ARIZONA REVISED STATUTES, CHAPTER 6.1, ARTICLE 1

Link to foreclosure laws in others states
WARNING THIS INFORMATION IS MOST LIKELY NOT ACCURATE

USE AT YOUR OWN RISK
 

ARTICLE - Trustee Sales, Foreclosure, Deed in Lieu, Deficiency:

◙  Selected Real Property Foreclosure Issues, Micheal McGrath

◙  In Arizona: Does the Lender have a right to a deficiency and other issues related to trustee's sales.  compiled by Diane L. Drain, 2011

TRUSTEE SALE CASE LAW

◙  BT Capital LLC v. TD Service Co of Arizona, 1 CA-CV 10-0450, 9/27/11  A Trustee's statutory power to postpone or continue a trustee's sale does not extend to voiding a sale after completion of the bidding.  Section 33-811(c) provides that all persons receiving notice of the trustee's sale waive all defenses and objection so the sale if they fail to obtain a court order enjoining the sale before 5 pm on the last business day before the scheduled ate of the sale.  Although Section 33-811(c) does not by its terms apply to a trustee, a trustee's duties and powers are otherwise governed by the statutory procedures for conducting a trustee's sale.  A trustee conducting a sale has authority under 33-810(B) to postpone or continue the sale.  Once the sale commences with the start of the bidding, however, the trustee's ability to postpone or stop the sale is strictly limited.

◙  AHCCCS v Allen (In re Stephenson) 1-CA-CV 06-0785 (11/27/07) A secured creditor does not need to seek permission from the Superior Court or the Personal Representative of an estate to enforce its secured even though probate has been opened.  Under common law and Arizona Probate Code the secured creditors have the power to choose a remedy after a debtor dies, either by foreclosing on their secured or by filing a claim in probate.  The Probate court does not have automatic supervisory authority over a deed of trust sale governed by a separate statutory scheme.

◙  Baker v. Gardner Ariz.,1988.  770 P.2d 766  Holder of purchase money note and trust deed on premises sought to bring suit to collect on note and waived security deed of trust.   The Superior Court, Maricopa County, No. C-587681, Michael J. O'Melia, J., found action precluded by anti-deficiency statute.   On appeal, the Court of Appeals reversed in a memorandum decision.   The Supreme Court, Feldman, V.C.J., held that:  (1) holders of purchase money note and security device could not hold maker liable for entire unpaid balance by waiving security, and (2) election of remedies could occur except where anti-deficiency statute applied. Full Case (includes supplemental opinion)

◙  Kelly vs. Nationsbanc, 12/26/2000 No. 1 CA-CV 99-0642 (Ct.App 1st Div): Chapter 13 case filed after trustee's sale noticed.  Four postponements, bankruptcy case dismissed, sale completed.  Kellys argue that they failed to receive detailed accounting of payments and failed to receive actual notice of continued sales.  Court upheld lower court's granting of summary judgment.  Good review of In re Acosta, 181 B.R. 477 (Bankr.D.Ariz. 1995) (DR's to receive actual notice of postponed trustee's sale while in bankruptcy), see also In re Duncan, 211 B.R. 42 (Bankr.D.Ariz. 1997)  In re Stober, 193 B.R. 5 (Bankr.D.Ariz. 1996) (did not follow Acosta and Duncan); In re Nagel, 245 B.R. 657 (D.Ariz. 1999) (dismissal of BK returns parties to the status quo prior to the filing of the BK.  Once returned they are subject to the laws of Arizona). 

◙  In re Bebensee, 248 BR. 820 (9th Cir. BAP 2000) (Calif).  Interpreting California’s Civil Code regarding perfection of a buyer’s interest in property purchased at a trustee’s sale, the BAP found that recordation of a trustee's deed within the fifteen-day time period after the sale perfected the buyer’s interest in property although that recordation occurred post-petition. 

Arizona recently amended its statutes, effective July 1, 2000, to mirror California law In the Bebensee case, a buyer had purchased a debtor’s home at a trustee’s sale. Twelve days later, the debtor filed for Chapter 13. Two days after the petition was filed, the buyer recorded the trustee's deed. Under California law recordation of a trustee's deed within fifteen days after a trustee sale is a ministerial act, and perfection relates back to the date of the trustee sale. Because the sale was deemed perfected pre-petition, the debtor had no interest in the home at the lime of filing. 

Section 5 of Ariz. Rev, Stat, § 33-810(A) has been amended to read, in pertinent part: “The sale shall be completed on payment by the purchaser of the price bid in a form satisfactory to the trustee. The subsequent execution, delivery and recordation of the trustee’s deed as prescribed by § 33-811 are ministerial acts.  If the trustee’s deed is recorded in the county In which the trust property is located within fifteen business days after the date of the sale, the trustee’s sale is deemed perfected at the appointed date and time of the trustee’s sale.”  Arizona’s statute was amended to add the “retroactive perfection” provision. Because of the similarity between Arizona’s amended statute and the language in the California Civil Code, consumer practitioners may find this case instructional in interpreting Arizona law

◙  Krohn vs Sweetheart Properties (AZ Supreme Ct) CV 01-0246-CQ, BK 00-10623-PHX-RTB Krohn filed a chapter 13 bankruptcy that was dismissed.  After the dismissal her home was sold through a trustee's sale.  Krohn then filed a second chapter 13 and sought to have the sale of the house vacated for gross inadequacy of price.  The court found that a trustee's sale could be set aside solely on the basis that the bid price was grossly inadequate (see Restatement (Third) of Property: Mortgages Section 8.3).

◙  DMC, Inc. v Downey Savings & Loan Ass'n, 99 Cal.App.4th 190, 120 Cal.Rprt.2d 761 (2002)  PRIORITIES; PURCHASE MONEY MORTGAGE; REATTACHING LIEN.  After obtaining two loans secured by deeds of trust on her property, Henry transferred the property to her parents. When they defaulted on the first loan, the lender foreclosed and acquired title, extinguishing DMC's second mortgage.  Two months later, Henry repurchased the property from the foreclosure sale purchaser.  To do so, she obtained a new loan, secured by a trust deed on the property from Downey S & L.  A year later, DMC sued to foreclose judicially its second lien. The trial court granted Downey's motion for summary judgment, holding that even if DMC's second trust deed reattached to the property, it remained junior to Downey's new purchase money trust deed.

The court of appeal affirmed.   Despite California's "first in time, first in right" approach to lien priority, under an equitable analysis, "the new senior lien holder would not have advanced the substantial funds necessary for the repurchase if it was not assured that it would have the rights and remedies associated with lien priority." 99 Cal.App.4th at 199. The foreclosure extinguished DMC's lien, and without Downey's new loan DMC would have been left holding a wiped-out junior lien without any legal claim to repayment. It was only because of the money advanced by Downey, therefore, that DMC's lien was revived, thereby retaining its original place in the order of priority

◙  Busquets-Ivars v. Ashcroft, June 24, 2004 - No. 02-70643 - A notice which fails to include a proper zip code is not properly addressed under 8 U.S.C. section 1229(a)(1).

◙  Foresight Investments Group vs Leader Mortgage Company (LMC), CV 2003-000195, LMC permits a trustee's sale to go forwarding knowing it should not have been held.  Court decides that the trustee was effectively a seller of real estate and that the buyer at the sale had entered into a contract for the sale of the subject property.  In that LMC could not transfer the subject property because the debt had already been paid, the trustee's sale was a sale of realty and the buyer at the trustee's sale was entitle dot a benefit of the bargain measure of damages  the difference between the fair market value of the property and the price bid by the buyer.  (case was settled).

◙  Dagburg, LLC vs Nations Title Insurance of Arizona, CV 1999-016823 (unpublished)

◙  Bank One v Beauvais, 188 Ariz. 245, 934 (P2.d 809 (App. 1997) (consolidated loan including purchase money debt ($240,000) and non-purchase money ($75,000) still retains purchase money protection.  Later workout note retains character of purchase money for the purpose of anti-deficiency.  Note: the original and workout loans were with same lender and it appears that the original loan was modified, not released.). “In summary, we hold that regardless of whether the workout note was an extension, renewal, or refinancing of the 1989 consolidated loan, it retained its character as a purchase-money note. See Lucky Invs., Inc. v. Adams, 183 Cal.App.2d 462, 7 Cal. Rptr. 57 (1960) (Cancellation and replacement with new notes, secured by the same property, transfers purchase-money status to new notes.). Accordingly, the Bank is prohibited from waiving the security under the deed of trust and suing on the note. We affirm the trial court's dismissal of the Bank's complaint”, at 816. 

◙  Resolution Trust Corp. v. Segel, 173 Ariz. 42, 839 P.2d 462 (App.1992), we examined the impact of the Baker holding on non-purchase-money loans that were secured by second-position deeds of trust on residential property of less than two and one-half acres with a one- or two-family residence. In Segel, the court held that because the lender did not institute trustee's sale proceedings and the deeds of trust secured non-purchase-money obligations, the lender was entitled to waive its security and sue directly on the notes under A.R.S. section 33-722. Id. at 44-45, 839 P.2d at 464-65.

◙  Cely v. DeConcini, McDonald, Brammer, Yetwin & Lacy, P.C., 166 Ariz. 500, 505, 803 P.2d 911, 916 (App.1990).  A "purchase money mortgage" for purposes of Arizona's anti-deficiency statutes is one that encumbers the property being sold.

◙  In re Boardwalk holds that late charges and interest must be reasonable and bankruptcy judge can reduce; any authority for once 13 filed, that no default or late fees on post-petition payments can accrue.

◙  Bank of Mellon vs De Meo, 1 ca-cv 10-1177 (Ct. App., Div 1) 5/3/11 - lender must comply with Protecting Tenants in Foreclosure Act 2009.

◙    Vasquez v Saxon Mortgage, Deutsch Bank, AZ Supreme Ct, No. CV-11-0091-CQ (11/2011) certified question from Bankruptcy Court No. 4:08-bk-15510-EWH Is the recording of an assignment of deed of trust required prior to the filing of a notice of trustee’s sale under A.R.S. § 33-808 when the assignee holds a promissory note payable to bearer? The answer is no; Arizona law imposes no such requirement.

◙   M&I vs Mueller, (Az Ct Appeals, Div 1, 12/27/11) 1 CA-CV 10-0804 CV 2009-031468  This case is distinguishable from Mid Kansas. Although the Muellers never actually occupied the dwelling, they intended to personally occupy it upon its completion. Therefore, we affirm the lower court summary judgment for the homeowners and rejecting M&I's claim for a deficiency claim.

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Attorney Notes:

In Arizona: Does the Lender have a right to a deficiency and other issues related to trustee's sales.  compiled by Diane L. Drain, 2011

Definitions:

Deficiency - arises when a creditor does not receive the full amount they are owed by contract or court order.

Foreclosure - action taken in court.  Mortgages can only be foreclosed in court.  Deeds of Trust can either be foreclosed in court (judicial foreclosure) or a statutory process called a trustee’s sale.

Trustee’s sale – Arizona statutory process that takes at least 91 days to complete, assuming no or little ligation and no bankruptcy.

Judicial foreclosure – takes approximately 9-12 months to complete, assuming no or little ligation and no bankruptcy.

Arizona anti-deficiency laws:

* if deed of trust, 2 ½ acres or less, used as a one or two family dwelling AND property sold through trustee’s sale - NO DEFICIENCY. ARS Section 33-814

* if deed of trust or mortgage, 2 ½ acres or less, used as a one or two family dwelling AND loan (all or part) was used to purchase the property AND property sold through judicial foreclosure - NO DEFICIENCY.  ARS Section 33-729.

How to determine whether or not the lender might have the right to a deficiency:

The first question is whether the loan document is a mortgage or deed of trust? 

If the loan document is a mortgage, the next few questions are about the property.  Did you borrow the money to buy the property?  Is it a dwelling? Is it on 2 ½ acres or less?  Is the property used as a one or two family dwelling?  If the answer is “yes” to all 4 questions - then A.R.S. Section 33-729(a) prohibits the lender in seeking a deficiency once they complete their judicial foreclosure of the real property.  PNL Credit LP v Southwest Pacific, 179 Ariz. 259, 877 P.2d 832 (App. 1994) (anti-deficiency does not apply to more than two single family units). Mid Kansas Fed. Sav. & Loan v Dynamic Dev. Corp, , 163 Ariz. 233, 787 P.2d 132 (App. 1989) vacated, 167 Ariz. 122, 804 P.2d 1310 (1991) &  Northern Arizona Properties vs Pinetop Properties, 151 Az 9, 725 P.2nd 501 (App. 1986) (can be investment property, no owner need to occupy). Cely v. Deconcini, 166 Ariz. 500, 803 P.2d 911 (App. 1990) (using one home as collateral for purchase of second home is not purchase money debt).  

Bank One v Beauvais, 188 Ariz. 245, 934 (P2.d 809 (App. 1997) (consolidated loan including purchase money debt ($240,000) and non-purchase money ($75,000) still retains purchase money protection.  Later workout note retains character of purchase money for the purpose of anti-deficiency.  Note: the original and workout loans were with same lender and it appears that the original loan was modified, not released.). “In summary, we hold that regardless of whether the workout note was an extension, renewal, or refinancing of the 1989 consolidated loan, it retained its character as a purchase-money note. See Lucky Invs., Inc. v. Adams, 183 Cal.App.2d 462, 7 Cal. Rptr. 57 (1960) (Cancellation and replacement with new notes, secured by the same property, transfers purchase-money status to new notes.). Accordingly, the Bank is prohibited from waiving the security under the deed of trust and suing on the note. We affirm the trial court's dismissal of the Bank’s complaint”, at 816. 

*Replacement note and deed of trust: The plaintiff sold property and received a note and deed of trust from the original buyer. When the original buyer then sold the property to the defendants, the plaintiff surrendered the original note and reconveyed the original deed of trust to the original buyer, and at the same time received from the defendants a new note and deed of trust. Id. The court held that despite the creation of a “new note and trust deed,” the defendants were protected by the antideficiency statute because the new note and trust deed replaced the original purchase-money note and deed of trust between the plaintiff and the original buyer. Jackson v. Taylor, 272 Cal. App. 2d 1, 3 (Cal. Ct. App. 1969). Id. at 5.

Attorney Notes: please note that (1) both loans with same lender. This result will most likely not be the same had there been a new lender involved.  Second, lender did not bifurcate their claim to request deficiency on the non-purchase money portion of the debt.  If they had, may have been a different decision.   Lastly, this case is 20 years old and does not reflect the type of refinanced loans made in the last few years.

 *Waste to the property: Anti-deficiency protection does not apply to waste of the property. “failure to exercise ordinary care to preserve and protect the property.” A.R.S. Section 729(B) and 333 West Thomas Medical Building v Soetantyo, 976 F. Supp. 1298 (D. Ariz. 1997).

*Character of the property: the Court held that, [A]s the Supreme Court observed decades ago, ‘[w]ith purchase money deeds, [sic] the character of the transaction must necessarily be determined at the time the trust deed is executed. Its nature is then fixed for all time and as so fixed no deficiency judgment may be obtained regardless of whether the security later becomes valueless.” [emphasis added]. Palm v. Shilling, 199 Cal.App.3d 63, 244 Cal.Rptr.600 (1988).  citing Goodyear v. Mack, 159 Cal.App.3d 654, 657, 205 Cal.Rptr 702 (1984), “[t]he purchase money character of the original note was not defeated by subsequent transactions involving the property until the purchase money deed of trust was reconveyed.” [emphasis added].

*Suit on the note: Following a judicial foreclosure by a senior lienholder, a junior lienholder can sue on Note (unless property is anti-deficiency in character) A.R.S. 33-722  Wells Fargo Credit v Tolliver, 183 Ariz. 343, 903 P.2d 101 (App. 1995). Lender may waive its security in the real property and sue on the note.  Darnell v. Denton, 137 Ariz. 204, 669 P.2d 81 (App. 1990).  Also, foreclosure of a senior lien extinguishes the junior lien, therefore no need to “release” the junior lien. Wells Fargo, supra.  Lender may not sue on the Note so long as the property fits within the anti-deficiency statutes (dwelling, 2 ½ acres or less, one or two family dwelling - ARS Section 33-814) Baker v. Gardner, 160 Ariz. At 105, 770 P.2d at 773 (1988) (first and second purchase money debts).  First lender noticed trustee’s sale and second (Bakers) elected to sue on Promissory Note).  Clarification in a supplemental opinion that the court did NOT mean to prohibit the non-PMSI creditor from waiving the security and suing on the note

*Lender waives security and sues on the note - DEFICIENCY so long as property not 2 ½ acres or less, used as a one or two family dwelling AND loan (all or part) was used to purchase the property.  Resolution Trust Corp vs Segel, 173 Ariz. 42, 839 P.2d 462 (App. 1992).

*Suit on Promissory Note: A lender may waive their lien on real property and sue on the Promissory Note.  That waiver is an “abandonment and release” of the lien and must be “evidenced by a recorded release of the lien”.  ARS Section12-1566(F)   All limitations of Baker v Gardner and Mid Kansas apply.  But see:     Smith v. Mangels, 240 P.2d 168 (1985) and Deming v. Walraven, 651 P.2d 1203 (App. 1982) (Mortgage not waived by going to judgment on the Note)

*Lender conducts trustee’s sale but may not have promissory note: Hogan vs Washington Mutual, CA-CV 10-0385 (Div 1, AZ Court of Appeals, filed 3/29/11)  Borrower argues lender not the proper assignee under the Promissory note, therefore had no standing to conduct trustee’s sale.  App Ct affirms lower court.  Deed of trust is a creature of statute and not a negotiable instrument.  Therefore, UCC does not apply. Lender can conduct trustee’s sale without the promissory note.

*Does lender need an assignment of beneficial interest before starting the trustee’s sale? VASQUEZ, v. SAXON MORTGAGE, DEUTSCHE BANK, AZ Supreme Ct, No. CV-11-0091-CQ (11/2011) certified question from Bankruptcy Court No. 4:08-bk-15510-EWH Is the recording of an assignment of deed of trust required prior to the filing of a notice of trustee’s sale under A.R.S. § 33-808 when the assignee holds a promissory note payable to bearer? The answer is no; Arizona law imposes no such requirement.

* Junior wiped out by senior’s foreclosure or trustee’s sale - NO DEFICIENCY if also purchase money lien Nydam v. Crawford, 181 Ariz. 101, 887 P.2d 631 (App. 1994).  DEFICIENCY – consolidated second loan, used to pay off original second, plus credit cards, etc.  Am. Gen. Fin.Serv. V. Dinwiddie, 2008 WL 4182862 (Ariz. Ct. Apps. 2/26/2008) (unreported)

*One lender - multiple notes: Mid Kansas Fed. Sav. & Loan vs Dynamic Dev. Corp, 167 Ariz. 122, 804 P.2d 1310 (1991): Vice Chief Justice Feldman summarized the anti-deficiency statutes:  “Read together, therefore, the statutes enact the following scheme: when the holder of a non-purchase money deed of trust of the type described in ARS Section 33-814(G) forecloses by non-judicial sale, the statute protects the borrower from a deficiency judgment.  The lender therefore may not waive the security and sue on the Note.”  Baker, 160 Ariz. at 106, 770 P.2d at 774.  The holder may, however, seek to foreclose the deed of trust as if it were a mortgage, as allowed by Section 33-814(E); if it does so, the debtor is allowed redemption rights under Sections 33-726 and 12-1281 through 12-1289 and is thus protected from low credit bids, but the holder may recover a deficiency judgment – the difference between the balance of the debt and the sale price – unless the note is a purchase money obligation.  In the latter case, the borrower is protected by the mortgage anti-deficiency statute ARS Section 33-729(a), which applies only to purchase money obligations.  Id, at 127, 804 P.2d at 1315.  (Emphasis added)

SUPPLEMENTAL OPINION: Summary and Application: “Where the creditor chooses non-judicial foreclosure, he cannot obtain a deficiency judgment if the collateral is within the class protected by the deed of trust anti-deficiency statutes.  Where, however, the creditor chooses judicial foreclosure, he can obtain a deficiency judgment in all cases except those involving purchase money loans on the type of real property that the mortgage foreclosure statute describes.  Therefore, where the creditor can obtain a deficiency judgment he can also elect to waive the security under ARS Section 33-722 and sue on the Note.  By choosing judicial foreclosure, the creditor can obtain a deficiency judgment in all cases except those dealing with purchase money collateral on the residential property described in Section 33-729(a).  He may, therefore, proceed under Section 33-722 in all cases that do not fall within Section 33-729(A)”

*Multiple lenders with multiple notes: Junior lender can sue on Note after foreclosure by first lender unless property is purchase money, 2 ½ acres or less and utilized as a one or two family dwelling.  Wells Fargo Credit v Tolliver, 183 Ariz. 343, 903 P.2d 1101 (App. 1995); W.D. Lang v Corbet, 181 Ariz. 153 (888 P.2d 1340 (App. 1994) (junior could pursue sue on note and collect excess sale proceeds from sale of first lender).

*Property not yet fully constructed does not qualify as “limited to and utilized for one or two family dwelling” DEFICIENCY allowed.: Mid Kansas, id at 129, 804 P2d at 117.

But see a completely different outcome, M&I vs Mueller, (Az Ct Appeals, Div 1, 12/27/11) 1 CA-CV 10-0804 CV 2009-031468  (in Mid Kansas, where the borrower was a corporation that never intended to occupy the property, the Muellers intended to live in the single-family home upon its completion. The primary purpose of the Arizona anti-deficiency statutes is to protect “homeowners” from deficiency judgments — not to afford protection to commercial homebuilders). In 2005, the Muellers purchased a plot of vacant land (the “Property”) in Arizona. In June 2006, the Muellers borrowed $444,000 from M&I to construct a single-family home on the Property for their own use.

Several months into construction, the Muellers discovered that the contractor was behind schedule, and much of the construction was defective. The Muellers notified M&I that they would need advances on loan disbursements to remedy the defects. M&I did not disburse additional funds, and the Muellers abandoned the Property and defaulted on the note.

In September 2009, M&I foreclosed and sued to recover a deficiency judgment for $68,196.91, the difference between the appraised value of the home prior to the foreclosure sale. The trial court dismissed M&I’s deficiency claim, finding as a matter of law that the Muellers were entitled to anti-deficiency protection under Arizona Revised Statutes (“A.R.S.”) section 33-814(G) (2010). Court of Appeals upheld lower court that owner could not be sued for a deficiency because they INTENTED on occupying the property.

*Three or more units: does not qualify as a one or two family dwelling, therefore DEFICIENCY allowed.  PNL Credit, supra.

*Commercial owner - NO DEFICIENCY so long as character or property fits within statutory requirements of anti-deficiency.  PNL Credit, supra

*Merger and extinguishment: Mid Kansas had both first and second deeds of trust.  Lender took title after trustee’s sale of second deed of trust by bidding full debt.  Absent contrary agreement by the parties or intent not to merge, the borrower’s liability under the first deed of trust is extinguished as a result of the merger of fee simple title with lender’s beneficial interest under the first deed of trust.  Mid Kansas, supra, at 130, 804 P2d at 1318.

*Partnership assets: Lender may collect a deficiency from community property of a general partner and spouse without the spouse signing the loan documents or partnership agreement.  MacCollum v. Perkinson, 185 Ariz. 179, 913 P.2d 1097 (App. 1996) (Partners community property liable for deficiency even though spouse did not sign loan documents); Chase Bank of Arizona vs Acosta, 179 Ariz. 563, 880 P.2d 1109 (App. 1994) (General partnership in bankruptcy, lender could sue general partner.)

* Guarantor separate liability: Tenet v. Silver, 52 P.3d 786 (App. 2002) (lender's t-sale didn't extinguish guarantors separate liability for the debt)

*Determining Deficiency: (1) Foreclosure action - difference between debt and amount obtained at sheriff’s sale or fair market value at the time of the foreclosure.  ARS Sections 33-725(B), 727(B), 814(C) and 12-1566(B).  (2) Trustee’s sale - same as foreclosure.  Market value determined by the court (expedited hearing process) must be brought within 90 days of trustee’s sale.  33-814(A).  This 90 statute of limitations does not apply to a lender who has the right to sue on the Note because this suit is not a deficiency action.  Wells Fargo v. Tolliver, supra.

*90 day statute of limitation re deficiency: U.S. v. Rezzonico, 32 F.Supp.2d 1112 (D. Ariz., 1998) The Arizona anti-deficiency statute has been interpreted by the Arizona Court of Appeals and this District Court to be a statute of repose. Valley National Bank of Arizona v. Kohlhase, 182 Ariz. 436, 897 P.2d 738 (Ct.App.1995); Resolution Trust Corp. v. Olson, 768 F.Supp. 283 (D.Ariz.1991). Statutes of repose limit the time in which a cause of action may be brought. As contrasted with statutes of limitations, which extinguish the right to proceed with an accrued cause of action, statutes of repose extinguish the actual action. In other words, once a statute of repose has expired, a valid cause of action no longer exists. Unlike statutes of limitations, statutes of repose are ordinarily binding on the federal government. Olson, 768 F.Supp. at 285 (citing United States v. Hartford Accident and Indemnity Co., 460 F.2d 17 (9th Cir.1972), cert. denied, 409 U.S. 979, 93 S.Ct. 308, 34 L.Ed.2d 243 (1972)).  …         The central dispute in this case is not whether Ariz.Rev.Stat. § 33-814 is a statute of repose binding on the United States, but whether the Government's right to collect its deficiency action is created by federal law. This Court erred in applying the anti-deficiency statute before considering whether the Secretary of Agriculture's right to bring a deficiency action arose under federal law…. Based on the foregoing analysis, summary judgment should have been entered in favor of the United States and against the Rezzonicos.

Norwest Bank Arizona v. Superior Court, 963 P.2d 319 (AZCA, 1998) (February 19, 1998) Arizona's anti-deficiency statute, A.R.S. Section 33-814(D), directs that since Praedium did not maintain an action for a deficiency judgment within the specified time, the proceeds at the trustee's sale are deemed to be in full satisfaction of the original...  

*Lender accepts less than what is owed on residential property, releases deed of trust, then sues borrower for deficiency.  TANQUE VERDE ANESTHESIOLOGISTS, L.T.D. PROFIT SHARING PLAN, 836 P.2d 1021, 172 Ariz. 311 (App. 1992)   “Although no trustee's sale occurred in this case, we agree with Proffer (borrower) that, based on the holdings of Baker, supra, and Mid Kansas, supra, and absent evidence of an agreement to the contrary (emphasis added), when Tanque Verde (lender) signed the deed of release and reconveyance, it thereby waived its right to seek a deficiency judgment.”  ((The assuming lender (Tanque Verde) signed the deed of release and included in the release language that the borrower is not released on the underlying debt.  The borrower (Proffer) did not sign the deed of release.  Nor, was there any other signed agreement where the borrower acknowledged that the debt was not released.  Correct conclusion.  This outcome will be different for short sales because there is almost always a new contract which details the agreement between the seller and the lender.  That short sale contract is signed by the seller/borrower, therefore will be binding on the seller/borrower.

* Suit for deficiency after trustee sale: Deficiency action is substantive, therefore covered by the law in the debt (the Note), whereas a trustee’s sale is procedural and governed by the law where the land is located. Cardon v. Cotton Lane Holdings, Inc., 841 P. 2d 198 - Ariz: Supreme Court 1992  Cotton Lane takes the position that because a trustee's sale held in Arizona is conducted in accordance with the procedures mandated by Arizona statute, the pursuit of a deficiency judgment after a trustee's sale is also a procedural matter governed by Arizona law. Once Arizona foreclosure procedure is invoked for a trustee's sale, "all aspects of the foreclosure provided for in the statutes should be applied," including the right to pursue a deficiency judgment. We disagree.

Cotton Lane is correct that the trustee's sale itself is a procedural matter and is governed by the law of the situs. See Restatement § 229; California Fed. Sav. & Loan Ass'n v. Bell, 6 Haw. App. 597, 735 P.2d 499, 504 (1987); Gate City Fed. Sav. & Loan Ass'n v. O'Connor, 410 N.W.2d 448, 450 (Minn.App. 1987). The situs in this case is Arizona, and the trustee's sale was conducted correctly in accordance with Arizona law. A deficiency judgment, on the other hand, is a matter of substantive law. Greater Ariz. Sav. & Loan Ass'n v. Gleeson, 5 Ariz. App. 577, 582, 429 P.2d 464, 469 (1967) (Hardy, J., dissenting in part), citing Kresos v. White, 47 Ariz. 175, 54 P.2d 800 (1936); Citibank v. Errico, 251 N.J. Super. 236, 597 A.2d 1091, 1094 (1991); Gate City, 410 N.W.2d at 450; see also Catchpole v. Narramore, 102 Ariz. 248, 250, 428 P.2d 105, 107 (1967) (California anti-deficiency statute is substantive). As a substantive matter, a deficiency action is governed by Arizona choice of law rules, and in Schwartz v. Schwartz, 103 Ariz. 562, 565, 447 P.2d 254, 257 (1968), this court expressly adopted the Restatement (Second) of Conflict of Laws as our guide in resolving choice of law questions. See also Estate of Levine, 145 Ariz. 185, 189, 700 P.2d 883, 887 (App. 1985) (Arizona courts follow Restatement to determine choice of law questions in contract actions), citing Burr v. Renewal Guaranty Corp., 105 Ariz. 549, 468 P.2d 576 (1970); Herma Hill Kay, Theory into Practice: Choice of Law in the Courts, 34 Mercer L.Rev. 521, 556 & n. 223 (1983) (as of 1983, Arizona one of 14 states relying on Restatement in choice of law cases). The Restatement states that a deficiency action is governed by the law applicable to the underlying debt (i.e., the Note), not the law of the situs. Restatement § 229 comment e; see also Catchpole, 102 Ariz. at 251, 428 P.2d at 108; Consolidated Capital Income Trust v. Khaloghli, 183 Cal. App.3d 107, 111-12, 227 Cal. Rptr. 879, 882 (1986); First Commerce Realty Investors v. K-F Land Co., 617 S.W.2d 806, 809 (Tex.Civ.App. 1981). Cf. Mid Kansas Fed. Sav. & Loan Ass'n v. Dynamic Dev. Corp., 167 Ariz. 122, 129, 804 P.2d 1310, 1317 (1991) (if deed of trust holder purchases property at trustee's sale, its interest in deed of trust merges in the fee and deed of trust no longer exists). Therefore, Cotton Lane's deficiency action is governed by the law applicable to the Note.

*Priorities for Collecting on Deficiency: A.R.S. Section 12-1566(D), requies a creditor collecting on a deficiency to proceed first against all other real property of the debtor before proceeding against the debtor’s primary residence.  This law does not apply when the mortgage or deed of trust is a consensual lien.  A.R.S. Section 33-964(B). Except as provided in section 33-1103, a recorded judgment shall not become a lien on any homestead property. Any person entitled to a homestead on real property as provided by law holds the homestead property free and clear of the judgment lien.

*Home Improvement loan not purchase money: the Supreme Court of Arizona has already identified a home improvement loan security instrument as a non-purchase money mortgage outside the scope of the anti-deficiency statutes. Southwest Savings & Loan Ass'n v. Ludi, 122 Ariz. 226, 594 P.2d 92 (1979); accord Allstate Sav. & Loan Ass'n v. Murphy, 98 Cal.App.3d 761, 764, 159 Cal.Rptr. 663, 664 (1979) (holding that “construction loans for improvements or repairs of the type involved in this case are not within the description of loans protected by the purchase-money deficiency prohibition of section 580(b)”). In Ludi, the property in question involved two promissory notes and two mortgages, executed at different times and by different individuals (prior owner and subsequent owner). Id. 122 Ariz. at 227, 594 P.2d at 93. While the first promissory note and mortgage involved monies used for the purchase of real property the second promissory note and mortgage was for a home improvement loan. Id. The Ludis, being the third purchaser, assumed both promissory notes and mortgages and defaulted on both of the notes. Id. The creditor Southwest foreclosed on the property in response to the Ludis' default of the first note and waived its security and brought an action on the second note. Id. Ludi contended that any action on the second note was barred pursuant to A.R.S. § 33-729. Id.

The issue was whether the Ludis as a subsequent party to the transaction who assumed both notes could force Southwest the creditor to elect its remedy to foreclosure of the security or an action on the note. Id. The Supreme Court ruled that the Ludis were subject to the same conditions and obligations as their grantor and the fact that the Ludis had assumed the notes simultaneously did not change the result. Id. 122 Ariz. at 227-28, 594 P.2d at 93-94. The Ludis also argued in the alternative that both mortgages were purchase money mortgages and barred by the anti-deficiency statute. Id. 122 Ariz. at 228, 594 P.2d at 94. The Court rejected this argument holding that the second mortgage and note was for a property improvement loan not for purchase money and therefore, was “clearly not covered by the statute.” Id. Cited in American National Bank vs Vatistas, , 2010 WL 3115419 (2010) (Ariz.App.Div.1) Cited in appellants opening brief.

*Bifurcating actions: The principal of bifurcating actions pertaining to portions of loan monies is supported by Southwest Savings & Loan Ass'n v.Ludi, 122 Ariz. 226, 594 P.2d 92 (1979). The similarities yet significant differences between Ludi and Baker were noted by the Supreme Court of Arizona in Mid Kansas Federal Sav. & Loan Ass'n of Wichita v. Dynamic Development Corp., 167 Ariz. 122, 129 fn 6, 804 P.2d 1310, 1317 (1991) (In Banc); accord Cely v.DeConcini, McDonald, Brammer, Yetwin & Lacy, P.C., 166 Ariz. 500, 505-06, 803 P.2d 911, 916-17 (App. Div. 1 1990). While in Ludi and Baker the two notes were secured by the same real estate, “the second note in Ludi was given to obtain a home improvement loan and therefore was ‘independent from’ the first note . . . .” Id. (citation omitted). According to the Mid Kansas Court, Ludi was not in conflict with Baker because the action on the second deed of trust that involved the home improvement loan was “non-purchase money obligation.” Id. (citation omitted). Cited in American National Bank vs. Vatistas, 2010 WL 3115419 (2010) (Ariz.App.Div.1) As cited in appellants opening brief.

*Rents – post-trustee’s sale: Norwest Bank Arizona v. Superior Court, 963 P.2d 319 (AZCA, 1998)  The right to receive rents is an appurtenance and an incident of ownership of real property. The right to rents was not excepted out of the property conveyed to Norwest in the trustee's sale, and was conveyed along with the other usual incidents of property ownership by the trustee's deed. Norwest need not pay rent to the receiver, nor to Praedium, and is entitled to the rents paid by the tenants occupying the property. Praedium is not entitled to a receivership to collect rents or manage the property.

*Excess sale proceeds:    Long v. Corbet, 181 Ariz. 153, 888 P.2d 1340 (Ariz. App. Div. 1, 1994)     This issue is whether a creditor who has received excess funds from a trustee's sale held by a senior creditor is precluded by Arizona's anti-deficiency statute, Ariz.Rev.Stat.Ann. ("A.R.S.") section 33-814(G), from pursuing a guarantor for satisfaction of the remainder of the debt. Because we conclude that the anti-deficiency statute does not apply in this situation, we affirm the trial court's grant of summary judgment to the creditor.

*Revived lien - borrower re-acquires title: Issue: two original purchase money loans on property – first lender completes trustee’s sale, thereby wiping out the second deed of trust.  Later the original borrowers takes title to the same property:  the issue arises under A.R.S. § 33-806(A), which states in part:
An interest in the trust property acquired by the trustor subsequent to the execution of the trust deed shall inure to the trustee as security for the contract or contracts for
which the trust property is conveyed as if the interest or claim had been acquired before execution of the trust deed.

See:Transamerica Financial Services, Inc. v. Carl Lafferty, 75 Ariz. 310, 856 P.2d 1188 (1993). This case dealt with two issues, the second of which is “Whether the beneficiary’s lien survived when the original debtor re-acquires the property and, if so, whether that lien acquired preference to other liens on the property.” The holder of the second lien, Transamerica, took the position that the re-acquisition of the property by the original debtor not only revived its lien, but also placed that lien in a superior position to the purchase money security interest of the new lender to the original debtor. The original debtor, Guerrero, argued that A.R.S. § 33-806(A) was intended to apply to situations in which a purchaser of property grants a deed of trust shortly before acquiring title to the property and was not intended to revive liens extinguished by a foreclosure sale. While the court agreed that this may have been the original intent, it stated, “. . . the literal terms of the statute are not so restrictive. The Guerreros, as trustors under Transamerica’s 1987 deed of trust, bought the property from Lafferty after the trustee’s sale. Thus, they acquired an interest in the property subsequent to the execution of the 1987 trust deed. Pursuant to this statute, that interest ‘inured[d] to the trustee as security for the contract.’” The court then reviewed other cases from other jurisdictions, including the case of Jensen v. Duke, 71 Cal.App. 210, 234 P. 876 (1925), and
concluded that “[P]laintiff’s case is within the purview of the statute; and to hold otherwise would involve a strained construction, where every consideration of justice forbids that the mortgagor should hold his title obtained from Abbott free of plaintiff’s mortgage lien.” The court examined Transamerica’s position that in addition to the revival of its lien, its lien had priority over the purchase money liens acquired in the sale of the property to the Guerreros. Transamerica’s theory was that the instant the Guerreros obtained title to the property from Lafferty, its lien re-attached and, therefore, the Guerreros, giving a lien to Lafferty occurred after they acquired title and thus, the property was subject to Transamerica’s lien. The court of appeals disagreed, stating, “The common law rule applicable to purchase money mortgages is equally applicable to Lafferty’s purchase money deeds of trust. That rule is: [A] mortgage on land executed by the purchaser of the land contemporaneously with the acquirement of the legal title thereto, or afterwards, but as a part of the same transaction, is a purchase money mortgage, and entitled to preference as such over all other claims or liens arising through the mortgagor, though they are prior in point of time; and this is true without reference to whether the mortgage was executed to the vendor or to a third person. (as authored by Thomas A. Stoops)

Bankruptcy and foreclosure – are foreclosures really final?

Whittle Development, Inc. v. Branch Banking & Trust Co.   (10/11) It is common practice for mortgagees, such as banks, to foreclose on the collateral securing their loans and, in the absence of a third party purchaser for a reasonable value, to purchase such collateral by credit bidding their debt at the foreclosure sale. Due to the circumstances of foreclosure sales, however, often such sales do not result in as a high a sale price as would a private sale transaction. In the recent case of Whittle Development, Inc. v. Branch Banking & Trust Co. (In re Whittle Development, Inc.), 2011 WL 3268398 (Bankr. N.D. Tex. July 27, 2011), the United States Bankruptcy Court for the Northern District of Texas (the "Court") held that a bankruptcy trustee can avoid a prepetition foreclosure sale of a debtor's property as a preferential transfer under section 547 of the Bankruptcy Code despite the fact that the sale was non-collusive and conducted in accordance with applicable state law. Section 547 provides for the avoidance of a prepetition transfer made to a creditor, on account of an antecedent debt, if the debtor was insolvent and the transfer enabled the creditor to receive more than it would have in a hypothetical chapter 7 liquidation. Whittle is significant not only because it calls into question the long-accepted notion that foreclosure sales are final, but also because it represents a departure from Supreme Court precedent in the related area of fraudulent transfers under section 548 of the Bankruptcy Code.

Background In 2007, Whittle Development, Inc. ("Whittle") borrowed $2.7 million from Colonial Bank, N.A. ("Colonial"). Branch Banking and Trust Company ("BB&T") later acquired Colonial and became the successor-in-interest to Colonial's loan to Whittle. In 2010, BB&T declared a default under the loan, accelerated the outstanding payments owed by Whittle and foreclosed on the real property securing the loan. The foreclosure sale complied with all relevant state law requirements. A subsidiary of BB&T purchased the property at the foreclosure sale for $1.22 million.

Within ninety days of the foreclosure sale, Whittle filed a Chapter 11 petition. BB&T subsequently filed a proof of claim, claiming a debt owed of $2,855,243 of which BB&T alleged $1,181,513 represented a deficiency from the foreclosure sale. Thereafter, Whittle brought an action to avoid, as a preferential transfer, the foreclosure sale. Whittle took the position that the approximate value of the property was $3.3 million, that BB&T's claim on the property at the time of foreclosure was approximately $2.2 million, and thus BB&T had received approximately $1.1 million more that it would have received in a chapter 7 case.

Whittle and BB&T agreed that the foreclosure sale effected a transfer of Whittle's interest in property and that Whittle stated a "facially plausible" claim as to all the requirements of 11 U.S.C. section 547(b) except subsection (5), which "requires a finding that the creditor received more than it would have under chapter 7." BB&T argued that the price paid at the foreclosure sale was the fair-market value of the property based on the Supreme Court's decision in BFP v. Resolution Trust Corp., 511 U.S. 531 (1994). Whittle asserted that since the property was worth more than the amount due to BB&T, BB&T received more than it would have received in a chapter 7. Whittle reasoned that BB&T received a total of $3,261,513, comprised of a deficiency claim in the amount of $1,181,513 and the net property value of $2,080,000 (calculated by subtracting the amount paid at foreclosure of $1.22 million from $3.3 million, the value of the property). Whittle argued that BB&T's maximum recovery in chapter 7 would have been $2.2 million, the amount of BB&T's claim at the time of foreclosure.

BFP v. Resolution Trust Corp. in BFP, a partnership formed for the purpose of buying a home defaulted on its mortgage payments, resulting in a foreclosure by the bank. A third party purchased the home for $433,000 at a properly noticed foreclosure sale shortly before the partnership filed for bankruptcy. Acting as a debtor in possession, the partnership sued to avoid the transfer as a fraudulent conveyance, alleging that the property had an actual value of $725,000.

In BFP, the Supreme Court addressed whether a foreclosure sale could be avoided as a constructively fraudulent transfer under section 548. The key issue in BFP was whether the foreclosure sale price could qualify as "reasonably equivalent value" or whether the purchaser has to pay fair market value for the property to be insulated from avoidance under section 548. The Supreme Court held that a "fair and proper price, or a 'reasonably equivalent value,' for foreclosed property, is the price in fact received at the foreclosure sale, so long as all the requirements of the state's foreclosure law have been complied with." To hold otherwise, the Supreme Court stated, would interfere with the essential state interest in ensuring the security of title to real property. This ruling effectively insulated regularly conducted foreclosure sales from avoidance under fraudulent conveyance law. In Whittle, BB&T requested that this result be extended to preference actions.

Holding  Despite the differences in the language of sections 547 and 548 of the Bankruptcy Code, the Court in Whittle noted that some courts have simply held that the test for preferences -- a transfer which enables a creditor to receive more than in a chapter 7 liquidation -- is essentially the same as the Supreme Court's test for "reasonably equivalent value" in the fraudulent conveyance context. See Chase Manhattan Bank v. Pulcini (In re Pulcini), 261 B.R. 836 (Bankr. W.D. Pa. 2001); Glaser v. Chelec, Inc. (In re Glaser), 2002 WL 32375007 (Bankr. E.D. Va. 2002).

In contrast, other courts analyzing the preference test simply highlight the plain language of the statute and point out that the test for whether a transfer is a preference is fundamentally different than the test used in the fraudulent conveyance statute. In Whittle, the Court sided with this second group of cases, holding that BFP was inapplicable in the preference context based on the clear language of the statute. "[L]ooking at the unambiguous language of the statute, it would seem that the only thing that must be shown is that the creditor did, in fact, receive more from the pre-petition transfer than it would have under a chapter 7 liquidation . . . ." The Court found BFP's assessment of "reasonably equivalent value" wholly inapplicable to the preference context.

Conclusion The Whittle court denied BB&T's motion to dismiss and allowed Whittle's preference action to proceed. As such, the critical issue remaining is whether the value of the property was the appraised value of $3.3 million or the price paid at the foreclosure sale of $1.2 million. Whittle's position is sustainable only if it rebuts the claim that the selling price of the property did not reflect its true value of $3.3 million and that the deficiency claim of $1,181,513 is worth its face amount. If Whittle's position on value is correct, BB&T did receive a preference in the amount of $1.1 million. However, if BB&T's position on value is correct, then BB&T did not receive a preference because it did not receive more than it would have in a chapter 7. It only received the sum of the amount paid at foreclosure and a deficiency claim.

Although the Whittle decision does not stand for the proposition that all valid prepetition foreclosure sales are susceptible to avoidance as preferential transfers, it does carve out a narrow subset of such sales for which the foreclosure sale may be anything but final. Based on this ruling and others like it, secured creditors and purchasers of foreclosed property who are also creditors of the estate should be cautious. These parties should view this case as a clear warning that, depending on the jurisdiction, the foreclosure sale may not be final. Additionally, purchasers of a foreclosed property must also take into account the risk that the property owner will file bankruptcy and seek to avoid the sale as a transfer under section 547 of the Bankruptcy Code. Purchasers may discount the price they are willing to pay for foreclosed properties to account for this additional risk, a result that is detrimental to the secured creditor, the debtor and its general creditors. If the Whittle opinion gains a widespread following in other jurisdictions and the market reacts to this risk by low bids from third parties, lenders may experience an increased incidence of being required to credit bid and take such assets into its OREO inventory. The determination of the amount of the credit bid may require re-examination as well in light of the risk that the credit bid will be determined to result in the lender receiving a voidable preference.

*VA Loans: DEFICIENCY allowed.  Connelly v.J Dervinski, 961 F.2d 129 (9th Cir, 1991) Once again we are asked to determine, once again, whether a state anti-deficiency scheme is preempted by Department of Veteran Affairs (VA) regulations that authorize the VA to collect deficiencies on VA-guaranteed home loans. This case involves Oregon law, which forbids a deficiency judgment after either a judicial or a non-judicial foreclosure sale. See Or.Rev.Stat. § 86.770(2). In United States v. Rossi, 342 F.2d 505 (9th Cir.1965), we held that a California anti-deficiency law, which in all material respects is identical to Oregon law, is preempted by the VA regulations. Id. at 506. Subsequently, in Whitehead v. Derwinski, 904 F.2d 1362 (9th Cir.1990), we held that a Washington anti-deficiency law, which permits a deficiency judgment after a judicial, but not a non-judicial sale, is not preempted by the VA regulations. Id. at 1369. In Whitehead, we distinguished the Washington anti-deficiency law from the California anti-deficiency law. Id. at 1368. Because the Oregon anti-deficiency law is materially different from the Washington anti-deficiency law, but identical to the California anti-deficiency law, we hold that this case is controlled by Rossi and that the Oregon law is preempted by the VA regulations.

It is evident that a state's anti-deficiency statute is irrelevant to VA-guaranteed home loans. This is consistent with the basic principle that federal law governs the rights of private citizens who contract in loans transactions with the United States. United States v. Kimbell Foods, Inc., 440 U.S. 715, 727, 99 S.Ct. 1448, 59 L.Ed.2d 711 (1979). There is nothing to suggest that this principle and the analysis undertaken in Carter would not also apply to other federal loan programs. See United States v. Einum, 821 F.Supp. 1283, 1284 (W.D.Wis.1992) (FmHA loans).

U.S. v.  Rezzonico, 32 F. Supp. 1112 (D.Ct. Ariz. 1998) that sheds a little more light on the issue.  In that case the FmHA guaranteed the loan, and the court follows Carter v Derwinski, 987 F.2d 611 (9th Cir.), a case in which the court held that “the VA always has a right of indemnity against the veteran for the amount of guarantee paid to the lender....[t]he VA’s right to indemnity derives from a contract independent of the mortgage.  As indemnitor the veteran is in the same position as the guarantor....”  Rezzonico, at 1115 (quoting Carter, 987 F.2d at 616-7).   The Rezzonico court applied the same reasoning to the FhMA as the line of cases finding no preemption with respect to the VA.

Throw Cippolline, Medtronic, and the Chevron two part defenses into the mix and you have a first class briefing nightmare on any preemption issue.  Predicting the outcome in these cases is anybody’s guess.

Thanks to the authors of Ins and Outs of Foreclosures, Yarnell, Cammack, Salerno, McNichol, and  Deatherage, Arizona State Bar, 2007