Monday, May 28, 2012

FYI: AZ Sup Ct Holds Proof of Authority to Enforce Note Is Not Required in Non-Judicial Foreclosures

The Supreme Court of Arizona recently held that a beneficiary under a deed of trust was not required to prove its authority to foreclose or to produce the underlying note before the foreclosure trustee could commence non-judicial foreclosure proceedings.
A copy of the opinion is available at: 
Plaintiff-borrower defaulted on mortgage loans on two parcels of land, each of which was subject to a deed of trust.  In the ensuing foreclosures, the respective trustees recorded a notice of sale for each property, listing therein a successor beneficiary under each trust deed. 
The Plaintiff-borrower filed actions against the trustees and beneficiaries (collectively "Defendants") seeking to enjoin the trustees' sales, arguing that the beneficiaries were required to prove that they were entitled to collect on the respective notes before the trustees could begin the non-judicial foreclosures.  The Defendants moved to dismiss.  The trial court granted the motions, and the Court of Appeals affirmed, ruling that Arizona's non-judicial foreclosure statute did not require presentation of the original note before a foreclosure action may commence.
The Arizona Supreme Court affirmed, ruling that a beneficiary is not required to prove its authority to enforce the underlying note before the foreclosure trustee may exercise its power of sale under the trust deed.
Rejecting the Plaintiff-borrower's assertion that beneficiaries under trust deeds must demonstrate their right to enforce the underlying note, the Arizona Supreme Court noted that Arizona's non-judicial foreclosure statutes neither impose such a requirement nor require presentation of the original note. 
Specifically, the Court observed that Arizona's non-judicial foreclosure statute authorizes a trustee to sell the real property securing the underlying note, but does not require a beneficiary to show possession of, or to otherwise document its right to enforce the note prior to the trustee's exercise of that power of sale.  See A.R.S. § 33-807.  The Court also observed that a trustee is only required to send the borrower notice of the default after recording notice of the trustee's sale.  See A.R.S. § 33-809(C); § 33-808.  The Court stated, "[t]he only proof of authority the trustee's sales statutes require is a statement indicating the basis for the trustee's authority."  See A.R.S. § 33-808(C)(5)(notice must set forth "the basis for the trustee's qualification"); A.R.S. § 33-807(A)(granting the trustee the "power of sale"). 
The Court also rejected the Plaintiff-borrower's argument that the trustees, as parties seeking to collect on the promissory notes, were required to demonstrate their authority to do so under Arizona's Uniform Commercial Code.  In so doing, the Court noted that the UCC does not govern liens on real property and, further, that the trustees were not seeking to collect on the underlying notes, but to sell the property under the trust deeds, which transferred interests in the property in order to secure repayment of the money owed under the notes. 
In addition, the Court rejected the Plaintiff-borrower's argument that if a beneficiary were not required to produce the original note, there was the risk that the original noteholder could later attempt to collect after the foreclosure had taken place.  The Court addressed this issue by noting that Arizona's anti-deficiency statutes precluded deficiency judgments against the type of residential properties owned by the Plaintiff.  A.R.S. § 33-814(g).
The Arizona Supreme Court concluded its analysis by observing that requiring beneficiaries to prove ownership of a note to defaulting borrowers before the commencement of a foreclosure would cause the mortgage foreclosure process to become time-consuming and expensive, and would also invite costly litigation. 
The Court thus ruled that the Plaintiff-borrower was not entitled to relief, and affirmed the dismissal of his complaints.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
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Chicago, Illinois 60602
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