Folks Hess, PLLC (�F&O�) conducts a multidisciplinary practice of law throughout Arizona. The firm�s primary client base consists of many of the banks and financial institutions located in the region. F&O lawyers have significant experience representing such clients concerning both complex commercial and consumer legal matters. In particular, the lawyers of the firm have expertise in all substantive areas related to collection, creditors� rights, bankruptcy, foreclosure and eviction litigation.
Although F&O often serves as legal counsel to major banks and financial institutions in high dollar and complex transactions and cases, its loan workout, bankruptcy, collection and foreclosure lawyers have significant experience with consumer and small business cases and understand their clients� conflicting need in such matters to both aggressively prosecute claims and minimize legal fees to be able to maximize their recoveries.
The firm has seasoned bankruptcy attorneys with experience in commercial and consumer cases. In particular, they have years of experience representing banks and other financial institutions with respect to: (i) all aspects of prosecuting their rights as secured and unsecured creditors in Chapter 7, 11 and 13 bankruptcy proceedings; and (ii) prosecuting their rights when their claims concern liens secured by all types of real and personal property.
F&O lawyers also have many years of experience representing banks concerning commercial and consumer foreclosure, loss mitigation, default servicing and eviction cases. The firm is one of the leading law firms that performs such services in Arizona. The firm major banks in every county of Arizona to: (i) conduct non-judicial trustee�s foreclosure sales; (ii) prosecute judicial foreclosures; (iii) monitor senior lien foreclosure sales and bid at such sales to protect our clients� junior lien positions; (iv) apply for excess foreclosure sale proceeds; (v) document deeds-in-lieu of foreclosure and loan forbearance and modification agreements; (vi) complete UCC sales of personal property; and (vii) prosecute post-foreclosure evictions.
Firm co-founder Larry O. Folks has over three decades of experience in representing banks and other financial institutions in collection, bankruptcy and foreclosure matters. Mr. Folks is a graduate of Northwestern University School of Law, a former partner of a national law firm, certified as a Business Bankruptcy Specialist by the American Board of Certification, certified as Bankruptcy Specialist by the Arizona Board of Legal Specialization, the chairman of the Bankruptcy Section of the State Bar of Arizona for 2009-2010, a former judge pro tem of the Superior Court of Arizona and an active foreclosure trustee who is a member of the Arizona Trustees Association.
This presentation shall include Mr. Folks� discussion of legal principles applicable to foreclosing mortgage liens in Arizona.
A. Why should the creditor foreclose non-judicially vs. judicially?
Timing. It takes 91 days, versus a minimum of four months, if the borrower defaults, and possibly in excess of one year if the foreclosure is contested.
Less Expensive. Nominal flat fee vs. potential contested hourly litigation.
Precipitates reinstatements vs. full acceleration of the debt.
No post-foreclosure redemption rights, except for the IRS 120-day redemption period.
The sale is presumed valid and not a fraudulent conveyance upon recordation of the trustee�s deed.
The primary reasons for judicially foreclosing a mortgage lien in Arizona are: (i) if the lender holds a mortgage instead of a deed of trust; (ii) the lender wants to obtain a deficiency judgment concerning a loan secured by residential real property which is available in certain limited circumstances; (ii) a title issue needs to be quieted; (iii) a stale and likely satisfied lien of record needs to discharged when a lien release cannot be obtained through normal means; and (iv) if the lender needs to fully accelerate the debt due to serial defaults and reinstatements by the borrower.
B. What is the process and timing to non-judicially foreclose upon real property in Arizona?
Statutory 90-Day Notice Period. The foreclosure cannot occur earlier than on the 91st day after recording the Notice of Sale.
Demand Letter. A demand letter is not statutorily required. The lender must, however, fulfill any contractual notice requirements included in the loan documents. It is a good idea to send demand letters to precipitate early reinstatements and to learn about other issues such as the death of the borrower.
Trustee�s Sale Guaranty. The TSG is a road map for noticing the foreclosure sale documents. It is not title insurance. The TSG is only intended to insure the foreclosure sale as being valid if the trustee fulfills all of the Arizona statutory foreclosure sale requirements, including giving notice to the parties listed on the TSG. Most title companies will issue an owner�s title policy at a discount with respect to a property foreclosed upon if that title company issued the TSG.
Statement of Breach. To be signed by lender or the trustee if duly authorized in writing. The Statement of Breach must include the amount in default, amount owed, a direction to the trustee to exercise the power of sale and a notice to junior lienholders that their rights may be terminated by the foreclosure sale.
Military Affidavit. Individuals on active military duty are entitled to extra notice and have additional rights under the Servicemembers� Civil Relief Act of 2003 (formerly known as the Soldiers� and Sailors� Civil Relief Act of 1940).
Substitution of Trustee. The Substitution of Trustee is required if a trustee other than the trustee named in the deed of trust is going to conduct the non-judicial trustee�s sale. The Substitution of Trustee must be signed by the lender or the trustee, if duly authorized, in writing. It must state how the substitute trustee is qualified to conduct the sale, be recorded in the county where the property is located and be mailed by certified mail to the borrower, former trustee and successor trustee.
Notice of Sale. The Notice of Sale is the document that schedules the date, time and location of the non-judicial trustee�s foreclosure sale. It must be recorded in the county where the property is located. The date of recordation commences the 90-day statutory notice period (the sale must occur no earlier than the 91st day after recordation) and is the operative date for all relevant statutory deadlines. The Notice of Sale must include: the date, time and place of the foreclosure sale, a legal description of the property, a street address or other identifiable location of the property, a tax parcel number for the property, the original principal balance of the loan, the name and address of the beneficiary, the name of the original borrower and the name and telephone number of the current trustee and the basis for the trustee�s qualification. Errors in the Notice of Sale that require cancellation of the sale are: the wrong date, time or place of sale, incorrect legal description and/or omission of the trustee�s qualifications. The foreclosure sale can be held at the property, at the county courthouse in which the property is located or at the trustee�s place of business. Foreclosure sales must occur between 9:00 a.m. and 5:00 p.m. and can be held on any day except for Saturday, Sunday or a legal holiday. Many legal holidays fall on Mondays, so it is a good practice not to schedule sales on Mondays.
5-Day Mailings. The Statement of Breach and Notice of Sale must be mailed by certified mail to the borrower and beneficiary (the date of recordation does not need to be noted on the Notice of Sale) at the addresses listed on the deed of trust within 5 business days after the date of recordation of the Notice of Sale.
30-Day Mailings. The Statement of Breach and Notice of Sale (with the date of recordation noted on it) must be mailed by certified mail to any party with a recorded interest in the property within 30 days after the date of recordation of the Notice of Sale. The trustee only has to give notice to the addresses of such parties that are reflected in the public record. The trustee is not required to seek out alternative addresses. Both the 5-day and 30-day mailings may be completed at the same time.
Publication. The Notice of Sale must be published for 4 consecutive weeks in a newspaper of general circulation in the county where the property is located. The last date of publication must occur not less than 10 days prior to the date of sale. It is good practice to complete the publication early in the sale process to allow for republication of notices if errors in publication occur and to attempt to complete publication in advance of any bankruptcy filing by the borrower. Publication of the Notice of Sale is deemed complete on the first date of publication.
Posting. The Notice of Sale must be posted on the bulletin board of the county courthouse in which the property is located and at a conspicuous place on the property�this requirement is waived if it would cause a breach of the peace to post the property. A property can be posted at a common gate for guard-gated communities. Posting must occur at least 20 days prior to the foreclosure sale date. Posting is deemed complete on the day of the first of the two required postings.
TSG �Bring Down� Endorsements. Any liens or encumbrances that become of record after the Notice of Sale is recorded are on constructive notice of the pending foreclosure sale and will be extinguished by the sale. If the TSG was obtained prior to the date of recordation of the Notice of Sale, a �bring down� to the date of recordation is required to make sure no intervening liens have come of record that need to be noticed. A 30-day �bring down� is recommended to determine if any new parties of record have appeared shortly after the sale to be able to provide them with notice. A 60-day IRS �bring down� is very important. That is the case, because if a federal tax lien is recorded more than 30 days before the foreclosure sale date, the trustee must give special notice to the IRS 25 days prior to the foreclosure sale date to extinguish the IRS lien. A Day of Sale �bring down� endorsement is suggested�the trustee can always postpone the sale if a problem is reflected in the endorsement.
Actual Bid or Credit Bid Information. Beginning at 9:00 a.m. and continuing until 5:00 p.m. on the last business day preceding the day of sale and continuing until the time of sale on the day of sale, the trustee must provide to any person who requests it the actual bid or credit bid that the beneficiary is entitled to make at the sale. The sale must be postponed if this information is not available.
Reinstatement. The borrower has an absolute right to reinstate the loan and cause the foreclosure sale to be cancelled until 5:00 p.m. on the last business day prior to the date of the foreclosure sale.
Conducting the Sale. The trustee or the trustee�s agent can conduct the foreclosure sale at the property, at the county courthouse steps or at the trustee�s place of business as provided for in the Notice of Sale. Trustees often use agents to conduct sales in remote counties. The foreclosure sale usually commences by the trustee reading the Notice of Sale. Thereafter, the bidding usually starts with the lender�s credit bid�typically this is the full balance owed to the lender. Every other bidder (except for the beneficiary who is entitled to credit bid) must give the trustee a $10,000 deposit to participate in the bidding process. If the highest bid at sale is less than the $10,000 deposit amount, the excess will be refunded to the bidder at the time of delivery of the Trustee�s Deed Upon Sale. The trustee may impose other bidding requirements and does not have to accept any bid. Important Decision: In re Krohn (the Sweetheart decision), 203 Ariz. 205, 52 P.3rd 774 (2002) (the Arizona Supreme Court held that a non-judicial trustee�s sale may be set aside if the price bid is grossly inadequate.
Payment of the Bid Price. The successful bidder at the foreclosure sale must pay the bid price in cash before 5:00 p.m. of the following business day after the foreclosure sale. The trustee can extend this deadline. If the sum is not paid, the bidder�s $10,000.00 deposit is forfeited as excess foreclosure sale proceeds. The trustee then has the discretion to conduct the sale on a specific continued sale date that was announced at the sale (or 28 days after the date of sale, at the same time and location if the trustee does not announce an alternative continuance date) or offer the property for sale to the second highest bidder who has until 5:00 p.m. of the next business day to perform and so on to other bidders until the trustee gets to the credit bidder. The trustee must provide notice by certified mail of any continued sale date to all bidders who provided their names and addresses at the original sale. At the continued sale, the trustee must reject the bid from any previous bidder who elected not to pay the price bid at the original sale.
The Sale Is Automatically Continued for 28 Days if It Is Conducted in Violation of the Automatic Stay. The sale would otherwise be void due to the operation of bankruptcy law. Also, the sale may be postponed on an ongoing basis during the pendency of the bankruptcy without giving any special notice�assuming the 5-day and 30-day mailings and the first date of publication and the posting at the courthouse were completed prior to the petition date. Important Decision: In re Benson, 2003 WL 21205286 (Bankr. AZ 2003) (trustee�s sale held not to be complete until the bid price is paid. As a result, if an intervening bankruptcy is filed between the time of the gavel falling at the sale to approve a bid and the date on which the bid price is paid, then the sale is not complete and is void due to the operation of the automatic stay).
Postponing the Sale. The sale may be postponed by the trustee simply announcing a continued new date, time and location of the sale at each currently scheduled sale. This may occur an infinite number of times. Postponements may occur for periods as short as several minutes up to 90 days. No other notice is required. If the postponement is for more than 30 days, another IRS �bring down� endorsement must be ordered. If an intervening bankruptcy is filed, as long as the 5 and 30-day mailings have been sent and the first publication date and the posting at the courthouse have occurred, then the lender can postpone the sale during the pendency of the bankruptcy. If those things have not occurred before the bankruptcy petition date, the sale must be cancelled and started again once stay relief is obtained or the bankruptcy is dismissed.
Conveyance of the Trustee�s Deed Upon Sale. The trustee must convey title to the property to the successful bidder within 7 business days after receipt of payment. Recordation of the Trustee�s Deed Upon Sale creates a presumption of the validity of the sale. If the Trustee�s Deed is recorded within 15 days after the date of sale, the Trustee�s Deed relates back and is deemed perfected as of the date of sale. The purchaser acquires the same title as the original borrower, such that it is subject to any senior liens or other title issues. There is no right of redemption, except for the 120-day right held by the IRS.
Obtain an Owner�s Policy if the Lender Takes Title through a Credit Bid.
Reinstatement. The borrower, the borrower�s successor-in-interest, any person having a junior lien or encumbrance of record or any beneficiary under a junior deed of trust has the absolute right to reinstate the loan until 5:00 p.m. on the business day prior to the date of the sale. The trustee has the discretion to allow reinstatement up to the time of the sale.
Temporary Restraining Order or Preliminary Injunction. This state law relief must be obtained prior to the date of sale.
Bankruptcy Filing. The borrower�s filing of a bankruptcy petition immediately imposes an automatic stay to preclude the trustee�s sale.
D. What risks are there that the lender�s lien may be extinguished by a third-party before the non-judicial foreclosure sale is completed?
Homeowner�s Association Liens. First priority deeds of trust are superior to HOA liens under Arizona law. Junior priority deeds of trust, however, are subordinate to HOA liens and can be extinguished if the HOA conducts a judicial foreclosure of its lien. A notice of Lis Pendens should be reflected in the TSG to reflect any pending judicial foreclosure of an HOA lien. The bank must pay off the HOA lien if entry of a foreclosure judgment is imminent. Also, as a strategic matter, the lender may elect to payoff an HOA lien to avoid the of significant statutory interest and attorneys� fees that will be a prior lien on the property. In addition, any sums paid by the lender to satisfy an HOA lien can be added to the lender�s indebtedness under the terms of most of its promissory notes and deeds of trust. The lender, however, may decide not to pay an HOA lien if there is no risk of loss of its lien and the lender believes that the loan will either be reinstated or the property will be sold to a 3rd party bidder at a scheduled non-judicial trustee�s sale.
Real Property Tax Certificates of Purchase. Investors can purchase tax certificates of purchase (�Tax CPs�) concerning delinquent real property taxes. The real property tax liens are superior to all consensual liens, including deeds of trust, regardless of their priority. The holder of a Tax CP can bring a lawsuit to judicially foreclose a Tax CP three years after the sale of the lien at a county auction. If such a judicial foreclosure is completed and the lender fails to pay off the Tax CP, it could have its lien interest extinguished. The lender will be able to determine if such a judicial Tax CP proceeding is pending by reviewing the TSG that should include a Notice of Lis Pendens concerning the action. The lender will need to pay off a Tax CP if a foreclosure judgment is imminent. It may also elect to do so to avoid the accrual of additional high statutory interest and attorneys� fees and costs concerning such a senior lien and add the payment to its loan balance. Alternatively, the lender may elect not to pay the Tax CP if a judicial foreclosure is not imminent and it believes that the borrower will either reinstate or the property will be sold to a third-party bidder at a scheduled non-judicial trustee�s sale.
E. How does the lender as a junior lien creditor protect its position when a senior lienholder forecloses?
The lender must bid at the senior lien foreclosure sale to protect its lien position or payoff the senior lienholder. If a senior lienholder to the lender has a non-judicial or judicial foreclosure sale set and the borrower does not resolve the matter by reinstating or paying off the loan, the lender must participate in the foreclosure sale. If the senior lienholder has scheduled a non-judicial foreclosure sale, the lender must closely monitor the sale and any postponements to make certain it attends the sale to bid to protect its position. The lender will have to physically attend the sale with a $10,000.00 deposit, bid and pay cash for the property by 5:00 p.m. the following business day if it is the successful bidder. It is a similar process concerning a judicial foreclosure sale. Alternatively, the lender may pay off the senior lienholder to avoid the risk to its lien.
F. How does the lender as a junior lien creditor recover excess foreclosure sale proceeds generated by a senior lienholder�s foreclosure sale to a third-party bidder?
Within 90 days after completion of the foreclosure sale, the trustee must either: (i) distribute the sale proceeds in the order of priority required by Arizona law; or (ii) deposit the excess sale proceeds with the county treasurer and file a lawsuit to effectuate the deposit and distribution of the excess sale proceeds.
Very few trustees elect to individually distribute the excess sale proceeds, because it exposes the trustee to liability if the proceeds are distributed to the wrong recipient or in the incorrect amount. If a trustee does distribute excess proceeds, the trustee usually requires a written indemnity from the recipient of the proceeds.
If the trustee deposits the excess proceeds with the county treasurer, the trustee must also initiate a lawsuit against the treasurer that is similar to an interpleader action. The trustee�s elect this procedure, because they are released from all liability concerning distribution of the proceeds if the trustee properly follows the deposit procedure. The trustee must: (i) mail notice of the existence of excess proceeds to the trustor and/or the current owner of the property by certified mail within 15 days of completion of the Trustee�s Sale; (ii) file and serve a complaint upon the county treasurer; and (iii) to give notice to all parties with a recorded interest in the property. Parties entitled to the proceeds can then intervene in the action to request an order of the court disbursing the funds. Our experience is that the trustee often has to respond to the applications filed by the claimants or objections filed by the county treasurer.
Distribution of the excess proceeds. Regardless of the procedure used, Arizona law requires the excess sale proceeds to be distributed in the following order of priority:
1. To the costs and expenses of conducting the foreclosure sale
2. To the payment of the sum due under the debt obligation (the promissory note) secured by the deed of trust foreclosed
3. To the payment of all other obligations secured by the deed of trust foreclosed that were actually paid by the lender
4. To Condominium and/or Homeowners Association fees, dues and assessments, whether or not there is an actual lien recorded
5. To junior lienholders and encumbrances in their order of priority
6. To the titleholder of record of the property prior to the foreclosure.
G. Can a mortgage lienholder obtain a deficiency judgment against the borrower and/or a loan guarantor after a non-judicial foreclosure sale in Arizona?
In most residential mortgage cases: No. Arizona has an anti-deficiency statute. If the loan involved is secured by a residential property of 2.5 acres or less, which is limited to and utilized for either a single-one family or single two-family dwelling, and the lender elects to complete a non-judicial foreclosure, then no deficiency may be obtained. There are, however, certain exceptions in which a lender may obtain a deficiency concerning this type of loan if the lender does not conduct a non-judicial trustee�s foreclosure sale.
In commercial cases: Yes. If the loan involved is secured by commercial real property, the �anti-deficiency� statute does not apply. Accordingly, a lender may sue the borrower and/or loan guarantors for a deficiency subsequent to conducting a non-judicial foreclosure sale upon the commercial real property.
Mortgage Deficiency lawsuits must be filed within 90 days after the date of the foreclosure sale or they are barred by statute. Also, the borrower and/or a guarantor is entitled to a credit against the loan balance due on the date of the foreclosure sale for the greater of the amount bid at the foreclosure sale or the �fair market value� of the property on the date of the foreclosure sale.