Wrongful Foreclosure Claims on Commercial Property in Texas

How a Texas commercial foreclosure is supposed to run

Almost every commercial real estate loan in Texas is secured by a deed of trust with a power of sale, which lets the trustee sell the property without a court order after default. Property Code § 51.002 sets the ground rules. The sale must be a public auction between 10 a.m. and 4 p.m. on the first Tuesday of the month (the first Wednesday when that Tuesday is January 1 or July 4), at the county courthouse in the area the commissioners court has designated. The sale must begin at the time stated in the notice or within three hours after it.

Notice of the sale must be given at least 21 days before the sale in three ways: posting a written notice at the courthouse door of each county where the property is located, filing a copy with the county clerk of each such county, and serving written notice by certified mail on each debtor who, according to the mortgage servicer's records, is obligated to pay the debt. Under § 51.002(e) mailed service is complete when the notice is deposited in the mail, postage prepaid, addressed to the debtor's last known address, and an affidavit from a person with knowledge is prima facie evidence of service. Under § 51.002(g) the day the notice is given counts and the day of sale does not.

The 20-day notice of default and opportunity to cure in § 51.002(d) applies only to real property used as the debtor's residence. A commercial borrower gets no statutory cure notice. Whatever default notice and cure period it has comes from the loan documents, so the note, deed of trust and any forbearance agreement must be read alongside the statute.

Two other statutory limits matter. Under Civil Practice and Remedies Code § 16.035 the lender must foreclose within four years after the cause of action accrues, measured for an installment obligation from the maturity of the last installment, and when that period runs out the lien and the power of sale become void. And the statutory rescission procedure in Property Code § 51.016, which lets a lender undo a flawed sale within 15 days, applies only to residential property, so a defective commercial sale can be unwound only by agreement or by a court.

What a wrongful foreclosure claim requires

Texas courts of appeals have settled on three elements for a damages claim: (1) a defect in the foreclosure sale proceedings, (2) a grossly inadequate selling price, and (3) a causal connection between the defect and the grossly inadequate price. All three are required.

A defect is anything that departs from § 51.002 or from the deed of trust: notice mailed fewer than 21 days before the sale, notice sent to an old address when the servicer's records showed a new one, no posting at the courthouse, a sale held at the wrong time or place, a sale by a trustee who was never properly appointed, a sale after the borrower cured under the loan terms, or a sale during a bankruptcy stay. The inadequacy element is a comparison between the price bid and the property's fair market value on the sale date. Texas courts have treated the inadequacy as an evidentiary question and have not fixed a percentage, but a sale at a modest discount to market is not grossly inadequate; the shortfall has to be severe. The causation element asks whether the defect chilled the bidding. A notice that failed to reach a borrower who could not have bid anyway, or a technical error no bidder knew about, is hard to connect to the price.

Because the price element is so demanding, many claims that start as wrongful foreclosure end up being pleaded as something else: breach of the deed of trust or a forbearance agreement, breach of the duty of good faith some courts impose on a trustee to conduct the sale fairly, fraud, or a request to set the sale aside without damages.

Remedies: setting the sale aside or damages

A borrower who acts before the property is resold can ask the court to set the sale aside and restore title. Courts generally require the borrower to tender what is owed on the debt, since equity will not return the property to a borrower who still cannot pay for it, and the remedy is unavailable once the property has passed to a bona fide purchaser for value without notice of the defect. A lender that bought at its own sale is not such a purchaser.

If the sale stands, the measure of damages is the difference between the property's fair market value at the time of the foreclosure and the balance of the debt. A borrower whose property was worth less than the debt has no damages under this measure even if the sale was defective, which is one reason commercial wrongful foreclosure cases are rarer than residential ones. Lost profits, lost equity in related deals and mental anguish are not part of the measure, though a borrower with a separate fraud or contract claim may pursue the damages those claims allow.

Stopping the sale before it happens

The strongest position is before the first Tuesday. A borrower who can show a defect in the notice, a dispute over whether a default exists, a lender's failure to honor a forbearance or a payoff tender can apply for a temporary restraining order and temporary injunction halting the sale, which is covered in emergency relief in Texas business cases. The court will usually require a bond, and the borrower should expect to show it can protect the lender's position while the dispute is decided. Lenders frequently respond by re-noticing the sale for a later month, which gives both sides time to negotiate.

The deficiency fight after the sale

When the sale brings less than the debt, the lender sues the borrower and any guarantors for the deficiency. Property Code § 51.003 gives the defendants two tools. First, § 51.003(a) requires any action to recover the deficiency to be brought within two years of the foreclosure sale. Second, § 51.003(b) lets any person against whom recovery is sought ask the court to determine the property's fair market value as of the sale date, with evidence such as expert opinion, comparable sales, anticipated marketing time and holding costs, costs of sale and any discount for the property's cash flow. If the court finds fair market value exceeded the sale price, § 51.003(c) gives the defendants an offset equal to the excess, less any lien the foreclosure did not extinguish. If nobody asks or the evidence does not support a finding, the sale price controls.

Guaranties commonly contain a waiver of the § 51.003 offset. Texas courts have enforced broad waivers of defenses in commercial guaranties, so a guarantor should expect the wording of the guaranty to decide whether the offset is available. The borrower's own position depends on whether the note is recourse, and the guarantor's on any carve-outs that turn a limited guaranty into a full one when, for example, the borrower contests the foreclosure.

Example

Suppose the owner of a flex industrial building in Irving falls two payments behind on a loan with a balance of about $3.2 million. The lender accelerates, mails a notice of sale to the address on the original loan application even though the servicer's own file shows a change of address two years earlier, and posts the property for sale 19 days before the first Tuesday. The lender is the only bidder and buys the building for $1.9 million. An appraiser later values it at $3.6 million on the sale date. The borrower has two defects (short posting and misaddressed notice), a price well below value, and a credible causation story: it never learned of the sale and so could not refinance, bid or bring investors to the courthouse. Because the lender still holds the property, the borrower can seek to set the sale aside on tender of the debt, or damages measured by value less debt. The lender's deficiency suit, if it files one, faces the fair market value offset unless the guarantor waived it.

Evidence to gather immediately

• Every notice received, with envelopes and postmarks, and the address the servicer had on file when it mailed them.
• The posted notice and the clerk's file copy, with the filing date, from the county clerk.
• The deed of trust, note, guaranties, modifications and any forbearance or workout correspondence.
• Payment history and proof of any tender or cure.
• Appraisals, broker opinions and offers showing value around the sale date.
• The trustee's deed and the appointment of any substitute trustee.

When to involve a litigator

The day a notice of default or notice of sale arrives, because the options narrow sharply after the first Tuesday, and again the day a deficiency demand arrives, because the two-year limit and the fair market value motion both require action in the lender's lawsuit. Tina Wysk represents borrowers, guarantors and lenders in foreclosure and loan enforcement disputes in Dallas-area courts through the firm's real estate litigation practice. Where a defective sale has left a questionable trustee's deed in the chain of title, the cleanup is addressed in clearing a cloud on title.