Pablo Garcia signed a real estate contract with Anthony Turner for a purchase price of $169,000. The terms included a $15,000 cash down payment and a $154,000 “Wrap” promissory Note. The note was payable to Turner over eight years, accruing interest at 7.2% APR.
Turner’s deed to Garcia was made subject to an existing lien securing Turner’s debt to DHI Mortgage Company, Turner’s acquisition lender. At Closing Garcia executed a Deed of Trust to Turner, to secure Garcia’s obligation to pay the Wrap Note.
The effect of the Wrap financing was that the underlying debt of Turner to DHI was not released. Nor was Garcia required to pay it, since Garcia did not assume it. Instead, the Wrap Note to Turner included the balance owing on the underlying debt to DHI. In that scenario, Garcia pays Turner, Turner pays DHI, and if the plan works then all debts are timely satisfied and ultimately discharged.
The plan didn’t work.
Initially, Garcia made Wrap Note payments to a management company arranged by Turner. When the management company was sold, Garcia was unable to connect with its successor for months. The next communication was a notice from Turner of Turner’s intent to foreclose, caused by Garcia’s failure to tender payments for the previous six-month period.
Garcia immediately brought the account current.
Five years later Turner approached Garcia with a document, requesting execution by Garcia to prove “you’re the owner and you made the payments for the other home.” Garcia signed it, unaware that it was a warranty deed conveying ownership of the property back to Turner.
When Turner was challenged, a “Cancellation of General Warranty Deed” was filed a year later, with the intent of rescinding the transfer.
Shortly after, Turner commenced foreclosure proceedings by accelerating the balance of the Wrap Note. The property was ultimately sold in 2018 at public auction.
Garcia asserted a lawsuit, claiming he was unaware of the foreclosure proceedings. Garcia testified that English is not his primary language and that he struggles to read English documents. The trial court found Turner liable and awarded damages to Garcia of almost $90,000.
Turner appealed.
Turner’s main issue on appeal was that Turner was justified in foreclosing because Garcia failed to make payments in 2012 or 2013, six years prior to the foreclosure date. The Appellate Court determined that Turner waived Garcia’s failure since Garcia paid all that was owing.
It didn’t help Turner’s cause that Turner accepted Garcia’s late payment without protest. See Turner v. Garcia; Case No. 07-24-00124-CV; Texas Court of Appeals, 7th District; August 20, 2024: https://casetext.com/case/turner-v-garcia-2.
Questions / Issues:
1. Wrap Financing. Years ago, mortgages did not contain verbiage that prohibited property transfers (“due on sale” clauses). Prior to the advent of due-on-sale provisions, buyers could elect to assume existing mortgages if the existing loan documents did not prohibit debt assumption. Clever property owners determined that they could sell properties “subject to” existing mortgages, and – if the underlying debt had a low interest rate – then the seller could enjoy the arbitrage between the lesser rate charged in the existing mortgage and the new rate to be charged to the new buyer. The result was known as “Wrap Financing.”
2. Advent of Due On Sale Provisions. Real estate lenders added due-on-sale provisions to mortgages in the 1970s. These clauses effectively ended wrap financing, as a transfer of the real estate triggered the election of the lender to accelerate the debt. And in 1982 federal laws were changed to make such due-on-sale provisions enforceable in almost all mortgage contracts.
3. Application to Turner v. Garcia. Turner’s original mortgage debt, created in 2008 to DHI Mortgage Company, Ltd., contained a due-on-sale provision in Section 9(b)(i). However, given Garcia’s testimony that he was challenged to understand English documents, it may be that Garcia did not attempt to review the underlying DHI mortgage. Or if he did, perhaps he was incapable of understanding these provisions. And consequently, one might wonder if this influenced the decision of the trial court and Court of Appeals in favor of Garcia.
Stuart A. Lautin, Esq.*
* Board Certified, Commercial and Residential Real Estate Law, Texas Board of Legal Specialization
Licensed in the States of Texas and New York
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