Austin Lawyer: "Produce the Note" Claims in Foreclosure

There have been many news reports making the rounds about ways to avoid foreclosure, and many Texas residents are believing such news reports to be a "magic bullet" to stave off foreclosure. One needs to realize that different states have different laws related to foreclosure of real estate, particularly residential real estate foreclosures, and one should not get their legal advice from such news reports.

So, what is all of this "produce the note" craze? What does it mean?

The basics of the idea is, when a debtor is desperate and their house is ready to be foreclosed upon, some lawyers (usually in other states) tell homeowners to request that the bank "produce the promissory note" related to the transaction. As many real estate lenders have acquired the promissory notes through sometimes hundreds of large portfolio transfers, often these are done electronically and the original closing paperwork gets lost in the mix, or so the theory goes. So if you need an extra two or three months to get finances back in order, so sayeth the news reports, this will provide the debtor with the time to do just this while the lender "scrambles" to find the promissory note signed at closing.

Sounds great, right? We never have to pay our mortgages again! Hooray!

Well, in Texas, as you can well imagine, it is not nearly that simple. Under Texas law, lenders hardly ever file a lawsuit to foreclose on residential real estate, choosing instead to do what's called a "non-judicial foreclosure". This is a procedure whereby notices are mailed and posted and ultimately the lender holds an auction on the courthouse steps on the First Tuesday of a month to foreclose their interest in the real estate and filing what's called a "Trustee's deed" (often a Substitute Trustee's Deed). Which means, unless the DEBTOR files a lawsuit PRIOR to the foreclosure and auction sale, there is never a time to demand that a lender "produce the note". Which means it ain't no magic bullet without litigation.

The other problem with the buy time theory is that by the time the foreclosure sale is posted, usually a lender has "accelerated" the note. Meaning, the debtor does not just owe the lender the three missed $1200 house payments. Now the debtor actually owes the lender the ENTIRE balance of the promissory note. So if a debtor waits until the foreclosure sale to try to block all of these things, they are usually not in a position to come up with the, say, $187,000 owed on the Note in order to stop foreclosure. Three months delay asking the lender to produce the note may not even matter, even if the debtor could then make all of their payments current.

Now, this is not to say that there are no ways to delay even a proper lender from foreclosing on a property. Bankruptcy filings and litigation can be used to delay foreclosure proceedings, as every lender knows. In fact, if there are legitimate reasons to believe that the lender has misapplied or failed to apply payments, or if there are other reasons to challenge the acceleration of the note (due to waiver or unlawful behavior by the lender), it is a very effective tool necessary to sort through these issues.

In such situations, a lawyer representing a homeowner, or the homeowner pro se (although this is not advised, but may be a financial reality), can seek injunctions against acceleration and foreclosure, as well as seek discovery that can be very time consuming and costly for the lender which may lead to settlement by negotiation. But they will first need to get a judge to so order prior to foreclosure in order for the note production to be relevant in most circumstances.

If there is litigation, certainly part of this process will be to determine by what authority the lender seeks to foreclose its interest, and burdens will be on the lender to prove a contract exists and they are the lawful holder of said note contract and security interest in the form of a deed of trust. When there have been hundreds of transfers, this is certainly more time consuming and difficult for a lender. Unfortunately for the "magic bullet-ers" out there, often these deeds of trusts securing the note and transfers are done in the real property records and it is simply a matter of getting the documents from the county clerk's office as certified copies. Certified copies of public records are usually automatically considered authentic under Texas Rules of Evidence 901(7) and are exempt from hearsay typically under Texas Rules of Evidence 803(14).

Also, as far as the Note goes, the lender does not need to have the original signature in pen ink to foreclose or get summary judgment. To prevail on a motion for summary judgment to enforce a promissory note, a plaintiff/lender must only establish that (1) a note exists, (2) the plaintiff/lender is the legal owner and holder of the note, (3) the defendant is the maker of the note, and (4) a certain balance is due and owing on the note. Scott v. Commercial Servs. of Perry, Inc., 121 S.W.3d 26, 29 (Tex. App.—Tyler 2003, pet. denied). If no genuine issue of material fact exists as to any of these elements, the plaintiff is entitled to summary judgment as a matter of law. See Tex. R. Civ. P. 166a(c). The lender can establish existence of the notes by attaching true and correct copies of the notes as exhibits to its motion and filing a sworn affidavit in verification of the copies. A photocopy of a promissory note, attached to an affidavit in which the affiant swears that the photocopy is a true and correct copy of the original note, is proper summary judgment proof which establishes the existence of the note. Johnson, 610 S.W.2d 143; Town N. Nat'l Bank v. Broaddus, 569 S.W.2d 489, 490 (Tex. 1978); Blankenship v. Robins, 899 S.W.2d 236, 238 (Tex. App.—Houston [14th Dist.] 1994, no writ). If the documents show that the plaintiff is the legal owner of the note and that a balance is owed, then the debtor must raise a fact issue as to one of the elements, and must do so by sworn testimony (and verified pleadings).

It is our guess that the lawyers discussing the "produce the note" claims do not practice in Texas. If you are an Austin or Texas lender with a "produce the note" debtor, give us a call at 512-472-2300.

Credit Card Agreements May be Implied under Certain Circumstances

In a recent case out of a Dallas, the Court found that a credit card agreement may be implied under certain circumstances. In this case, Bank X issued a credit card to the debtor. Bank X then merged with another bank, Bank Y. Bank Y sued the debtor to collect the balance on the credit card. The debtor argued that Bank Y had not produced an agreement between the debtor and Bank Y, that the debtor had not made an agreement with Bank Y, and that the debtor was, therefore, not liable.

Even though there was no written agreement, the Court found that the debtor and Bank Y had an implied agreement. An “implied contract” can arise from the acts and conduct of the parties.

The Court noted conduct of the parties evidencing an implied agreement. The initial interest rate on the account was set forth on the first billing statement, and the financial terms in effect each time the card was issued were set out on each monthly statement. One of the monthly statements informed debtor of merger and stated that words “we, us and our” as used in cardmember agreement now referred to bank Y. Even after debtor was given notice of the merger, new charges were made on account almost every month and late fees and “over the limit” fees were periodically assessed which the debtor did not object to or dispute. The Court determined that based on the series of transactions reflected on the account statements, it was reasonable to infer that the debtor agreed to the full amount shown on the statements and impliedly promised to pay the indebtedness.

Texas Foreclosure Procedures

In order to set up a non-judicial foreclosure, the lender must do several things in order to have the ability to foreclosure their security interest, or what we call a Deed of Trust. First, the loan papers (or "documentation") must include an obligation to pay (usually called a Note, Real Estate Lien Note, Promissory Note, or Note with Vendor's Lien) and should also include the security agreement (usually referred to as a Deed of Trust). The Deed of Trust gives the lender the right to "foreclose" its security interest if the Obligor fails to pay. The Deed of Trust should appoint a "trustee" and must contain a "power of sale." The Deed of Trust should also give the lender the right to designate "Substitute Trustee." In Texas, the foreclosure is usually by way of a "non-judicial" foreclosure, or by way of the posting of the property for sale on the first Tuesday of the month.

The following steps contain the basic procedures that the lender must go through in order to get to the point where they may foreclose the lien:

1) Demand for Payment - once the Obligor defaults in the making of one or more payments, the lender must give notice of the default and demand the overdue payment or payments.

2) Notice of Intention to Accelerate - prior to being able to foreclose its lien, the lender must give notice of intention to accelerate. The Notice of Intention to Accelerate is usually combined with a demand for payment. The notice should give at least ten (10) days within which the Obligor can cure the default. If the property is the Obligor's "residence," then the Notice of Intention to Accelerate should give the Obligor at least twenty (20) days notice. After the appropriate time period has expired, then the lender is free to "post" the property for a non-judicial foreclosure.

3) Notice of Foreclosure - assuming that the Lender has a valid Deed of Trust and that the lender has appropriately moved to foreclose through the designated trustee or its "substitute" trustee, then after the expiration of time on the Notice of Intention to Accelerate, the lender can "post" the property for foreclosure. This is done with the giving of Notice of Foreclosure. The Notice must be posted at the Courthouse and must be send via Certified Mail, Return Receipt Requested to the last known address of the debtor. Because only the sending of the certified mail is required, it does no good to attempt to refuse delivery. You are only denying yourself the information contained in the Foreclosure Notice. The Notice must give the debtor at least 21 days notice of the foreclosure, and must inform the debtor of the time, date, and place of the foreclosure sale. Foreclosure sales take place at the location designated by the Commissioner's Court for each County in which the property (or any part of the property if the property is located in more than one County) is located.

4) Posting of the Property - the Notice of Foreclosure should then be "posted" at the designated location where notices are given at the County Courthouse (or other designated location). The Notice should be posted for the full twenty one (21) days prior to the sale and must be filed with the County Clerk's office.

5) Foreclosure Sale - The foreclosure sale should take place on the designated date between the hours of 10:00 a.m. and 4:00 p.m., that date being the first Tuesday of the month of the foreclosure sale. The sale must begin within three (3) hours of the time stated in the notice of foreclosure. At the foreclosure sale, the trustee or substitute trustee must "strike off" or sell the property to the highest bidder. The trustee is not required to sell the property for any particular price. For this reason, if your property is being foreclosed upon you should at least attend the sale.

6) Substitute Trustees / Trustee's Deed - the final step in the process is for the Trustee (or Substitute Trustee if one was appointed) to prepare and file a Trustee's or Substitute Trustee's Deed to reflect that the property was sold. The Deed will then transfer title of the property to the purchaser or back to the lender, as the case may be. You should check the Deed to be sure that it accurately reflects what happened at the foreclosure sale.

Due to the complexity of these proceedings and the possibility of many pitfalls (or loopholes as many call them), if you have questions about the validity of any foreclosure sale, you should seek the advice of an attorney who is experienced in foreclosure litigation and foreclosure sales.