Stoops,
Denious, Wilson & Murray, PLC
350 East Virginia Avenue, Suite 100
Phoenix, Arizona 85004
Email:
mdenious@stoopsazlaw.com
In one of our
articles a few months back, we discussed the potential
effect of the “anti-deficiency” statutes, which apply under
certain circumstances to loans secured by residential
dwellings consisting of a single or dual-family structure,
on a lot consisting of 2.5 acres or less.
In the context
of commercial properties, unimproved land, or residential
properties with three units or more, those anti-deficiency
statutes will not be of any help. In such cases, a borrower
whose property has been foreclosed must be prepared for the
deficiency action, in which the lender will seek to collect
the remaining amounts owed, over and above what was
recovered via the trustee’s sale or sheriff’s sale. In many
cases, loans involving commercial properties or vacant land
may include guarantors along with borrowers, all of whom
will be liable for the deficiency.
Typically, the
method of foreclosure will be via a trustee’s sale, which
does not require the filing of a lawsuit. The deficiency
action is a lawsuit, however, and must be filed by the
lender / beneficiary not later than 90 days following the
trustee’s sale. Where more than one trustee’s sale is
conducted (as where more than one deed of trust exists as
security for the loan), the 90 days runs from the date of
the last sale. If this time period passes without the
deficiency action being filed, under Arizona statute the
proceeds obtained from the trustee’s sale, regardless of
amount, are deemed to be “in full satisfaction of the
obligation and no right to recover a deficiency in any
action shall exist.” A.R.S. § 33-814(D). There are no
exceptions to this deadline.
Assuming a
deficiency action is brought within the 90-day period
following the trustee’s sale, what does the lender have the
right to recover? The difference between the amount
recovered at the trustee’s sale and the balance of the
loan? No. In 1990, following the last major real
estate recession in Arizona, our state legislature imposed
additional protections for the benefit of
debtors from excessive deficiency judgments resulting from
the forced sales of encumbered properties. See A.R.S.
sections 12-1566, 33-725, 33-727 and 33-814(A); see
generally
Wells
Fargo Credit Corp. v. Tolliver,
183 Ariz. 343, 345, 903 P.2d 1101, 1103 (App. 1995). One of these
protections is the provision under A.R.S. 33-814(A), which
governs a deficiency action following a trustee’s sale.
Under that statute, the deficiency claim is limited to the
difference between the total amount owed, less the greater
of (a) the sale price of the trustee’s sale, OR (b)
the fair market value of the property on the date of the
trustee’s sale. Id.; see also A.R.S. §
12-1566(C).
As anyone familiar with the trustee’s sale process will
agree, a trustee’s sale is not an example of a commercially
reasonable sale. It is not advertised on the MLS; it does
not involve fliers, open-houses, or even a showing to
potential buyers. It involves no disclosure to potential
buyers regarding the physical or environmental condition of
the property (or the status of leases or income in the case
of commercial properties). It also requires an up-front
deposit of $10,000 by any bidder, along with the requirement
that the prevailing bid price be paid in full by 5:00 p.m.
on the next business day. Therefore, the sale price of most
any trustee’s sale will be (and understandably should be)
substantially below the fair market value of the property.
The provisions of A.R.S. § 33-814(A), reflecting these
concerns, gives specific guidance on its definition of fair
market value:
“Fair market value” shall
mean the most probable price, as of the date of the
execution, sale, in cash, or in terms equivalent to cash, or
in other precisely revealed terms, after deduction of prior
liens and encumbrances with interest to the date of sale,
for which the real property or interest therein would sell
after reasonable exposure in the market under conditions
requisite to fair sale, with the buyer and seller each
acting prudently, knowledgeably and for self-interest, and
assuming that neither is under duress.
Id.
(underlines added). Therefore, if the balance of a loan on
a commercial property is $1,000,000.00, and the fair market
value is $800,000.00, the borrower or guarantor can limit
the amount of the deficiency to $200,000.00; even if the
property sold at the trustee’s sale for only $400,000.00
(which otherwise would have resulted in a deficiency claim
of $600,000.00).
Assuming a borrower (or guarantor, who also has the right to
assert this provision) believes the fair market value of the
property was higher than the price it sold for, he or she
should, and has the right to, apply to the court for a
determination of the fair market value of the property as of
the sale date. Where the property was sold at a trustee’s
sale, the borrower or guarantor may submit the application
in the deficiency action, at which point the court is
required to schedule a “priority hearing” to determine the
fair market value, and hear whatever evidence the court may
allow. The borrower or guarantor should be prepared to call
a qualified appraiser to appraise the property and testify
at the hearing, along with (subject to the court’s
allowance) a real estate agent familiar with the relevant
market.
Of course, under present market conditions the value of the
property in question may be less than the total loan amount;
nevertheless, it may also be substantially higher than the
sale price at the trustee’s sale, and a borrower or
guarantor should take every opportunity to mitigate, and
potentially minimize, the amount of the deficiency the
lender might otherwise be able to pursue. In addition, in
cases where it appears that the fair market value of the
property may be substantially higher than the price a
trustee’s sale might obtain, a borrower or guarantor may be
able to use this information in advance of a foreclosure to
better negotiate a loan workout or settlement, such as a
short sale or deed in lieu of foreclosure.
