Analysis of Arizona Non-Judicial Foreclosure and Title

I have excerpted the Arizona section of this article, without footnotes,  but the whole article is found here, and it is a good read.  It needs to be updated to reflect the recent In re Vasquez decision, in which the Arizona Supreme Court stated that an assignment need not be recorded prior to noticing a sale despite the language of ARS 33-411.01, but the reasoning is still valid and meaningful.

 PROPERTY TITLE TROUBLE IN NON-JUDICIAL FORECLOSURE STATES: THE IBANEZ TIME BOMB?

Elizabeth Renuart

 

VII. COMPARISON OF THE FORECLOSURE REGIMES IN ARIZONA,

CALIFORNIA, GEORGIA, AND NEVADA TO MASSACHUSETTS

A. Arizona

1. Introduction

The instrument predominantly used in Arizona to secure a debt or obligation is the deed of trust.166 Unlike a mortgage, a deed of trust is a three party instrument in which the trustor (borrower) conditionally conveys title to a third party trustee who holds it as security for the debt owed to the beneficiary (lender).167 A deed of trust vests in the trustee bare legal title sufficient only to permit it to convey the property at a non-judicial sale.168 Nonetheless, under Arizona law, there is no significant difference between a mortgage ―lien‖ and the trustee‘s ―title.‖169 For this reason, Arizona is a lien theory state.

Arizona‘s seriously delinquent foreclosure rate exceeded that of the nation as a whole leading up to and during the financial crisis. Among the nonjudicial foreclosure states, it ranks third. As of the second quarter of 2011,8.06% or 89,262 loans were seriously delinquent in Arizona.170

Source: Mortgage Bankers Association National Delinquency Survey

2. Authority to Foreclose

A power of sale provision in the deed of trust allows the trustee (or its successor) or the beneficiary to exercise the power of sale clause permitting a private sale of theproperty upon default.171 All sales or transfers of real estate or any legal or equitable interest therein must be recorded by the transferor within sixty days of the transfer.172

The beneficiary may substitute the trustee with another for any reason but the substitution must be acknowledged by all beneficiaries named in the deed of trust and recorded at the time of substitution. The beneficiary must give written notice of the substitution to the trustor.173

In Arizona, the mortgage (or deed of trust) follows the note.174 In 1938, the Arizona Supreme Court ruled that an assignment of the deed of trust without the debt transfers no right upon the assignee and is a nullity.175 Without mentioning the Hill decision and in apparent conflict with it, the intermediate appellate court recently suggested that the standards applicable to negotiable instruments regarding the right to enforce them found in Arizona‘s version of Article 3 of the UCC are irrelevant to a foreclosure sale conducted under a power of sale.176 Rather, they apply to a suit on the debt.

3. Statutorily Required Notices and Relevant Contents

The trustee shall record the notice of sale.177 The notice must contain, inter alia, the original principal balance as shown on the deed of trust; name and address of each beneficiary and of the current and original trustees; and a statement that a breach or nonperformance of the deed of trust has occurred and the nature of the breach.178 The trustee must send a copy of the notice of sale to the parties to the deed of trust at the addresses listed on the instrument within five business days after recordation. Thestatement of breach or non-performance shall be signed by the beneficiary or its agent.179

4. Effect of Defective Foreclosure

An error or omission in the information to be contained in the notice of sale under subsections (C) and (D) of section 33-808 shall not invalidate the trustee sale.180 This provision does not apply to the failure to comply with section 33-809(C) which covers the timing of the mailing of the notice of sale, to whom it must be sent, and its publication and posting. Arizona‘s Supreme Court unequivocally has held that a sale held without strictly complying with the statutory notice requirements is void.181 . Based upon the plain language of the statute, the provision should not bar a challenge to a foreclosure sale on the grounds that the trustee deed could not transfer title to the purchaser or that the beneficiary or trustee had no authority to foreclose because neither of these grounds is listed in that provision.

Once the trustee issues a deed to the purchaser following a foreclosure sale, a presumption of compliance with the contract provisions in the deed of trust and the statutory provisions in ―this chapter‖ relating to the exercise of the power of sale and theconduct of the sale arises.182 The trustee‘s deed is not conclusive, unless the purchaser is a BFP.183

These provisions are designed to ensure finality of title. In addition, section 33-811(C) instructs the trustor and certain specified parties to whom the trustee mailed a notice of the sale to bring an action seeking an injunction before 5:00 P.M. on the last business day before the scheduled sale184 Failure to do so constitutes a waiver of all  defenses and objections to the sale.185 This provision places the trustor-homeowner on as extremely short leash—either raise objections before the sale or potentially lose all rights to attack the sale. Arizona state courts have not applied this provision in the context of an attack to a completed sale based upon lack of authority to foreclose and an allegedly void sale, at least in published decisions.186 One federal judge recently sought additional briefing related to the legislative history, the effect of other provisions in section 33-811, and the statutory construction analysis that Arizona courts apply before entering a ruling.187

5. Effect of Defective Foreclosure on Bona Fide Purchasers

If the purchaser pays value without actual notice of non-compliance with the contract provisions in the deed of trust and the statutory requirements to foreclose, the trustee deed constitutes ―conclusive evidence‖ of validity.188 The trustee deed may not be conclusive where ―the notice was insufficient because of fraud, misrepresentation, or concealment.‖189 According to a federal district court, even if the trustor cannot undo the sale, she may seek damages for a wrongful foreclosure in certain circumstances.190 In another case, a federal judge refused to dismiss a quiet title action against the bank acting as trustee for the securitized trust that purchased the house at the foreclosure sale.191

6. Ibanez Traction in Arizona

Based upon this understanding of Arizona law, Ibanez may be persuasive authority in Arizona on two issues. First, like assachusetts, Arizona requires the assignment of the deed of trust to be written because it mandates recordation of the assignment within sixty days of the transfer.192 Further, in practice, most, if not all, assignments will be recorded before the sale.193 For this reason, the fact that Massachusetts is a title theory state is irrelevant to the application of the Ibanez holding in Arizona. In other words, even though the note follows the deed of trust in Arizona, assignments of the deed of trust must be recorded before the sale.

The second issue addresses the consequences of failing to possess the right to foreclose upon a completed sale. Here, both Massachusetts and Arizona require strict compliance with the power of sale clause and with additional legal requirements. The court in Ibanez voided the sale. In Arizona, the Supreme Court agreed that notice defects, at the very least, void a sale.

However, section § 33-811(C) waives all defenses the trustor may have to the sale if she fails to file an action challenging the sale by 5:00 P.M. on the day prior to the sale. If this provision cuts off the rights of homeowners to challenge the authority to foreclose following the sale, the finality of title in Arizona is absolute. If this provision does not waive authority-to-foreclose defects that void a sale, other finality provisions in Arizona law, such as the effect of the execution of the trustee‘s deed to a BFP arguably eliminatesonly objections relating to non-compliance with notice provisions in the deed of trust and specific statutory provisions.194 Challenging a sale as void on the grounds of lack of authority to foreclose may remain viable.

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