We have become aware of the referenced case, currently pending in the Texas Supreme Court under cause number No. 10-0389, on appeal for the Dallas Court of Appeals.
This case is a suit to set aside a foreclosure sale that occurred after the automatic stay was lifted allowing a sale of property out of a bankruptcy. Five years after the sale, the Debtors brought suit to set aside the sale because the sale was on the wrong date. The trial court held that the sale was valid. The Dallas Court of Appeals disagreed twice and the case has been appealed to the Texas Supreme Court.
The Court of Appeals case presents an extreme difficulty and risk for the title industry. If the Court of Appeals decision stands it will be very difficult to determine if a court order of sale is valid and thus forming the basis for title insurance since there is no limitation on the time where the sale can be challenged and set aside. In this case, the sale was overturned even though the bankrupt's attorney was involved at every step along the way and even asked the Court to dismiss the bankruptcy because the property had been foreclosed.
An examiner in this case would have seen the following documents regarding the foreclosure and sale:
1. Bankruptcy petition.
2. Agreed order in an adversary proceeding allowing the limited partner to purchase the bankrupt's interest in the partnership in return for a cash payment and an installment payment within 120 days. Failure to make the installment payment would allow either foreclosure or filing of a deed in lien of foreclosure.
3. Motion to lift stay.
4. Order conditionally terminating the stay and requiring the payments agreed to and providing that if payment was not received on August 1st, the limited partner could foreclosure on August 1st.
5. Foreclosure sale dated September 5th.
6. Motion by bankrupt to dismiss the case on the grounds that stay had been lifted, the property foreclosed and the proceeds used to satisfy the creditors and that "there was nothing left to do."
7. Dismissal of the case.
About four years later, the former bankrupt asserted for the first time that the sale was void since the sale took place September 5th rather than August 1st. Ultimately, the Dallas court of appeal accepted this assertion and placed title back in the bankrupt.
This case, if upheld by the Texas Supreme Court, will mean that a third party will not be able to rely on the deed/real property records because a challenge can occur at any time even after a bona fide purchaser has acquired title.
The Court of Appeals believes that the "clear language of the order unambiguously modified the stay to allow for a sale only on August 1, 2000." While this is unusual wording in any court order, nevertheless it does make questionable our reliance on any sale done after a specific date unless other or subsequent dates are specifically allowed.
When this case is finally decided, we will notify you. An examiner reviewing title stemming from a foreclosure sale should review for any bankruptcy proceeding involving the foreclosed debtor, and determine whether an order granting relief from the automatic stay of proceedings had been issued. If the order was issued, it should be read to determine if it sets a specific date for the foreclosure sale. If a specific date was set and the sale was actually held on that date without other apparent defect, the issue should be moot. If the sale was held on a date other than that which was set by the bankruptcy court order, the matter should be referred to underwriting counsel. It is not safe to assume that an order setting out a specific date for a sale implies that the sale can be done at a later date. You cannot rely on statements of the bankrupt or counsel that the sale was done correctly unless the sale was conducted on the specified date.
If you have any questions relating to this or other bulletins, please contact your local underwriting personnel or Stewart Legal Services.
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