Trustee’s Sales Are Not a Determination of Breach

Judge The mere occurrence of a trustee sale, predicated on an allegation of a breach, does not constitute a judicial determination that the borrower has breached the note.

Morgan AZ Financial, LLC v. William Gotses, 235 Ariz. 21 (App. 2014)

This case dealt with promissory notes secured by deeds of trust on undeveloped real property in Flagstaff, Arizona. There was a default by the borrowers and the lender initiated a trustee sale. The borrowers did not seek to enjoin the sales. The sales were completed and the lender obtained title to the real property.

Following the trustee’s sale, the lender commenced a deficiency action against the borrowers. One borrower argued that certain defenses rendered the notes void and unenforceable. The lender then moved for summary judgment under A.R.S. § 33 811(C), arguing the defenses relating to the enforceability of the notes were waived because the borrower failed to enjoin the trustee sales. The superior court granted the motion for summary judgment filed by the lender, overruling the defenses.  The borrower appealed the trial court. The appellate court, reversed the trial court, and held that common-law defenses to a borrower’s liability under a note generally survive a trustee’s sale and may be asserted in a deficiency action.

The lender argued that the borrower who does not enjoin a trustee sale loses his right to litigate any defenses to potential post-sale deficiency action. The appellate court concluded the lender’s contention was unsupported by the plain language of the statute and inconsistent with the process of purpose of non-judicial foreclosures. The court held that the purpose of a non-judicial trustee sale is to allow the lender to recover the property or value of the property outside of the judicial process; but the action to enforce a post-sale deficiency must be brought in court under the protections of the court process.  The appellate court, reversing the trial court, remanded the case to allow the borrowers to litigate their defenses to the deficiency action.

The most significant take away from this case is the mere occurrence of a trustee sale predicated on an allegation of a breach does not constitute a judicial determination that the borrower has breached that note. Consequently, issues surrounding the enforceability of a note may be litigated in the subsequent deficiency action.

If you are faced with deficiency litigation, hire counsel that know and understand the legal process.

The attorneys at Windtberg & Zdancewicz, PLC provide clients with experienced legal representation in all litigation and bankruptcy matters. We are experienced in creditor’s rights prosecuting and defending garnishments, charging orders, attachment, property execution, trustee’s sales, foreclosures, judgments, judgment collection, domestication of foreign judgments, and creditor’s issues in bankruptcy cases. If you need assistance with your collection matters, please contact us at (480) 584-5660.