In a case of first impression, the Texas Court of Appeals, Houston [14th Dist.], addressed the issue of whether an action brought against a guarantor to recover a deficiency after a non-judicial foreclosure is barred by the four-year statute of limitations in section 16.004 of the Texas Civil Practice and Remedies Code if the action is filed more than four years after the claim on the guaranty accrued but less than two years after the foreclosure sale. The court concluded that, under section 51.003(a) of the Texas Property Code, such an action is not barred by the statute of limitations contained in section 16.004.
In the fact pattern presented to the court, the default on a promissory note occurred on November 30, 2004, the date the note matured. The property securing the note was foreclosed on February 4, 2007. A deficiency balance remained after the foreclosure sale and on February 4, 2009, suit was filed against the guarantor. Thus, more than four years passed between the default on the note and the filing of suit against the guarantor for the deficiency balance.
The court analyzed the four-year statute of limitation on notes secured by real property under Section 16.004 of the Texas Civil Practice and Remedies Code and how it relates to a similar but different two-year statute under Section 51.003(a) of the Texas Property Code. See Sowell v. International Interests, LP, 416 S.W.3d 593 (Tex. App. – Houston [14th Dist.] 2013, pet. filed). Under the facts presented, there was an irreconcilable conflict between section 51.003(a) and the limitations period in section 16.004. The court explained that under the unambiguous language of section 51.003(a), this statute applied and the lawsuit was timely because it was filed within two years of the foreclosure sale. See Tex. Prop. Code Ann. § 51.003(a). The court also stated that under the unambiguous language of section 16.004, this statute applied and the suit was time-barred because it was filed more than four years after the day the claim accrued. See Tex. Civ. Prac. & Rem. Code Ann. § 16.004(a). As the two statutes irreconcilably conflict in this fact pattern, the court analyzed Government Code section 311.026, entitled “Special or Local Provision Prevails Over General,” which states, in part, that if a conflict between the general provision and the special or local provision is irreconcilable, the special or local provision prevails as an exception to the general provision unless the later enactment and the manifest intent is that the general provision prevail. In this situation, section 16.004 is not the later enactment. Therefore, section 51.003, the special provision, prevails as an exception to the general provision. See Tex. Gov’t Code Ann. § 311.026 (West 2013).
In this situation, if a deficiency remains after a nonjudicial foreclosure sale (conducted within four years of the default) before the creditor files suit against a guarantor, then the effect of section 51.003 is to extend the limitations period under section 16.004 so that it ends two years after the date of the foreclosure sale. See Tex. Civ. Prac. & Rem. Code Ann. § 16.004(a); Tex. Prop. Code Ann. § 51.003(a).
Although not discussed in the opinion, other banks may want to try to argue a six year statute of limitation could apply as set forth in the Texas version of the UCC.
The guarantor also argued that the assignee bank failed to mitigate its damages, but the court overruled this argument and found that under the unambiguous language of the guaranty, the guarantor waived his right to assert the failure-to-mitigate-damages defense and that waiver did not violate Texas public policy for various other reasons.
No information in this article is intended to constitute legal advice. For specific legal advice, please contact an attorney.
If you have any questions or would like more information about Texas statutes of limitations and how they apply to foreclosure sales, please contact William P. Huttenbach at 713-220-9184.