DEFICIENCY JUDGMENTS AND ARBITRATION CLAUSES IN NOTES AND MORTGAGES

Jun 27, 2012

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Editor’s Notes:

When I was on Wall Street, we had an expression “Bears make money, bulls make money but pigs never make money.” It means that people who think the market is going down have a number of ways to bet in that direction and protect their risks. People who think the market is going up have the same options. But those who seek to overreach and get all the money going both ways will lose.

In this case, National Bank is the pig. After invoking the power of sale in a non-judicial foreclosure, they sued for a deficiency they created by submitting a low bid at the “auction.” If the loan was securitized, (which presumably it was not or it was not brought to the attention of the trial court and therefore was not in the record on appeal) there is a good chance that the auction was rigged and faked because the trustee would have been a controlled or owned entity and the credit bid was false because it was not submitted by a party who was “the beneficiary in full or partial satisfaction of the contract secured by the trust deed. A.R.S. § 33-801(5) (2007). Bank asserted $675,000 was the fair market value at the time of the sale.”

In virtually ALL cases, the credit bid accepted by the trustee was from a party that was not, at the time the bid was submitted, a party whose description conformed to the definition of a beneficiary (creditor) in the statute. Thus the bid was an empty bid, void from inception, and should have been disregarded by the trustee (which of course was never done because they were taking their orders from the pretender lender instead of following the state statute. In this case the record on appeal is devoid of any evidence that National Bank was not the originator AND the lender at the time of the foreclosure, so you need to keep that in mind, if you are going to use this case for anything.

The Court appeals was completely perplexed by the action brought by National bank for a deficiency judgment against the “former” homeowners who probably have every right to reverse the foreclosure sale, remove or discredit the deed upon foreclosure and return to having full title and right of possession. The Court just didn’t understand why the deficiency action was ever filed, but was willing to rule on the arbitration clause, on the outside chance that there was something else besides a foreclosure invovled. IF not, the deficiency action should obviously be dismissed:

In the footnotes of the decision the Court makes it clear that the anti deficiency statutes apply, and hints that if the pretender lender sues for the deficiency they might be invalidating the foreclosure by their own actions because the Arizona statute gives a choice between foreclosure or suing on the note. Under no circumstances do the Arizona statutes allow the lender to pursue both remedies for the obvious reason that the so-called deficiency is artificially created by a self-serving “credit bid” and self serving statement as to the value of the property.

“1

A credit bid is a bid made by the beneficiary in full or partial satisfaction of the contract secured by the trust deed. A.R.S. § 33-801(5) (2007). Bank asserted $675,000 was the fair market value at the time of the sale.

2

The record is devoid of an explanation as to why the anti- deficiency statutes are inapplicable here. We are unable to discern if the property was too large or that the promissory note was not for purchase money or why the anti-deficiency statutes do not apply to homeowners.

We note that Arizona has two anti-deficiency statutes: (1) A.R.S. § 33–729(A), which applies to purchase money mortgages and purchase money deeds of trust that are judicially foreclosed, Baker v. Gardner, 160 Ariz. 98, 770 P.2d 766 (1988); and (2) A.R.S. § 33– 814(G), for deeds of trust foreclosed by trustee’s sale whether or not they secure purchase money obligations. And both anti- deficiency statutes prohibit the entry of a deficiency judgment after the forced sale of a parcel of “property of two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling.” A.R.S. §§ 33–729(A) and –814(G).

Arizona also has an election of remedies statute applicable to mortgages. Under A.R.S. § 33–722, a mortgagee can sue to judicially foreclose its mortgage or can sue on the note and waive the mortgage, but it cannot maintain both actions simultaneously. See Tanque Verde Anesthesiologists L.T.D. Profit Sharing Plan v. Proffer Group, Inc., 172 Ariz. 311, 313, 836 P.2d 1021, 1023 (App. 1992).”

The Appellate Court overruled the trial court as to its ruling on the deficiency action being “ancillary” to the foreclosure in order to reach its legal conclusion that if an action can be arbitrated it should be arbitrated:

“The Bank argues, as it has before3, that the deficiency action is “ancillary” to its statutory foreclosure action and therefore excepted from the arbitration agreement. Specifically stating:

‘Consequently, a deficiency action arises out of, relates to, and is dependent upon the non-judicial foreclosure of a deed of trust. The deficiency action is thus an “ancillary remedy” necessarily related to the non- judicial foreclosures.’

The trial court adopted that reasoning, finding:

[t]here would be no deficiency without a foreclosure; deficiency arises from the foreclosure. Therefore, a deficiency action is excluded from arbitration under the terms of the Note.

We disagree.”

It is a challenge to interpret this decision. It swings one way and then it swings the other way, bat apparently only to preserve the right to binding arbitration if it has already been agreed between the parties. But it restates those statutes that are clearly intended to make Arizona an anti-deficiency state.

To read the entire opinion click here: CV100772-opinion