deed in lieu of foreclosure transactions · frank oliver practices law in austin, texas, with the...

DEED IN LIEU OF FORECLOSURETRANSACTIONS

Frank OliverOliver & Oliver, P.C.

2008 Texas Land Title Institute Deed in Lieu of Foreclosure Transactions

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RESUME OF FRANK OLIVER Oliver & Oliver, P.C.

100 Congress Avenue, Suite 2100 Austin, Texas 78701

(512) 370-4050 Fax (512) 370-4051

[email protected]

Frank Oliver practices law in Austin, Texas, with the firm of Oliver & Oliver, P.C. He is a 1972 graduate of the University of Texas and a 1975 honors graduate of the University of Texas Law School where he was an editor of the Texas Law Review. Following a federal appellate judicial clerkship, he has engaged in the private practice of law, principally in the area of real estate litigation and transactions. He has represented title insurance companies, agents, and insureds in the defense of title claims for almost thirty years. He is the author of Garrett and McDaniel, DTPA Liability for Issuance of a Title Insurance Commitment, published in 26 Texas Tech Law Review 857 (1995) and previous TLTA Institute papers. He is an Associate Member of the Texas Land Title Association and has served as a member of the Defense Counsel Committee and the Legal Issues Committee. He is a Life Fellow of the Texas Bar Foundation. He is listed in Best Lawyers in America and is a Texas Monthly Super Lawyer in Real Estate.

Deed in Lieu of ForeclosureApplicable Case LawProperty Code § 51.006Drafting ConsiderationsTitle Insurance IssuesTax Considerations


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Flag-Redfern Oil Co. v. Humble Exploration Co., Inc., 744 S.W.2d 6 (Tex. 1988)

Facts:• Owner granted deed of trust lien to Lender• No vendor’s lien • Owner later deeded 1/2 minerals to third

party• Owner then deeded property and all

minerals to Lender in lieu of foreclosure


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The Texas Supreme Court held that the deed in lieu of foreclosure did not extinguish the intervening legal estate in the 1/2 of the mineral estate created by the prior conveyance to the third party.


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The Texas Supreme Court observed:

“There is no such deed as a deed in lieu of foreclosure. A deed given in satisfaction of a debt may serve as a convenient, efficient transfer of title upon default of a debt.”


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“ It would be unfair to allow parties to make private conveyances, although judicially efficient, to the detriment of unknowing parties by foreclosing their right to bid at a trustee’s sale; to redeem their interests; to insist on marshalling of assets; or to set forth the affirmative defense of merger or extinguishment of the debt.”


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The Texas Supreme Court distinguished prior cases holding that a voluntary reconveyance operates as a foreclosure for the mortgage holder and for both junior creditors and intervening purchasers.

E.g., Jones v. Ford, 583 S.W.2d 821 (Tex. Civ. App. -- El Paso 1979, writ ref’d n.r.e.)


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“ . . . [Here the Lender] held a deed of trust mortgage, not a vendor’s lien mortgage. . . . A deed conveying land but coupled with a lien for the unpaid purchase money equates to an executory contract that will ripen into a title in the purchaser when the obligation to pay the purchase money is met.”


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“ Default can lead to rescission of the contract. This can be accomplished through foreclosure, or privately when the vendee executes a deed reconveying the property. But this is not the case here. [The Lender] held only a mortgage.”


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Martin v. Uvalde Savings and Loan Assn., 773 S.W.2d 808 (Tex. App. -- San Antonio 1989)

Facts:• Owners granted deed of trust lien to Lender• Following default, owners unilaterally

executed deed in lieu of foreclosure to Lender with deed stating conveyance was in satisfaction of debt

• Lender then foreclosed and brought suit to collect deficiency


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Martin v. Uvalde Savings and Loan Assn., 773 S.W.2d 808 (Tex. App. -- San Antonio 1989)

The Court of Appeals held that effective delivery of a deed requires acceptance of the deed by the grantee, either expressly or impliedly (such as by recording of the deed by the grantee).

The unilateral deed from the owner/borrower was ineffective.


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Morrison v. Christie, 2008 WL 3877199 (Tex. App. -- Fort Worth 2008)

Facts:• After default Owner gave Lender deed in lieu of

foreclosure with an agreement that net sales proceeds received by Lender upon resale would be applied to debt

• Lender then sued for deficiency following sale• Owner then asserted that deed in lieu of foreclosure

was actually intended as a mortgage requiring formal exercise of power of sale and application of Property Code § 51.003


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The Court of Appeals stated:

“[W]e have found no law, and the [Borrowers] have not pointed us to any, that holds that parties cannot agree to partial satisfaction of a debt by conveyance of property.”


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In response to the borrowers’ argument that the credit was required to be the fair market value of the property, the Court of Appeals further stated:

“We have found no law that would prohibit parties from agreeing to the method of payment reflected on the deed-in-lieu. . . .”


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In response to the borrowers’ argument that the credit was required to be the fair market value of the property, the Court of Appeals further held that Property Code § 51.003, providing a right to a credit for the full market value of the property did not apply.

In effect allowing the parties to override the statute by contract in a deed-in-lieu transaction.


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Texas Property Code § 51.006

Applies to holder of a debt under a deed of trust who accepts from the debtor a deed of the real property subject to the deed of trust in satisfaction of the debt.

Allows the debt holder to void the deed in lieu of foreclosure until the fourth anniversary of the deed in lieu of foreclosure.


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Requirements for Use of Statute:

Debtor fails to disclose a lien or encumbrance on the property before executing the deed in lieu of foreclosure.

Lender had no personal knowledge of the undisclosed lien or encumbrance.


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If Lender elects to void deed in lieu of foreclosure, the priority of the deed of trust is not affected or impaired.

After accepting deed in lieu of foreclosure, Lender may still foreclose the deed of trust without voiding the deed in lieu of foreclosure.


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Texas Property Code § 51.006Joiner v. PACTIV Corp., 2005 WL 1907780 (Tex.

App. -- Corpus Christi 2005, pet. denied).

Facts:• Owner grants deed of trust to Lender• Third party records abstract of judgment

against Owner• Owner executes deed in lieu to Lender• Lender acknowledges payment in full and

releases lien• No disclosure to Lender of abstract of judgment


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Texas Property Code § 51.006Joiner v. PACTIV Corp., 2005 WL 1907780 (Tex.

App. -- Corpus Christi 2005, pet. denied).

The Court of Appeals held that Property Code §51.006 was inapplicable.

Lender had “personal knowledge” of the abstract of judgment because of the constructive notice that resulted from recording of the abstract of judgment.


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Texas Property Code § 51.006Cameron Life Ins. Co. v. PACTIV Corp., 2007 WL

2388906 (Tex. App. -- Corpus Christi 2007, pet. denied).

The Court of Appeals reaffirmed it prior holding in Joiner that Property Code § 51.006 was inapplicable, because the Lender had “personal knowledge” of the abstract of judgment because of the constructive notice that resulted from recording of the abstract of judgment.


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Texas Property Code § 51.006Cameron Life Ins. Co. v. PACTIV Corp., 2007 WL

2388906 (Tex. App. -- Corpus Christi 2007, pet. denied).

The Court of Appeals denied equitable subrogation to the Lender’s successor, holding that the deed in lieu transaction destroyed the Lender’s equitable subrogation rights.

When it accepted the deed in lieu the Lender’s position became inferior to the abstract of judgment.


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Drafting Considerations• Express non-merger language in the deed in

lieu of foreclosure.• Specify if the debt is fully or only partially

discharged.• Expressly reserve the right to pursue

deficiency if debt is not completely forgiven.• Avoid granting debtor any retained rights in

property (such as repurchase option) that would give rise to equitable mortgage claim.


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Title Insurance ConsiderationsMortgagee Policy - Continuation of CoverageThe coverage of this policy shall continue in force as of Date of Policy in favor of an Insured after acquisition of the Title by an Insured . . , but only so long as the Insured retains an estate or interest in the Land, . . . .

Post-policy claims relating to the subsequent deed in lieu transaction may not be covered.


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Title Insurance ConsiderationsTransamerica Title Ins. Co. v. Alaska Fed. Sav. and Loan Assn., 833 F.2d 775 (9th Cir. 1987)

The Court held that the title insurance company had no duty to defend the insured lender against the borrower’s claim that the deed-in-lieu transaction created an equitable mortgage because the lender granted the borrower a repurchase option.

The Court held that the actions of the lender in structuring the transaction had “created” the alleged equitable mortgage and the claim was therefore excluded under the policy.


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Title Insurance Considerations

As counsel for the lender, advise your client of the limitations on the continuation of coverage under the existing mortgagee’s policy and the benefits of obtaining a new owner’s policy in connection with the deed-in-lieu transaction.


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Tax Considerations

Gross income includes “gains derived from dealing in property.”

26 U.S.C. § 61(a)(3).

Gross income includes “income from discharge of indebtedness.”

26 U.S.C. § 61(a)(12).


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Tax Considerations

The transfer of property by deed in lieu of foreclosure is treated as a “sale or exchange” for federal income tax purposes.

Allen v. Commissioner, 856 F.2d 1169, 1172 (8th Cir. 1988).


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Tax Considerations

IRC Section 61(a)(3) applies to the transaction if (1) the borrower is relieved of his obligation to pay the debt, and (2) the borrower is relieved of title to the property.

Allen v. Commissioner, 856 F.2d 1169, 1172 (8th Cir. 1988).


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Tax Considerations

For federal income tax purposes, the amount realized includes the amount of liabilities from which the transferor is discharged as a result of the transfer.

Commissioner v. Tufts, 461 U.S. 300, 306 (1983) 26 U.S.C. § 1001(b)


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Tax Considerations

For non-recourse debt, the amount realized includes the entire amount of the mortgage on the property.

Commissioner v. Tufts, 461 U.S. 300 (1983)Yarbro v. Commissioner, 737 F.2d 479 (5th Cir. 1984)


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Tax Considerations

For non-recourse debt, the amount realized includes the entire amount of the mortgage on the property.

Commissioner v. Tufts, 461 U.S. 300 (1983)Yarbro v. Commissioner, 737 F.2d 479 (5th Cir. 1984)


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Tax ConsiderationsBASIC DEBT FORGIVENESS TRANSACTION

Purchase Price $ 2,000,000Debt Balance $ 1,900,000Adjusted Tax Basis $ 1,200,000Fair Market Value $ 1,500,000

Taxable Gain $ 700,000


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Tax ConsiderationsNO DEBT FORGIVENESS TRANSACTION

Purchase Price $ 2,000,000Debt Balance $ 1,900,000Adjusted Tax Basis $ 1,200,000Fair Market Value $ 1,500,000

Taxable Gain $ 300,000


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Tax Considerations2925 Briarpark, Ltd. v. Commissioner163 F. 3d 313 (5th Cir. 1999)

Debt Forgiven

Debtor Lender

Third Party Purchaser

Arranged sale to third party with simultaneous agreed debt forgiveness


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V.T.C.A., Property Code § 51.006

Page 1

Effective:[See Text Amendments]

Vernon's Texas Statutes and Codes Annotated Currentness

Property Code (Refs & Annos) Title 5. Exempt Property and Liens

Subtitle B. Liens Chapter 51. Provisions Generally Applicable to Liens

§ 51.006. Deed-of-Trust Foreclosure After Deed in Lieu of Foreclosure

(a) This section applies to a holder of a debt under a deed of trust who accepts from the debtor a deed conveyingreal property subject to the deed of trust in satisfaction of the debt. (b) The holder of a debt may void a deed conveying real property in satisfaction of the debt before the fourth an-niversary of the date the deed is executed and foreclosed under the original deed of trust if:

(1) the debtor fails to disclose to the holder of the debt a lien or other encumbrance on the property before ex-ecuting the deed conveying the property to the holder of the debt in satisfaction of the debt; and

(2) the holder of the debt has no personal knowledge of the undisclosed lien or encumbrance on the property.

(c) A third party may conclusively rely upon the affidavit of the holder of a debt stating that the holder hasvoided the deed as provided in this section. (d) If the holder elects to void a deed in lieu of foreclosure as provided in this section, the priority of its deed oftrust shall not be affected or impaired by the execution of the deed in lieu of foreclosure. (e) If a holder accepts a deed in lieu of foreclosure, the holder may foreclose its deed of trust as provided in saiddeed of trust without electing to void the deed. The priority of such deed of trust shall not be affected or im-paired by the deed in lieu of foreclosure. CREDIT(S) Added by Acts 1995, 74th Leg., ch. 1020, § 1, eff. Aug. 28, 1995. HISTORICAL AND STATUTORY NOTES 2007 Main Volume Section 2 of Acts 1995, 74th Leg., ch. 1020 provides:

© 2008 Thomson Reuters/West. No Claim to Orig. US Gov. Works.

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V.T.C.A., Property Code § 51.006

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“This Act applies only to a holder of a debt who accepts a deed conveying property in satisfaction of a debt onor after the effective date [Aug. 28, 1995] of this Act.” LIBRARY REFERENCES 2007 Main Volume

Mortgages 335. Westlaw Topic No. 266. C.J.S. Mortgages §§ 506 to 512, 579, 602, 604.

RESEARCH REFERENCES 2008 Electronic Update Encyclopedias TX Jur. 3d Deeds of Trust & Mortgages § 242, Deed of Trust Foreclosure After Deed in Lieu of Foreclosure. Forms 14 West's Texas Forms § 10.114, Deed of Trust Foreclosure After Acceptance of Deed in Lieu of Foreclosure. Treatises and Practice Aids Baggett, 15 Tex. Prac. Series § 2.33, Section 51.006 of Property Code: Deed-Of-Trust Foreclosure After Deed inLieu of Foreclosure. Baggett, 15 Tex. Prac. Series § 2.35, Unilateral Reconveyance of Property by Mortgagor to Mortgagee Does NotRelease Secured Debt and Deed of Trust. Baggett, 15 Tex. Prac. Series § 17.16, Deed in Lieu of Foreclosure. Cochran, 27 Tex. Prac. Series § 7.15, Challenges to Foreclosure. V. T. C. A., Property Code § 51.006, TX PROPERTY § 51.006 Current through the end of the 2007 Regular Session of the 80th Legislature (c) 2008 Thomson Reuters/West END OF DOCUMENT

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