United States: Foreclosure Procedures: Dot Those i’s and Cross Those t’s… Or Else

Last Updated: December 9 2013
Article by Vicki Harding

In re AMRCO, Inc., 496 B.R. 442 (Bankr. W.D. Tex. 2013) –

A mortgagee requested a comfort order from the bankruptcy court to confirm that the automatic stay did not apply to property that it had purchased at a non-judicial foreclosure sale immediately before the mortgagor filed bankruptcy.  The debtor countered that the foreclosure sale was invalid.  If the debtor was correct, the consequence was that the property would be part of the bankruptcy estate and protected by the automatic stay.

The creditor made a $175,000 loan to AMRCO secured by a lien on an undeveloped lot pursuant to a duly recorded deed of trust.  In essence the property was the debtor's only asset and the mortgagee was its only creditor.

After the debtor defaulted, the creditor initiated a foreclosure sale.  After unsuccessfully seeking a temporary restraining order in state court, the debtor filed bankruptcy at 10:22 a.m. on June 4, 2013.  In the meantime, the creditor claimed that it purchased the property at the non-judicial foreclosure sale no later than 10:12 a.m. on June 4, 2013.

The debtor argued that the sale was invalid because (1) a law firm was appointed as the substitute trustee under the deed of trust, not the lawyer himself, so he had no right to act as substitute trustee in conducting the foreclosure sale, (2) the sale was unfair and irregular and there was a gross shortfall in the price sufficient to void the sale, and (3) the substitute trustee's address was not included in the notice of foreclosure sale.

The court brushed aside the first two arguments.  The applicable statute allowed a "person" to be appointed as a trustee or substitute trustee under a deed of trust.  Asserting that appointment of an entity as a substitute trustee precluded an individual acting on its behalf was tantamount to claiming that only natural people could be appointed as trustees.  Since other similar provisions of the statute made it clear that corporations could be "persons," the court concluded that the reference to "persons" as trustees must include both artificial and natural persons, as opposed to only natural persons.  Since law firms must act through their members, a member can represent a firm in acting as a trustee.

As for the second argument, the debtor provided no support for its allegations that the sale was unfair or that the price was inadequate.  The court took note that the county appraisal district valued the property at $125,000, while the creditor bid in the full amount of its debt of ~$192,000.  The debtor contended that the property had a fair market value of $530,000, but did not provide support for that value.

However, the third argument was a different matter.  The applicable state statute provided that the "name and a street address for a trustee or substitute trustees shall be disclosed on the notice" required by statute.  In this case the mailing address was provided in a recorded appointment of substitute trustee.  However, the court concluded that this did not constitute disclosure in the notice.  The notice also attached the deed of trust, which included an address that was the substitute trustee's current address.  However, that address was only in an attachment to the notice and was identified as the address of the original trustee, not the substitute trustee (though the addresses happened to be the same).

The creditor argued that this combination of facts amounted to substantial compliance, and the court acknowledged that "it is difficult to imagine how any party could be adversely affected by the deficiency in the Notice of Foreclosure under these circumstances."  However, the court held that strict compliance was required under state law to invoke the power of sale under a deed of trust.  Consequently, the court held that the sale was void and the property was part of the bankruptcy estate.

While acknowledging that this "might seem to take 'strict compliance' too far" and that "this result may seem overly technical or formalistic," the court concluded the result was required by law and had no sympathy for the creditor:  "mortgagees can avoid this result by taking greater care to comply with each requirement of the Texas foreclosure statute."

An "itsy bitsy teenie weenie boo-boo" strikes again.  Don't think that this opinion is an aberration.  Details do matter.  There are a number of bankruptcy cases in which very minor mistakes have caused a mortgagee to lose its lien or otherwise suffer significant adverse consequences in a bankruptcy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Vicki Harding
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