Court Holds That Lender Did Not Have Standing To Sue An Estate For A Deficiency After Electing That Its Claim Is A Preferred Debt And Lien

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In In re Estate of Chapman, Peoples Bank (the Bank) conducted a non-judicial foreclosure sale of secured real estate owned by an estate and then sued the administrator of the estate in district court due to a deficiency remaining on the note after the foreclosure sale. No. 06-17-00051-CV, 2017 Tex. App. LEXIS 10478 (Tex. App.—Texarkana November 9, 2017, no pet. history). The Bank obtained a default judgment against the estate and then filed an action in the probate court seeking to remove the administrator and to enforce its claim against certain funds that might be payable to the estate in a separate lawsuit. After a hearing, the probate court ordered that any funds payable to the estate be paid first to the Bank. The administrator appealed, arguing that the Bank did not have standing to intervene in the lawsuit and obtain an order directing payment to itself that should have gone to the estate.

The court of appeals noted that to have standing in probate cases, the Texas Estates Code “requires the person to qualify as an ‘interested person,'” and an “interested person” is “an heir, devisee, spouse, creditor, or any other having a property right in or claim against an estate being administered.” Id. (citing Tex. Est. Code Ann. § 22.018(1)). The Bank asserted that it was an interested person because it was a creditor. The court of appeals described the process that a secured creditor must follow to assert a claim against an estate:

Under the Texas Estates Code, if a secured creditor does not elect to have its claim treated as a matured secured claim within a prescribed time period, the creditor has effectively elected that the claim will be a preferred debt and lien against the property securing the indebtedness “and the claim may not be asserted against other assets of the estate.” Explaining the effect of the predecessor Probate Code provisions, the Texas Supreme Court has explained that, when a secured creditor elects for its claim to be approved as a matured secured claim, upon any sale of the collateral, the creditor’s claim has priority over any other claim, except for claims for funeral and last illness expenses and for the expenses of administering the estate. Further, if the proceeds from the sale of the collateral did not pay off its note, the matured secured claimant can “collect[] the deficiency as an unsecured seventh-class creditor.” However, when the secured creditor elects to have its claim approved as a preferred debt and lien, the creditor has priority over all other claims on sale of the collateral, but the preferred debt and lien claimant “forfeit[s] any possibility of collecting a deficiency from the estate.”

In other words, the Texas Estates Code provides that, when a secured creditor elects to have its claim approved as a preferred debt and lien claim, if the independent executor defaults in the payment of the debt, the secured creditor may look only to its collateral for the satisfaction of any claim it may have against the estate. By foreclosing on the secured real estate, the Bank satisfied any debt or claim against the Chapman estate and did not have a deficiency claim as asserted in its notice of claim and motion to remove the Administrator. Therefore, the Bank’s pleadings do not support its contention that it had a claim against the Chapman estate.

By foreclosing on its collateral, the bank effectively satisfied its claim against the estate, and under Tex. Estates Code Ann. § 403.052 (2014), the bank was forbidden from asserting the claim against any other asset of the estate; by obtaining the deficiency judgment in the district court based on the amount remaining after foreclosure, and seeking to enforce that judgment in the probate court, the bank attempted to do indirectly what the Texas Estates Code forbid it from doing directly. Because neither the bank’s pleadings nor the record showed that it was an interested person, it lacked standing to sue on a deficiency.

Id. (internal citations omitted). The court then held that the deficiency judgment was void:

In this case, the Bank elected to have its claim allowed as a preferred debt and lien against its secured real property, thereby electing to look only to its collateral for the satisfaction of its claim. By foreclosing on its collateral, the Bank effectively satisfied its claim against the estate. Under the Texas Estates Code, the Bank was forbidden from asserting the claim against any other asset of the estate. By obtaining the Deficiency Judgment in the District Court based on the amount remaining after foreclosure, and seeking to enforce that judgment in the Probate Court, the Bank attempted to do indirectly what the Estates Code forbids it from doing directly. Under these circumstances, the Deficiency Judgment is void and does not constitute a claim against the estate.

Id. (internal citations omitted).

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