Dale Whitman Dissects the Lunacy in Arizona Foreclosure Case Law

Words can’t really express how refreshing I am finding Dale Whitman’s analysis.Foreclosing on Nothing (final changes incorporated)

Professor Dale Whitman is a scholar in the area of the UCC, promissory notes, and mortgages.  This working paper will be published soon.

What does Dale Whitman have to say about Arizona’s decisions regarding non-judicial foreclosure?

Well, this is from his new working paper on the courts’ response to the foreclosure crisis in some of the crazier (ahem) Western non-judicial foreclosure states:

Foreclosing on Nothing: The Curious Problem of the Deed of Trust Foreclosure Without Entitlement to Enforce the Note

Dale A. Whitman* and Drew Milner*

            In this article we propose to examine the extent to which a party conducting a nonjudicial foreclosure of a mortgage or deed of trust must establish that it is entitled to enforce a promissory note that the mortgage or deed of trust secures.  It may seem patently obvious that such a showing is required, but that proposition turns out to be far from true.

. . .

B. Who Can Enforce a Negotiable Note?

This brings us to the discussion of how a party becomes a PETE.  UCC Article 3 provides the answer but is applicable only if the note is negotiable.  The concept of negotiability is complex, with the consequence that it may sometimes be unclear whether Article 3 or the common law governs a particular mortgage note.[1]  Indeed, despite considerable litigation, it remains uncertain whether the standard Fannie Mae or Freddie Mac residential-mortgage note is negotiable.[2]  Courts often apply a presumption that mortgage notes are negotiable, perform a cursory analysis of the issue, or completely refrain from any analysis at all.[3]  This situation is, to put it mildly, unsatisfactory; it is absurd that in a modern industrialized society, it is unclear what law governs the largest financial transaction most households will ever make.  But that is a problem that cannot be resolved here . . .

. ..

Given that the British long ago forsook the deed of trust, why it became the predominant model for nonjudicial foreclosure in the United States is unclear.  Perhaps the presence of the trustee, a purportedly independent party with duties to both borrower and lender, gave an air of greater fairness to the foreclosure process.  In practice, this has turned out to be a dubious proposition.

. . .

When the loan has been sold on the secondary market, the foreclosing party is not the “mortgagee, beneficiary, or any of their agents.”[1]  These parties have parted with their interest in the loan.  Rather bizarrely, the statute does not seem to recognize that anything like the secondary-mortgage market exists or that mortgage loans are routinely transferred by the original deed of trust beneficiary.

. . .

In 2012, the Bankruptcy Appellate Panel for the Ninth Circuit published an opinion that agreed with Candelo and went even farther in the case of In re Cedano.[1]  There, the court stated, “Under Cal. Civ. Code § 2924, the party initiating foreclosure proceedings is not required to have a beneficial or economic interest in the note in order to foreclose.”[2]  Observe the leap:  the foreclosing party not only is not required to produce the note, but need not even hold an interest in it!

. . .

In light of the fact that deficiency claims are barred against all mortgage loans foreclosed nonjudicially, but only for some loans foreclosed judicially,[1] there is a rationale supporting California’s policy of requiring proof of the right to enforce the note in judicial foreclosures but not in trustee’s sales.  Nonetheless, there is an unseemly casualness about the distinction.  After all, different lenders have different policies and procedures with respect to forbearance, loan modification, mediation, approval of short sales, and a variety of other measures to relieve the harshness of foreclosure.  Hence, many consequences may turn on which lender attempts to foreclose.  As a matter of orderly process and fundamental fairness, should not borrowers be eligible to know that the party depriving them of their real estate is legally entitled to do so and to have the opportunity to claim whatever foreclosure mitigation procedures that particular lender has adopted?  We think they should.

. . .

1. Arizona

The Arizona statute, even more starkly than California’s statute, appears to contemplate foreclosure by the trustee without any instruction to foreclose by the beneficiary of the deed of trust,[1] thus presenting the possibility of a rogue trustee as discussed above.[2]  As in California, Arizona’s drafters seem to have been completely unaware that a secondary market in mortgage loans exists.  Before the Arizona state courts addressed the issue, several Arizona federal courts held that the foreclosing party had no duty to show entitlement to enforce the note, reasoning— like California federal courts—that since the foreclosure statutes were silent on the point, no incorporation of the Article 3 requirement to show entitlement to enforce could be implied. [3]

When the matter finally came up on appeal, however, the Arizona Supreme Court followed a slightly different approach.[4]  Rather surprisingly, the court first noted that “a deed of trust, like a mortgage, may be enforced only by, or in behalf of, a person who is entitled to enforce the obligation the mortgage secures.”[5]  Not so fast!  Noting that the borrower had failed to allege that the foreclosing party lacked the note, the court concluded that nothing in the foreclosure statute placed the burden of proof on the foreclosing lender.[6]  The court then slipped into the comfortable rhetoric used by the prior federal and California cases:  “the deed of trust statutes impose no obligation on the beneficiary to ‘show the note’ before the trustee conducts a non-judicial foreclosure.”[7]  Moreover the court, inconsistently, seemed to find that the UCC did not apply. The court stated, “The UCC does not govern liens on real property.  The trust deed statutes do not require compliance with the UCC before a trustee commences a non-judicial foreclosure.”[8]

In summary, the court’s position seems to be that the foreclosing party must have the right to enforce the note but need not prove or provide evidence of it.  This gives the borrower a sort of right without a remedy.  Perhaps the court’s statements were only about the burden of going forward with evidence.  The court pointed out that the borrower “alleges that [the investor and servicer of the loan] have the burden of demonstrating their rights before a non-judicial foreclosure may proceed.  Nothing in the non-judicial foreclosure statutes, however, imposes such an obligation.”[9]  Suppose the borrower had alleged in his complaint that the assignee of the deed of trust lacked possession of the note.  Would the court have compelled the assignee to produce it then?[10]

Of course, this position seems nonsensical; it effectively requires the borrower to bring a lawsuit in order to make such an allegation and then places the burden of alleging evidence as to possession of the note on the borrower¾the party least likely to have any information or knowledge on the subject.  The court’s handling of this issue is, to put it mildly, unsatisfactory.

The Arizona court attempted to buttress its position by referring to the state’s antideficiency legislation, but its effort was not very convincing:

[The borrower] suggests that if we do not require the beneficiary to “show the note,” the original noteholder may attempt to later pursue collection despite a foreclosure.  But Arizona’s anti-deficiency statutes protect against such occurrences by precluding deficiency judgments against debtors whose foreclosed residential property consists of 2.5 acres or less, as is the case here.[11]

Fair enough, but Arizona’s antideficiency statute for nonjudicial foreclosures is far less comprehensive than California’s.[12]  What about foreclosures on nonresidential property or on houses located on parcels larger than 2.5 acres?  Would those borrowers (who have no protection against a later lawsuit for the remainder of the debt) be entitled to demand production of the note as a precondition of foreclosure?  Nothing in the opinion suggests that they would.  On this point, as on the question of whether the court is merely speaking to the burden of going forward with evidence, the opinion seems maddeningly inconsistent.  As a practical matter, Arizona has ended up in the same position as California; the trustee can foreclose the deed of trust without making any inquiry as to whether the foreclosing party holds the note.[13]


[1] Ariz. Rev. Stat. Ann. §§ 33-807 to -808.

[2] See supra text accompanying note 76.

[3] Mansour v. Cal-Western Reconveyance Corp., 618 F. Supp. 2d 1178, 1181 (D. Ariz. 2009) (“Arizona’s judicial foreclosure statutes . . . do not require presentation of the original note before commencing foreclosure proceedings.”); Diessner v. Mortg. Elec. Registration Sys., 618 F. Supp. 2d 1184, 1187 (D. Ariz. 2009); Blau v. America’s Servicing Co., No. CV-08-773-PHX-MHM, 2009 WL 3174823, at *6 (D. Ariz. Sept. 29, 2009) (“Absent specific and compelling Arizona case law, this Court will not presume that the UCC has any applicability to foreclosure proceedings.”); Goodyke v. BNC Mortg., Inc., No. CV 09 0074 PHX MHM, 2009 WL 2971086, at *4 (D. Ariz. Sept. 11, 2009); In re Weisband, 427 B.R. 13, 22 (Bankr. D. Ariz. 2010), aff’d, 2011 WL 3303453 (B.A.P. 9th Cir. 2011).

[4] Hogan v. Wash. Mut. Bank, N.A., 277 P.3d 781 (Ariz. 2012).

[5] Id. at 783 (citations omitted) (internal quotation marks omitted).

[6] Id.

[7] Id.

[8] Id. (citation omitted).

[9] Hogan, 277 P.3d at 783.

[10] We are unsure whether such an allegation, based on nothing more than suspicion, is improper or sanctionable in Arizona.  Arizona’s Rules of Civil Procedures prohibit “the filing of a pleading when the party or counsel knew, or should have known by such investigation of fact and law as was reasonable and feasible under all the circumstances that the claim or defense was insubstantial, groundless, frivolous or otherwise unjustified.”  Gilbert v. Bd. of Med. Exam’rs, 745 P.2d 617, 631 (Ariz. Ct. App. 1987) (emphasis omitted).  What sort of investigation can the plaintiff or his counsel make?  Is simply asking the foreclosing party whether it has the original note likely to do any good?  It seems probable that such a request would be ignored.

[11] Hogan, 277 P.3d at 784.

[12] See generally Emily Gildar, Comment, Arizona’s Anti-deficiency Statutes: Ensuring Consumer Protection in a Foreclosure Crisis, 42 Ariz. St. L.J. 1019 (2010).

[13] Hogan, 277 P.3d at 783.


[1] Non-purchase-money borrowers remain liable for deficiencies in judicial foreclosures.  See Cal. Civ. Proc. Code § 580b.


[1] 470 B.R. 522, 530 (B.A.P. 9th Cir. 2012).

[2] Id.


[1] Id.


[1] See U.C.C. § 3-104 (2002) (defining negotiability).

[2] Several recent cases have found these notes to be negotiable, but the courts’ reasoning is hardly overwhelming.  See HSBC Bank USA Nat’l Ass’n v. Gouda, No. F-20201-07, 2010 WL 5128666, at *3 (N.J. Super. Ct. App. Div. Dec. 17, 2010) (concluding that the clause obligating the mortgagor to notify the mortgagee of an intent to prepay the loan did not render the note nonnegotiable).  One federal district court, several bankruptcy courts, and an Alabama appellate court agreed with this approach.  See Picatinny Fed. Credit Union v. Fed. Nat’l Mortg. Ass’n, No. 09 1295 (GEB), 2011 WL 1337507, at *7 (D.N.J. Apr. 7, 2011); In re Walker, 466 B.R. 271, 283-84 (Bankr. E.D. Pa. 2012); In re Kain, No. 08-09404-HB, 2012 WL 1098465, at *5 (Bankr. D.S.C. Mar. 30, 2012); In re Edwards, No. 11 23195, 2011 WL 6754073, at *5 (Bankr. E.D. Wisc. Dec. 23, 2011); Thomas v. Wells Fargo Bank, N.A., ___ So. 3d ___, ___, 2012 WL 3764729, at *6-7 (Ala. Civ. App. 2012); see also Dale A. Whitman, How Negotiability Has Fouled Up the Secondary Mortgage Market, and What To Do About It, 37 Pepp. L. Rev. 737, 749-50 (2010).

[3] Whitman, supra note 30, at 754; see also CPT Asset Backed Certificates, 278 P.3d at 591.  In CPT, the court said, “Because the note is a negotiable instrument, it is subject to the requirements of the UCC” without the slightest analysis of the note’s content.  Id.  At least one reason for the evident preference of courts to assume that mortgage notes are negotiable is that UCC Article 3 provides a clear set of rules for the transfer of PETE status for negotiable notes, while the transfer of PETE status for nonnegotiable notes is governed by the common law, and there are few modern cases explicating it.


*Distinguished Visiting Professor of Law, University of Arkansas School of Law, Fayetteville, Arkansas.

*Second-year law student, University of Arkansas School of Law, Fayetteville, Arkansas.

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