FYI: AZ Sup Ct Holds Notice of Trustee's Sale Does Not Accelerate Debt, Foreclosure Not Time-Barred

The Supreme Court of Arizona recently held that recording a notice of trustee's sale, by itself, is not an affirmative act that accelerates the debt.  Therefore, the Court held, the foreclosure at issue in the notice of trustee's sale in this case was not time-barred.

 

A copy of the opinion is available at:  Link to Opinion

 

A borrower obtained a loan for which he executed a promissory note secured by a deed of trust against his residential property. The promissory note and deed of trust included optional acceleration clauses authorizing the lender to accelerate the debt if the borrower defaulted. To initiate the acceleration clauses, the promissory note required that the borrower be given notice of acceleration, and the deed of trust also required that the lender provide notice to the borrower of "(a) the default; (b) the action required to cure the default; (c) a date . . . by which the default must be cured; and (d) that failure to cure the default . . . may result in acceleration . . . and sale of the property."

 

The borrower eventually defaulted on the loan. The lender sent the borrower a notice of default, but it did not state that failure to cure the default would result in the acceleration of the loan or sale of the property. The borrower did not cure the default, which led to two notices of trustee's sales being recorded. However, neither notice invoked the optional acceleration clause, and the property was not sold.

 

Eventually, the borrower sought declaratory relief, arguing that the current servicer could not foreclose on the property because Arizona's six-year statute of limitations had expired. See A.R.S. § 12-548(A)(1). The borrower then moved for summary judgment, asserting that the notices of trustee's sales accelerated the debt, triggering the statute of limitations, and that the statute of limitations had run.

 

The servicer responded and cross-moved for summary judgment, arguing that the notices of trustee's sales did not accelerate the debt and that the borrower presented no evidence that the servicer intended to accelerate the debt. The trial court granted the borrower' summary judgment motion, concluding that the notices of trustee's sales accelerated the debt.  The servicer appealed.

 

On appeal, the intermediate appellate court reversed the trial court's ruling and held that "absent an express statement of acceleration in the notice of trustee's sale, or other evidence of an intent to accelerate, recording a notice of trustee's sale, by itself, does not accelerate a debt." The borrower timely appealed to the Arizona Supreme Court.

 

The borrower argued that recording a notice of trustee's sale accelerates the debt as a matter of law because the debtor has a reasonable expectation that the lender intends to sell the property and collect on the entire debt, notwithstanding the requirements for acceleration in the note and deed of trust. 

 

However, the Supreme Court of Arizona noted that parties are generally "free to contract as they please," Shattuck v. Precision-Toyota, Inc., 115 Ariz. 586, 588 (1977) (quoting Naify v. Pacific Indem. Co., 76 P.2d 663, 667 (Cal. 1938)), and when entered into voluntarily, courts will enforce the contract's provisions. 1800 Ocotillo, LLC v. WLB Grp., Inc., 219 Ariz. 200, 202 ¶ 8 (2008).

 

The Supreme Court of Arizona determined that the promissory note gave the lender discretion to accelerate the debt, rather than automatically accelerating the debt upon default. See Prevo v. McGinnis, 142 Ariz. 298, 302 (App. 1984). Additionally, the promissory note required the lender to give notice of acceleration. Thus, the Court concluded that it had to enforce the provisions of the promissory note, and the parties were bound by their agreement.

 

Nevertheless, the Supreme Court of Arizona also recognized that a deed of trust "is a creature of statutes." In re Krohn, 203 Ariz. 205, 208 ¶ 9 (2002); see also A.R.S. §§ 33-801 to -821. The deed of trust statutory scheme allows lenders to sell property without judicial action, and "thus strip[s] borrowers of many of the protections available under a mortgage." Krohn, 203 Ariz. at 208 ¶ 10 (emphasis omitted) (quoting Patton v. First Fed. Sav. & Loan Ass'n, 118 Ariz. 473, 477 (1978)). For this reason, courts should interpret a deed of trust consistent with its plain language and in favor of protecting borrowers. Id.; see also Schaeffer v. Chapman, 176 Ariz. 326, 328 (1993).

 

Here, the Court held that the deed of trust's plain language did not create a self-executing or automatic acceleration upon default. Consequently, the debt was not automatically accelerated under the provisions contained in the deed of trust. See Schaeffer, 176 Ariz. at 328

 

Furthermore, the notices of trustee's sale in this case did not refer to or invoke the deed of trust's optional acceleration clause.  Therefore, the Supreme Court of Arizona concluded that recording the notices did not accelerate the borrower's debt.

 

The Court also ruled that the plain language of A.R.S. § 33-813(A), which sets forth the procedure for reinstating a defaulted contract secured by a deed of trust, supports this conclusion. Section 33-813(A) provides that "[i]f . . . all or a portion of a principal sum . . . of the contract . . . secured by a trust deed becomes due or is declared due by reason of a breach or default," the debtor "may reinstate by paying . . . the entire amount then due"—not the entire loan balance—as late as the day before the trustee's sale. Accordingly, the Court held that when a trustee's sale is merely noticed under § 33-813(A), the entire debt is not accelerated because, under the plain language of the statute, a debtor can cure the default and reinstate the contract by paying only the "amount then due" before the trustee's sale is held.

 

Despite this plain language, the borrower cited Baseline Financial Services v. Madison, 229 Ariz. 543 (App. 2012) to urge the Supreme Court of Arizona to create a bright-line rule that would establish that the recording of a notice of trustee's sale accelerates a debt even when the terms of the deed of trust do not require notice of acceleration. The appellate court in Baseline held that, to exercise its option to accelerate the debt, a3 creditor "must undertake some affirmative act to make clear to the debtor it has accelerated the obligation," even if the parties agreed the option to accelerate does not require notice to the debtor. Id. ¶ 8

 

However, the Supreme Court of Arizona held that recording a notice of trustee's sale, by itself, is not an affirmative act that accelerates the debt. The Court's conclusion was bolstered by the fact that the lender did not accelerate the debt by exercising its right to sell the borrower's property and Section 33-813(A)'s plain language that allows the debtor to cure its default and reinstate the contract by paying the entire amount in arrears before the trustee's sale.

 

Accordingly, the Court reversed the trial court's ruling and remanded for entry of summary judgment in favor of the servicer.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

  

 

 

 

FYI: 3rd Cir Vacates $3.7MM Attorney Fee Award in Class Action Settlement

The U.S. Court of Appeals for the Third Circuit recently overturned a $3.7 million attorney fee award in a class action settlement.  In so ruling, the Third Circuit held that:

 

* The appellant did not waive its right to appeal due to an agreement for "final evaluation and decision" by a magistrate judge, or due to statements made by counsel for the appellant in a prior court proceeding;

 

* The record relied upon by the lower court in calculating the lodestar fee award was insufficient.

* The record was also insufficient to determine the propriety of a lodestar fee multiplier, if such a multiplier were even appropriate in this case.

 

A copy of the opinion is available at:  Link to Opinion

 

This appeal arose from the settlement of a class action lawsuit filed by various name plaintiffs against an automotive manufacturer ( "Company") alleging that the Company knowingly manufactured and sold defective vehicles. Plaintiffs' complaint included various causes of action including alleged violations of the Magnuson-Moss Warranty Act, state consumer fraud and deceptive practices claims.

 

The parties resolved all issues with the exception of the amount of attorney's fees awarded to the plaintiffs' counsel. In an attempt to narrow the issues needed to be resolved by the court, the parties agreed to a "high-low" arrangement. In this arrangement, the plaintiffs agreed to not seek an award of fees that exceed $3.7 million dollars and the Company agreed that attorneys' fees should at least be $1.5 million dollars. The parties jointly agreed to submit the issue of the attorneys' fees to a magistrate judge for ruling.

 

In support of the fee award, the plaintiffs submitted summary charts of the time they committed to the matter and more specific declarations in support of the award of legal fees. The magistrate judge agreed with the plaintiffs, and using the Lodestar analysis awarded Plaintiffs' counsel with $1.9 million in legal fees plus a lodestar multiplier award of $1.8 million dollars which resulted in a total fee award of $3.7 million dollars.

 

The Company appealed.

 

Before examining the specific issues raised by the Company, the Third Circuit first addressed whether or not the Company waived its right to appeal by agreeing to submit the fee issue to the magistrate judge for "final evaluation and decision" or whether waiver occurred due to statements made by counsel for Company in a prior court proceeding.

 

Plaintiffs' counsel argued that after the magistrate judge's ruling counsel for the Company's statement that "We put it in the hands of the Court, and you've made your decision, Judge" effectively barred the Company from seeking an appeal. The Third Circuit disagreed stating that judicial admissions are required to be "unequivocal" or "deliberate, clear, and unambiguous." In re Motors Liquidation Co., 957 F.3d 357, 360 (2d Cir. 2020) The Appellate Court held that the statements made by counsel for the Company merely acknowledged the adverse result of the hearing and did not meet this standard required to constitute a waiver.

 

The Third Circuit also considered whether or not the parties' agreement to submit the issue of attorney's fees to the magistrate judge for a "final evaluation and decision" could be construed as a waiver of their right to appeal. The Third Circuit noted the distinction between prior case precedent which has construed waiver of the right to appeal without requiring an express waiver of appeal. In re Odyssey Contracting Corp., 944 F.3d 483 (3d Cir. 2019).  However, in class action settlement cases the Fifth Circuit and Tenth Circuit have required express waiver of the right to appeal when the parties have stipulated that a court will decide a certain issue.  See In re Deepwater Horizon, 785 F.3d 986, 997 (5th Cir. 2015); Montez v. Hickenlooper, 640 F.3d 1126, 1132 (10th Cir. 2011)). Here, the Third Circuit did not agree that the Company waived its right to appeal and concurred with the Fifth and Tenth Circuit's prior holding requiring an express waiver of the right to appeal.

 

After deciding that the Company did not waive its right to an appeal, the Third Circuit addressed two substantive issues raised by the Company. 

 

In reviewing a fee award, the Third Circuit noted that "so long as it employs correct standards and procedures and makes findings of fact [that are] not clearly erroneous," a trial court has discretion to decide the amount of an award. However, the lower courts must "clearly set forth their reasoning for fee awards so that we will have a sufficient basis to review for abuse of discretion."

 

First, the Company argued that the trial court's fee award was based on insufficient information. Generally, when courts calculate attorney fee awards, they often use the lodestar method. "Lodestar, though, is a term-of-art used by courts to denote an award that is "calculated by multiplying the number of hours [the lawyer] reasonably worked on a client's case by a reasonable hourly billing rate for such services based on the given geographical area, the nature of the services provided, and the experience of the attorney." In re Rite Aid Corp. Sec. Litig., 396 F.3d at 305, 299 (3d Cir. 2005). As the plaintiffs' counsel were seeking to recover legal fees pursuant to a fee shifting statute "any hours to be used in calculating attorneys' fees . . . be detailed with sufficient specificity." Keenan v. City of Philadelphia, 983 F.2d 459, 472 (1992).

 

In support of their fee award, Plaintiffs' counsel submitted summary charts which included three pages of information that summarized their time over a three year period along with declarations by the plaintiff's counsel. However, the Third Circuit ruled this was not sufficient information for the lower court to base its fee award stating "[w]e simply cannot discern from the charts whether certain hours are duplicative (a determination that is particularly crucial here, given that three plaintiffs' firms seek fees for performing the same categories of work) or whether the total hours billed were reasonable for the work performed." Furthermore, the Third Circuit noted that contemporaneous billing records are not required but preferred. As a result, the Third Circuit vacated the trial court's fee award and remanded for further proceedings.

 

Lastly, the Company raised the issue of whether or not the lodestar multiplier awarded by the lower court was proper. The Company argued that "multipliers are inappropriate where fees are based on a fee-shifting statute, determined by a lodestar calculation, as they were here."  However, the Third Circuit noted that the lower court "awarded the attorney's fees pursuant to a contract — the settlement agreement — not pursuant to a statute."

 

Because the Third Circuit ruled that the original fee award should be vacated, the lodestar multiplier was also required to be vacated.  Although the Third Circuit did not specifically opine on the validity of the lodestar multiplier, the Third Circuit recommended that the lower court provide additional reasoning to support its multiplier because the previous ruling did not contain a "sufficient basis to review" its decision to award the fee multiplier. Rite Aid, 396 F.3d at 301.

 

Accordingly, the Third Circuit vacated the judgment of the lower court and remanded for further proceedings.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars