House up for foreclosure

The Foreclosure Process in the Probate Context

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This article was originally published in the Advocate The Advocate (Texas) – Symposium on Decedents and Ward – Fall, 2009. It is intended to provide an overview of the real property foreclosure process in the probate context. The substance of the article assumes basic familiarity with the foreclosure process under the Texas Property Code and basic familiarity with the estate administration processes under the Texas Probate Code.

Dependent Administrations

If a dependent administration has been opened, any attempt by a creditor to exercise its power of sale under a deed of trust and under Section 51.002 of the Texas Property Code is void.1 Instead, the Texas Probate Code requires the “sale of any property of an estate [to be made by] an order of court authorizing the same.”2 And, in its order, “the court may order property sold for cash or on credit, at public auction or privately, as it may consider most to the advantage of the estate, except when otherwise specially provided herein.”3

In Pearce, Mr. and Mrs. Stokes executed a deed of trust on certain lots as security for payment of purchase-money promissory notes. Mr. Stokes later died and eventually an event of default occurred in the payment of one of the promissory notes. The real property was then sold by the trustee pursuant to the power of sale in the Stokes’ deed of trust. Thereafter, the administrator of Mr. Stokes’ estate filed suit to cancel the trustee’s deed. On these facts, the Texas Supreme Court asked the question:

Must a court, in a suit by the administrator of the estate of a deceased mortgagor of non-homestead real property in which there is no evidence of claims against the estate of higher priority than secured claims, set aside a sale of such property made after the death of the mortgagor under a power of sale in a deed of trust?4

The court “unconditionally” answered its own question in the affirmative– reasoning, in relevant part:

It is no great hardship on the mortgagee to hold that at the suit of an administrator the court must cancel a sale made under a deed of trust after the death of the mortgagor. Where there is a necessity therefor the mortgagee himself can force the opening of an administration or the payment of his claim and thus avoid the expense and trouble of a sale under the deed of trust …. If, alternatively, he elects to have the sale made and take a chance on the subsequent opening of an administration and a suit to cancel the sale, he should abide the consequences.5

Surviving Co-Makers/Mortgagors

Referring again to the facts presented in Pearce, suppose the creditor wanted to proceed with the foreclosure of the surviving spouse’s interest alone. This question was answered in Albiar v. Arguello, 612 S.W.2d 219, 220 (Tex. Civ. App.–Eastland 1980, no writ). In Albair, the surviving spouse argued that since the creditor’s claim, asserted in district court, was barred against him as the administrator of his deceased wife’s estate, the creditor’s ability to assert its claim against him in his individual capacity in district court should likewise be barred.6 The court disagreed with the argument, however, noting that the surviving spouse “in his individual capacity, is liable as a joint maker of the note for the full amount of the indebtedness.”7 The court also explained that a creditor’s foreclosure “is [likewise] proper against [the surviving spouse’s] undivided one-half of the community property.”8

It is equally settled under Texas law that in the case where a maker/mortgagor no longer owns an interest at the time of his death, a creditor may move forward with foreclosure.9

Independent Administrations

In contrast to a dependent administration, a power of sale under a deed of trust may be exercised during the course of an independent administration– i.e., without the risk of the sale being canceled by an independent executor. In Bozeman v. Folliott, the Corpus Christi appellate court summarized Texas law in this regard, explaining:

Where the deceased mortgagor of property dies intestate and administration is opened on his estate within the time prescribed by law, a sale of the property under a preexisting deed of trust made after administration is opened and before it is closed is void, because the opening of the administration suspends the power of sale under the deed of trust.Robertson’s Adm’x v. Paul, 16 Tex. 472 (1856)Pearce v. Stokes, [291 S.W.2d 309 (Tex. 1956)]. However, *100 the rule is different with respect to independent administrations, where the control of the decedent’s estate is in the hands of an executor. ‘The law is settled that a trustee under a deed of trust can exercise the power of sale after the death of the grantor when the grantor’s estate is being handled under an independent executor as provided and directed in the will.’ Fischer v. Britton, 125 Tex. 505, 83 S.W.2d 305, 306 (1935)Pearce v. Stokes, supra; Freece v. Truskett, 130 Tex. 90, 106 S.W.2d 675, 677 (Tex. Comm’n App. 1937, opinion adopted).10

As a preliminary matter, if foreclosure is the objective, the creditor must make a preferred debt and lien election to the independent executor under Section 306(a)(2) of the Texas Probate Code. At that point, the independent executor may either pay the debt off or continue making payments as per the terms of the contract that secures the debt.11 Regardless of which method the independent executor chooses, however, the creditor will have priority over all other debts (even first- and second-class claims) to the extent of the value of its collateral.12

In the event that an independent executor defaults in repaying the indebtedness, the creditor should: (a) make a proper demand to the independent executor, (b) provide an opportunity for the independent executor to cure the default and, assuming the independent executor fails to cure the default, (c) provide notice to the independent executor that the entirety of the indebtedness is due, accelerate the debt, and provide proper notice of a trustee’s sale.13

The notice of trustee’s sale should be given to the independent executor in the same manner that it would have been given to the deceased debtor, i.e., as in other cases by following the provisions set forth in the parties’ deed of trust and as provided in TEX. PROP. CODE § 51.002(b). However, once the foreclosure sale has occurred, if the creditor’s claim is not fully satisfied through the sale of the property the creditor may not then look to the independent executor to pay any deficiency out of other assets of the estate.14

No Administration

If a creditor forecloses on real property within four years after the death of a deceased debtor, but before an administration of the deceased debtor’s estate is opened, the foreclosure is valid. However, if a dependent administration is opened within four years after the death of the deceased debtor, the foreclosure sale is voidable by the administrator.15 What’s more, the administrator can seek to recover damages for use of the property from the date that the purchaser at the foreclosure sale obtained possession.16 Only after the expiration of four years from the decedent’s death is a foreclosure sale free from the risk of being set aside by an administrator.17

Potential Feasibility of Temporary Administrations

Obviously, if no administration is opened within the requisite four-year period, the creditor’s foreclosure sale will remain valid. However a creditor should not have to wait until this four-year period is over in order to be free of all risk of having its foreclosure sale set aside. Waiting four years may be just as risky and uncertain as if the creditor had simply decided to move forward with foreclosure. Indeed, during a four-year period, the improvements on the real property will likely be subjected to neglect–even to the point of becoming substandard, dilapidated or otherwise unfit. Worse-case scenario: The condition of the improvements on the real property get to the point where costly renovation or demolition is required by the city in which the improvements and real property are located.18 In short, without an administration the value of the collateral securing the deceased debtor’s indebtedness is prejudiced and the value of the decedent’s estate is itself diminished.

Still, while a creditor is included in the order of persons qualified to serve as an estate representative under Section 77 of the Texas Probate Code–and while it is true, e.g., as stated in Pearce, that a creditor “can force the opening of an administration or the payment of [its] claim”19–the commitment involved in handling all aspects of a formal administration may be cost-prohibitive in comparison to the value of the creditor’s claim. Thus, under the right circumstances, a creditor may petition the probate court to open a temporary administration under Section 131A of the Texas Probate Code20 with, e.g., the following limited powers for an appropriate duration not to exceed 180 days: (a) to take possession of the real property and improvements located at [location] (hereinafter “Property”); (b) to take all necessary steps to preserve and protect the Property, as the temporary administrator deems appropriate; and (c) after taking possession of the Property and taking the necessary steps to preserve and protect the Property, to affect (or allow *101 to be affected) the sale of the property under Section 51.002 of the Texas Property Code, with authority to accept all notices pertaining to the indebtedness and all notices pertaining to the foreclosure of the real property and improvements on behalf of the estate.

In contemplating a temporary administration, it is important to identify facts and to present sufficient evidence that the interests of an estate require “immediate appointment.”21 Temporary administrations are sometimes “not viewed with total favor” by some probate courts.22 What’s more, the Texas Supreme Court has described the purpose of a temporary administration as “a mechanism by which the assets of an intestate decedent’s estate could be preserved until delivered into the control of a permanent administrator.”23 In fact, the court in Neal went so far as to say that a temporary administration “serves the same purpose as the temporary injunction–to preserve the status quo.”24 That being said, the court in Neal affirmed the appellate court’s decision finding proper the appointment of a temporary administrator to accept service of process so that the decedent’s estate could be sued.25

To comply with the requirements of a valid (and verified) application underSection 131A of the Texas Probate Code (and Section 81 or 82 of the Texas Probate Code, as appropriate), the creditor’s attorney will necessarily have to undertake a rigorous investigation of the attendant facts and circumstances. Fortunately, this pre-application investigation sometimes results identifying relatives of the decedent who may be willing to open the administration of the decedent’s estate–in which case the creditor is relieved of having to open the administration itself, and instead is now able to simply move though the probate claims process as in other cases. Still, even if the decedent’s relatives are unwilling to open the administration of the decedent’s estate, communication with these relatives will likely be a critical step for the creditor’s attorney in obtaining some of the information (or, better yet, the sworn testimony) necessary to move forward with the creditor’s application for temporary administration.

Additional preliminary matters recommended before a creditor’s attorney submits an application for temporary administration: (a) obtain an updated appraisal of the subject property–not just for the purposes of the application, but also to determine a proper bid amount if/when a trustee’s sale takes place; (b) order a title run to identify all mortgagees and lienholders of the subject property; and (c), given the nature of the powers sought, the creditor’s attorney should also identify (perhaps with the assistance of the court at the hearing on the application for temporary administration) a qualified local attorney who might be willing to serve as an attorney ad litem for unknown heirs.

If the court grants the creditor’s application for temporary administration, in addition to setting forth the matters under Section 131A(c) of the Texas Probate Code, the order should specifically list all powers and duties of the temporary administrator because any act taken by the temporary administrator beyond these powers and duties is void.26 What’s more, the appointee’s obligation to notify the mortgagees and lienholders of the subject property (and other known creditors) should be set forth in the order. However, given the purposes of the temporary administration contemplated in this article, whether a temporary administrator must file an inventory is questionable. Thus, if an inventory is desired, it is advisable to state that requirement in the order as well.

Admittedly, utilizing the temporary administration process under the circumstances described in this article is not appropriate in every case. However, until the legislature provides for a different vehicle, utilization of the temporary administration process is sometimes the only feasible option for both the creditor and the deceased debtor’s estate.

 

Footnotes

a1

Josh White is a shareholder at the law firm of Haley & Olson, P.C. Mr. White focuses his practice on the litigation of creditor’s rights, business and construction-related claims.

1

See Pearce v. Stokes, 291 S.W.2d 309 (Tex. 1956) (when an administration is opened on the estate of a deceased mortgagor a sale made while the administration is pending is void because the opening of the administration suspends the power of sale).

2

TEX. PROB. CODE § 331.

3

Id.

4

Pearce, 291 S.W.2d at 310.

5

Id. at 312.

6

Id.

7

Id.

8

Id. (citing Martin v. Harrison, 2 Tex. 456 (1847) (holding that there was no error in prosecuting a claim against a surviving spouse to the full extent of his indebtedness, and to obtain satisfaction from the mortgaged property, to the extent of such surviving spouse’s interest in the mortgaged property));see also Wiley v. Pinson, 23 Tex. 486 (1859) and Kruger v. Taylor, 27 S.W.2d 130 (Tex.Comm’n App. 1930, holding approved).

9

See Taylor v. Williams, 108 S.W. 815 (Tex. 1908)see also Estrada v. Reed, 98 S.W.2d 1042, 1044 (Tex. Civ. App.–Amarillo 1936, writ ref’d) (when a mortgagor conveys his interest in property before he dies, his mortgagee’s power of sale is not revoked by the mortgagor’s death).

10

Bozeman v. Folliott, 556 S.W.2d 608, 613 (Tex. App.–Corpus Christi 1977, writ ref’d, n.r.e.)

11

See TEX. PROB. CODE § 306(a)(2) and (c).

12

See TEX. PROB. CODE § 306(a)(2) and (c); see also Wyatt v. Morse, 102 S.W.2d 396, 398-99 (1937).

13

See Fenimore v. Gonzales County Sav. & Loan Assoc., 650 S.W.2d 213, 214 (Tex. App.–San Antonio 1983, writ ref’d, n.r.e.). As a caveat, the court inFenimore emphasized the distinction between a “notice of acceleration” from the later “notice of trustee’s sale.” Id. at 215. Specifically, under Texas law, the authority to move forward with foreclosure depends “not only upon regularity of the notice of sale but also upon [the] propriety and validity of the antecedent notice of acceleration.” Id. (citing Lockwood v. Lisby, 476 S.W.2d 871, 873 (Tex. Civ. App.–Fort Worth 1972, writ ref’d n.r.e.)).

14

See TEX. PROB. CODE § 306(c); see also Wyatt, 102 S.W.2d at 398-99.

15

American Savings & Loan Assoc. v. Jones, 482 S.W.2d 62, 63 (Tex. App.–Houston [14th Dist.] 1972, writ ref’d n.r.e.) (citing Pearce v. Stokes, 291 S.W.2d 309 (Tex. 1956)).

16

Id.

17

Freece v. Truskett, 106 S.W.2d 675, 677 (Tex. 1937) (citing Wiener v. Zweib, 141 S.W. 771, 776 (Tex. 1911) (holding that when no administration for the subject estate was opened and after the lapse of four years a sale under a deed of trust after the death of the mortgagor, but before the lapse of four years, was valid.)).

18

See, e.g.TEX. LOCAL GOV’T CODE 214.001, et seq.

19

Pearce v. Stokes, 291 S.W.2d 309, 312 (Tex. 1956).

20

The processes up to, including, and after a temporary administrator’s appointment are detailed in Sections 131A (appointment of temporary administrators), 133 (powers of temporary administrators), 134 (accounting), and 135 (closing) of the Texas Probate Code. Anyone not otherwise disqualified by law, including creditors, may file an application for the appointment of a temporary administrator. See TEX. PROB. CODE 131A(b);Beall v. Cooke, 2001 Tex. App. LEXIS 4141 (Tex. App.–Houston [1st Dist.] 2001, no pet. h.) (not designated for publication) (citing Nelson v. Neal, 787 S.W.2d 343, 344-45 (Tex. 1990) and further explaining that, in Harris County, the procedure to make a claim against an estate when no one has qualified as executor or administrator, is to petition the probate court to appoint a temporary administrator for the estate).

21

TEX. PROB. CODE 131A.

22

See Stanley M. Johanson, Johanson’s Texas Probate Code Ann., Texas Probate Code § 131A, commentary (2007 ed.) (citing Judge Mike Wood, How to Get a “Yes” in Probate Court, Houston Bar Ass’n Wills & Probate Institute 10 (Feb. 2000))

23

Nelson v. Neal, 787 S.W.2d 343, 346 (Tex. 1990) (citing Ex parte Lindley, 354 S.W.2d 364, 366 (Tex. 1962)).

24

Id. (citing and recommending for comparison Ex parte Lindley, 354 S.W.2d at 366 with Texas Aeronautics Comm’n v. Betts, 469 S.W.2d 394, 398 (Tex. 1971)).

25

Id.

26

See TEX. PROB. CODE § 133(a); see also Bandy v. First State Bank, Overton, Tex., 835 S.W.2d 609, 615 (Tex. 1992).