 7(iii) Reinstatement After Acceleration 8C. Notice of Sale 8(i). Receipt of Notice 8(ii) Mortgagor's Address 92. Loss Mitigation Options 9

A. Borrower Qualifications 9B. Mortgage Servicer/Holder Loss Mitigation Tools 10C. Reinstatement, Forbearance and Repayment Plans 10D. Mortgage Modification 10E. Parial Claim 1 1F. Pre-Foreclosure ("Short Sale") Sale or Short Payoff 11G. Assumption by Qualified Buyer 12H. Deed in Lieu of Foreclosure 12

3. Loss Mitigation and Consumer Protection Statutes: The Big Chil? 124. Loss Mitigation in Bankptcy 155. Loss Mitigation in Foreclosure 166. No Safe Harbor 16V. ETHICS IN FORECLOSURE 171. Rules of Professional Conduct, Disclosure, Conflicts of Interest 17A. Late Payments Made by Mail 17B. Reinstatement After Acceleration 17C. Statute of Limitations 17(i) Demand Notes l8(ii) Installment Notes 18D. Void vs. Voidable Sale 18(i) V oid Sale 18(ii) V oidable Sale 182. Wrongful Foreclosure 19

A. Effect of Foreclosure on Other Liens 19B. Standing to Contest Foreclosure Sale 19C. Strict Constitution 19

3.

D. Inadequate Selling PriceE. Chilled Sale

F. Fatally Defective Sale

G. Deceptive Trade Practice Act LiabilityH. Remedies for Wrongful Foreclosure

(i) Election of Remedies

(ii) Monetary Damages

(iii) RescissionGood Faith DepositsA. Bid at SaleB. Foreclosure Sale Proceeds

C. Disputed FundsD. Recoverability of Defense Costs

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11

III. UPDATE: CASE LAW AND LEGISLATION

The "subprime crisis" has changed the environment in which both mortgage-related

lawsuits in banptcy and counterclaims to foreclosures are brought. An ever increasing

percentage of homeowners face foreclosure due to an inability to make higher payments uponresets of interest rates, unsuitability of the mortgage for the paricular consumer, tax andinsurance advances by the mortgage holder, inflated appraisals and mortgage fraud.

As empirical evidence sheds light on inaccurate or incomplete servicer data resultingfrom improperly entered data or in accurate information provided by the seller, the cours areassuming a larger oversight role. Servicers are under the spotlight. Judges across the nation, andtwo banuptcy Judges in Houston in paricular, are shining a very bright spotlight on past andcurrent lending and servicing practices.

Contrar to the picture painted by the press, most lenders have a strong financialincentive to keep the borrower in the home. If a property is foreclosed, the cost to market andsell the foreclosure REO ranges from twelve to twenty-two percent of the property's fair marketvalue, including broker's commissions, repairs and maintenance and title insurance!.

A. Federal Law

Loss mitigation is not a foreign concept to consumer mortgage lenders. Fifteen yearsago, in an effort to assist borrowers facing a financial crisis due to loss of employment, ilness,divorce or death, the Deparment of Housing and Urban Development ("HUD ") and theV eterans Administration ("VA") initiated Mandatory Home Ownership Counseling and LossMitigation Programs for all VA and FHA Loans Secured by Single-Family Residence2

backed by monetary penalties for lenders who failed to offer loss mitigation Fannie Mae andFreddie Mac followed suit establishing their own written loss mitigation policies.3 Today,articles informing borrowers of loss mitigation opportnities are posted on the HUD website.4

On September 4, 2007, the federal financial institution regulatory agencies and theConference of State Bank Supervisors issued a statement encouraging institutions that servicesecuritized residential mortgages to review their pooling and servicing agreements. to determinewhether they had the authority under the servicing agreements to identify at-risk borrowers andpursue appropriate loss mitigation strategies, including. loan modifications, payment deferrals,reduction of principal and referrals to qualified homeownership counseling services to help avoidunnecessary foreclosures. Specifically, the Streamlined Modifcation Program targets

I V A Servicing Guide, §§ 3.01-3.06 and Appendix D ("net value factor" is used to calculate all costs the V A must pay to acquire,

maintain and market the propert ifthe borrower's home is foreclosed).2 The most recent version of HUD's loss mitigation programs is found in HUD 2000 Mortgagee Letter ML-00-05 Loss

Mitigation Program, dated Januar 19, 2000, 24 C.F.R. § 203.501. See also, V A Servicing Guide, § 3.01 -3.06 and Appendix

D.3 Freddie Mac Single Family Servicing Guide, Vol. II, Chap. 65, A65 and B65; Fannie Mae Single Family Servicing Guide, VII

§§ 501-508.4U.S. Deparment of Housing and Urban Development Home Page, http://www.hud.gov/foreclosure/index.cfm. "Relief Options

for FHA Homeowners" describes what homeowners can do to obtain a "loss mitigation" or workout from the mortgagee. "Helpfor Homeowners Facing the Loss of Their Home," the collaborative effort of the Deparment of Labor, Fannie Mae, FreddieMac, the V A, HUD, and members ofthe mortgage industry, provides generic loss mitigation information for borrowers.

1351052 NBI Foreclosure 2.08 catOl05

borrowers who have missed three or more payments, who own and occupy the property as aprimary residence, and who have not filed for bankuptcy; (2) defines "affordable" mortgage

payment as no more than 38% of the household's monthly gross income; (3) gives servicersflexibility in modifying loans, including reducing the interest rate, extending the loan term, ordeferring principal payments; and (4) provides for selVicers to receive an $800 payment for eachmodification.

On November 24, 2008, the Federal Housing Finance Agency sent a letter tomortgage loan servicers and trustees of private label mortgage-backed securities

advocating the Streamlined Modifcation Program as the industry standard to be used byservicers to identify and assist seriously delinquent borrowers and urging them to supportand utiize the Streamlined Modification Program

In the third quarer of 2007, President Bush, Treasury Secretary Henry Paulson and

federal bank regulators endorsed the fast track loan modification procedures for initial

interest rate resets on subprime adjustable rate mortgages promulgated by the AmericanSecuritization Forums. Three months later, Internal Revenue Procedure 2008-28 entitled"Guidance on Loan Modifcations" ("Rev. Proc. 2008-28" "Rev. Proc.") was published forcomment.6 Under this Rev Proc, pre-default loan modifications of certain qualifying loans? is notdeemed "active management" and wil not change the tax status of certain investment trusts andtrusts and real estate investment conduit.

HOPE NOW,8 an alliance between counselors, servicers, investors and other mortgagemarket paricipants, was also formed during this time period under the direction of theDeparment of Treasur and the Deparment of Housing and Urban Affairs. was establishedduring that time period. This alliance strives to maximize outreach efforts to distressedhomeowners under a unified coordinated plan. Authorized actions include increasing the loan tovalue ratio to 96.5 percent for some H4H loans; simplifying the process to remove subordinateliens by permitting upfront payments to lienholders and allowing lenders to extend mortgageterms from 30 to 40 years.

In November 2008, Fannie Mae and Freddie Mac suspended foreclosure sales on andcompletion of evictions and lockouts on single family occupied residences scheduled to occur

between November 26, 2009 and January 9, 2009.

S "Streamlined Foreclosure and Loss Avoidance Frameworkfor Securitized Sub prime Adjustable Rate Mortgage Loans."www.americansecuritization.com (updated July 8, 2008).

6 Comment period expires July 15,2008.7 Qualifying loans: Entered into on or after May 16,2008 and on or before December 31, 2010; 1 to 4 family owner occupied;

terms of modified loan less favorable to holder than original terms; holder/servicer reasonably believes significant risk offoreclosure; modified loan significantly reduces foreclosure risk; if the investor is a REMIC holder, on start up day or end onmonths period beginning on star up day, not;; 10% of stated principal of total assets are loans with payments 30 or more daysoverdue; and if the investor is an investment trust holder:, as of all dates when assets were contributed to the trust, not;; 10%of stated principal of all debt instruments held by trust are instruments with payments 30 or more days

8 See, www.HOPENOW.com

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2. State Law

Representative examples of recently enacted legislation include:

Ilinois- Amendment To Foreclosure Statute

Effective January 1,2009, the amendments require, among other things, (i) that aHome Owner Notice be attached to all sumons in residential foreclosure actions,including specific disclosures in both English and Spanish with certain type sizerequirements and (ii) All payoff demand statements be delivered to the mortgagoror his authorized agent within ten business days of receipt of a written requesttherefore.

Pennsylvania-HB 2188 Abandoned and Blighted Property Conservatorship Act

Effective Februar 24, 2009, Pennsylvania courts may appoint conservators torehabilitate blighted properties and grant liens with priority over existing on-governent liens and authorize sale of properties free and clear of all liens.

If a structue has not been occupied for the preceding 12 months, not been

actively marked durng the past 60 days, and was not acquired by the currentowner within the last 6 months, a conservator may be appointed upon the petitionof an interested party. Appointment of a conservator is mandatory the buildingexhibits at least three criteria showing it is in disrepair or is dangerous.

Vacant and Abandoned Property Ordinances

As of December 31, 2008, 74 local ordinances have been located in 23 states thatimpose securty, maintenance and registration requirements upon owners, lendersand servicers who own vacant or abandoned properties or properties inforeclosure.

Representative examples of pending legislation include:

Texas - HB 421 Amendments to Texas Propert Code

Sponsored by Attorney General Greg Abbott, the proposed changes.

Extend the notice of sale period from 21 to 60 days (Chapter 51.002(b)(g)).

A borrower must give a tenant notice of foreclosure sale within 7 days afterborrower receives same (Chapter 5 1.022) and if notice given, may only requiretenant to vacate prior to scheduled sale date only upon failure to pay rent 30 days

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written notice to vacate must be given a residential tenant current II rentalpayments prior to fiing eviction.

California- Foreclosure Statute

Senate Bil 1137

Sponsored by Governor Schwarzenegger, the bil proposed a 90 day foreclosuredelay on owner occupied first mortgages, which was not applicable tolenders/servicers who demonstrated to regulators that they had previouslyengaged in "robust" loan modification programs without success.

House Bil AB 4X 4 (legislative response)

Extends the 90-day moratorium to 120 days.

Proposed Bil for 2009-2020 session

90 day moratorium; exempts loans held by lenders with assets ofless than $5 bilion.

City of Providence Rhode Island- Mandatorv Foreclosure Mediation

The lender must give notice of foreclosure to the city and attend amandatory mediation with the borrower within 90 days of the date of theinitial notice of intent to foreclose.

The lender must notify bona fide tenants of intent to foreclose, continue toprovide essential services (utilities), and post a notice at the property withcontact information for the new owner.

The proposed penalty is $ 1 ,000 per offense.

C. Recent Case Law

Recent court decisions that impact foreclosure are discussed throughout Sections III, IVand V.

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iv. AL TERNA TIVES TO FORECLOSURE: STEP BY STEP PROCEDURE ANDLEGAL ISSUES

1. Foreclosure Notices

A. Notice of Default and Opportunity to Cure and of Intent to accelerate("30 day demand")

A monetar or non-monetary default or breach of a term or condition of the underlyingloan documents is a requirement to initiation of the foreclosure process. See, e.g., State Nat'lBank v. Farah Mfg. Co., 678 S.W.2d 661 (Tex.App.-El Paso 1984, writ dism'd by agr.). Anumber of state and federal statutes and court cases impact the type and amount of notice thatmust be given to the borrower, including the Texas Property Code,9 the Fair Debt Collection

Practices Act ("FDCP A"), lO and the Texas Debt Collection Practices Act ("TDCP A"). 1 I

Under Texas law, a formal "demand to cure" the alleged default is required. Odgen v.Gibralter Savings Ass 'n, 640 S.W.2d 232 (Tex. 1982). If the debt is an installment loan, aformal "notice of intent to accelerate" the maturity of the debt must be given to the borrower asconditions precedent to acceleration and foreclosure. Id. A creditor who fails to send the "noticeof intent to accelerate" can collect only the past due installments (as opposed to the unpaidprincipal, eared interest and other assessed charges). Id. If the property is the borrower's

residence, the Texas Property Code requires that the borrower be given at least twenty (20) daysto cure the default before a notice of foreclosure sale is sent. 12 The demand to cure the defaultand the notice of intent to accelerate are often incorporated into the same letter.

The FDCP A mandates certain disclosures, including the "debt validation" notice in thedebt collector's initial communication ("validation notice")13 and the "Mini-Miranda" warningidentifying the caller as a debt collector ("Mini- Miranda"Y4 in subsequent communications. TheFDCP A further prohibits certain third party communications.

15 Absent the prior consent of the

consumer "'given directly to the debt collector," the debt collector may not, in connection withcollection of the debt, communicate with any person other than the consumer, his attorney, thecreditor, the creditor's attorney or the attorney of the debt collector, or a credit reporting agencyif otherwise legally permitted. Id. Although the FDCP A applies only to third party debt

9 Tex. Prop. Code Ann. § 51 .002( d).10 15 U.S.c. § 1692 et seq.

i 1 Tex. Fin. Code Ann. § 392.001 et seq.12 Tex. Prop. Code Ann. § 51.002(d).13 15 U.S.C. § 1692g.

UNLESS WITHIN THIRTY (30) DAYS AFTER RECEIPT OF THIS NOTICE YOU DISPUTE THE VALIDITY OF THE DEBT,OR ANY PORTION THEREOF, AND NOTIFY THE UNDERSIGNED OF SUCH DISPUTE, THE DEBT WILL BE PRESUMEDTO BE VALID. IF WITHIN SUCH TIME PERIOD YOU DISPUTE THE DEBT, OR ANY PORTION THEREOF, UPONREQUEST THE UNDERSIGNED WILL FURNISH YOU WITH VERIFICATION OF THE DEBT.

UPON YOUR WRITTEN REQUEST WITHIN SUCH THIRTY-DAYTIME PERIOD, THE UNDERSIGNED WILL FURNISHYOU WITH THE NAME AND ADDRESS OF THE ORIGINAL CREDITOR, IF DIFFERENT FROM THE CURRENTCREDITOR.

14 15 U.S.c. §§ 1692e and 1692f

THIS COMMUNICATION IS AN ATTEMPT TO COLLECT A CONSUMER) DEBT, ANY INFORMA TlON OBTAINED WILLBE USED FOR THAT PURPOSE

1515 U.S.c. § 1692c(b)

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collectors,16 many states have enacted comparable consumer protection statutes that providebroader coverage that includes the conduct of the original creditor and its employees whilecollecting their own debts.

Texas law does not require disclosure of the dollar amount due in the initial breach letter.See, e.g., Davis Chevrolet, Inc., 135 B.R. 29 (Bank. N.D. Tex. 1992); Sanders v. Shelton, 970S.W.2d 721 (Tex.App.-Austin, 1998, pet. denied.). By contrast, the FDCPA requires that theborrower be advised of the amount due in the first communication with the borrower. 15 U.S.C.§ 1692g. Thus, if the 30-day demand is the debt collector's first communication with theborrower to collect the debt, the notice must contain the amount due under federal, not Texas,law. Bartlett v. Heibl, 128 F .3d 497 (7th Cir. 1997).

The demand to cure the default, the notice of intent to accelerate and the 20 day notice tocure required by the Texas Property Code may be incorporated into the same letter. Dependingon whether the communication is the first or a subsequent communication, the validation noticeand/or the Mini-Miranda waring may also be included in the initial demand.

(i) Cure of Default

Cure of a monetary default requires that the borrower tender or make an unconditionaloffer to tender the amount due in cash or cash equivalent. See, e.g., Arguelles v. Kaplan, 736S.W.2d 782 (Tex.App.-Corpus Christi 1987, writ ref'd n.r.e.). Forestier v. San AntonioSavings Ass'n, 564 S.W.2d 160 (Tex. Civ. App.-San Antonio 1978, writ ref'd n.r.e.). A"promise" to make an unconditional offer to pay the amount due in the future does not cure thedefault. Id

Once the borrower tenders the amount due, the borrower is not liable for additionalattorney fees or accrued interest if the lender refuses or neglects to accept the tender. See, e.g.,Thomas v. Thomas, 917 S.W.2d 425 (Tex.App.-Waco 1996, no wrt); Staff Industries, Inc. v.Hallmark Contracting, Inc., 846 S.W.2d 542 (Tex.App.-Corpus Chrsti 1993, no writ).

Creditors are cautioned that acceptance of a check containing a restrictive endorsementsuch as "full payment" or "final satisfaction of the debt" without some form of protest, may beconstrued acceptance of the lesser amount as full payment. See, e.g., Hixson v. Cox, 633 S.W.2d330 (Tex.App.-Dallas 1982, writ ref'd n.r.e.); Borland v. Mundaca Inv. Corp., 978 S. W.2d 146(Tex.App.-Austin 1998, no writ).

B. Notice of Acceleration

Formal notice of the mortgagee's intent to accelerate the loan (declare it due and payablein full) is required prior to acceleration. Wiliamson v. Dunlap, 693 S.W.2d 373 (Tex. 1985).Failure to give such notices makes the acceleration void. Ogden v. Gibralter Savings Ass 'n, 640

S.W.2d 232 (Tex. 1982). A creditor satisfies the notice requirement by properly sending the

1615 U.S.C. § I 692a; Tex. Bus. & Com. Code Ann. § 392.001(6)

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notice by certified mail, even if the letter is returned unclaimed. Dilard v. Broyles, 633 S.W.2d636 (Tex.App.-Corpus Christi 1982, writ retd n.r.e.).

(i) Effect of Acceleration

Once accelerated, the entire balance owing under the note and deed of trust becomes due.Hiler v. Prosper Tex., Inc., 437 S.W.2d 412 (Tex.App.-Houston (1st Dist.) 1969, no writ).This includes all collection costs and expenses, attorneys and corporate advances made by themortgagor to protect the property, such as taxes and insurance. See, e.g., Ogden v. GibralterSavings Ass'n, 640 S.W.2d 232 (Tex. 1982). In many jurisdictions, late charges canot beassessed after acceleration. See, e.g., FDIC v. MF.P. Realty Associates, 870 F. Supp. 451 (D.Conn. 1994); Security Mut. Life Ins. Co. of New York v. Contemporary Real Estate Associates,979 F.2d 329 (3rd Cir. 1992). There are curently no Texas court cases addressing this issue.

The statute of limitations for enforcing an installment note is six years beginning on thedate the note matures or the date the maturity ofthe debt is accelerated. Tex. Bus. & Com. CodeAn. §3.118(a). If the note is a demand note or there is no maturity date (making it a demandnote), the note is due from the date the note is signed. Martin v. Ford, 853 S.W.2d 680(Tex.App.- Texarkana 1993, writ denied). The statute of limitations for enforcing a demandnote is six (6) years from the date a demand for payment is made on the maker, or if no demandis made, ten years, "if neither principal nor interest has been paid for a continuous period of tenyears. Tex. Bus. & Com. Code Ann. § 3.1 18(a).

By contrast, the four year statute of limitation for enforcing a security instrument beginson the date that the loan matures (the date the final installment payment is due or uponacceleration), rather than the date the loan goes into default. Tex. Civ. Prac. & Rem. Code Ann.§§ 16.035-.037. See also Shepler v. Kubena, 563 S.W.2d 383 (Tex. Civ. App.-Austin 1978,writ denied); Palmer v Palmer, 831 S.W.2d 479 (Tex.App.-Texarkana 1992, no writ).

There is a two-year difference between the statutes of limitations for enforcing a note (sixyears) and enforcing a security interest (four years). The Texas State Bar Committee commentsclarify that the statutes for enforcing a security interest against real property are Texas CivilPractice & Remedies Code §§ 16.035-.037 and not Texas Business & Commerce Code §3.11 8(a). If the four-year limitation statute prevents foreclosure, the lender can stil sue on thenote ifthe six-year limitation period has not run.

(ii) Waiver of Acceleration

Because acceleration of the debt is a harsh remedy, acceleration is closely scrutinized.See Vaughn v. Crown Plumbing & Sewer Serv., Inc., 523 S.W.2d 72 (Tex.App.-Houston (1stDist.) 1975, writ retd n.r.e.). A mortgagee may waive the right to accelerate if it consistentlyaccepts late payments without objection, l7 for equitable reasons, such as deplorable conduct,

18

and/or acceleration was improper. 19

17 See, e.g., McGowan v. Pasol, 605 S.W.2d 738 (Tex.App.-Corpus Christi, 1980, no writ); Highpoint of Montgomery Corp v.

Vail, 638 S.W.2d 624 (Tex.App.-Houston (Ist Dist.) 1982, writ reld n.r.e.).

i 35 i 052/catlO i 05NB1/2/09 7

(ii) Reinstatement After Acceleration

Most deeds of trust sold in the secondary market have a clause reqUllng that theborrower be given notice of the "right to reinstate" the loan by paying the amount needed to curethe default (not the accelerated amount) five days before the foreclosure sale date. See, e.g.,Jasper Federal Savings & Loan Ass 'n v. Reddell, 730 S.Wold 672 (Tex. 1987). There appear tobe no reported Texas cases on whether, after acceleration, the mortgagee can force the borrowerto pay the accelerated amount to stop foreclosure.

3. Notice of Sale

The foreclosure notice giving the date, time and location of the foreclosure sale iscommonly called the 'sale notice" or "posting notice." The purose of the sale notice is toprovide minimal due process to the debtor. Hausman v. Texas Savings & Loan Ass 'n, 585S.Wold 796 (Tex.App.-El Paso, wrt retd n.r.e.). The notice must be sent to each person"obligated to pay the debt," posted at the courthouse (or other place designated by the countycommissioners) and fied with the county clerk in the county where the real property is located.Tex. Prop. Code Ann. § 51.002(b)(3) and (t). Posting is constructive notice that the loan hasbeen accelerated, even if the posted notice is not visible to the public. Chambers v. Lee, 566S.Wold 69 (Tex. Civ. App.-Texarkana 1978, no writ); TMS Mortg., Inc. v. Golais, 102 S.W.3d768 (Tex.App.-Beaumont 2003.)

Only persons "obligated to pay the debt" are required to receive the statutory foreclosurenotices. Tex. Prop. Code Ann. § 51.002(b) (3). Unless the record owner is legally obligated topay the debt, there is requirement that notice of sale be given the record owner. Id. As a practicalmatter, industry practice is to give notice to the record owner to satisfy title underwritingrequirements for subsequent sales of foreclosed properties. Likewise, with limited exceptions,junior lien holders are not legally entitled to notice of sale.20 Id. Sending a courtesy foreclosurenotice to one who may have a putative interest in the property risks a PDCP A violation, if therecipient of the notice is not obligated for the debt. 15 U.S.C. §§ 1692e and 1692f.

(i) Receipt of Notice

Actual receipt of a foreclosure notice is not required for a valid sale. Valley v. Patterson,

614 S.Wold 867 (Tex. Civ. App.-Corpus Christi 1981, no writ); Onwuteaka v. Cohen, 846S.W.2d 889 (Tex.App.-Houston (1 st Dist.) 1993, writ denied). Texas law only requires that thelender deposit the notice properly addressed postage pre-paid (certified mail) with the U.S.Postal Service (hand delivery of foreclosure notices may be sufficient). Tex. Prop. Code Ann. §51.002(b) (3); Savers Federal Sav. & Loan Ass'n v. Reetz, 888 Fold 1497 (5th Cir. 1989);

18 See, e.g., Winston v. Daves, 614 S.W.2d 867 (Tex.App.-Waco 1981, no writ).19 See, e.g., Vaughn v. Crown Plumbing & Sewer Serv., Inc., 523 S.W.2d 72 (Tex.App.-Houston (1st Dist.) 1975, writ rerd

n.r.e.) (Although the notice stated the failure to make monthly mortgage payments was the basis for acceleration, non-paymentof taxes was the actual basis of the default.).

20 Internal Revenue Code § 7425(b) and (c) provide that if25 days notice of sale is given to the IRS, and the IRS does not redeemthe property within 120 days from the date of the foreclosure sale, the sale is free and clear of the IRS lien. Conversely, if25

days notice of sale is not given the IRS, the foreclosure sale is subject to the IRS lien.

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Lambert v. First Natl Bank of Bowie, 993 S.W.2d 833 (Tex.App.-Fort Worth 1999, pet.denied). Proof of the lender's customary business practices for sending foreclosure notices can

serve as credible evidence that notices were in fact sent. Mahon v. Credit Bureau of PlacerCounty Inc., 1717 F.3d 1197 (9th Cir. 1999); Van Westrienen v. Americontinental Collection

Corp., 94 F. Supp. 2d 1087 (D. Or. 2000).

(ii) Mortgagor's Address

The borrower has a statutory duty to provide the mortgage servicer with a change ofaddress in a reasonable maner. Tex. Prop. Code Ann. §§ 51.0001(2) and 51.0021; Burnett v.Anderson, 543 S.W.2d 15 (Tex. Civ. App.-Dallas 1976, no writ). If the borrower's address isnot reflected in the mortgagee's records or if the mortgagor's last known address is obviouslyinvalid, no duty is imposed on the mortgagee to search for the debtor's curent address. Kruegerv. Swann, 604 S.W.2d 454 (Tex. Civ. App.-Tyler 1980, writ refd n.r.e.).

The mortgagee must keep its records up to date if the borrower provides a change ofaddress. Tex. Prop. Code Ann. § 51.002(e); Lido Inter, Inc v. Lambeth, 611 S.W.2d 622, 624(Tex. 1981). Since many mortgage servicers organize their default servicing activities intofuctional areas, e.g. collection, pre-foreclosure, dispute resolution, and bankuptcy, it is notunusual for one department to fail to inform another department of the borrower's new change ofaddress when the borrower's file is transferred.21

2. Loss Mitigation Options

A. Borrower Qualifications

A mortgage servicer or note holder's ability to effectuate loss mitigation with borrowersmay be constrained guidelines and policies and may require the prior consent of third parties,including those of private mortgage insurance issuers, private mortgage insurers, governentsponsored entity guarantors/insurers, and securitized trusts. Such restrictions include, but are notlimited to, requirements that arrearage be reinstated within a time certain, that the arrearage notexceed a stated percentage of the unpaid principal balance, and that late charges not assessedduring repayment period and/or that loans securitized in a guaranteed pool be repurchased priorto loan modification. Subject to such restrictions, factors commonly considered in the lossmitigation process include: default status of the loan; owner occupancy (not vacant orabandoned); prohibition of other FHAlGSE loans; prior bankptcy (with limited exceptionswhere case dismissed or discharged); borrower's financial condition and repayment ability; valueand condition of property; lien status.

21 Lambert v. First Nat'l Bank of Bowie, 993 S,W.2d 833 (Tex.App.-Fort Worth 1999, pet. denied) (a wrongtùl foreclosure

resulted where the servIcer's bankruptcy department obtains the borrower's current address from the borrower's bankruptcypleadings and schedules, obtained relief from stay, sent the fie to the foreclosure department to proceed with foreclosure

without providing the current address).

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B. Mortgage Servicer/Holder Loss Mitigation Tools

Mortgage holders and servicers have expanded their loss mitigation efforts in innovativeways to help borrowers stay in their homes. Borrower outreach programs include collaborationwith regulators22, counseling agencies, nonprofit organizations and foreclosure and bankptcycounsel to disseminate loss mitigation information to distressed borrowers. Informational mailouts, statement stuffers, toll free 800 telephone lines, live hot transfer phone lines to which callsfrom borrowers are transferred and connected with a live loss mitigation representative in theservicer's shop "door knockers," and promotional incentives, such as gift certificates or cellphones conditioned upon borrower contacting the servicer, are among the creative means used toreach non-communicative borrowers.

C. Reinstatement, Forbearance and Repayment Plans

These are significant claim benefits, intended to reduce the risk to lenders of offeringreduced or suspended payments, and/or longer than normal repayment terms. These incentivesare not available with any other loss mitigation option, and, with the exception of the incentivefees, do not apply if the lender files a claim for reimbursement as a result of a modification orparial claim.

The lender must file the claim for incentive payment within 60 days of the date ofexecution of the special forbearance agreement. It is not necessary to submit a copy of the

special forbearance agreement or checklist. However, all documentation pertaining to the specialforbearance must be retained in the claim review fie.

If special forbearance is combined with any other option, the lender is entitled to file aclaim for the special forbearance incentive fee, and file a subsequent claim when the other lossmitigation action is finalized.

D. Mortgage Modifcation

A loan modification is a permanent change in one or more of the terms of aborrower's loan which brings the loan current for resulting in a payment the borrower can afford.Borrowers must be able to support the monthly mortgage debt after the terms of the loan aremodified. Modification terms may include a change in the interest rate; capitalization ofdelinquent principal, interest or escrow items; extension of the loan term or re-amortization ofthe balance due; waiver of fees, advances and other changes; and/or deleting the delinquency

and/or advances to the end of the loan.

22 "Help for Homeowners Facing the Loss of Their Home," www.hud.gov/foreclosure/related information, a collaborative effortof the Department of Labor Fannie Mae, Freddie Mac, V A, HUD and members of the mortgage industry, provides general lossinformation for borrowers.; Interagency Statement on Loss Mitigation Strategies for Servicers of Residential Mortgages(September 2007), http://www.nuca..bov/news/oress releases/2007/JR07-0004.odf and NeUA Letter to Credit Unions # 07-CU-06, Working With Residential Borrowers (April 2007), http://www.ncua.gov/letters/2007/CU/07-CU-06.pdf.

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Modification may be appropriate for borrowers who have experienced a permanent orlong term reduction in income or increase in expenses, do not have sufficient surplus income torepay the arrearage through a repayment plan; loans with above market interest rates; lower thanloan to value ratios; and/or mature terms (loans paid down 10 years or more). The modificationtool is also valuable when the arearage can be capitalized into the loan balance, the termextended and/or the interest rate adjusted to current market rate, so that the resulting monthlypayment is at the level the borrower can afford.

As a general rule, in a modification, no new funds are advanced, no intervening liens arepermitted and the loan modification most be recorded if the maturity date changes. Servicer maylack authority to modify loan without the approval of third paries including, rating agencies,regulation authorities (i.e., the FTC, FDIC, GSE), bond issuers, guarantors, and/or privatemortgage insurers. Securitization may present obstacles to loan modification. Many securitizedtrusts do not allow loan modifications on a case-by-case basis and lender is required torepurchase the loan from the securitized pool before the modification may be entered into.

E. Partial Claim

A parial claim is a HUD program in which the lender advances the delinquent fuds onbehalf of the borrower in an amount to cure the delinquency (up to a maximum of 12 months ofprincipal, interest, taxes and insurance) in the form of a second mortgage. The borrowerexecutes a promissory note and subordinate deed of trust payable to HUD. The "partial claim"note generally is non-interest bearing and is due and payable when the borrower pays off theloan or no longer owns the property. The lender then fies a "parial" claim in the amount of theadvance plus any agency approved lender incentive fee to HUD. The partial claim loan is thenserviced by a contractor retained by HUD.

F. Pre-Foreclosure ("Short Sale") or Short Payoff

A short sale or short payoff is an option that allows the borrower in default to sell hishome and to use the proceeds to pay the mortgage debt, even if less than the amount owed, withthe lender's consent. Some lenders negotiate an unsecured promissory for the deficiency or anagreed portion thereof. .The borrower commits to actively market the property for sale for astated time (usually 4 to 6 months), during which time the lender delays foreclosure.

As a general rule, the property value must support the short sale or payoff price, no fundspaid to the mortgagor, any junior liens must be released and any necessary third party approvalsobtained. Once those conditions have been met, this alternative is appropriate for borrowers whocanot afford the mortgage payments, but are unable to sell the home for the payoff amount dueto decline in the propert value.

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G. Assumption by Qualified Buyer

In an assumption, a third party assumes liability to pay the loan with or without release ofthe original obligor (at the lender's option). A qualified assumption is one that is approved bythe noteholder.

H. Deed in Lieu of Foreclosure

A Deed in Lieu of Foreclosure is a voluntary conveyance of the secured property fromthe mortgagor to the mortgagee in return for forgiveness of the debt. Tex. Prop. Code § 51.006.Note that a mortgagor canot unilaterally extinguish the debt by delivering a Deed in Lieu to themortgagee or filing it in the real property records; the mortgagee must knowingly accept theconveyance. Puckett v. Hoover, 146 Tex. 1,202 S.W.2d 209 (Tex. 1947).

Conditions precedent to acceptance of a Deed In Lieu of Foreclosure include clear andmarketable title (no junior liens or other encumbrances), the property is left in "broom cleanswept" condition, the deed contains a non-merger clause (preserves the right of foreclosure) andall necessary third pary approvals have been obtained.

A lender who accepts a Deed in Lieu of Foreclosure may foreclose its deed of trust lienwith or without voiding the deed in the event a title or other defect is discovered. Tex.Prop.Code § 51.006 (d) or (e). The action must be taken before the fourth anniversar of the datethe deed was executed or it wil be time barred by the statute of limitations. See also,Tex. Prop. Code § 51.006 (b),

3. Loss Mitigation and Consumer Protection Statutes: The Big Chil?

Whenever a servicer contacts a borrower, they have to begin every discussion with the MiniMiranda warning: "This communication is an attempt to collect a debt and any informationobtained will be usedfor that purpose ,23 "This disclosure must be given whether the borrower is

delinquent or current, which does not make sense in today's environment, " When you're havingtrouble reaching troubled borrowers already and you're ready to offer a range of workout

solutions, this phrase is seen by some as a dead weight around the neck of workouts.Vicki Vidal, senior director of loan administration for the governmental affairs committee for theMortgage Bankers Association.

In 1978, faced with "abundant evidence of the use of abusive, deceptive, and unfair debtcollection practices by many debt collectors" contributing to "the number of personalbanptcies, martal instability, loss of jobs, and invasions of individual privacy,"24 Congressenacted the Fair Debt Collection Practices Act ("FDCP A")25 The legislation was designed toprovide debtors with a means for challenging payoff demands and for determining the accuracyof asserted debts and establishes ethical guidelines for the collection of consumer debts.

15 u.s.c. § l692c24 15 u.s.c. § 1692e.

25 15 U.S.C. § 1692 et seq.

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The FDCPA broadly prohibits use of "false, deceptive, or misleading" "representations orpractices,"26 "unfair or unconscionable collection methods,"27 and/or "harassment or abuse,"28 andregulates communications with the debtor and third parties29. In addition, the FDCP A mandatescertain disclosures, including the ""debt validation" notice in the debt collector's initialcommunication30 (""Validation Notice") and the ""Mini-Miranda" warning (""Mini-Miranda"), theidentification of the caller as a debt collector, in subsequent communications.31 Although thefDCP A applies only to third pary debt collectors,32 many states have enacted comparable

consumer protection statutes that provide broader coverage that includes the conduct of theoriginal creditor and its employees while collecting their own debts.

The range of remedies for violating the FDCP A include administrative enforcement,33 a

private right of action to recover actual damages, statutory damages, attorneys' fees and costsand, in a class action lawsuit, additional damages for the class not to exceed the lesser of$500,000 or 1 percent of the net worth of the debt collector.34 The standard for review is the""least sophisticated consumer"35 described as ""one not having the astuteness.. .or even thesophistication of the average, everyday common consumer. "36

Determining when a collector crosses the line from assertive debt collection practices toaggressive tactics that are offensive and illegal is sometimes difficult to determine. Furher, thereis a seemingly irreconcilable conflct between the required Mini-Miranda and Validation Noticesand the prohibition against third party disclosure and the chiling effect of those disclosures oncreditors' loss mitigation efforts.

The Federal Trade Commission (""FTC") advisory opinion dated March 19, 2008provides some instruction on these issues37. That opinion states that a debt collector does not perviolate the FDCP A by discussing foreclosure loss mitigation options in the initial or subsequentcommunication with borrower. However, the opinion goes on to caveat that this does notpreclude a fact-based finding that a specific communication overshadows or is inconsistent withdisclosure of right to dispute or validate debt or that a specific communication is false, deceptiveor misleading upon consideration of all facts.

26 15 U.s.c. § 1692e

27 15 U.S.C. § 1692f28 15 u.s.c. § 1692f

29 15 u.s.c. § 1692c

3015 U.S.c. § l692g31 15 U.S.c. § 1692c32 15 U.S.C. § 1692n33 15 U.S.c. § 1692g3415 U.S.C. § 1692k3515 U.S.c. § 1692e(1 1)

36 F oti, at 28

37 The three issues presented were:

(i) Does a debt collector violate the FDCP A when it, in conjunction with the sending of a "validation notice" pursuant to Section809(a) of the FDCPA, notifies a consumer of settlement options that may be available?

(ii) Does a debt collector violate the FDCPA when it, subsequent to sending the validation notice pursuant to Section 809(a) ofthe FDCPA, notifies a consumer of settlement options that might be available to avoid foreclosure: and (iii) Does a debtcollector commit a false, misleading or deceptive act or practice in violation of Section 807 of the FDCPA when he presents toa consumer settlement options that are available to the consumer to avoid foreclosure?

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These innovative loss mitigation techniques have not gone unchallenged. Use of thirdpary "door knockers:" to a initiate loss mitigation dialogue with the borrower have been thesubject of several federal class action lawsuits fied in the Midwest against the third pary "doorknocker" and/or the lender.38

In the Lappin Lige and Grubek cases, the lender retained Titanium Solutions Inc("Titanium") to contact the borrower and elicit financial information to analyze loan workoutoptions. All three cases involved a letter sent by Titanum to the borrower on Titaniumletterhead signed by Titanium as "independent agent for your (lender") and disclaiming debtcollector status with a subject line reference that included the lender's name, loan number andproperty Each letter stated that the lender had requested that Titanium contact the borrower"because of certain payment arearages on your loan," that Titanium's services were offered at nocost to the borrower (implying that the lender would pay such costs), and that "Titanium mustcollect certain information from you to analyze your current financial situation," among otherrepresentations, enclosed a "Financial Information Form" and requested copies of the borrowers'pay stubs and federal income tax returns. In each suit, the borrower alleged false and misleadingrepresentations, unfair and unconscionable debt collection practices and failure to give the Mini-Miranda waring and sought statutory damages, attorney's fees and costs, as well as nationwideclass certification.

The facts in the Lige case were slightly more egregious than in the other two, as theborrower was an elderly widow that was medically disabled at the time of the home loanrefinance and she received subsequent telephone calls from Titanium representing thatrefinancing services were being offered to bring her loan current and only Titanium wasauthorized to assist in foreclosure avoidance and offer a "short sale" for the "best possible price"with a deficiency waiver. Id. Despite its disclaimer of debt collector status, it is significant thatTitanium's web site boasted of "communications to over 50,000 homeowners anually relativeto mortgage debt collection." The Lige case settled early in the litigation with entry ofthe agreedJudgment on January 17, 2008 (Docket 37). The $20,230.00 settlement was comprised of:$ 1 000 individual recovery to Lige (FDCP A statutory and individual damages claims); $9000class recovery with an opt out option ($50.00 cap per class member, the class being defined as allindividuals with an Indiana address who received the Titanium or a similar letter on or afterNovember 30, 2005); and attorneys fees of $ 1 0,250.00.

In summary, in today's environment, creditors engaging in loss mitigation may beembarking in untested waters. Until loss mitigation is afforded a safe harbor, the tension betweenprohibited third-pary disclosure and adequately informing the consumer that the communicationis from a debt collector, among other issues, wil continue to present significant challenges forthe consumer mortgage industry.

38 See, e.g., Lappin v. Titanium Solutions, Inc\l., 1 :06-cv-01320 ( C.D. II December 28.2007) ("Lappin"); Lige v.

Titanium Solutions, Inc., 2:06-cv-0400ts (N .0. IN-(November 30, 1006) ("Lige"); Gburek v Litton Loan Servicing,LP, 08-cv-3 188, u.S. (E.D. II June 3, 1008) ("Gburek");

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4. Loss Mitigation in Bankruptcy

The Twin Pillars of Bankruptcy

"The American bankruptcy system is often described as having two primar objectives: firt,ensuring the equitable and timly repayment of credìJors wìJh valid claims; and second,

affording debtors a fresh start once they emerge from bankruptcy." In re Sanchez, 372 B.R.289 (Bank. S.D. Tex. 2007

Chapter 13 banptcy seems to be an ideal arena in which to effect homeretention. Repayment arrangements and loan restructurngs reached pre-confirmation may beincorporated into the Chapter 13 plan and sanctioned by the Banptcy Cour's confirmationorder. For example, the Banruptcy Courts for the Southern District of Texas recently adoptedamendments to the standard chapter 13 plan to allow debtors to obtain cour approval, throughthe confirmation or modification process, of the refinancing of home mortgages when therefinancings are approved by the lender and fully retire existing home mortgage debt.39 Yet, thereality is that banruptcy is currently not a safe harbor for loss mitigation bit but is viewed as alandmine by many in the trenches. Bankptcy judges complain that "some servicers refuse toengage in loss mitigation and wil not negotiate a loan modification if the customer is inbanptcy," those servicers point to existing cour rulings that severely penalize servicers andmortgage holders for loss mitigation actions. See, e.g. In re Sanchez, 372 B.R. 289 (Bankr. S.D.Tex. 2007); In Deutsche Bank National Trust Company v. Wiliams, 842 N.Y.S.2d 338, 339(N.Y. Ap. Div. 2007).

Loss mitigation post-confirmation presents challenges. A confirmed Chapter 13 planconstitutes a new contract between the debtor and its creditors. Hils Motors, Incl, v. Hawaii

Auto Dealers' Ass 'n, 997 F2d 581 588 (9th Cir. 1993); In re Padila, 379 B.R. 641 (Bank. S.D.Tex. 2007). An order confirming a chapter 13 plan represents a binding determination of therights of the parties as set out in the plan and is res judicata as to all issues that could have beenraised at the confirmation hearing. Hamilton v. Washington Mutual Bank FA (In re Colon), 376B.R. 33, 3; (B.A.P. 10th Cir. 2007); In re Sanchez, 372 B.R. 289. 503-505 (Ban. S.D.Tex.2007.

Many bankuptcy judges monitor post-confirmation activity of secured creditors out ofconcern about the overall reliability of the mortgage service industry to charge homeowners onlythe correct legal amount of the debt and to comply with applicable consumer protection lawsbecause a servicer's mistakes or misbehavior can have grave consequences-loss of the debtor'shome. In re Sanchez, 372 B.R. 289. 503-505 (Ban. S.D. Tex. 2007).

The Chapter 13 bankruptcy case of Lino and Mar Sanchez exemplifies a securedcreditor's "good intentions gone bad." In Sanchez, the automatic stay of 11 USC Section 362was terminated after plan confirmation pursuant to the terms of an agreed stay order. The

39 http://www.txs.uscourts.gov/bankruptcv/rulesformsproc/ch i 3forms/ch 1 3plan.pdf (mandatory use effective October i, 2008).

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debtors and the servicer then entered into a forbearance plan that included a down payment of$4,000.00 to be applied $l,200.00 to "additional bankptcy fees," $516.25 to "additionalbankuptcy costs," $217,00 to property inspections; and $2270.47 accrued interest. Neither thesecured creditor nor the debtor advised the debtor's attorney, the Chapter 13 trustee or thebankruptcy court of the agreement. The Banptcy Court held the forbearance plan to be animpermissible attempt to modify a confirmed plan without compliance with 11 U.S.C. §1329 (b)(9). thereby subjecting the secured creditor to liability for civil contempt as well as damages forviolation of the automatic stay.

In rendering his decision, Texas Judge Bohm emphasized, "In order for these twin goalsto be achieved--indeed, in order for the banptcy system in fuction--every entity involved in abanuptcy proceeding must fully disclose all relevant facts." Post-petition amounts chargedenlarge debt of the estate making reorganzation more diffcult for the debtor and adverselyimpacting the claims of other creditors. In re Jones, 2007 W: 1112047 at *8 (Bank. E.D. La.2007).

5. Loss Mitigation in Foreclosure

The use of forbearance agreements in lieu of foreclosure has recently come underincreased scrutiny in state court actions. In Deutsche Bank National Trust Company v. Wiliams,842 N.Y.S.2d 338,339 (N.Y. Ap. Div. 2007), a New York cour vacated a foreclosure judgmentbecause the forbearance agreement entered into after the suit was commenced was never fiedwith the court.

Significantly, the forbearance provided for a $20,000 down payment and set the monthlypayments at a rate significantly higher than his previous monthly payments. Not After a year theborrower defaulted, the foreclosure was reinstated judgment entered and the borrower sued tovacate the foreclosure.

In vacating the foreclosure judgment, the court held that a forbearance agreement

constitutes a settlement of the foreclosure action and, as such, "must be fied with the Court." Bynot fiing the agreement with the court, the cour feared (i) that sums charged to the borrowermay be usurious (as the court seemed to indicate may be the situation with this case), and (ii) thatthe payments under the agreement would not be properly credited to the borrower's account (asthe court found to be the situation in this case).

6. No Safe Harbor

Until provided with a loss mitigation safe harbor, servicers and mortgage holders caughtin a loss mitigation "catch 22" are encouraged to take note of Judge Bohm's admonition..." "Thethree most important words.. .are: disclose; disclose, disclose." (Emphasis added) In re Hight,2008 WL 3539802 (Bankr.S.D. Tex. August 13, 2008).

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v. ETHICS IN FORECLOSURE

1. Rules of Professional Conduct, Disclosure, Conflcts of Interest

There are a number of legal, ethical and conflicts in which that the unwary foreclosurepractitioner may become entrapped. Issues which commonly arise are discussed below.

A. Late Payments Paid bv Mail

When a note permits a mortgage payment to be made by mail, a default does not arise solong as the payment is place in a properly addressed and postage paid envelope on or before thedue date. McGowan v. Pasol, 605 S.W.2d 728 (Tex.App.-Corpus Christi 1980, no writ).However, the mortgagee is not obligated to accept parial payments, provided the payments arereturned and notice of non-acceptance is given to the mortgagor. Merrell v. Fanning & Harper,597 S.W.2d 945 (Tex.App.-Tyler, 1980).

B. Reinstatement After Acceleration

If a loan has been accelerated but reinstated prior to foreclosure, the mortgagee mustdocument that the debt has been de-accelerated in the reinstatement or loss mitigation agreementor must record a rescission notice in the deed records in accordance with Tex. Civ. Prac. & Rem.Code § 16.036. De-Acceleration is critical to stop the statute of limitations from running. Thelender should sign and record a unilateral § 16.036 notice stating acceleration has been

abandoned, or if the borrower's signature canot be obtained.

The lender may also send wrtten notice to the borrower that the loan has been de-accelerated and the lender is abandoning its right to collect the accelerated amount. Thisabandonment letter should be par of the borrower's permanent servicing file.

C. Statute of Limitations

If the debt is barred by the statute of limitations, the trustee has no authority to conduct aforeclosure sale. Stubbs v. Lowrey's Heirs, 253 S.W.2d 312 (Tex.App.-Eastland 1952, reldn.r.e.). Because the lien is incident to and inseparable from the debt it secures, if the debt isbared by limitations, the lien is likewise bared. University Savings & Loan Ass 'no v. Security

Lumber Col, 423 S.W.2d 287 (Tex. 1967). Further, foreclosure to a time barred loan may violatethe Federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692e.

The Texas courts are divided as to whether filing suit constitutes presentment or demandfor payment. Mackey v. Mackey, 721 S.W.2d 575, (Tex.App.-Corpus Christi 1986, no writ)(does not constitute presentment/demand). Smith v. Davis, 453 S.W.2d 340 (Tex.App.-Ft.Worth 1970, writ reld n.r.e.), (fiing suit is sufficient to accelerate the maturity of the debt).

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(i) Demand Notes

If a note does not have a time for repayment, then the note is a demand note. Martin v.Ford, 853 S.W.2d 680 (Tex.App.-Texarkana, 1993, reh. denied). If the demand note is securedby the borrower's residence, the mortgagee must give the borrower at least twenty days' noticeto cure the default. Tex. Prop. Code § 51.002. A "waiver of notice" clause in a demand notedoes not apply ifthe secured property is the borrower's residence.

The demand note limitation period is six years and begins to run when a demand forpayment is made. If no demand for payment is made, a ten year limitation period commencesfrom the date the last payment of principal or interest was made. Tex. Bus. & Com. Code §3.118(b). See also, Holy Cross Church o/God in Christ v. Wolf 44 S.W.3d 562 (Tex. 2001)

(ii) Installment Notes

An installment note is one that provides for payments of principal and interest. State BarCommittee Comments to Tex. Bus. & Com. Code § 3.118 The installment note is secured byreal property, secured by real property, The four year statute of limitations found in Tex. Civ.Prac. & Rem. Code §§ 16.035 thr 16.037 applies to an installment note secured by realproperty. Id. The four statute of limitations begins to run on the date the final installmentpayment is due, i.e., the matuity date. Gariel v. Alhabbul, 618 S.W.2d 894 (Tex.App.-Houston(1st Dist) 1981, writ retd n.r.e.). See also, Palmer v. Plamer, 831 S.W.2d 479 (Tex.App.-Texarkana 1992, no writ).

D. V oid or Voidable Sales

Whether a foreclosure sale is void or voidable depends on the effect on title on the datethe deed is executed and delivered.

(i) Void Sale

If a sale is void, title is never passed and no legal rights were conveyed. Situations thatcan void a foreclosure deed are fraud, failure or lack of capacity to execute an instrument, noloan default, or failure to property appoint a substitute trustee. A pending bankptcy voids anyforeclosure. Continental Casing Corp. v. Samedon Oil Corp., 751 S.W.2d 499 (Tex. 1988) andGraham v. Pazos De La Torre, 821 S.W.2d 162 (Tex.App.-Corpus Christi 1991, writ den). If aforeclosure sale is void, the trustee's deed should not be recorded, or if sent for recording shouldbe immediately rescinded to avoid later problems in the chain of title.

(ii) Voidable Sale

If the foreclosure deed passed title subject only to the rights of the borrower to set itaside, the sale is voidable. Slaughter v. Quales, 139 Tex. 340, 162 S.W.2d 671 (1942). Avoidable sale is valid until set aside and thus, can pass title to the purchaser. West TrinityProperties, Ltd. v. Chase Manhatten Mortg. Corp., 92 S.W. 34d 866 (Tex.App.- Texarkana 2002,

i 35\ 052/catlO \ 05NB1/2/09 18

no writ). While a foreclosure sale that occurs before a bankruptcy filing is void, a sale thatoccurs after the banptcy petition date may be voidable. See, e.g., DIes v. Curl, 65 S.W.3d 129

(Tex.App.-Amarillo 2001, no writ).

2. Wrongful Foreclosure

There are a number of fact scenarios that may give rise to claims of wrongful foreclosure.Issues which commonly arse are discussed below.

A. Effect of Foreclosure on Other Liens

Texas is a "first in time" "first in right" state. As a general rule, the first lien recorded intime in the real property records is superior to all subsequent recorded liens, except for certaintax liens. Windham v. Citizens Nat. Bank, 105 S.W.2d 348, (Tex.App.-Austin 1937, writ

dismissed). It thus follows that a foreclosure by a senior lien holder cuts off the rights of allinferior lien holders. Hampshire v. Greeves, 104, Tex. 620, 143 SoW. 147 (Tex. 1912.

B. Standing to Contest Foreclosure Sale

To contest a foreclosure sale, a person must be the mortgagor, be in privity with themortgagor or have an equitable or legal in the property affected by the foreclosure. Goswami v.Metropolitan Savings & Loan Ass's, 751 S.W.2d 487. (Tex. 1988). Junior lien holders havestanding to contest a first lien foreclosure. Likewise first lien holders have standing to contest anad valorem tax sale. Id.

C. Strict Constitution

Texas courts follow strict construction rules of interpretation involving foreclosurebecause "foreclosure is a harsh remedy." Hiler v. Prosper Tex., Inc., 437 S.W.2d 412(Tex.Civ.App.-Houston, (15t Dist.) 1969, no writ) and Bischoffv. Rearick, 232 S.W.2d 174 (Tex.Civ. App.-El Paso 1950, writ refd n.r.e.).

When the loan documents conflct with statutory law, the statute controls. Wylie v. Hays,114 Tex. 46, 263 S.W. 563 (Tex.Com.App. 1924). Ifthere is a conflict between the note and thesecurity instrument, the note controls. Wells v. Smith, 144 S.W.2d 430,432 (Tex.Civ.App.-FortWorth 1940, writ dism'd judgm't corr.). When the note, security instrument, and ancilary loandocuments are executed at the same time and for the same purposes, all of the loan instrumentsare construed as a single document under the integrated document rule. Vista Dev. Joint VentureII v. Pacifc Mutual Life Ins. Co., 822 S. W.2d 305 (Tex.App.-Houston (15t Dist.) 1992, wrt den).

Traditionally, Texas state courts have strictly applied the terms of a security instrument,even if the term seems unimportant or frivolous. Clarkson v. Ruiz, 108 S.W.2d 281, 285

(Tex.Civ.App.-San Antonio 1937, wrt dism'd); American Sav. and Loan Ass'n of Houston v.Musick, 517 S.W.2d 627, (Tex.Civ.App.-Houston (14th Dist.) 1974 reversed on other grounds,531 S.W.2d 581 (Tex. 1975); and Lawson v. Gibbs, 591 S.W.2d 292 (Tex.Civ.App.-Houston

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(14th Dist.) 1979, writ refd n.r.e.). Recently, however, a Bankruptcy Court in the NorthernDistrict of Texas used a balancing test between the rights of the borrower and lender. In Davis,the Court held that the terms in the loan documents "could not be so rigidly construed as toprevent the enforcement of an honest obligation." In re Davis Chevrolet, Inc. 135 B.R. 29

(Ban. N.D.Tex. 1992). Whether the Banruptcy Court's interpretation resulted because it is acourt of equity or is indicative of a future trend remains to be seen.

D. Inadequate Sellng Price

Inadequate consideration alone is not sufficient grounds to set aside a trustee's sale thatwas legally and fairly made. American Savings and Loan Ass'n of Houston v. Musick, 531S.W.2d 581 (Tex. 1975). Rather, the mortgagor must prove some irregularty that caused orcontrbuted to the propert being sold for a grossly inadequate price, such as failure to follow atechnical notice procedure required by the deed of trust. Delley v. Unknown Stockholders ofBrotherly and Sisterly Club of Christ, Inc., 509 S.W.2d (Tex.Apj.-Tyler 1974, writ refd n.r.e.);Intertex, Inc. v. Walton, 698 S.W.2d 707 (Tex.App.-Houston (14 Dist.) 1985, writ refd n.r.e.).

E. Chiled Sale

A "chiled" foreclosure sale occurs where the trustee's conduct discourages bidding bydisinterested parties causing the property to be sold for an inadequate price. Biddle v. NationalOld Line Ins. Co., 513 S.W.2d 135 (Tex.App.-Dallas 1974, writ refd n.r.e.); Charter Nat'l Bank-Houston v. Stevens, 781 S.W.2d 368 (Tex.App.-Houston (14th Dist.) 1989, writ refd n.r.e.).

An example of bid chiling is found in Charter Nat. Bank-Houston v. Stevens, 781

S.W.2d 368 (Tex.App.-Houston (l4th Dist.) 1989, reh. den). In Charer, the court found that theban's loan officer's conduct chiled the bidding when he agreed to advise a tenant of theforeclosure sale date after the tenant had obtained financing and hired an attorney to attend thesale. The ban's officer failed to tell the tenant of the sale date and the ban acquired theforeclosure property for less than the tenant's financing. By contrast, a Fort Worth state courheld the lender's attorneys error in calculating the lender's credit bid did not chil the bid, eventhough the property was sold for approximately 36% of its fair market value ($200,000 value vs.$72,500 credit bid). Powell v. Stacey, 117 S.W.3d 70 (Tex.App.-Fort Worth 2003, reh.overrled).

F. Fatally Defective Sale

Noncompliance with any of the statutory foreclosure requirements or provision in theDeed of Trust is grounds to set aside a foreclosure sale. Shearer v. Alled Live Oak Bank, 758S.W.2d 940 (Tex.App.-Corpus Chrsti 1988, wrt denied) and Houston First American Savingsv. Musick, 650 S.W.2d 764 (Tex. 1983); University Savings Ass'n v. Springwoods Shopping

Center, 644 S.W.2d 705 (Tex. 1982).

At least one Texas case seems to indicate that a foreclosure sale can be set aside byagreement. Ogden v. Gibraltar Savings Ass 'n, 640 S.W.2d 232 (Tex. 1982). By contrast, a

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trustee cannot unilaterally rescind and re-hold a foreclosure simply because the mortgagee didnot like the original sales results. Bonila v. Roberson, 918 S.W.2d 17 (Tex.App.-Corpus Chrsti1996). In Bonila, the trustee rescinded a "total debt bid" foreclosure sale so that he could re-foreclose to obtain a deficiency after it was discovered the property had been trashed inside. Id.

G. Deceptive Trade Practice Act Liabilty

Deceptive trade practice allegations are often included in wrongful foreclosure suitsunder the Texas Deceptive Trade Practices Act ("DTPA") Tex. Bus. & Com. Code §§ 17.41 -17.63 . To maintain a DTP A cause of action, the plaintiff must show: (i) the debtor is aconsumer; (ii) the lender either committed a false, misleading or deceptive act under § 17 .46(b)of the DTP A; breached an expressed or implied waranty; or engaged in an unconscionable

action or course of conduct; (iii) these acts were the producing cause of the consumer's actualdamages; and (iv) the action is brought within two years of the false, misleading, or deceptive actor within two years after the consumer, using reasonable diligence, could have discovered the

bad act, not when the consumer actually suffered out-of-pocket expenses. Brown v. Bank ofGalveston, Natl Ass'n, 963 S.W.2d 511 (Tex. 1998)

Whether a borrower is a consumer depends on whether the goods or services acquired bythe borrower were the object of, as opposed to incidental to, the loan transaction. FDIC v. Munn,804 F.2d 863-864 (5th Cir. 1986).

By contrast, a purchaser at foreclosure sale takes the property "as is," without anywaranties except as to title from the mortgagor and thus, is not a consumer. Tex. Prop. Code §51.009.

H. Remedies for Wrongful Foreclosure

(i) Election of Remedies

A borrower can plead alternatively for rescission of the sale and monetary damagesReyna v. State Nato Bank of Iowa Park, 911 S.W.2d 851 (Tex.App.-Fort Worth 1995, writ den)and Carrow v. Bayliner Marine Corp., 781 S.W.2d 691 (Tex.App.-Austin 1989, no writ).However, prior to judgment, the borrower must elect: either rescission or damages, not bothremedies. Id.

(ii) Monetary Damages

The measure of damages for a wrongful foreclosure determined as of the date of the sale,is the difference between the fair market value of the property and the total debt owed by themortgagor. Farrell v. Hunt, 714 S.W.2d 298 (Tex. 1986).

If there is a finding of liability against the lender, damages may also be awarded forintentional inflction of emotional distress, mental anguish and/or lost earings. LaCoure v.

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LaCoure, 820 S.W.2d 228 (Tex.App.-El Paso 1991, writ denied); Dickerson v. CareDebarbieris, 964 S.W.2d 680 (Tex.App.-Houston, (14th Dist.) 1998).

If the borrower does not make mortgage payments while contesting a foreclosure sale,constructive free rent may be ordered as an offset to any damages awarded to the mortgagor.Reyna v. State Natl Bank of Iowa Park, 922 S.W.2d 851 (Tex.App.-Ft. Worth 1995, writdenied) and Carrow v. Bayliner Marine Corp., 781 S.W.2d 691 (Tex.App.-Austin 1989, no

writ).

(ii) Rescission

The validity of a foreclosure sale challenged in a lawsuit to set aside the sale and cancelthe trustee's deed and re-tenders the amount of the foreclosure bid. Durkay v. Madco Oil Co.,862 S.W.2d 14 (Tex.App.-Corpus Chrsti 1993, wrt denied) and Bracken v. Haid & Kyle, Inc,589 S.W.2d 501 (Tex.App.-Dallas 1979, writ refd n.r.e.).

If a foreclosure sale is set aside, all paries must be returned to the same status thatexisted prior to sale. Price v. Reeves, 91 S.W.2d 862 (Tex.Civ.App.-Fort Worth 1936, no writ).

To retain possession of the property by rescission of the foreclosure sale, the mortgagormust cure the default by paying the total amount due under the note. Bracken v. Haid & Kyle,Inc., 589 S.W.2d 501 (Tex.Civ.App.-Dallas 1979, writ re'd n.r.e.). The amount due cannot bepaid in the form of a letter of credit, but must be in cash or cash equivalent. Baucum v. GreatAm. Ins. Co. of New York, 370 S.W.2d 863 (Tex. 1963) and Filion v. David Silvers Co., 709S.W.2d 240 (Tex.App.-Houston (14th Dist.) 1986, writ refd n.r.e.).

To rescind a foreclosure sale when the property was sold to the mortgagor, the mortgagormust cure the default by paying the total amount due on the note in cash or cash equivalent.Bracken v. Haid & Kyle, Inc., 589 S.W.2d 501 (Tex.App.-Dallas 1979, writ refd n.r.e.), LoomisLand & Cattle Co. v. Diversifed Mortgage Investors, 533 S.W.2d 420 (Tex.Civ.App.-Tyler

1976, writ refd n.r.e.), Lambers v. First Nat. Bank of Bowie, 993 S.W.2d 833 (Tex.App.-FortWorth 1999, no wrt), Durkay v. Madco Oil Co., 862 S.W.2d 14 (Tex.App.-Corpus Christi 1993,writ den.) and Bracken v. Haid & Kyle, Inc., 589 S.W.2d 501 (Tex.Civ.App.-Dallas 1979, writrefd n.r.e.).

To rescind a foreclosure sale that was sold to a third party the bid price plus interest, anypayments made for delinquent taxes, insurance, and improvements made to the property must berefuded to the third pary. Keda Development Corp. v. Stanglin, 721 S.W. 2d 897 (Tex.App.-

Dallas 1986, no wrt).

Further, any person in possession of a wrongfully foreclosed property is liable to therightful owner for the fair market rental value of the property. Criswell v. Southwestern Fidelity

Life Ins. Co., 373 S.W.2d 893 (Tex.Civ.App.-Houston (1 st Dist.) 1963, no wrt).

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3. Good Faith Deposits

A. Bid at Sale

A third pary purchaser must tender the bid price in cash or cash to the trusteeimmediately upon the trustee's acceptance of the bid. Tex. Prop. Code § 51.0075 (t). The note

holder may submit a credit bid, which upon acceptance b y the trustee is credited against theindebtedness owing. Id.

B. Foreclosure Sale Proceeds

Foreclosure sale proceeds are distributed by the substitute trustee/lender/servicer inaccordance with the terms of the deed of trust, i.e., generally, first to the trustee, then forcollection costs and attorney's fees and then to the mortgagee, then to junior lien holders in orderof priority and the balance, if any, to the mortgagor. The payment of excess foreclosureproceeds always flow down, not up to lien holders in the chain of title. Conversion PropertiesL.L.c. v. Kessler, 994 S.W.2d 810 (Tex.App.-Dallas 1999).

C. Disputed Funds

During foreclosure litigation, funds in dispute should be deposited in the registry of thecourt. The party interpleading the funds is entered to recover the reasonable costs of theinterpleader, including reasonable attorneys fees, and court clerk becomes responsible fordelivering the funds to the rightful owner.

D. Recoverabilty of Defense Costs

Attorney fees relating to the lender's defense in a wrongful foreclosure suit cannot berecovered under the collection clause of the loan agreement. Slivka v. Swiss Ave. Bank, 653S.W.2d 939 (Tex.App.-Dallas 1983, no writ).

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