A sometimes overlooked area of the real estate foreclosure landscape is the application of the statute of limitations (hereinafter the "Statute") to the decision by the trustee to foreclose on default of the real estate lien note by the mortgagor (landowner). This is an important consideration as there is no authority for the trustee designated in the deed of trust to conduct a foreclosure sale if the Statute bars enforcement of the debt. One must remember that the lien is incidental to and inseparable from the debt secured. If the debt is barred by the Statute, then enforcement of the security interest (which is provided for in the deed of trust) is also barred. If the trustee proceeds with the foreclosure of a debt barred by the Statute, such conduct may also be a violation of the Fair Debt Collection Practices Act, 15 U.S.C. sec. 1692e.
So how does one compute the time period within which foreclosure is allowable? If you are dealing with a note that contains no maturity date, the note is considered to be a "demand" note. A demand note is due from the moment the note is signed. Because a demand note is due from the moment it is signed, the trustee need not accelerate the note because it is enforceable from the moment of execution. The trustee’s failure to make a demand in such circumstances does not constitute a breach of contract.
So what is the limitations period for a demand note? In Texas, the answer is found in Section 3.118 of the Texas Business and Commerce Code. There, the following language can be found in subsection (b): " . . . if demand for payment is made to the maker of a note . . . , an action . . . must be commenced within 6 years after the demand. If no demand for payment has been made . . . , an action to enforce the note is barred if neither principal or interest on the note has been paid for a continuous period of 10 years."
But wait, are the above time periods affected by a different statute of limitation for enforcing a lien against property? The answer is yes. Section 16.035 of the Texas Civil Practice and Remedies Code states that the limitations period for enforcing a lien against property is 4 years. Thus, there is a 2 year difference in enforcing a note (6 years) and enforcing a lien against property (4 years). If the trustee waits until the fifth year after a demand note is signed to foreclose, the 4 year statute will bar the foreclosure action, although the debtor could still be sued for the debt as the 6 year limitation period for suits on a demand note will not yet have run. What should be apparent by now is the need for the note holder to employ an attorney to handle all aspects of the foreclosure proceeding as the path is strewn with land mines.
Nothing in this post should be considered legal advice. Let’s face it. You don’t know me and I don’t know you. My aim is simple, to provide the reader with some useful, but general, information about the topic. In fact, any reader of this post should assure himself that the material is still current and applicable at the time it is read. If you want a legal opinion that has teeth, consult your personal lawyer about your specific facts and circumstances. If you don’t have a lawyer and like what you see here, then perhaps you should contact my office to determine if we might be a good fit. To do so, simply click on my name above and you will be directed to my website, or you can reach me by telephone at (713) 626-2221. When responding, kindly refer to this Blog No. 40.