Foreclosure of real property and disposition of personal property are governed by different bodies of law. Real property foreclosure sale varies dramatically among the states. Personal property disposition is governed by each states’ versions of Article Nine commercially reasonable disposition.
Texas Real Property Foreclosure
Section 51.002, et seq. of the Texas Property Code defines the minimum statutory procedure that must be satisfied to properly foreclose upon real property. In addition to the minimum statutory requirements, the deed of trust executed by the debtor-mortgagor details the agreed contractual terms and conditions for foreclosure of real property.
Personal Property Disposition in Texas
Article Nine of the Texas Business and Commerce Code defines the minimum statutory procedures that must be satisfied to foreclose upon personal property. In addition to the Article Nine requirements, the security agreement executed by the debtor-mortgagor defines the contractual terms and conditions for foreclosure of personal property. Generally, personal property disposition must be commercially reasonable.
Comparison of Texas Foreclosure Procedures for Real property and Personal Property
Real property and personal property foreclosures are dramatically different. Real property foreclosures are conducted on the first Tuesday of each month between the hours of 10:00 a.m. and 4:00 p.m. at the courthouse door in the county in which the real property is located, with a notice posted at the courthouse door, personal notice to the debtor, and filing of the notice with the county clerk, all 21 days before the foreclosure sale. These requirements are defined by § 52.001 of the Property Code and are unique to Texas law. Personal property foreclosures are conducted under § 9.504 of the Texas Business and Commerce Code, which generally requires a commercially reasonable sale. The requirements of Article Nine of the Texas Business and Commerce Code are followed, with some minor variations, by all states except Louisiana.
Thus, real property foreclosures in Texas are very defined and structured procedures unique to Texas law which do not require the sale to be commercially reasonable. On the other hand, personal property foreclosure sales are not structured by statute, but they must be commercially reasonable as to every aspect of the disposition, including method, manner, time, place, and terms. The apparent conclusion is that although the legislature has specifically defined the procedures that must be followed to dispose of real property, personal property may be disposed of in any manner the secured party elects, as long as the sale is in all respects commercially reasonable.
The differences between real and personal property foreclosure procedures and requirements have had interesting effects upon lenders and borrowers. The notice provisions for real property foreclosures mandate procedures known to both the lender and the borrower. The procedures provide certainty as to the mechanics of the sale. Both lender and borrower are offered an opportunity to dispose of property, with each fully understanding when, where, and how the sale or purchase will occur. In contrast, the nebulous standard of a commercially reasonable sale leaves both the lender and the borrower uncertain as to the ultimate and satisfactory sale or purchase procedure for personal property. Article Nine attempts to place the burden on the secured lender seeking a deficiency to sell in a commercially reasonable manner, whatever that may be in the particular circumstances found by the lender. Likewise, the debtor has no knowledge of how the lender will proceed with foreclosure and has the burden of proof, if attacking the sale, to show that the sale was not commercially reasonable. The more certain real property foreclosure procedures seem to work more effectively for both the lender and the borrower.
Nonjudicial Foreclosure Available for Personal and Real Property
Nonjudicial foreclosure is the sale of property without the filing of a lawsuit and the entry of a judgment ordering foreclosure. Nonjudicial foreclosure allows all aspects of foreclosure to proceed without a court order or direct supervision. The initial default in the deed of trust or security agreement may be declared by the holder without court order. Demand, notice, and the foreclosure sale may also occur without direct court order or approval. The sale must comply with the terms of the deed of trust and § 51.002 of the Property Code for real property, and with the terms of the security agreement and § 9.504 for personal property, but the actual sale procedure is not directly supervised by the court.
Objections to foreclosures usually take the form of seeking an injunction from a state or federal court to stop a foreclosure, filing of bankruptcy, or filing a lawsuit after the foreclosure that seeks damages for wrongful foreclosure or rescission to set the foreclosure aside. All of these objections to foreclosure require court action for relief.
There are exceptions to the general proposition that all real and personal property may be foreclosed nonjudicially. Mechanic’s and materialman’s liens for removable property oil and gas liens, and landlord’s liens must be foreclosed through judicial proceedings. Also, home equity loans, reverse mortgages and tax liens require that a court enter an order authorizing nonjudicial foreclosure.
Foreclosure of Real and Personal Property Together
In the event the deed of trust (combination deed of trust and security agreement) covers both real and personal property, the secured party may proceed with respect to the Business and Commerce Code personal property under Article Nine, or he or she may proceed as to both the real property and personal property in accordance with his or her rights as to real property, and in that event, the provisions of Article Nine do not apply.