## Facts

- Homeowners Joan Wilson Kessler and Karen Ledesma bought a residence and assumed a note secured by a first deed of trust (senior lien).
- They also executed a $36,364 note secured by a second deed of trust (junior lien), which directed foreclosure proceeds to pay (1) sale costs, (2) sums secured by the second deed of trust, and (3) any excess to persons legally entitled to it.
- After default on the junior note, a substitute trustee foreclosed under the second deed of trust.
- Conversion Properties, L.L.C. bought the property at the junior-lien foreclosure sale for $50,000.
- The trustee paid sale costs and satisfied the junior debt, leaving $14,791.08 in surplus proceeds.
- After the sale, Conversion Properties paid delinquent installments and additional principal on the senior note and entered a subrogation agreement with the senior noteholder to the extent of those payments.
- The homeowners demanded the surplus; Conversion Properties claimed the surplus should be applied to reduce the senior debt.
- The homeowners filed a declaratory judgment action; the trial court granted their summary judgment and denied Conversion Properties’ cross-motion.

## Issues

1. Whether surplus proceeds from a junior-lien foreclosure must (or may) be applied to reduce the senior mortgage debt instead of being paid to the former owners.
2. Whether a junior-foreclosure purchaser who later pays the senior debt and becomes subrogated to the senior lienholder’s rights can require that the surplus be applied to the senior debt.

## Decision

- The court of appeals affirmed summary judgment for the homeowners.
- A junior-lien foreclosure does not affect the senior lien; the purchaser takes subject to the senior lien.
- The surplus remaining after costs and satisfaction of the junior debt belongs to the persons legally entitled to it, which here were the former owners.
- Conversion Properties’ subrogation rights did not create any entitlement to the surplus because the senior lienholder itself had no right to those funds.

## Legal Principles

- Foreclosure under a junior deed of trust transfers title subject to all prior liens; it does not impair the senior lienholder’s rights or security.
- After paying foreclosure costs and the junior debt, surplus proceeds ordinarily represent the mortgagor’s equity and are payable to the mortgagor absent a superior legal claim.
- A senior lienholder’s collateral is the real property securing its debt; absent specific contractual or statutory authority, it has no claim to surplus generated by a junior-lien foreclosure.
- Subrogation is derivative: a subrogee acquires no greater rights than the party to whom it is subrogated and cannot use subrogation to obtain surplus funds the senior lienholder could not claim.

## Conclusion

The court held that surplus proceeds from a junior-lien foreclosure could not be diverted to reduce the senior mortgage debt and instead had to be distributed to the former owners; a purchaser’s later subrogation to the senior lienholder did not confer any right to the surplus.


Conversion Props., L.L.C. v. Kessler, 994 S.W.2d 810 (Tex. App.—Dallas 1999)