Texas Foreclosure Law (Part 4) IV. Repossession and Foreclosure of Personal Property A. The Uniform Commercial Code: History and General Principles Although Article 9 of the Uniform Commercial Code (“UCC”) may seem complex and obtuse to one unfamiliar with it, in actuality, the UCC greatly simplified pre-code personal property security devices. The UCC was created to simplify various bodies of law in each state relating to creating an enforceable lien against personal property. Prior to the UCC, each type of personal property (chattel paper, instruments, equipment, etc.) had its own body of law and procedures. Perhaps the most revolutionary and innovative change brought by Article 9 was to develop a universal security device governed by a uniform set of laws. Article 9 applies to contractual liens and specifically excludes from its coverage judgment liens or statutory liens. Such liens arise by operation of law rather than by contract. Similarly, Article 9 specifically excludes realty (other than fixtures). To create a security interest in personal property under Article 9 the lien must “attach”. This means the lien has become enforceable against the debtor and against third parties not holding “perfected” liens. Perfection is generally achieved under the Code by proper filing of notice. B. Creating, Attaching and Perfecting Security Interests In order to have an enforceable security interest and the right to repossess and foreclose, the creditor must take the steps set forth in Article 9. Once a creditor complies with these fairly simple requirements, a security interest is created in his favor and the lien is said to “attach”. Once a “lien attaches”, the security interest becomes enforceable against the debtor. This means that upon default, the creditor may foreclose or take other steps to enforce its interest in the collateral. While attachment of the security interest is basic to the right of a creditor to enforce its lien against the debtor, it does not put third parties on notice of the lien or establish the creditors’ priority vis-a-vis any third party taking a lien against the collateral after the creditor’s lien. In order to win in a lien contest against such third party creditors, a security interest must be “perfected”. Perfection against personal property (other than items such as stock, money, instruments, etc. which are perfected by possession) is achieved by filing a financing statement with the Secretary of State of the state where the property is located at the time the lien is created or if affixed to real estate, in the county where the real estate is located. Once a creditor’s lien is properly perfected, its lien priority is established for most purposes. A lender may create an Article 9 security interest simply by entering into a written security agreement with the debtor concerning property in which the debtor has an interest in exchange for value (typically a loan) given by the creditor. While security agreements are frequently lengthy in order to cover details of payment, default, lien enforcement, etc., to be an enforceable security agreement, a writing is only required to have the following: (1) language by which the debtor grants a security interest; (2) an adequate description of the collateral; and (3) the debtor’s signature. In addition to protecting the parties to the agreement, the security agreement protects third parties. Because a debtor in default or in bankruptcy may not be concerned about who
among his creditors realizes on the collateral, the security agreement has essential evidentiary value in resolving lien priority issues. While Article 9 applies to the creation and perfection of security interests in many items of personal property, there are notable exceptions. For example, security interests in ships, railroad equipment, and aircraft, among other items, must be perfected in accordance with federal statute. Filing a financing statement with the Secretary of State’s office will not perfect the creditor’s security interest for these items. Likewise, perfection for certain items such as automobiles maybe governed by a state notice system (such as certificate of title). However, even in areas where Article 9 does not control proper means of perfection of a security interest, Article 9 will govern other aspects of a secured transaction not governed by the federal or state statute. This is why we look to Article 9 for guidance concerning how to repossess vehicles and sell them at foreclosure. Assuming we have a properly attached and perfected security interest against personal property of the debtor in default, then we must next consider what steps may be taken to attempt to recover our debt by realizing on the collateral. C. “Self-help” Remedies on Default 1. Defining default. Although Article 9 clearly requires a “default” prior to a secured creditor taking any action the word “default” is not defined in Article 9. Consequently, we must look both to the terms of the agreement between the parties and Texas law in evaluating whether a default has occurred. In this respect, in defining default and determining the requirements for notices of right to cure, intent to accelerate and acceleration, the law relating to real property foreclosures and personal property foreclosures in Texas is virtually identical. Consequently, please refer to §L.3 above concerning Texas law relating to default and acceleration. 2. Self-help. Upon default, a creditor may seize the collateral (subject to UCC and state law restrictions against trespass and breach of peace) and either keep the collateral in satisfaction of the debt or resell the collateral and apply the proceeds to the debt. In the alternative, the creditor may sue on the note and obtain a judgment and proceed by execution and levy. Many creditors prefer to use self-help and foreclose under the UCC whenever possible because it allows them to realize upon collateral sooner and less expensively than proceeding judicially. When proceeding non-judicially, the creditor must first obtain possession of the collateral. A secured party has the following self-help alternatives: Section 9-503 states: unless otherwise agreed a secured party has on default the right to take possession of the collateral. In taking possession a secured party may proceed without judicial process if this can be done without breach of the peace or may proceed by action. If the security agreement so provides the secured party may require the debtor to assemble the collateral and make it available to the secured party at a place to be designated by the secured party which is reasonably convenient to both parties. Without removal a secured party may render equipment unusable, and may dispose of collateral on the debtor’s premises under $9-504. 3. Breach of the peace. The most important restriction upon repossession of collateral is that it be done without “breaching the peace”. A breach of the peace may expose a creditor to tort liability, liability under §9-507 and deprive the creditor of the right to a deficiency judgment. Although the most critical element in repossession, the term “breach of the peace” is somewhat vague.
The Texas Supreme Court appears to have made repossession a riskier alternative in the case of bank El Paso, N.A. v. Sanchez, 836 S.W. 2d 151, the Texas Supreme Court stated that a secured creditor trying to repossess collateral has two choices: (1) it may repossess if this can be done without breach of the peace; or (2) it may choose to take legal action. If the secured creditor chooses the first option, it runs the risk that repossession may, in fact, breach the peace and if that happens, the secured creditor may be held liable in tort. Id. In Sanchez, the court found that the bank, which had hired a towing service to repossess an automobile, could not delegate the duty to avoid breach of peace even though the towing service was an independent contractor. Id. The court imposed on secured creditors pursuing non-judicial repossession a duty to take precautions for the public safety. Nevertheless, there are instances when repossession has been determined to be allowable. It is clear that consent to repossession, given freely by the debtor at the time of repossession cannot be a breach of the peace. The critical element here is that the consent be freely given and not induced by duress, fraud or given by a third party other than the debtor. Fraud may be allowable in certain circumstances although the courts frown on the fraudulent or unauthorized use of a law enforcement officer’s badge or by one representing that he is a law enforcement officer or affiliated in some way with a state or federal agency. It is important to note that violence or the threat of violence will constitute a breach of the peace regardless of whether the violence or threats of violence originate with the secured party or the debtor. Consequently, if a secured party encounters hostility, threats of violence or actual violence while attempting to repossess collateral, he should retreat immediately, end all self-help efforts and proceed to file suit for judicial foreclosure. Id. D. When “Self-Help” Doesn’t Work: Judicial Remedies There is no doubt that from a legal standpoint the safest way for a secured party to proceed to recover collateral is to sue for judicial foreclosure. Repossession undertaken in this manner insulates the creditor from claims of breach of the peace, improper repossession and a multitude of other claims which have been asserted by disgruntled debtors. In addition, if a secured creditor plans to seek a deficiency, the deficiency action will be included within the judicial foreclosure. When proceeding judicially, a creditor is much less likely to face objections from a debtor that the debtor should not have to pay a deficiency as a result of improper repossession, maintenance, notice, or sale of the collateral. On the other hand, safety has its price. Suing for judicial foreclosure when compared to self-help repossession and sale is time consuming and expensive. Judicial foreclosure requires filing suit, serving the debtor, filing motions, responding to motions, attending hearings and, potentially, trial. Once judgment is obtained, the creditor must obtain a writ of execution and a sheriff’s sale of the property. A creditor is not entirely safe from liability by pursuing judicial foreclosure, however, because an improperly conducted sheriff’s sale may cause additional problems for the creditor. The fact that the debtor is responsible for any additional costs associated with a judicial foreclosure and with additional interest which accrues until the collateral is liquidated, is not particularly consoling to most creditors since it is uncommon to collect a deficiency from one so financially distressed they cannot pay their loan and suffer the loss of their property.
E. Foreclosure Sales of Personal Property Under the UCC, there are two procedures by which a defaulting debtor may be legally dispossessed of ownership of personal property. As a preliminary matter, both procedures require the notification of others who have a security interest in the property as reflected by their filing of a UCC financing statement with the Secretary of State or the County Clerk. 1. Lien report. To assist you in identifying and locating the secured parties, private reporting agencies, (such as Capitol Commerce Reporter; 1-800-252-9335) will, for a fee, provide you with a report listing all parties who have filed a financing statement against the debtor with the Secretary of State. The report may also include copies of the financing statements filed by the other creditors, if requested. For local filings which include fixtures, goods which are to become fixtures, or farm equipment, the UCC division of the County Clerk’s office will provide reports similar to those provided by Capitol Commerce Reporter. 2. Public or private sale. Once you have determined the parties who have an interest in property of your debtor, you may proceed to dispose of the defaulting debtor’s property through either public or private sale. The UCC has different notice requirements for each. For a public sale, a notice letter must be sent to the debtor and all parties having a security interest in the property sought to be sold. The notice letter must specify the time and place of the sale and afford the debtor and secured parties a reasonable opportunity to attend the sale. A private sale merely requires that notice be sent to the debtor and all secured parties informing them of the time after which the property will be sold. 3. Commercially reasonable sale. The UCC standard for a properly conducted sale is what is called the “commercially reasonable” standard. For a public sale, the standard focuses on how the sale is conducted. For example, whether there was adequate advertisement of the sale and whether the collateral was sold at a reasonable time and in an accessible location would be indicative of the “commercial reasonableness” of the sale. In a private sale, the “commercially reasonable” standard focuses primarily on the amount received for the goods. If the goods are sold for approximately their current market value, there is little chance the sale can be successfully attacked. You, as a secured party, may buy at a public or private sale provided the UCC requirements have been met. 4. Valuation of property. When there is doubt as to the value of property to be sold by private sale, an appraisal is recommended. An appraisal by a reliable and credible appraiser will help in proving that you conducted a “commercially reasonable” sale by establishing some indication of the market value of the collateral. If the collateral is sold at, near or above the appraised value, you will have substantially protected yourself against claims that the sale was not “commercially reasonable”. You should always remember as well that proceeds from the sale (public or private) that exceed the amount owed to you are to be turned over to the debtor. 5. Retention of collateral in satisfaction of debt. An alternative to public or private sale is also available. You can, under the UCC, simply retain the collateral in satisfaction of the obligation. Written notice of your proposal to do so must be sent to the debtor and any other party secured by the same collateral. Such notice should be sent certified mail, return receipt requested. If you receive an objection in writing to your retention of the collateral from the debtor or a secured party within twenty-one (21) days after notice is
sent, you must then proceed to sell the collateral by private or public sale using the procedures for those sales outlined above. If you receive no written objection within twenty-one (21) days, you may simply retain the collateral in satisfaction of the debtor’s obligation. 6. Notification is essential. The importance of the UCC notification requirements cannot be over-emphasized. If one entitled to receive notification is not notified, he has a right to recover from the party conducting the sale any loss they have suffered as a result of the lack of notification, up to the amount of the value of their security interest in the collateral. To protect yourself against an action for wrongful disposition of property, extra care should be taken to document your satisfaction of the notice requirements and your efforts to conduct a “commercially reasonable” sale of the property. V. Ethical Considerations in Foreclosure The importance of ethical considerations in providing legal services goes without saying. A basic understanding of ethical considerations emphasizing the issue of conflicts is essential to reduce the risk of inadvertent violations. A. Applying the Rules of Professional Conduct The rules of professional conduct are found in Section 9, Article 10 of the State Bar Rules, Tex. Rev. Civ. Stat. Ann., Title 14 (the “Texas Code of Professional Responsibility”). The Texas Code consists of nine canons of ethics (the “Canons”) accompanied by Disciplinary Rules (the “Disciplinary Rules” or, the “Rules”) as adopted by the Texas Supreme Court. The Canons state the fundamental general principles governing the practice of law while the Disciplinary Rules set out the minimum level of conduct required of lawyers. The Canons are “aspirational in character” and are due the “utmost consideration when interpreting the disciplinary rules”. The Disciplinary Rules most likely to apply in the foreclosure and repossession context are those related to conflict of interest. Immediately following the Disciplinary Rules are comments. These comments are permissive and define areas where a lawyer may exercise professional discretion. When a lawyer exercises such discretion, whether by acting or not acting, no disciplinary action may be taken for failure to conform to the Comments. The Disciplinary Rules may be considered the baseline of acceptable lawyer conduct. While compliance with the Disciplinary Rules is mandatory, the Rules do not define standards of civil liability of lawyers and violation of a rule does not give rise to a private cause of action or create any presumption that a legal duty to a client has been breached. Rule 1.02 defines the basic scope and objectives of client representation of clients. Rule 1.02(a) sometimes traps attorneys who reject settlement offers they perceive as inadequate without consulting their client because Rule 1.02(a) provides that acceptance or rejection of settlement offers is solely the clients decision to make. In foreclosure situations, it is not uncommon for the borrower to propose a plan for reworking the debt. Sometimes, when these plans are particularly inadequate, (as they frequently are) an attorney may be inclined to reject the plan without client consultation in a violation of Rule 1.02(a)(s). The Comments provide some instruction in this area noting that “except where prior communications have made it clear that a particular proposal would be unacceptable to a client, a lawyer is obligated to communicate any settlement offer to the client in a civil case.” It would seem, therefore, this all offers, however inadequate, should be communicated to the client, preferably in writing.
Rule 1.02(c) may also be of particular concern in that provides “A lawyer shall not assist or counsel a client to engage in conduct that the lawyer knows is criminal or fraudulent”. Attorneys representing clients endeavoring to limit their potential liability to creditors through what have been accepted methods of asset planning this provision. The risk under Rule 1.02(c) arises when the client wants to convey assets to protect them from being seized in payment of a judgment or liability for a pending action. For example, transfers to hinder, delay, or defraud creditors are “fraudulent” under the Uniform Fraudulent Conveyances Act. B. Attorney Fee Disputes Rule 1.02 and the threat of malpractice claims and malpractice carrier requirements have led most lawyers to use written engagement letters with clients. The comments provide little direction in this area other than that the agreement must conform with the rules and law and that the “scope of representation” cannot be so limited as to violate Rule 1.01 or cannot provide that the client cannot terminate the attorney’s services. Nevertheless, engagement letters serve useful purposes, mostly involving resolution of the fee disputes. In foreclosures, an engagement letter can be useful as a general “wake-up” call to the lender as to what documents and other materials will be needed to conduct an adequate foreclosure sale and can be combined with a checklist and dates for completing the sale. The use of an engagement letter will also satisfy the requirements of Rule 1.04(c) which provides “when a lawyer has not regularly represented the client, the basis or rate of the fee shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation.” C. Avoiding Conflicts of Interest What is a conflict of interest and how is the issue of such a conflict likely to arise in the foreclosure context? Unfortunately, one cannot precisely define what actions will or will not constitute a conflict of interest. A lawyer must use his or her judgment when evaluating a potential conflict of interest situation and he or she must be able to conclude that his or her independent professional judgment as to one client will not be affected by representation of the other client. Lawyers, however, may represent multiple clients if each client’s interest is adequately represented, their interests vary only slightly, and each client consents to dual representation after full disclosure of the possible effect of such representation on the independent professional judgment of the lawyer. One example of a potential conflict in the real property foreclosure context concerns lawyers serving as trustees at foreclosure sales. The lawyer, as trustee conducting a foreclosure sale, is charged with the duty of acting on behalf of the borrower while the lawyer, as counsel for the lender, has the duty to represent the lender’s interest. Thus, one individual is acting in two capacities simultaneously and the potential for a conflict of interest seems apparent. The lawyer must be ever mindful, therefore, of his dual role and not take any actions which will disadvantage the borrower to the benefit of the lender. For example, a lawyer must not discourage bidding at the sale in order that the lender may purchase the property at a lower price and obtain a higher deficiency. Such an action would not only provide a firm footing for a wrongful foreclosure suit but it would also be a gross violation of the professional code of conduct. Another potential conflict arises where the lawyer who is representing the lender in preparation for foreclosure is contacted by the borrower who has no representation. It frequently happens that the borrower, subject to foreclosure, is
unable to afford legal representation. It is not uncommon for such a borrower to contact the lawyer handling the foreclosure proceedings and ask questions concerning foreclosure procedures such as how the sale is conducted and his alternatives for stopping the foreclosure, etc. In the event the lawyer responds to the borrower in trying to be helpful and provide some information, it could be argued that at some point an implied attorneyclient relationship was created as a result of the lawyer providing advice and the borrower’s reliance on such advice. It is admittedly a difficult situation because it is a relatively simple matter to answer the borrower’s questions while it seems rather coldhearted to refuse to answer any of the borrower’s questions when it is apparent he is distressed and cannot afford a lawyer. Once the attorney clarifies that the borrower is not represented, then each attorney must make his own decision concerning what he may discuss with the borrower, if anything. In a similar example, it may occur that the borrower has the wherewithal to attempt a workout arrangement with the lender although he either cannot afford a lawyer or decides not to use a lawyer. In this situation, the borrower should be advised both in writing and verbally to obtain counsel and have the workout documentation explained to him. The lawyer should further advise the borrower to acknowledge that they were so advised and, to the extent possible, the lawyer should insist on the borrower obtaining representation. Care should be taken to comply with Rule 4.02(a) because failing to comply may provide your opponent with a potent weapon. Rule 4.02(a) provides that a lawyer shall not communicate or cause or encourage another to communicate about the subject matter with a person...the lawyer knows to be represented by another lawyer regarding the subject, unless the lawyer has the consent of the other lawyer or is authorized by law to do so. These provisions appear particularly applicable to those lawyers who routinely send foreclosures notices to the debtor, as required by the Property Code, but, not to debtor’s counsel. While the Property Code requires that notice be provided to the debtor (without regard to whether the debtor is represented), other types of communication with debtors who are represented should be limited. In real estate transactions, it is common for lawyers to talk to another lawyer’s clients, but the consent of the other lawyer should always be obtained before doing so. In a deteriorating situation such as a work-out or “friendly” foreclosure, should be taken to obtain the necessary consent in writing. In Texas, it is rather common for the attorney to act as the trustee in a foreclosure and the attorney’s right to serve in this capacity and also act as an attorney in matters related to the sale, such as a suit on a deficiency judgment have been upheld by the courts. A troublesome issue arises in this regard if the attorney is also the trustee who conducts the foreclosure. Obviously, the debtor has a right to determine what is necessary to discharge the debt, when the sale will be conducted, how to find the trustee at the sale, etc. As a trustee, the attorney cannot refuse to answer these questions without putting the validity of the sale in issue because to refuse to provide this basic information may be deemed to be tantamount to “chilling” the sale, thereby reducing the amount bid for the property. Care should be taken in this area, especially if the debtor is represented by counsel, while the attorney/trustee situation may fall within the “except as otherwise provided by law” exception, it would be prudent to contact opposing counsel and advise him or her of the client contact and the subject matter of the conversation.
Ethical issues may be presented when the attorney acts as a trustee or substitute trustee is conducting a foreclosure sale, the sale is contested and the attorney is later called as a witness. Rule 3.08(s) provides that a lawyer shall not accept or continue employment as an advocate before a tribunal in a contemplated or pending adjudicatory proceeding if the lawyer knows or believes that the lawyer is or may be a witness necessary to establish an essential fact on behalf of the lawyer’s client, unless: (1) the testimony related to an uncontested issue; (2) the testimony will relate solely to a matter of. formality and there is no reason to believe that substantial evidence will be offered in opposition to the testimony, (3) the testimony relates to the nature and value of legal services rendered in the case; (4) the lawyer is party to the action and is appearing pro se, or (5) the lawyer has promptly notified opposing counsel that the lawyer expects to testify in the matter and disqualification of the lawyer would work substantial hardship on the client. Rule 3.08(b) provides: A lawyer shall not continue as an advocate in a pending adjudicatory proceeding if the lawyer believes that the lawyer will be compelled to furnish testimony that will be substantially adverse to the lawyer’s client, unless the client consents after full disclosure. The Comments indicate the principal concern of this Rule is the possible confusion that [the] dual roles create for the finder of fact....If the lawyer’s testimony concerns a controversial or contested matter, combining the roles of advocate and witness can unfairly prejudice the opposing party. A witness is required to testify on the basis of personal knowledge, while an advocate is expected to explain and comment on evidence given by other. Comment No. 8 also notes that “This Rule does not prohibit the lawyer who may or will be a witness from participating in the preparation of a matter for presentation to a tribunal.” To minimize the possibility of unfair prejudice to an opposing party, however, the Rule prohibits any testifying lawyer who could not serve as an “advocate from taking an active role before the tribunal in the presentation of the matter”. Finally, Rule 3.08(c) provides that another lawyer in the testifying lawyer’s firm may act as an advocate, provided the client’s informed consent is obtained. In light of the foregoing, if there is a reasonable probability that the sale might be contested, the attorney should consider not serving as a trustee at the foreclosure sale and should consider having someone else conduct the sale. If someone else conducts the sale, opposing counsel will not be able to call the attorney as a witness merely because the attorney attended the sale, but will be required to show that there is a “genuine need” for the attorney’s testimony which is “material to the adversary’s case as well as prejudicial to the interest of the attorney’s client”. Nevertheless, if a lawyer conducts a sale which is later challenged, the argument may be made that the lawyer should still be able to testify if his or her testimony is largely factual in nature, such as the time of sale, etc., and is unlikely to be contested. D. Lender Liability There is potential for a lender to be liable for the actions of his agents both in foreclosing liens against real estate, improperly evicting a tenant, and wrongfully taking possession of property improperly foreclosed. Additionally, a lender runs significant risks in repossessing and selling personal property under the UCC. Lender liability as it relates to real property and personal property are discussed below.
1. Lender liability in real property foreclosure. As noted above, a lender may be sued for wrongful foreclosure. A wrongful foreclosure action may arise from the lender’s negligence and could result in the imposition of actual and punitive damages against the lender, although the recovery of damages is similar in basis and theory to the tort of conversion of personal property. Generally speaking, a wrongful foreclosure occurs when there is an illegal or wrongful sale of property. In Owens v. Grimes, 539 S.W.2d 387. the Court stated: It is generally held that where an illegal or wrongful sale of the property is made under a power of sale contained in a mortgage or deed of trust, the mortgagee or trust deed mortgagee will be held liable to the mortgagor for the damages sustained. A wrongful sale may occur under various conditions such as failure to follow the deed of trust or the loan documents, the loan is not in default, statutory requirements have not been followed or the lien is invalid, inequitable conduct by the mortgagee such as accelerating a debt after several late payments were accepted, foreclosure proceedings undertaken in order to force the mortgagor to settle a suit against the mortgagee, and accelerating a debt to force early payment by the borrower. 2. DTPA. Where a foreclosure is unconscionable, an action may lie under the DTPA. In Flenniken v. Longview Bank and Trust Company, 661 S.W.2d 705, the borrowers bought a home from a builder who financed the transaction with a note and a deed of trust. The note and deed of trust were then assigned by the builder to a savings and loan before the house was completed. The builder then abandoned construction. Because construction had ceased, the Flenniken’s stopped making loan payments. The savings and loan then foreclosed. The jury found that the savings and loan had acted unconscionably in foreclosing under the deed of trust. The saving and loan’s unconscionability arose not out of what they did as a lender, but from the failure of the builder to complete the house. The court noted that the builder, as assignor, would not have been in a position to rightfully foreclose. The court concluded therefore that the lender, as assignee of the builder, should also not have the right to foreclose. 3. Inadequacy of price. In general, it is difficult to overturn a foreclosure sale because of an alleged inadequacy of price. In order to do so, the borrower must also prove an irregularity in the foreclosure which caused or contributed to cause the property to be sold for a price that is grossly inadequate. Notwithstanding whether a lender may be liable under Texas foreclosure law for wrongful foreclosure, a lender runs the entirely separate risk of being liable under the DTPA for an “unconscionable foreclosure”. The DTPA defines unconscionable conduct as an act or practice which: “results in a gross disparity between the value received and consideration paid, in a transaction involving transfer of consideration.” Section 17.45(5), Tex. Bus. & Comm. Code Where the price paid at foreclosure is grossly unfair after considering the value received the borrower may have a cause of action under the DTPA. 4. Lender liability under the UCC. As discussed above, lenders and attorneys generally look to Article 9 of the UCC to determine appropriate procedures for repossessing and selling personal property at foreclosure. Specifically, §§9.504 and 9.505 concern the issue of notice as it pertains to public or private sales. Section 9.505(b) provides that the secured party may simply retain the collateral in satisfaction of the debt while §9.505(a)
requires the secured party to dispose of the repossessed collateral within 90 days or be liable for conversion. The most important criteria in handling a UCC foreclosure is that all actions taken from the point of repossession, storage of the property, notice, advertisement and conducting the sale be commercially reasonable. Whether a sale is commercially reasonable is a question for fact for the jury regardless of whether the sale was public or private. A lender who makes a commercially unreasonable disposition of collateral subjects themselves to a cause of action for breach of contract but not tort liability. A lender may be guilty of conversion if it receives proceeds in excess of the debt which it does not return to the debtor. A lender may substantially diminish their rights of recovery against a co-maker or guarantor in the event the lender is commercially unreasonable in their handling or sale of the collateral. This theory is known as “impairment of collateral which holds that if a lender unjustifiably causes the value of the collateral to diminish, then co-makers and guarantors may be released of liability”. The secured party is not liable, however, for the decline in value of pledged instruments even if a substantial decline in instruments value would have been available had the lender sold the instruments in a timely fashion. This holding follows the Texas Supreme Court’s holding in FDIC v. Coleman, 795 S.W.2d 706 (Tex. 1990), where the court found that delaying a real property foreclosure when the real property collateral was declining in value was not a breach of good faith. Merely including a provision in a retail installment contract allowing the secured party to take possession of the property without demand, enter upon the premises where the property may be and remove same was a violation of Tex. Rev. Civ. Stat. Ann. Article 5069-7.07(3), prohibiting entry upon the debtor’s premises unlawfully or commission of any breach of the peace in repossession of a motor vehicle. Once a secured party obtains possession of collateral, they are required to maintain possession until they provide proper notice of disposition in accordance with Tex. Bus. & Comm. Code Ann. $9.504, and any transfer of the collateral to a third party without notice to the debtor is actionable. As noted above, a secured party may be liable for any breach of the peace caused by improper repossession, and repossession includes a non-delegable duty by the secured party to avoid breach of the peace. 5. Mitigation Not Required By The Mortgagee. A Lender has no duty to foreclose in a timely fashion in order to mitigate a borrower’s losses which may occur where a borrower’s assets are depreciating. In Cocke v. Meridian Savings Association, 778 S.W.2d 516 the borrower complained that the lender did not mitigate its damages when it dawdled and did not foreclose until ten months after it could have foreclosed. During the ten months which passed, the borrower claimed the property value decreased by $300,000. The court concluded: we decline to create a duty to mitigate in property law. In property law, a party who believes the foreclosed property was sold for an inadequate price can seek avoidance of a deed of trust foreclosure with proof of grossly inadequate price and irregularities that were calculated to cause and did contribute to the inadequacy in price. The rule that a lender has no duty to mitigate was later upheld in Federal Deposit Insurance Corp. v. Coleman, 795 S.W.2d 706, where the Texas Supreme Court affirmed a deficiency judgment for the lender and ruled against the borrower’s arguments that the
foreclosure was delayed without reason in a declining real estate market causing the borrower substantial damages.