There is no question that the COVID-19 pandemic has prompted a swift and large-scale shift in the way real property transactions take place from “business as usual” to a state of limbo in most of the 50 states. In Texas, commercial real estate lenders and creditors have recently found themselves to be no exception when it comes to carrying out foreclosure sales. Executive Order GA-28 is changing, if not outright preventing, a valid foreclosure sale from taking place in Texas—at least for the time being.
Foreclosure laws and procedures vary from state to state. State law sets out the specifics of whether a given jurisdiction allows judicial and/or nonjudicial foreclosure. In Texas, when a mortgage loan is in default, a mortgagee may elect to institute either a judicial foreclosure or, when vested with power of sale via a deed of trust, a nonjudicial foreclosure. The primary method in Texas, however, involves nonjudicial foreclosure, which does not require court action.
In order for there to be a valid foreclosure sale, Chapter 51 of the Texas Property Code prescribes the minimum requirements for a nonjudicial sale of real property under a power of sale conferred by a deed of trust or other contract lien. In either case, judicial or nonjudicial foreclosure, many foreclosure sales in Texas are well-attended and held outdoors. Thus, amid the coronavirus pandemic, the Attorney General’s Office—as well as government leaders in the individual counties—have had to address whether foreclosure sales may persist as is customary in the state or with restrictions.
Executive Order GA-28
On June 26, 2020, Texas Governor Greg Abbott issued Executive Order GA-28, relating to the targeted response to the COVID-19 disaster as part of the reopening of his state.
Executive Order GA-28, which remains in effect as of the publication date of this Alert, generally orders that “[e]very business establishment in Texas shall operate at no more than 50 percent of the total listed occupancy of the establishment.” Paragraph five of the order originally stated that “[f]or any outdoor gathering in excess of 100 people… the gathering is prohibited unless the mayor of the city in which the gathering is held, or the county judge in the case of a gathering in an unincorporated area, approves of the gathering, and such approval can be made subject to certain conditions or restrictions not inconsistent with this executive order.” Paragraph five was later amended, on July 2, 2020, to apply to prohibit outdoor gatherings “in excess of 10 people.” On July 3, Harris County Judge Lina Hidalgo issued an Outdoor Gatherings Order in accordance with Executive Order GA-28, specifically prohibiting outdoor gatherings estimated to be in excess of 10 people for sales of real property, including foreclosure sales under Chapter 51 of the Texas Property Code.
As we have observed time and again throughout the COVID-19 pandemic, newly issued executive orders across the various U.S. jurisdictions often go through a series of subsequent clarifications, where it is unclear whether the terms of a given order apply to a particular business, industry, group, demographic or event. With respect to Executive Order GA-28, the need for clarification quickly arose regarding the order’s applicability to in-person attendance at judicial or nonjudicial foreclosure sales throughout the state.
On August 1, 2020, the Texas Attorney General’s Office provided informal guidance on the attendance limitation issue, concluding that a foreclosure sale of residential or commercial real property that is conducted outdoors is subject to the limitation on outdoor gatherings in excess of 10 persons imposed by Executive Order GA-28. The guidance further noted that:
[A]n outdoor foreclosure sale may not proceed with more than 10 persons in attendance unless approved by the mayor in whose jurisdiction the sale occurs, or if in an unincorporated area, the county judge. However, to the extent a sale is so limited, and willing bidders who wish to attend are not allowed to do so as a result, the sale should not proceed as it may not constitute a “public sale” as required by the Texas Property Code.
While this guidance theoretically permits for an outdoor foreclosure sale of 10 persons or fewer to take place, it leaves open the question: Does a 10-person sale constitute a “public sale” under § 51.002(a) of the Texas Property Code?
The answer, it appears, is likely, no. Under the Property Code, “[A] sale of real property under a power of sale conferred by a deed of trust or other contract lien must be a public sale at auction held between 10 a.m. and 4 p.m. of the first Tuesday of a month.” The purpose of the public sale requirement is to “secure the attendance of purchasers and obtain a fair price for the property.” Strict compliance with the Property Code is required for a trustee to properly make a foreclosure sale. Thus, “[i]f an attendance limit precludes the conduct of a public sale for the purpose of securing sufficient bidders to obtain a fair price, the propriety of a foreclosure auction may be called into question.” It can hardly be said then that a 10-person foreclosure sale, regardless of whether potential attendees make their inability to attend known, suffices as “public,” when a majority of foreclosure sales in high-population counties such as Harris and Tarrant counties regularly attract more than 10 attendees. For this reason, any creditor or lender who chooses to move forward with a 10-person foreclosure sale while GA-28 remains in effect runs the very real risk of having the sale challenged and/or invalidated for failure to comply with the public sale requirement in the Property Code.
Other Practical Considerations for Creditors
Notably, prior to and following the institution of Executive Order GA-28, many of Texas’ largest counties have suspended and/or postponed foreclosures amid COVID-19 concerns. While there is no official statewide moratorium on foreclosures in Texas, Executive Order GA-28, when considered in light of Chapter 51 Property Code requirements, effectively operates to prevent valid nonjudicial foreclosure sales from being firmly consummated. For these reasons, creditors seeking to proceed on “foreclosure Tuesday” in Texas must take into consideration local and statewide prohibitions on such sales and their potential invalidity when determining whether to proceed with pending foreclosures or renoticing for future postings. Creditors and lenders should also be wary of closing risks associated with these foreclosure transactions. Namely, that title insurance companies may refuse to issue title insurance, primarily due to the uncertainty surrounding the timing of deed-recordation during this time.
Overall, it is unclear as to the authority of a county to refuse to make public facilities available in contravention of Executive Order GA-28. Nor is it clear whether some other means, such as Zoom, Skype, etc., could be used to allow sales to proceed. It is likely the response to Executive Order GA-28 will continue on an ad hoc basis by county. However, due to the current lack of uniformity and clarity, and considering the risks involved, “those in the financial services industry should proceed with a ‘caveat lender’ approach” in all real estate transactions, but particularly foreclosure sales conducted pursuant to Executive Order GA-28.