Pub. 4 2014 Issue 3

18 www.azbankers.org Enforcing Real Estate Collateral Judicially Now Less of a Lesser Alternative COUNSELOR’S CORNER A L ENDER FACED WITH FORE- CLOSING A DEED OF TRUST AFTER A BORROWER’S DE- FAULT MAY CHOOSE BETWEEN two alternate remedies: foreclose by non-judicial trustee's sale; or file a com- plaint in court for judicial foreclosure. (As an aside, if an Arizona lender still has that almost extinct lien instrument called a mortgage, judicial foreclosure is the only option.) A lender almost always will pursue a trustee's sale. It requires no judicial involvement (unless a borrower or third- party files a lawsuit to block it), it is quicker (can be completed in as little as 91 days after recording a notice of trust- ee's sale), and there is no redemption period after the issuance of the trustee's deed, although there are exceptions for the I.R.S. and some other federal liens. In contrast, a judicial foreclosure takes much longer and costs more, including necessary attorneys' fees and court costs. And the usual six-month statutory redemption period after a sheriff's sale means that the lender, if it is the successful bidder, may not get clear title through the sheriff's deed until a year or more after the action was first filed. But wait. There are times when a ju- dicial foreclosure is more advantageous to the lender. Recent cases and statuto- ry changes mean lenders may choose to eschew the more summary trustee's sale process in favor of the lengthier judicial foreclosure. In particular: Deficiency Rights. There is a slight yet key difference in the word- ing of Arizona's anti-deficiency statutes relating to trustee’s sales and judicial foreclosures as it relates to property on 2 ½ acres or less and limited and utilized as a dwelling (think: residen- tial). If the lender forecloses via trustee's sale, it makes no difference whether the loan was for purchase money. The lender may not then recover a deficiency. However, in a judicial foreclosure, only "purchase money" loans on such properties are protected. Thus, a lender holding a non-purchase money loan (e.g., a home equity loan) may still seek a deficiency if it forecloses judicially, even if the property were to otherwise qualify for anti-deficiency protection. Refinanced Loans. A fairly recent Arizona Court of Appeals decision clarified that while a refinanced loan is technically still a "purchase money" loan, the "cash-out" equity from a refinance is not encompassed within the anti-deficiency protection. Only the original purchase money amounts in a refinance, not the monies representing “cashed out” equity, is insulated. This bifurcation of the loan may inform the lender's decision about what foreclosure option to pursue. Acceleration of Loan and Avoid- ing Reinstatement. While a trustee’s sale is pending, the borrower may “re- instate” the loan by curing all defaults. By contrast, filing a judicial foreclosure action enforces acceleration, and allows the lender to deal effectively with the chronically defaulting borrower, at least regarding monetary obligations. Validating the Loan and the Lien. A judicial foreclosure establishes the validity of the loan and the loan documents. The Court determination implicit in a judgment may be par- ticularly desirable when there is some question about the execution of the documents, the amount of the loan, the legal description of the encumbered property, or a non-monetary default, such as waste. Priority of the Lien. Similarly, a judicial foreclosure may establish the priority of other liens, such as whether By CHRISTOPHER M. MCNICHOL, Gust Rosenfeld P.L.C.