Deed was not delivered until after the bankruptcy case was filed. The debtor argued that the foreclosure sale was incomplete because the trustee’s deed had not been recorded and, if it were not recorded, then the bankruptcy trustee could take the property as a BFP under §522(h) of the Bankruptcy Code. Analyzing Texas and Bankruptcy law, the court held that for the Debtor to step into the shoes of a hypothetical bona fide purchaser, it had to be without notice, either constructive or inquiry. Since the deed was not filed, notice could not be constructive. After a discussion the court concluded that the trustee was on inquiry notice of the mortgage and should have inquired of the record Substitute Trustee whether the property had been scheduled for foreclosure. Therefore the bankruptcy trustee was on inquiry notice and the property could not become part of the bankruptcy estate. So, what about the standard Texas requirement for a valid conveyance: delivery? Texas Title Standard 4.30 says, in the comment, “Delivery is a formality essential to the effectiveness of conveyances, recorded or otherwise.” The court found that the transfer to the lender was accomplished without the delivery of a deed: “In Texas, title acquired at an execution sale may be established by proof of a valid judgment, issuance of an execution thereon, a sale thereunder, the acceptance of a bid by the sheriff, payment of the costs, and payment of the purchase money either in cash or by crediting the judgment with the amount bid at the sale. Proof of these matters establishes an “equitable and superior’ title in the purchaser. A deed from the sheriff is a ministerial act not essential to the investiture of title ...” [Quoting Glenn v. Hollums, 80 F.2d 555, 556 (5th Cir. 1935).] Take Away If you take a property based on ownership via a previous foreclosure, check again; if you own a lease covering foreclosed property, the lease may not be gone. If you loaned money against a property with minerals, you may not have the minerals. For more information on the matters discussed in this Locke Lord QuickStudy, please contact the author. Martin Gibson | 512-305-4743 | mgibson@lockelord.com
modify the effect of the law unless agreed to by the lessee, and (iv) deny the application of the law where the mortgage does not cover the minerals. As to the underlying mineral ownership, the statute provides that “An interest of the mortgagor or the mortgagor’s assigns in the oil or gas lease, including a right to receive royalty or other payment that become due and payable after the date of the foreclosure, passes to the purchaser of the of the foreclosed property to the extent that the security instrument under which the real property was foreclosed had priority over the interest in the oil or gas lease of the mortgagor.” The fate of the mineral interest (reversionary right) is unclear since the above provision is limited to the mortgagor’s interest in the oil and gas lease. Does the purchaser at foreclosure own the minerals after the lease expires? Probably so since nothing in the statute purports to save the underlying mineral interest – just the leasehold interest. The new law takes effect on January 1, 2016 but there is a timing limitation so that the law “applies only with respect to a foreclosure sale for which the notice of sale is given ... on or after the effective date ....” In the Arbuckle case it appears (but is not clear) that the mortgage was foreclosed before the January 1, 2016 effective date making the new law inapplicable. The legal landscape may shift in later cases where both the mortgage and lease were in place before 1/1/16 but the foreclosure is after, especially as to whether the senior lien’s priority status can retroactively be modified to deny the lien holder the traditional effect of extinguishing junior interest and whether one can, by statute, modify the terms of an existing oil and gas lease to surrender surface rights. In Re: Jones, Case No. 16-31468-SGJ-13; Adversary No. 16-03110 (USBC, N.D. Texas, Dallas Division) August 30, 2017. As long as we are talking about foreclosures, here is an interesting tidbit in a bankruptcy context. Here the Bankruptcy Court decided that a bankruptcy filing the day after the date the foreclosure occurred could not bring the property back into the bankruptcy estate. A lender held a non-judicial foreclosure sale one day before the Debtor filed a Chapter 13 bankruptcy case at which a credit bid from the Lender was accepted but the Trustee’s
Locke Lord Publications October 3, 2017. Reprinted by permission.
G r o w t h T h r o u g h E d u c a t i o n - O c t o b e r / N o v e m b e r / D e c e m b e r 2 0 1 7 17
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