The Foreclosure Title Report
Title companies in Arizona issue a trustee’s sale guarantee for non-judicial foreclosures. A litigation guarantee or a foreclosure report is issued for the judicial foreclosure of a real property security interest. The guarantee report is generally a commitment to insure title to the property in the name of the beneficiary under the deed of trust or the mortgage holder, assuming a successful foreclosure is conducted as provided in the report. The report typically lists all interests that appear of record subsequent to the recording of the lien to be foreclosed, with listed entities being designated as necessary parties to the foreclosure. Those parties must receive notice of a non-judicial sale or be included as parties to a judicial foreclosure.
A “bring-down” report is typically ordered after recording a notice of a trustee’s sale or filing a judicial foreclosure complaint. The purpose of the “bring-down” is to notify the trustee or the plaintiff’s attorney of any interest which has appeared subsequent to the preparation of the initial report.
In the case of trustees’ sales, approximately 25-30 days before the date of a sale, a second bring-down search should be obtained from the title company to determine whether any federal tax liens have been recorded in the 30 days before the sale. If a tax lien has been recorded, special notice must be given to the government and the sale should be continued for not less than 30 days to provide that notice.
In a judicial foreclosure, it is common practice to list fictitious parties (e.g., John Does, Jane Does, ABC Corporations), so that if certain parties appear in the bring-down report, they can be named as additional defendants.
Reinstatement Under A Deed of Trust
The trustor or his successor-in-interest or any person having a subordinate lien or encumbrance may reinstate the debt before 5:00 p.m. MST on the last day (other than a Saturday or legal holiday) before the sale date or the filing of a judicial foreclosure. A.R.S. §33-813(A). The reinstatement does not have to be accepted if it is tendered on the day of the sale, as opposed to the day before. Schoonover v. Arizona Title Insurance & Trust Co., 126 Ariz. 438, 616 P.2d 898 (App. 1980). At any time that the deed of trust is subject to reinstatement, upon written request, the trustee must provide (if known to the trustee), the following information: (i) the unpaid principal balance of the obligation secured by the deed of trust; (ii) the name and address of the record owner of the trust property as of the Notice of Trustee’s sale recordation date; and (iii) a list of all the liens and encumbrances upon the trust property as of the Notice of Trustee’s sale recordation date. The trustee may charge a fee for providing this information, not to exceed 1/20 of the amount that the trustee may charge upon reinstatement, but not less than $20. The trustee may charge a lesser fee at the trustee’s discretion. The trustee or other person supplying such information is not subject to liability for any error or omission, except for the willful and intentional failure to provide information in the trustee’s actual possession. A.R.S. §33-809(E). The trustee is also required to provide a good-faith estimate of sums necessary for reinstatement to any person entitled to notice. A.R.S. §33-813(C). The party reinstating must pay the entire amount then due (without regard to acceleration), plus costs and expenses incurred in enforcing the deed of trust. A reinstatement must include reasonable attorney’s fees and/or trustee’s fees actually incurred, neither of which may exceed the greater of $250 or one-half of 1% of the entire unpaid principal sum secured. A.R.S. §33-813(B). Also, a beneficiary may require payment of other expenses and attorney’s fees which are incurred in protecting and preserving the beneficiary’s interest in the trust property. A.R.S. §33-813(B)(5). Within thirty days of reinstatement, the trustee must record a cancellation of notice of sale, or be liable for any actual damages suffered by the reinstating party. A.R.S. §33-813(E).
Continuing a Deed of Trust Sale
The person conducting the sale may, “for any cause deemed in the interest of the Beneficiary or Trustor, or both,” postpone or continue the sale or change the place of the sale by giving notice of the new time and place by public declaration. No other notice of the postponed, continued, or relocated sale is required. A.R.S. §33-810(B). Braun and Co. v. Anderson, 195 B.R. 87 (9th Cir. BAP 1996). The Trustee’s sale cannot be postponed for more than 90 days at a time. There is no restriction on the number of continuances, but each one must be less than 90 days in length. A Trustee’s sale is deemed not to be completed (but not void), if held in violation of any federal statute applicable because of any unknown or undisclosed bankruptcy. Such a sale is technically in violation of the automatic bankruptcy stay. A Trustee’s sale so held is deemed automatically continued to the same time and place 30 days later (or the first business day thereafter, if a weekend or holiday). The trustee must send notice of the continuation of the Trustee’s sale, by registered or certified mail, with postage prepaid, to all bidders who provide their names, addresses, and telephone numbers to the person conducting the Trustee’s sale. A.R.S. §33-810(C).
Common Defenses to Foreclosure Actions
There are a few commonly raised defenses to foreclosure actions. While not always the case, most of these defenses can be listed in one of four categories described below.
Waiver. A common defense raised in a foreclosure action is that the foreclosure is inequitable because the lender has somehow waived its right to foreclose. In the seminal waiver case, Arizona Coffee Shops, Inc. v. Phoenix Downtown Parking Association, 95 Ariz. 98, 387 P.2d 801 (1963), a lender attempted to accelerate and foreclose after a default in only one payment. The missed payment was due to the illness of a bookkeeper. The lender saw the owner after the default had occurred but said nothing about the impending foreclosure. The Arizona Supreme Court held that, under such circumstances, it was inequitable to permit a foreclosure.
Another variation on the theme involves those situations where the lender has made a practice of accepting late payments from the borrower over a period of time, and the borrower asserts that the right to foreclose has, in fact, been waived by this pattern of accepting late payments.
In Browne v. Nowlin, 117 Ariz. 73, 570 P.2d 1246 (1977), the unintentional acceptance of late payments prior to acceleration was held to cure the default. However, in Browne, the Arizona Supreme Court found that waiver as to late payments did not constitute a waiver on tax payments if the mortgage requires the borrower to pay them. The loan may have been in default previously and subsequently may have been reinstated or modified. Such facts might also give rise to an equitable defense. Seale v. Berryman, 46 Ariz. 233, 49 P.2d 997 (1935).
In order to eliminate the danger of this defense, it is recommended that an attorney letter be sent in every case reinstating that “time is of the essence.” In those cases where it is not sent, the court may still not find that there has been a waiver, depending upon the circumstances of the case. Strict performance under the terms of the documents may be required in order to enforce acceleration clauses, absent fraud or bad faith by the Lender. Cinuarelli v. Zimmerman, 122 Ariz. 143, 593 P.2d 697 (1979). Most mortgages and deeds of trust now contain provisions asserting that the acceptance of a payment in one instance does not necessarily mean that the lender is obligated or bound to accept late payment in another instance. A lender can place much reliance upon these contractual provisions to show that there has not in fact been any waiver.
The Arizona courts have shown a strong inclination to uphold non-waiver provisions in mortgages and deeds of trust. Sanson v. Gonzales, 142 Ariz. 30, 688 P.2d 676 (App.), dismissed, vacated, 141 Ariz. 633, 688 P.2d 641 (1984). Automatic acceleration provisions in deeds of trust, which simply provide that upon non-payment the entire balance becomes immediately due and payable without any action on the lender’s part, have also been permitted. Prevo v. McGinnis, 142 Ariz. 298, 689 P.2d 557 (App. 1984). Perhaps the strongest repudiation of the Arizona Coffee Shop waiver line of cases was in First Federal Savings & Loan Ass’n v. Ram, 135 Ariz. 178, 659 P.2d 1323 (App. 1982), in which the court specifically held that acceleration clauses will be enforced in the absence of fraud, bad faith or other conduct on the part of the lender which would make it unconscionable. While the Arizona Coffee Shops case involved allegations that the lender’s conduct clearly was unconscionable, the language in that case has been used for many years to support the argument that acceptance of some late payments in the past requires acceptance of late payments forever.
Notwithstanding these cases, the Arizona Court of Appeals has since held that notice of default is required where late payments were accepted previously by the lender and the lender did not complain about the late payments but could easily have done so. Miller v. Uhrick, 146 Ariz. 413, 706 P.2d 739 (App.), approved, 146 Ariz. 511, 707 P.2d 309 (1985).
Further, in the case of Teran v. Citicorp Person-to-Person Financial Center, 146 Ariz. 370, 706 P.2d 382 (App. 1985), the borrower stated that he contacted representatives of the lender when he could not make his payments, due to a strike. He further claimed that someone at the office told him to begin making his payments again when the strike was over. The court held that this was not a waiver, absent the borrower’s being able to identify the person who made the statement to him and establish the authority of that person to bind the lender.
The issues of waiver and estoppel are closely intertwined. A creditor is not equitably estopped from foreclosing on a mortgage by a promise to release claims on properties in the future. MH Investment Co. v. Transamerica Title Insurance Co., 162 Ariz. 569, 785 P.2d 89 (App. 1989). Such a promise relates only to future acts and therefore does not constitute a defense to the foreclosure.
Inaccurate Accounting. A second commonly raised defense is that the lender’s figures are somehow wrong and that the borrower does not owe as much as the lender indicates is owed. This defense is usually raised in an effort to create an issue of material fact and to bar plaintiff from summary judgment in judicial foreclosures. It is probably the most appropriate area for the application of Rule 56(g). Lenders must maintain payment records and be able to verify them.
The claim of setoff cannot usually be made in contesting the amount due, absent special circumstances. Setoff or counterclaim based on unliquidated damages are improper in a foreclosure action. Nogales Service Center v. Atlantic Richfield Co., 119 Ariz. 552, 582 P.2d 642 (1978); Nutter v. Occidental Petroleum Land & Development Corp., 117 Ariz. 458, 573 P.2d 532 (1977).
Broken Priority. It is often claimed that the mortgage or deed of trust has in some way lost its priority, or never had its priority from the inception. If this defense is raised, it is important that the lender put its title insurer on notice and tender the defense of that claim to the insurance company. Most lenders obtain mortgagee’s insurance policies on their loans, and if a subordinate lienholder makes a claim that its interests are prior, those matters generally will be covered by that title policy.
Ordinarily, the issue of priority is a fairly simple one to resolve. An exception to this general rule is the problem caused by mechanic’s lien claimants who have a lien on the property as of the date that construction is commenced. Wylie v. Douglas Lumber Co., 39 Ariz. 511, 8 P.2d 256 (1932). A common dispute is whether the commencement of construction was before or after recordation of the lien. This factual issue, when raised, must be resolved before foreclosure. In addition, where materials are delivered to a common site for use on several buildings, the lien is established for all, even if the work is only being done on some; the lien is comprehensive and takes priority over all later recorded liens. Wahl v. Southwest Savings & Loan Association, 106 Ariz. 381, 476 P.2d 836 (1970).
Earth work and site preparation have generally been held to constitute sufficient commencement of labor to establish a priority under A.R.S. §33-992. Woolridge Construction Co. v. First National Bank, 130 Ariz. 86, 634 P.2d 13 (App. 1981). Since most loans are title-insured, for construction loans the insurance company will generally require an inspection on the date that the loan is to close so as to verify that absolutely no work of any sort has taken place.
Occasionally, a junior lienholder will raise the question of priority of a senior lienholder if there have been subsequent advances under the senior lien after the junior lien has been placed of record. The Arizona Court of Appeals has held that non-obligatory advances by the holder of a deed of trust containing a dragnet clause will take priority over a second deed of trust, particularly where the holder of the first deed of trust has no actual knowledge of the intervening lien. La Cholla Group, Inc. v. Timm, 173 Ariz. 490, 844 P.2d 657 (1992).
Deeds in Lieu of Foreclosure
A deed in lieu of foreclosure generally refers to the transfer of the borrower’s equity in property to the lender in full or partial satisfaction of a debt owed the lender. Deeds in lieu are often done where there is little equity in the property, so as to avoid expenses on either or both sides, as part of a settlement of dispute where a lender might accept a deed in lieu in consideration for agreeing not to pursue a deficiency judgment, or where the borrower has no defense to the lender’s foreclosure.
A deed in lieu is a consensual transaction where the borrower and the lender agree that the mortgagee will become the owner of the fee title of the property. See Binder v. Fruth, 150 Ariz. 21, 721 P.2d 679 (App. 1986). This results in a merger where the mortgagee’s interest and the fee title come to be owned by the same person. See Mid-Kansas Federal Savings & Loan v. Dynamic Development, 163 Ariz. 233, 237, 787 P.2d 132 (Ariz. App. 1989).
Deeds in lieu of foreclosure are restricted in their use by the fact that the mortgagee takes the property subject to any items of record against the property, including any judgment liens, tax liens, or junior liens the borrower may have given third parties subsequent to its transaction with the lender.
Deeds in lieu have been determined not to be against public policy so long as they are made fairly, for sufficient consideration, and without fraud, oppression or undue advantage. Elson Development Company v. Arizona Savings & Loan Association, 99 Ariz. 217, 407 P.2d 930 (1965). Generally, a lender taking a deed in lieu of foreclosure will want to obtain an Owners Policy, a title insurance policy guaranteeing title to the policy subject only to those liens and encumbrances specifically provided for in the title insurance policy. Tax considerations of the borrower can play a roll in a deed in lieu transaction. 26 U.S.C. §108 provides that a borrower will realize gross income for forgiveness of indebtedness. A deed in lieu transaction may be constructed in order to attempt to avoid discharge of indebtedness income.
Equitable Liens
The claim of an equitable lien holder can bedevil the rights of a foreclosing secured creditor. Arizona’s recording statute requires that all conveyances of real estate be acknowledged and recorded. A.R.S. §33-412. A land conveyance not notarized and recorded is otherwise void. This statute, however, does not, arguably, apply to equitable conveyances. See Blalac v. Mid Valley Transportation, Inc., 175 Ariz. 538, 858 P.2d 683 (App. 1993).
Arizona case law has long held that a beneficial interest in real property arising from a resulting trust is a valid and enforceable real property right without being recorded, even as to subsequent parties with an interest in that property. Valley National Bank v. Hay, 13 Ariz. App. 39, 474 P.2d 46 (1970). The Blalac decision expanded Hay to protect an equitable interest arising from an express trust in addition to a beneficial interest arising from a resulting trust. The rights of an equitable lien holder were narrowed in Hunnicutt Construction, Inc. v. Stewart Title & Trust, 187 Ariz. 301, 928 P.2d 725 (App. 1996), which held that the recorded interest of a bona fide purchaser without notice takes priority over an unrecorded equitable lien arising out of Arizona’s mechanics and materialman’s lien statutes.
An equitable mortgage may also result where the parties to a real estate transaction fail to comply with statutory requirements. Where clear and convincing evidence demonstrates that parties intended to create a security interest, an equitable mortgage will be found. Bostwick v. Jasin, 170 Ariz. 15, 821 P.2d 282 (App. 1991).
A lesson from Blalac, even as narrowed by Hunnicutt, is that foreclosure documents should explicitly address the transferee’s lack of knowledge as to any claims of an equitable interest held by a party related to the transferor or other third party.
Deficiency Judgments
A lender’s ability to obtain a judgment personally against the borrower or an accommodating party after a foreclosure is restricted by statute, though is not entirely prohibited in certain instances.
Arizona’s anti-deficiency statutes are found in A.R.S. §33-729(A) (mortgages) and A.R.S. §33-814(D) (deeds of trust). Essentially, a deficiency cannot be obtained in Arizona on any debt secured by a property of 2 1/2 acres or less used as a one- or two-family dwelling.
The dwelling does not have to constitute the debtor’s residence for the anti-deficiency provisions to apply. Northern Arizona Properties v. Pinetop Properties Group, 151 Ariz. 9, 725 P.2d 501 (App. 1986). However, the anti-deficiency statutes do not apply to loans secured by houses owned by a developer, where the houses have not yet been used as a dwelling and are not yet susceptible to being used as a dwelling. Mid Kansas Federal Savings & Loan Ass’n v. Dynamic Development Corp., 167 Ariz. 122, 804 P.2d 1310 (1991). The Supreme Court has held that the anti-deficiency statutes apply to second mortgages as well as first mortgages. Generally, a holder of a first or second mortgage cannot waive its security and sue on the debt. Baker v. Gardner, 160 Ariz. 98, 770 P.2d 766 (1988). However, in a supplemental opinion, the court clarified its ruling and specified that as to non-purchase money mortgages or deeds of trust (even though on residential property of 2 1/2 acres or less), the creditor could waive the security and sue on the note. This exception is based upon a distinction between the anti-deficiency statute dealing with mortgages (A.R.S. §33-729) and the one involving deeds of trust (A.R.S. §33-814). More importantly, a deficiency judgment can be obtained on a non-purchase money mortgage or deed of trust foreclosed upon judicially. The Arizona Supreme Court has held that the provisions of A.R.S. §33-814(E) apply to protect developers as well as homeowners, if the other criteria of the statute are met. Mid Kansas Federal Savings & Loan Ass’n v. Dynamic Development Corp., 167 Ariz. 122, 803 P.2d 1310 (1991). However, the court also held that deeds of trust given to secure payment for construction are not purchase money mortgages under A.R.S. §33-729(A).
Where permitted, a deficiency action must be instituted within 90 days after the sale of the trust property. A.R.S. §33-814.
Where a deficiency is permitted, any sale of real property shall be a credit against the amount of the judgment in an amount equal to the higher of the fair market value of the real property, or the sales price at a public sale. A.R.S. §12-1566(B). Fair market value will be determined by the court, per A.R.S. §12-1566(C), if the judgment debtor seeks such a determination within 30 days of the foreclosure sale. Thus, the fair market value credit is available to a guarantor as well as the judgment debtor. A.R.S. §12-1566(E). The statute does not, however, prevent a secured creditor from waiving its security and suing on the note and/or guarantee. Id.
A.R.S. §12-1566(D), passed by the legislature in 1990, requires 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 primary residence is the security for the mortgage or deed of trust.
A number of additional cases have refined certain points concerning deficiencies. For purposes of the anti-deficiency provisions of the statutes, a “purchase money mortgage” is one that encumbers the property being sold in the specific loan transaction, not another piece of property which is somehow involved in the sale. Cely v. DeConcini, McDonald, Brammer, Yetwin & Lacy, P.C., 166 Ariz. 500, 803 P.2d 911 (App. 1990). A purchase money loan, when extended, renewed, refinanced, or “worked out,” retains its purchase money status, and the borrower retains the attendant protections. Bank One v. Beauvais, 188 Ariz. 245, 934 P.2d 809, 239 Ariz. Adv. Rep. 13 (App. 1997). A non-purchase money lender on a residential property may waive the security and sue directly on the notes where that lender had not instituted a trustee’s sale and the anti-deficiency statutes would not have prohibited a deficiency judgment against the debtor. Resolution Trust Corp. v. Segel, 173 Ariz. 42, 839 P.2d 462 (App. 1992). The Arizona Court of Appeals also has held that the same deficiency limitations (such as the time for filing a deficiency action or the rules regarding valuation of the property), apply to guarantors just as they do the debtor. First Interstate Bank of America, N.A. v. Tatum & Bell Center Associates, 170 Ariz. 99, 821 P.2d 1384 (App. 1991).
A.R.S. §33-722, the Arizona election of remedies statute on foreclosures, was dealt with extensively in Baker v. Gardner, 160 Ariz. 98, 770 P.2d 766 (1988). Additional cases have added interpretations of this statute as well. Allowing the plaintiff to collect a deficiency after a foreclosure sale has been held not to violate the statutory requirement that the plaintiff make an election of remedies under A.R.S. §33-722. Faber v. Althoff, 168 Ariz. 213, 812 P.2d 1031 (App. 1990). The mortgagee is entitled to either sue judicially to foreclose, or sue on the note and waive the mortgage, but cannot do both simultaneously. Tanque Verde Anesthesiologists v. Proffer Group, Inc., 172 Ariz. 311, 836 P.2d 1021 (App. 1992).
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