When a deed of trust lien is foreclosed after default of the secured indebtedness, a deficiency will result if the sale price at foreclosure is less than the outstanding secured debt. In many states, including Texas, the secured lender then can seek to recover that deficiency by a lawsuit against the responsible parties (e.g., the borrower or a guarantor of the debt). Under Section 51.003 of the Texas Property Code, any person against whom recovery of such a deficiency is sought can ask the court to determine the property's fair market value ("FMV") as of the foreclosure date. On a hearing of that motion, the parties must introduce "competent evidence" of the property's value. If, after reviewing the evidence, the court determines that the property's FMV was more than the sale price at foreclosure, then the deficiency amount will be adjusted to reflect that fact.
In hearing such FMV cases in the past, the Texas Supreme Court has established the "Property Owner Rule," which says that a property owner is qualified to testify as to his own property's value even if he is not an expert in real estate property values and would not be competent to testify as to the value of other property. (See Porras v. Craig, 675 S.W.2d 503, 504 (Tex. 1984)). Recent Texas court opinions have extended the benefits of the Property Owner Rule to real-estate-owning entities, as well as individuals. In Reid Road Mun. Dist. No. 2 v. Speedy Stop Food Stores, Ltd., 337 S.W.3d 846 (Tex. 2011), the Texas Supreme Court held that an organization should be treated the same as an individual for purposes of the Property Owner Rule. Of course, an entity cannot testify directly -- only a natural person can appear in a courtroom to testify -- and the Supreme Court made it clear that not just any employee can testify on behalf of an organization under the Property Owner Rule. The Speedy Stop case limits admissible testimony to those witnesses whose roles and duties within the organization give them personal familiarity with the property at issue and its FMV. In fact, the Supreme Court ruled in Speedy Stop that the proffered testimony was not admissible because the witness didn't meet the requirements noted above. In the summer of 2011, though, the Dallas Court of Appeals, in a case dealing with these issues (Corniello v. State Bank & Trust Dallas, 334 S.W.3d 601 (Tex.App. - Dallas 2011), ruled that the sole member of a property-owning limited liability company was competent to testify on the LLC's behalf as to the FMV of its real estate, which had been foreclosed upon by its lender, leaving a deficiency that the lender sought to recover.
If you have questions about foreclosure, deficiency liability, or the Property Owner Rule, please feel free to contact me or T&K trial partner Steve Schoettmer for more information.
Laura McClellan
www.tklaw.com