Case For Efficiency In Deficiency Judgments: Timely Tips For Lenders Holding Arizona Real Estate As Collateral
The wild ride of Arizona real estate extends beyond land acquisition, developments and foreclosures. Lenders who hold collateral in the form of deeds of trust against Arizona real estate would be wise to familiarize themselves with a recent case.
Lenders might already be (or certainly should be) aware of the limited time they have to seek a deficiency judgment against a borrower or guarantor following a trustee’s sale of collateral. Neglecting to file action in the form of a lawsuit within a 90-day period following the sale normally bars the lender from collecting a deficiency. (Arizona’s deed of trust statute: A.R.S. § 33-814(A))
But a surprising twist in the road emerged in a recent case. In National Bank of Arizona v. Schwartz, 230 Ariz. 310, 283 P.3d 41 (Ariz. App. 2012), a loan for roughly $1.36M was secured by a deed of trust against the borrowers’ residence in Scottsdale. The borrowers defaulted on their loan; and because of this, the bank conducted a trustee’s sale on the property. The home sold for “fair market value” at the time, leaving a deficiency of nearly $765,000.
The bank filed suit within the required 90-day period seeking to recover the deficiency amount. The borrowers had a different idea, and sought to dismiss the suit. Alternatively they sought to arbitrate the dispute, citing an arbitration clause in the promissory note; however, the trial court denied the motion. The bank’s victory was short lived when the Appeals Court reversed the decision and enforced the arbitration clause, upholding the borrowers’ request that the deficiency claim be arbitrated rather than determined by a court.
So what is an “action?”
Traditionally, “filing action” within the 90-day window after the sale of collateral has been interpreted by legal counsel to mean filing a lawsuit. Is seeking arbitration a sufficient “action” to take to collect on deficiency judgments? Based on the footnote in this case, it seems so. But lenders, beware: most promissory notes and guarantees do not contain an arbitration clause. Either way, the prudent thing to do is take action in the form of filing a lawsuit to seek a deficiency judgment. If you do, the suit can always be stayed if the parties agree to arbitrate.
Takeaways for lenders here are noteworthy.
1) Careful attention to the promissory note is critical. Was National Bank of Arizona aware of the arbitration clause in its own note?
2) In certain situations — like this one — a lender’s right to a deficiency judgment may be determined by an arbitrator and not a court.
3) A lawsuit is an undeniable “action.” To remove all doubt and eliminate the need for a court to decide what is or is not considered an “action,” a lender should file a lawsuit seeking a deficiency judgment within the 90-day period after a trustee sale.
In conclusion, lenders holding loans secured by real estate in Arizona should be aware of the state’s statute (A.R.S. § 33-814(A)) requiring a lender to bring an action for any deficiency amount within 90 days of the sale of collateral. Although the court in the Schwartz case determined a deficiency claim can be arbitrated versus resolved in court, it remains to be seen whether this case set a precedent, and if, in the future, courts will consider a demand for arbitration as an “action.” Therefore, covering all the bases by filing a lawsuit within 90 days of a trustee’s sale will at least be an undeniable “action” under the law and get the deficiency collection process underway.
This article originally appeared in the June 5, 2013 online issue of AZRE.