Trustee Paying off Second Lien Home Equity Lien Does Not Violate Texas Constitution

Foreclosure Sale In Dallas County Yields Surplus Proceeds

Sometimes foreclosure sales by the first lienholder will have excess proceeds to pay the balance due on inferior liens and possibly something left over for the owner. This rare situation occurred in Dallas County that involved valuable real property in the University Park area.

In Patton v Porterfield, 2013 WL 4653309 (Tex. App. — Dallas Aug. 30, 2013, no writ history) the borrower, Porterfield went into default of his first lien mortgage against his home. The first lienholder initiated the foreclosure process and the property was eventually sold at a foreclosure sale for $1,102,000 by the substitute trustee.

After the sale the substitute trustee remitted the sales proceeds of $733,558.23 to pay off the first lien and $293,424.27 to pay off a second lien home equity security instrument. Porterfield was sent a check for $70,375.33 being the remainder of the foreclosure sale proceeds.

Porterfield filed suit claiming that the payoff of the home equity security instrument was improper because that kind of lien could only be foreclosed on by a court order. This is correct but the foreclosure that occurred was not the home equity lien but the first lien that does not require a court order and the first lienholder had no control over the inferior lien debts. The substitute trustee remitted the surplus proceeds to pay off the second lien home equity loan which the borrower most likely wanted to contest at some point in time.

Amazingly, the trial court agreed with Porterfiled and found that he was damaged in the amount of $293,424.27 by the payment to the second lienholder. The case originated from the County Court at Law Number 1 in Dallas County, Texas and was appealed to the Fifth Court of Appeals in Dallas.

The Fifth Court of Appeals in Dallas saw through this blatant windfall effort and reversed and rendered that Porterfield take nothing and finding no violation of the Texas Constitution when the substitute trustee paid off the second lien debt against the property.

This procedure was the proper law in other real estate foreclosures involving subordinate non-home equity lien cases. After Texas adopted the home equity lending the courts are now dealing with whether the previous common law rules applied in non-home equity lien cases applies in home equity litigation cases.

So far the courts are continuing to apply the prior existing common law to home equity lending cases. Subrogation and estoppel have been applied in home equity lending cases and one court is deciding whether the doctrine of acquired property applies.