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Change to Deed of Trust LawNew Arizona Law Limits Borrowers' Protection from Deficiency Judgment After Foreclosure of a Home
Arizona Courts Could Be Flooded with Deficiency Lawsuits
Jeana Morrissey
& Richard Keyt, Arizona Real Estate
Lawyers
July 19, 2009
Good News! On September 4, 2009, Arizona Governor Jan Brewer signed House Bill 2008 , which repeals the awful Senate Bill 1271 that changed Arizona’s anti-deficiency law. As a result, the law referred to in the following story never took affect and the problem described in the following story has been resolved in favor of borrowers.
The Problems Caused by Now Repealed SB 1271
For the latest on the fight to repeal or fix this awful new law, see our 33-814 news and development web page.
On July 10, 2009, Arizona Governor Brewer signed into law a change to Arizona Revised Statutes Section 33-814(G) that will be effective on September 30, 2009. The change apparently is intended to protect only borrowers who live in a home from deficiency judgments. This law is a huge change in Arizona real estate lending law that may affect hundreds of thousands of borrowers who secured their loans with Arizona residential real estate.
What is a Deficiency?
A deficiency arises on a real estate loan secured by a lien on land if the lender forecloses and the amount collected by the lender at the foreclosure sale is less than the total amount owed.
Example: Homer Simpson borrows $100,000 from Friendly Bank to buy a home in Maricopa County, Arizona. Homer defaults on the loan. Friendly Bank forecloses under the deed of trust and sells the home at a trustee's sale for $80,000 (its fair market value) when the total amount owed by Homer is $110,000 including accrued interest and the costs of foreclosing. The amount Homer owes Friendly Bank after the foreclosure is $30,000, which is the deficiency amount.
Under Arizona law before September 30, 2009, more often than not the lender who foreclosed a deed of trust by conducting a trustee's sale of the property could not pursue the borrower for the deficiency. In the example above, Friendly Bank's ability to get any more money on its $100,000 loan ended at the trustee's sale.
Arizona's Deed of Trust & Mortgage Foreclosure Law
Set forth below is a general summary of Arizona law regarding when a borrower may be subject to a deficiency action or sued on the promissory note after a foreclosure or short sale.
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When a borrower signs a promissory note, the borrower promises to pay the lender a specific amount of money according to the conditions stated in the promissory note. Lenders frequently require that the borrower secure the promise to pay with a lien on real estate. Arizona real property owners who grant a security interest in their real estate do so by signing a mortgage or a deed of trust that is recorded in the county in which the real property is located. Almost all Arizona lenders use a deed of trust rather than a mortgage because it is usually cheaper and quicker to foreclose under a deed of trust than under a mortgage.
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A lender can foreclose its deed of trust lien either judicially by filing a lawsuit in superior court or non-judicially by conducting a private trustee’s sale.
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If the foreclosure price (based on the higher of the fair market value of the property on the day of the trustee’s sale or a bid amount that is higher than the fair market value) is not enough to pay a lender the full amount it is owed, the lender may have the right to seek a deficiency against the borrower for the difference. However, Arizona’s anti-deficiency laws bar a lender from seeking a deficiency in certain situations.
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Arizona’s anti-deficiency laws are found in Arizona Revised Statutes § 33-729(A) (regarding judicial foreclosures of mortgages and deeds of trust), and Arizona Revised Statutes § 33-814(G) (regarding trustee’s sales under a deed of trust). If both the borrower’s property and loan qualify for anti-deficiency protections, the lender will have no recourse against the borrower other than foreclosing on the property that secures the loan.
Arizona Anti-Deficiency Law Before September 30, 2009
Before September 30, 2009, a borrower whose real property was lost in a foreclosure following a trustee's sale was protected from a deficiency if : (a) the real estate did not exceed 2.5 acres; and (b) the land was limited to and utilized as a single one-family or single two-family dwelling. The word “utilized” means that the property must have been occupied by someone for at least some period of time. Loans secured by residential homes being constructed, but never occupied as dwellings don’t qualify for anti-deficiency protection.
In Northern Arizona Properties v. Pinetop Properties Group, 151 Ariz. 9, 725 P.2d 501 (App. 1986), the Arizona Court of Appeals stated the following about Section 33-814(G):
"The . . . exemption 'which is limited to and utilized for either a single one-family or single two-family dwelling' does not require that the dwelling constitute someone's permanent residence or normal place of abode. Further, it does not preclude investment use such as occurred in this case. The statute simply does not address the contentions relied on by Northern. While we agree with Northern, that the legislature perhaps meant only to exclude deficiency judgments in foreclosure actions against a single family homeowner and not against an investment homeowner, the statute just docs not say that. If Northern is correct in its surmise, only the legislature can correct the language . . . to preclude investment homeowners."
Note that under pre-September 30, 2009, Arizona law, the status of the borrower (home owner, investor, parent buying for child, limited liability company, partnership, corporation, etc.) was irrelevant. If the foreclosure was via a trustee's sale and the two conditions were met, the lender could not pursue the borrower for a deficiency.
Arizona Anti-Deficiency Law After September 29, 2009
Beginning September 30, 2009, Arizona Revised Statutes § 33-814(G) will be changed to read as follows (the changes are in all capital letters):
If trust 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 BY THE TRUSTOR UNDER THE DEED OF TRUST FOR AT LEAST SIX CONSECUTIVE MONTHS AND FOR WHICH A CERTIFICATE OF OCCUPANCY HAS BEEN ISSUED is sold pursuant to the trustee's power of sale, no action may be maintained to recover any difference between the amount obtained by sale and the amount of the indebtedness and any interest, costs and expenses. THE TRUSTOR IS RESPONSIBLE FOR DEMONSTRATING THAT THE TRUST PROPERTY WAS USED BY THE TRUSTOR AS A ONE-FAMILY OR A SINGLE TWO-FAMILY DWELLING FOR AT LEAST SIX CONSECUTIVE MONTHS.
"Trustor" means the person conveying trust property by a trust deed as security for the performance of a contract or contracts, or the successor in interest of such person. A.R.S. § 33-801.11.
After September 29, 2009, Arizona Revised Statutes § 33-814(G) will not prohibit a deficiency judgment unless the borrower has been a trustor who "utilized" a single one-family or a single two-family dwelling for at least six consecutive months and a certificate of occupancy was issued for the property.
Problems Created by the New Law
This change to Section 33-814(G) was either approved by people in the back pocket of trial lawyers whose goal is to encourage litigation or by legislators who suffer from LRD (Lawmaker Reading Disorder), a disorder that has reached pandemic proportions in the United States. This new Arizona law reminds me of something former U.S. Supreme Court Justice William O. Douglas said about why the U.S. Supreme Court should not review federal income tax cases. Justice Douglas said that a U.S. Supreme Court case about income tax law was like a bolt of lightning on a dark night - it provides a brief moment of illumination followed by extreme darkness. The Arizona legislature's change in the law has given Arizona lenders and borrowers extreme darkness about what the new law means.
New Unanswered Questions
Here is my short list of unanswered questions and ambiguities created by new Section 33-814(G):
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Does the law apply only to loans entered into after September 29, 2009?
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Does the law apply to all loans regardless of when the loan was made?
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Must the six month utilization period be after September 29, 2009?
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If the trustor utilizes the home for 1 day a month or less than 30 days a month does the trustor get credit for a full month of utilization?
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What counts as a day of utilization - fifteen minutes, 5 hours, 24 consecutive hours or must the trustor or occupant sleep in the home overnight to get credit for a day of use?
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If the trustor goes on vacation for 32 or more consecutive days during the six period does it blow the six consecutive month requirement?
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If the trustor is in the hospital for 32 or more consecutive days during the six period does it blow the six consecutive month requirement?
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Can an entity such as an limited liability company be a "trustor" even though it is not possible for an entity to live in a home?
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Is an entity considered a "person" under A.R.S. § 33-801.11, the statute that defines "trustor"?
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Does "utilize" and "used" mean "live in" or "occupy"? Prior Arizona case law concluded that property was utilized as a dwelling when a vacation home was rented for a few weeks during a year.
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Does the trustor have to actually live in the home or is the trustor protected if any man or woman other than the trustor lives in / utilizes the home?
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How does a trustor prove the dwelling was utilized for six consecutive months? Perhaps court testimony will suffice. Must neighbors testify? Are utility bills sufficient?
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To whom and in what arena is the trustor obligated to prove the dwelling was utilized and used for six consecutive months? Will the trustor be forced to incur the legal fees and stress associated with defending a lawsuit to prove that the lender had no right to bring the action against the trustor in the first place?
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Some Arizona jurisdictions do not provide for or require certificates of occupancy for dwellings. The Arizona New Times newspaper says Mesa does not provide COs. Many homes were built before a certificate of occupancy was required. Why should a trustor whose home is in Mesa and many other trustors lose the protection from a deficiency because their home lacks a certificate of occupancy through no fault of the trustor?
Unfortunately, Arizona borrowers and lenders will not know the answers to these and other important questions about the new law until an appellate court tells us several years from now.
Legislative History
Senate Bill 1271 was sponsored by Senator Sylvia Allen, an Arizona realtor. The Arizona Bankers Association pushed for passage of the bill. A review of the ABA's website on July 25, 2009, failed to find any mention of new Section 33-814(G). Why is the ABA silent about its new baby, SB 1271? Most parents are proud of their progeny.
There is not much legislative guidance on Arizona Senate Bill 1271, the bill that modified Section 33-814(G), but what exists is troubling.
House Summaries
House Summaries of SB 1271 dated June 22, 2009, June 25, 2009 and July 14, 2009 (as sent to the Governor) contain the following statement:
"SB 1271 requires a trustor to have lived in a trust property for at least six consecutive months in order for a deficiency judgment against that trustor to be prohibited."
This is not true. SB 1271 requires that the trustor to "utilize" and "use" the property as a dwelling for six consecutive months to be protected from a deficiency judgment. The Merriam Webster online dictionary defines "utilize" as: "to make use of" and "use" as: "the act or practice of employing something." Note: Neither term means "live in" or "occupy." It defines "lived in" as: "suggesting long-term human habitation or use." If the legislature intended that the trustor must live in or personally occupy the property, why didn't it modify Section 33-814(G) to say that? Unfortunately, Arizona borrowers and lenders will have to wait years until an Arizona appellate court tells us if the trustor must personally live in or occupy the property to be protected from a deficiency judgment.
Arizona Real Estate Attorneys Guesses
Michelle Lind is the general counsel for the Arizona Association of Realtors. She thinks that "properties sold at trustee’s sale likely will not qualify for the anti-deficiency exemption unless the trustor lived in the single one-family or single two-family dwelling for at least six consecutive months." See Legislation Issues.
Arizona real estate lawyers Aaron M. Green and Christopher A. Combs speculate that "investment homes will continue to have the same protection as owner-occupied homes under the anti-deficiency statutes." See New Law Limiting the Protection of Arizona Anti-Deficiency Statutes.
These Arizona real estate lawyers are very knowledgeable and experienced, but they disagree on what the new law means. Each of them has a valid basis for their predictions. Their disagreement, however, illustrates why this new law will be a substantial problem until it is fixed by the legislature or an appellate court tells us what the law means.
Senate Research Staff Memo Dated June 8, 2009
There is an Arizona Senate research staff memo dated June 8, 2009, that states:
"Purpose Modifies the residency requirements that apply to foreclosed properties and deficiency judgments."
"Background A deed of trust is a deed that conveys trust property to a trustee or trustees to secure the performance of a contract. Arizona statute defines trust property as any legal, equitable, leasehold or other interest in real property that is capable of being transferred, whether or not it is subject to any prior mortgages, trust deeds, contracts for conveyance of real property or other liens or encumbrances."
"When a foreclosed home is sold at auction, the deficit amount that the lender does not receive from the mortgage balance and expenses due is called deficiency. In many cases, the lender has the option to get a judgment in this amount against the borrower, called a “deficiency judgment.” Current law protects a trustor (often the borrower) from losing their home in a deficiency judgment if he or she dwelt in the property and the lender takes a loss. Investment property, however, is not protected from a deficiency judgment."
"The strike-everything amendment modifies the residency requirements for foreclosed homes and deficiency judgments."
"Provisions 1. Contains the following requirements in order for a deficiency judgment on a single one-family or two-family trust property to be prohibited:
a) Requires the trustor to have lived in the trust property for at least six consecutive months.
b) Requires a certificate of occupancy to have been issued for the property.
c) Places responsibility on the trustor to demonstrate that the trust property was utilized by the trustor for six consecutive months."
"2. Makes technical and conforming changes."
"3. Becomes effective on the general effective date."
Senate Staff Memo Misstates Arizona Law
The Senate staff memo shows a troubling legislative ignorance of Arizona foreclosure law. The text in red capitals in the above memo was not the law of Arizona during the time the legislature considered Senate Bill 1721. Here are the misstatements of Arizona foreclosure law:
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"Current law protects a trustor (often the borrower) from losing their home in a deficiency judgment" Wrong! If a trustee's sale occurs, the trustor looses the property regardless of whether there is a deficiency or a deficiency judgment (obtained by filing a lawsuit and getting a court order that the trustor owes a deficiency amount).
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"if he or she dwelt in the property" Wrong! Under Arizona law before September 30, 2009, it was irrelevant if the trustor or anybody else dwelt in the property.
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"Investment property, however, is not protected from a deficiency judgment." Wrong! Under Arizona law before September 30, 2009, a trustor who purchased investment property was protected from a deficiency judgment if the requirements of Section 33-814(G) applied.
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"Requires the trustor to have lived in the trust property for at least six consecutive months." Wrong! SB 1271 requires "utilized" and "used," but does not state that the trustor must have "lived" in the trust property.
Apparently the legislature passed the change in the law based on an incorrect understanding of Section 33-814(G), Arizona foreclosure law and the actual text of SB 1271.
What Will Happen in the Short Term?
Because of the uncertainty in the law, lenders who have trustee's sales after September 29, 2009, will have to decide if they want to preserve the option to sue a borrower for a deficiency because Section 33-814(G) does not apply to a specific loan. Section 33-814(A) provides that the lender must file a lawsuit to collect a deficiency within ninety days after the date of the trustee's sale or the lender is barred from seeking a deficiency.
Every lender who has a deficiency after conducting a trustee's sale after September 29, 2009, of Arizona residential property of 2.5 acres or less with one or two dwellings on it will have to decide on one of the following courses of action:
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Do nothing and let the 90 day statute of limitations on filing a lawsuit to collect the deficiency expire. The lender will then not be able to seek or obtain a deficiency judgment.
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File a lawsuit in an Arizona Superior Court within the 90 day period after the trustee's sale and ask the court to order that the people and/or entities liable on the promissory note pay the deficiency.
Senate Bill 1271 May Have the Opposite Result Intended by the Legislature
Apparently the Arizona legislature's goal in modifying Section 33-814(G) was to provide deficiency protection only to trustors who live in their homes. Unfortunately, the new law may also ensnare the very trustors the law was intended to protect.
After September 29, 2009, a lot of lenders may routinely sue the borrowers for a deficiency because the lenders: (i) lack knowledge of whether the trustor utilized the dwelling for six consecutive months, and/or (ii) expect that few borrowers will have the financial ability to hire a lawyer to defend the lawsuit. When people default on loans because they don't have the money to make the payments, they usually don't have the money to hire a lawyer to defend a deficiency lawsuit.
A lender who sues a trustor for a deficiency following a trustee's sale that occurs after September 29, 2009, may get an easy and relatively inexpensive default judgment against the borrower(s) for the amount of the deficiency because the financially strapped borrower(s) cannot afford to defend the lawsuit.
Additional Articles on Arizona's New Law, Including a Story in the New York Times
The Arizona Association of Realtors has taken a proactive position to try to change this awful new Section 33-814(G). See the letter from AAR CEO Tom Farley to Governor Jan Brewer requesting that she amend her call for a special session of the legislature to address issues resulting from SB 1271. The Phoenix New Times has an excellent article on the new law called "Housing Crisis: Governor Brewer Signed a Bill that Has the Potential to Bankrupt Homeowners Facing Foreclosure." Arizona attorney Marc McCain is following developments on his blog.
The new Arizona law has gotten national attention. The New York Times in a story entitled "New Ariz. Law Would Allow Post-Foreclosure Suits" dated July 24, 2009, stated "Arizona's changes appears to be a departure from most other states' consideration of legislation on foreclosure issues." The story quotes Charles Delbaum, a lawyer for National Consumer Law Center in Boston, as saying ''Times are hard enough as is. It may help your friendly banker but it's not in the interest of your state's economy ... to go ahead.''
The Arizona Republic finally woke up and took notice of the new law on July 26, 2009, after being scooped by the New York Times and the Phoenix New Times. Better late than never. Catherine Reagor is the Arizona Republic reporter who wrote "New law triggers fear for housing. It holds some owners liable for debt, even in foreclosure."
Join KEYTLaw's Campaign Calling for the Current Special Session of the Arizona Legislature to Fix the Broken Law
KEYTLaw real estate attorneys Richard Keyt and Jeana Morrissey have written a letter to Arizona Governor Jan Brewer asking her to amend her call a special session of the legislature to include fixing Arizona Revised Statutes Section 33-814(G). We request that readers of this article also write a letter to Governor Brewer requesting that she ask the current special session of the legislature to consider fixing Section 33-814(G). We've made it very easy for you to send the message to the Governor. Just print our pre-addressed request letter, sign it and mail it to Governor Brewer. We hope that the governor gets a large number of letters.
Please print our letter to Governor Brewer, sign it and mail it to the Governor at the address at the top of the letter. Our letters are here:
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Letter to Governor Brewer - Word 2003 format (editable) |
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Letter to Governor Brewer - Adobe pdf format (not editable) |
Conclusion
This change in Arizona's foreclosure law will have significant and serious consequences to many borrowers who will be liable after September 29, 2009, for a deficiency from which they were protected under the prior Arizona law. The bottom line is there will be thousands and thousands of lawsuits filed by lenders who seek to collect some or all of the deficiencies that were not collectable before September 30, 2009. Great news for Arizona litigation lawyers, but terrible news for many borrowers who invested in rental properties.
In the short term until the courts clarify some of the important unanswered questions, many prospective borrowers will pass on buying investment real estate. Arizona's real estate market will suffer because there will be fewer buyers.
Schedule an Arizona Foreclosure Law Consultation
If you have questions about Arizona foreclosure law and the legal consequences of defaulting on a loan secured by a lien on an Arizona home, hire Arizona real estate attorney Jeana Morrissey to review your loan situation and answer your questions. Jeana offers a one hour in office or over the phone consultation for $349. Contact Jeana at 602-906-4953 ext. 4 or jrm@keytlaw.com. To hire Jeana, complete our online consultation agreement. To schedule a consultation, call Jeana's legal assistant Milena at 602-424-4159.
About KEYTLaw, LLC, and Jeana Morrissey
Information on www.keytlaw.com about Arizona foreclosure law and real estate matters is provided as a public service by KEYTLaw, LLC, and Jeana Morrissey, a residential and commercial real estate attorney licensed to practice law in Arizona. Jeana's telephone numbers are 602-906-4953, ext. 4 (voice) & 602-798-7682 (fax), and her email address is jrm@keytlaw.com. Communicating with Jeana Morrissey or KEYTLaw, LLC, personnel via email or otherwise does not cause you to become a client or cause your communications to be confidential or subject to the attorney client privilege.
Schedule an Arizona Foreclosure Law Consultation
If you have questions about Arizona foreclosure law and the legal consequences of defaulting on a loan secured by a lien on an Arizona home, hire Arizona real estate attorney Jeana Morrissey to review your loan situation and answer your questions. Jeana offers a one hour in office or over the phone consultation for $349. Contact Jeana at 602-906-4953 ext. 4 or jrm@keytlaw.com. To hire Jeana, complete our online consultation agreement. To schedule a consultation, call Jeana's legal assistant Milena at 602-424-4159.
This page was last modified on November 12, 2010.
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