Arizona Foreclosure Law
Why should the creditor
foreclose non-judicially vs. judicially?
What is the process and timing to
non-judicially foreclose upon real property in Arizona?
How can the borrower stop a
non-judicial foreclosure sale?
What risks are there that the lender’s lien may
be extinguished by a third-party before the non-judicial foreclosure sale is
How does the lender as a junior lien
creditor protect its position when a senior lienholder forecloses?
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?
Can a mortgage lienholder obtain a
deficiency judgment against the borrower and/or a loan guarantor after a
non-judicial foreclosure sale in Arizona?
Folks & O’Connor, 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
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
Larry O. Folks has over two 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
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.
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.
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
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
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
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
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
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
Obtain an Owner’s Policy if the
Lender Takes Title through a Credit Bid.
C. How can the borrower
stop a non-judicial foreclosure sale?
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.
Matured notes cannot be
reinstated. They must be paid off.
Reinstatement is accomplished by
paying all sums due under note (except for principal), the trustee’s
statutory reinstatement fee (which is the greater of $600 or one half
of one percent of the unpaid principal balance) and any expenses and
reasonable attorneys’ fees incurred by the lender in addition to the
trustee’s statutory fee.
If the loan is reinstated, the
trustee’s sale must be cancelled.
Serial defaults and
reinstatements can be stopped by sending a notice of acceleration of the
indebtedness and commencing a judicial foreclosure proceeding.
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
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
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
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
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.
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
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
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