Texas Commercial Law Firm
Probate
Once probate of the estate is opened, any foreclosure sale occurring between the time of the mortgagor's death and the opening of a probate estate is subject to being voided. American Savings & Loan Association of Houston v. Jones, 482 S.W.2d 62 (Tex. Cir. App. - Houston [14th Dist.] 1972, writ ref'd n.r.e.) Consequently, even though the lender may have reached an agreement with the heirs not to contest the foreclosure sale, there is always the possibility that a creditor or some other interested party could open a dependent administration and void a foreclosure sale. If a lender were to foreclose under such circumstances, (and there is equity in the property) title would be unisurable until four years have passed since the mortgagors death. It is frequently the case, therefore, that if no probate administration is pending for the deceased's estate, and there appears to be equity in the property, a secured lender will open a creditor's administration.
A creditor's administration requires the creditor to post a surety bond and then manage all the affairs of the estate including settling debts and liabilities of the decedent, selling assets of the estate and making distribution to the heirs. Such a procedure is usually time consuming and relatively expensive. Many creditors opt for this approach, however, because a court approved foreclosure is virtually unassailable.
An alternative to opening a probate estate frequently followed by lender's in "no probate" situations is to request a title company to issue a title commitment in advance of foreclosure. Title companies frequently will issue a title commitment in advance of foreclosure in a "no probate" situation where: 1) there is no will; 2) there are no heirs, the heirs cannot be located, or they consent to the foreclosure; and 3) there is no equity in the property.
If a title company issues a title commitment prior to foreclosure, many lenders will proceed to foreclose in reliance on the commitment. Title companies frequently issue title commitments under these circumstances in the belief that if there are no heirs who will challenge the foreclosure and there is no equity in the property, it is unlikely anyone will challenge the foreclosure sale as there would be no apparent benefit in doing so. It is important to note, however, when foreclosing in such a "no equity" situation, that the title company will be relying upon information furnished to it by the lender. In the event any of this information is inaccurate, the title company may use it as a defense to providing coverage in the event a probate estate is subsequently opened and the foreclosure sale is challenged.
Bear in mind that in the event a title company issues title in the "no probate" situation and the lender forecloses and deeds the property to a third party and the foreclosure sale is later voided, the third party and any parties who may have purchased subsequently will look to the lender for recovery of damages. This is because the lender gives a warranty of title when it gives its deed. The lender would then look to the title company to recover any damages and defend the lender. The risk a lender runs under such circumstances is that: 1) the title company will deny it is liable for the damages and defend against the claim; and 2) the title company may not be in existence when such a claim is made. (When dealing with a larger title company, this second concern is admittedly minor. However, we have represented clients in many matters who have had legitimate title claims only to find the title company was defunct. We must, therefore, note this potential risk.)
A title company that issues insurance in a "no probate" situation does so in reliance upon the representations of the lender as stated above. If any of these representations turn out to be inaccurate, then the title company may be able to side-step its coverage. In that case, the lender would be solely liable under the warranty given in its deed.
In summary, the three situations most easily handled when a mortgagor dies are where: 1) more than four years have passed since the mortgagor's death and no probate estate has been opened; 2) there is an independent administration and an Independent Executor is approved by the Court. or 3) there is a dependent administration. In these cases, the lender has little choice as to how to proceed and little or no risk in proceeding.
The situation posing the most difficulty and most potential risk is where there is no probate estate and four (4) years have not passed since the mortgagor's death. When confronted with such a situation, depending on whether there are heirs or equity in the property, a lender may attempt to obtain a "clean" title commitment prior to foreclosure. A safer (albeit more expensive and timeconsuming) alternative is to open and administer a dependent probate estate and obtain court authorization to foreclose. How to proceed in these circumstances is the lender's business decision and will be presumably based on an evaluation of the relative risks and benefits attendant with either choice. In our experience, lender's who are able to obtain a clean title commitment will choose to foreclose rather than endure the delay and incur the costs of opening a dependent administration.
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