Stoops, Denious, Wilson & Murray, PLC
350 East Virginia Avenue, Suite 100
Phoenix, Arizona 85004
Email:
mdenious@stoopsazlaw.com
Amid the
rising defaults of loans secured by real estate, real estate
agents and real estate attorneys these days are frequently
asked whether certain real estate mortgage loans can be
enforced against a borrower as a personal debt in addition
to foreclosure of the secured property. Generally, a loan
secured by real estate may be enforced by either suing the
borrower directly on the underlying promissory note, or by
conducting either a judicial foreclosure or (in the case of
a deed of trust) a non-judicial trustee sale. Upon
completion of the foreclosure or trustee sale, the lender
will in many cases have the right to collect the
“deficiency,” that is, the remaining amount owed that was
not collected via the foreclosure (or trustee sale) of the
property.
However,
Arizona statutes pertaining to foreclosures and trustee
sales contain two “anti-deficiency” statutes that will often
apply to loans secured by residential real estate. Where
these statutes apply, a lender’s remedy will essentially be
a foreclosure; without any right to sue directly on the
promissory note, or to collect any deficiency following
foreclosure or trustee sale.
One of the
“anti-deficiency” statutes applies to mortgages, which must
be foreclosed judicially, or deeds of trust if foreclosed
judicially. See A.R.S. § 33-729(A). The mortgage
instrument is seldom used today, and the reference to a
“mortgage” or “mortgage loan” is usually in a generic sense
that includes deeds of trust, the typical instrument used to
provide security in real estate. The other
“anti-deficiency” statute applies only to deeds of trust
when foreclosed via a trustee sale. See A.R.S. §
33-814(G).
For either of
the anti-deficiency statutes to apply, the mortgage or deed
of trust must be secured by real property that:
Consists of 2 ½ acres or less; and is restricted to
and utilized for a single-family or dual-family dwelling.
Assuming the
answer to each of the above is “Yes,” the next question is
whether the loan was used to pay all or part of the purchase
price of the property. Depending on whether the answer to
this question is yes or no, and depending upon whether a
trustee sale is conducted, a deficiency may or may not be
available.
1.
Purchase loan.
If the loan
was used to pay all or part of the purchase price of the
property, no deficiency will be available (except in cases
of voluntary waste). A.R.S. § 33-729(A). Likewise, no action on the note can be
brought. In other words, the loan is essentially a
non-recourse loan that gives the lender the sole option of
foreclosing and collecting whatever it can from the
foreclosure. This will be the case regardless whether the
loan is first-position, second-position, or otherwise. As a
result, a second “mortgage” that was used for the purchase
of qualifying property (an example being a 20% loan behind
an 80% loan) can be collected only by judicial foreclosure
or trustee sale, and is otherwise equivalent to a
“non-recourse” loan. Even if the junior loan is left
without any security on the property as a result of a senior
loan encumbrance being foreclosed, no action may be
brought.
See generally Mid-Kansas Federal Savings and Loan Ass’n. v.
Dynamic Development Corp.,
167 Ariz. 122, 804 P.2d 1310 (1991).
Often times
the question arises as to whether a “refi” loan will be
subject to the anti-deficiency provision as a purchase money
loan. This question was addressed in the case
Bank One v. Beauvais,
188 Ariz. 245, 934 P.2d 809 (App. 1997), in which the court
held that an extension, renewal, and/or refinancing of a
purchase-money loan retained the character as a
purchase-money loan, and therefore was subject to the
anti-deficiency statute. It is worth noting that in the
Beauvais case, the same deed of trust continued to be
the security for the modified/refinanced loan. Notably, in
almost all cases involving a refinance residential mortgage
loan, a new deed of trust would be created and recorded.
It is unclear to what extent this distinction is relevant,
assuming the underlying loan that is being refinanced is a
purchase-money loan.
The Beauvais court also noted that the lender could have
allocated out any portions of the refinanced loan that were
not used directly for refinancing the purchase-money
mortgage (an example being cash out to the borrower or to
pay off a separate unsecured obligation), though the lender
did not do so in that case. Whether such an “allocation”
could in fact be carried out would seem questionable,
however, because the anti-deficiency protection under
A.R.S. § 33-729(A) applies to loans used for payment of all
“or part” of the purchase price.
NOTE FROM DIANE DRAIN: I DO NOT FEEL
AS CONFIDENT THAT BEAUVAIS ADDRESSED THE REFINANCE
ISSUE GIVEN THE FACTS OF THE CASE. DO NOT RELY ON THIS
ARTICLE AS A REPRESENTATION OF FUTURE LITIGATION RESULTS.
2. Not a purchase loan: If the loan
(or any part of it) was not used to purchase the property in
question, the lender may either (a) sue directly on the
note, and waive the security of the mortgage or deed of
trust; or (b) bring a judicial foreclosure, and after sale
of the property, seek the remaining deficiency against the
borrower; or (c) bring a non-judicial trustee sale if the
security is a deed of trust.
IF
the lender elects (c) and conducts a trustee sale, upon
completion of that sale no deficiency will be
available. A.R.S. § 33-814(G). For various reasons,
notwithstanding this result, a lender will often opt to
conduct a trustee sale instead of options (a) and (b)
above. The trustee sale is by far the quickest, most
efficient, and least costly means of collecting on the debt;
and upon completion of the sale, the borrower has no further
redemption or other rights in the property. The lender
simply arranges to have a trustee (typically an attorney or
title/escrow company) notice a trustee sale, and as soon as
90 days later sells the property at a public auction. Thus,
a lender who holds a lien that is in senior position, or in
a junior position with sufficient value in the property to
support the loan, will probably elect to conduct a trustee
sale and thereby forego suing on the note or bringing a
judicial foreclosure and a deficiency action.
Where the
lender elects (a) and sues on the note, the lender is
foregoing the security in the property. The case in which
this may make sense would be where the property has little
or no “equity” over any senior encumbrances, the borrower
has other collectible assets, and the lender does not want
to spend up to a year in a judicial foreclosure, completing
the sale of the property and seeking a deficiency
thereafter. Or, where a security interest has been
extinguished by a senior lien foreclosure, and the lender is
left with an unsecured note.
If the lender
elects (b), and seeks a judicial foreclosure, the process is
much more cumbersome, costly, and time-consuming. The
lender must file a lawsuit and seek a judgment foreclosing
the mortgage or deed of trust, which would probably involve
4 to 12 months. In addition, the borrower will then have a
right to redeem, that is, pay off the mortgage debt, for six
months following the entry of judgment. After such time the
lender will put the property up for auction via a sheriff’s
sale, and then seek to collect whatever deficiency remains.
For ease of future reference, following is a summary of how
the anti-deficiency provisions apply, assuming the secured
property is 2 ½ acres or less and is restricted and utilized
for a single-family or dual-family dwelling:
Summary
Deeds of Trust:
(1) If the loan
is "purchase money," the lender cannot sue on the note,
nor can the lender seek a deficiency after its foreclosure
(regardless of whether the lender utilizes a trustee's sale
or judicial foreclosure); and
(2) If the loan
is not "purchase money," the lender is prohibited from
seeking a deficiency after holding a trustee's sale,
but the lender may claim a deficiency after a judicial
foreclosure of the deed of trust. In the alternative,
the lender may waive the deed of trust and sue directly on
the note.
Mortgages:
(1) If the loan
is "purchase money," the lender cannot sue on the note,
nor can the lender seek a deficiency after foreclosure; and
(2) If the loan
is not "purchase money," the lender may seek a
deficiency after judicial foreclosure (which, of course, is
the only type of foreclosure available under a mortgage).
In the alternative, the lender may elect to waive the
mortgage and sue directly on the note.
