Daily Development for Tuesday, November 23, 2004
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

MORTGAGES; FORECLOSURE; REATTACHMENT: Lien of mortgage foreclosed away in tax foreclosure of mortgaged property will reattach if mortgagor rdeems property from purchaser at tax lien foreclosure sale. Associates Home Equity Services Co., In.c v. Hunt, 2004 WL 2474546 (Tex. App. 11/4/04)

The Texas Tax code gives an owner of property foreclosed at a tax sale the right to redeem the property from the sale if it is homestead property, as this property was. The mortgagor, who had encumbered the property with a $155,000 deed of trust to Associates, suffered a tax foreclosure sale, which wiped out the deed of trust lien, but then reaquired title by redeeming from the foreclosure sale purchaser.

The deed of trust holder took the position that its deed of trust reattached to the property and noticed a foreclosure sale.

The question of whether the lien reattached appears to be one of first impression in Texas. Prior authority had held that one who purchases directly at the foreclosure sale cannot “strengthen his title” by such purchase. The court extended that reasoning here, basing its decision partly on the technical language of the statute, which states that describes the party having a right to redeem from a tax foreclosure as “the owner of the property.” The purchaser at the tax foreclosure, on the other hand, receives a conditional estate, subject to redemption. From this, the court concluded that the party redeeming is not buying a fresh title held by th foreclosure sale purchaser but simply restoring its original ownership, an ownership encumbered by prior liens.

A dissenter on the three judge panel noted that the precise language of the tax foreclosure statute does not talk about a “conditional title,” but rather states that “a purchaser for value at or subsequent to the tax sale may conclusively presume the validity of the sale and takes free of any claim of a party with a prior interest in the property subject to the [applicable rights of redemption.]” The dissent commented:

“There is no reason to lengthen this dissent by describing the mischief that might be created between third party purchasers at tax sales and potential redemptors towards lien holders to avoid the ‘foreclosures at tax sales do not extinguish liens’ rule established by the majority or even the mischief that might be created between lien holders and potential redemptors towards third party purchasers.”

Comment 1: Actually, the editor would like to see more speculation as to what “mischievous” events developments might arise out of efforts by the redemptor to avoid the consequences of this case. One assumes that they would wait until after the redemption period is over and then buy the unredeemed title from the foreclosure purchaser. The language of the statute would seem to preclude reattachment at that point, since it states that subsequent purchasers from the foreclosure sale purchaser take free of prior liens. Cases in other jurisdictions might permit reattachment in this case, but the statute appears to preclude it in Texas.

As to collusion between the prior lienholder and the original owner, it would seem that, if anything, the “reattachment on sale” rule would lead to equal mischief, if any.

Comment 2: For an earlier DD on a similar issue, see: DMC, Inc. v Downey Savings & Loan Ass'n, 99 Cal.App.4th 190, 120 Cal.Rprt.2d 761 (2002) When original owner of property, who transferred subject to a lien to parties who then defaulted, repurchases it after foreclosure with a new purchase money loan, that purchase money lien has priority over a wiped-out junior lien that revives and reattaches to property.

Comment 3: Is there constructive notice of a “reattached lien?” Or if the purchaser in this case were to resell to another party, would that party be a BFP? The information, of course, is there to be found, but do title insurers find it? Should they?

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