Deeds of Trust
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Statutes
Limitation on Deficiency Actions Applicable to Purchase Money Mortgages: When a mortgage or deed of trust is foreclosed, the court shall give judgment for the entire amount determined due, and shall direct the mortgaged property, or as much thereof as is necessary to satisfy the judgment, to be sold.(A.R.S. § 33-725) If a mortgage is given to secure the payment of the balance of the purchase price, or to secure a loan to pay all or part of the purchase price, of a parcel of real property of two and one-half acres or less which is limited to and utilized for either a single one-family or single two-family dwelling, the lien of judgment in an action to foreclose such mortgage shall not extend to any other property of the judgment debtor, nor may general execution be issued against the judgment debtor to enforce such judgment, and if the proceeds of the mortgaged real property sold under special execution are insufficient to satisfy the judgment, the judgment may not otherwise be satisfied out of other property of the judgment debtor, notwithstanding any agreement to the contrary. (A.R.S. § 33-729)
Limitation on Deficiency Action Applicable to Deeds of Trust: If trust property of two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling is sold pursuant to the trustee's power of sale, no action may be maintained to recover any difference between the amount obtained by sale and the amount of the indebtedness and any interest, costs and expenses. (A.R.S. § 33-814)
Cases
Deeds of Trust from an Historical Perspective
Deeds of trust have been recognized in Arizona for many years. See A.R.S. § 33-705 (1956). Historically, and prior to 1971, a deed of trust was simply treated as a mortgage. In response to criticism from the mortgage banking industry concerning the time and expense necessary to judicially foreclose a deed of trust and the attendant uncertainly created by redemption requirements, the legislature adopted a comprehensive Deed of Trust Act in May, 1971. See A.R.S. § 33-801, added by laws 1971, Chapter 136, Section 7, effective August 13, 1971. See also Lawyer, The Deed of Trust: Arizona’s Alternative to the Real Property Mortgage, 15 Ariz. L. Rev. 194 (1973).
The legislature included in the Deed of Trust Act anti-deficiency protection at A.R.S. § 33-814(E) (1971). Also In 1971, the legislature added A.R.S. § 33-729(A) which is the anti-deficiency statute applicable to mortgages. Generally speaking, these anti-deficiency statutes were intended to provide protection to homeowners. See, Baker v. Gardner, 160 Ariz. 98, 770 P.2d 776 (1989).
Limitation on Deficiency Action Applicable to Deeds of Trust
It should be briefly noted that the deed of trust anti-deficiency provision applies to all deeds of trust not just purchase money obligations. One court has suggested that this important difference between the mortgage and deed of trust anti-deficiency statutes is justified because non-judicial foreclosure denies the borrower the ability to protect against low credit bids through the exercise of a right of redemption that is allowed as part of the judicial foreclosure process. Mid Kansas Federal Savings and Loan Association of Wichita v. Dynamic Development Corporation, 167 Ariz. 122, 127, 804 P.2d 1310, 1315 (1991) (footnote 3).
Important Arizona Cases Discussing the Anti-Deficiency Statutes
A. Baker v. Gardner, 160 Ariz. 98, 770 P.2d 776 (1989).
The first important authority considering the scope of the anti-deficiency statutes is Baker v. Gardner, 160 Ariz. 98, 770 P.2d 776 (1989). In that case, the Bakers assisted the Gardners with the purchase of the Baker’s home by financing a portion of the purchase price through a carry-back note secured by a carry-back deed of trust recorded in second position after the deed of trust the Gardners granted to a mortgage lender. The Gardners defaulted and the lender noticed a trustee’s sale for the non-judicial foreclosure of its first position deed of trust. In hopes of securing some advantage, the Bakers immediately filed suit to enforce the carry-back note. The trial court granted summary judgment in favor of the Gardners deciding that the anti-deficiency statutes prohibited the Bakers from waiving the security granted by the carry-back deed of trust and electing to sue on the note. The Arizona Supreme Court affirmed.
The precise issue considered by the Arizona Supreme Court was whether the anti-deficiency statutes limited the Bakers’ ability to rely on A.R.S. § 33-772 to waive the security granted by the carry-back deed of trust and in turn to elect to enforce the carry-back note. The court first discussed the legislative intent behind anti-deficiency protection.
The legislature enacted both anti-deficiency statutes in 1971. . . . These statutes were to preclude artificial deficiencies resulting from forced sales. More importantly, the statutes created the direct benefit of the elimination of hardships resulting to consumers who, when purchasing a home, fail to realize the extent to which they are subjecting assets besides the home to legal process.
* * *
Therefore, we read both anti-deficiency statutes—§§ 33-729(A) and 33-814(E) —as evincing the legislature’s desire to protect certain homeowners from the financial disaster of losing their homes to foreclosure plus all their other nonexempt property on execution of a judgment for the balance of the purchase price.
Id. at 160 Ariz. 101, 770 P.2d at 769 (citations omitted).
Focusing solely on the anti-deficiency statute applicable to deeds of trust, the court concludes that the legislature’s objective in enacting A.R.S. §33-814 was to abolish the personal liability of those who give deeds of trust encumbering properties of two and one-half acres or less and used for single-family or two-family dwellings. According to the court, this legislative objective can only be furthered by a rule that the holder of a note and security device that is covered by the anti-deficiency statutes may not, by waiving the security and bringing an action on the note, hold the maker liable for the entire unpaid balance. Id. at 104, 770 P.2d at 772.
B. Mid Kansas Federal Savings and Loan Association of Wichita v. Dynamic Development Corporation, 167 Ariz. 122, 804 P.2d 1310 (1991).
The case of Mid Kansas Federal Savings and Loan Association of Wichita v. Dynamic Development Corporation, 167 Ariz. 122, 804 P.2d 1310 (1991) considers whether commercial developers of residential property who borrow for business purposes are entitled to the protections granted by Arizona’s consumer anti-deficiency statutes, A.R.S. § 33-729(A) and A.R.S. § 33-814(G). The case arose out of ten (10) loans granted to a developer secured by separate deeds of trust against ten (10) unimproved residential lots. The loan funds were used by the developer to construct homes on the lots on a speculative basis.
The court began its analysis by revisiting its pronouncement in Baker v. Gardner, supra., that the anti-deficiency statutes were intended to protect homeowners. Noting that the anti-deficiency statutes themselves do not expressly limit their application to homeowners, the court readily decided that the anti-deficiency statutes equally protect homeowners and developers of residential real estate. It is the nature of the residential real property that is subject to the mortgage or deed of trust that must then be considered.
Both anti-deficiency statutes require that the property be: (1) two and one-half acres or less, (2) limited to and utilized for a dwelling that is (3) single one-family or single two-family in nature. A “dwelling” for the purpose of these statutes means a “shelter in which people live” Id. at 129, 804 P.2d at 1317, citing, In Northern Arizona Properties v. Pinetop Properties Group, 151 Ariz. 9, 725 P.2d 501 (App. 1986). Recognizing, however, that there was a difference between property being utilized as a dwelling and property intended for eventual use as a dwelling, the court goes on to hold as follows:
We hold that commercial residential properties held by the mortgagor for construction and eventual resale as dwellings are not within the definition of properties “limited to” and “utilized for” single-family dwellings. The property is not utilized as a dwelling when it is unfinished, has never been lived in, and is being held for sale to its first occupant by an owner who has no intent to ever occupy the property.
Id. at 129, 804 P.2d at 1317 (emphasis in original).
Since the homes that were newly constructed by the developer were not limited to and utilized for dwellings the developer was not entitled to the protections of the anti-deficiency statutes. The court went on to resolve the case favorably to the developer based upon a merger analysis not applicable to this Memorandum.
C. PNL Credit, L.P. v. Southwest Pacific Investments, Inc., 179 Ariz. 259, 877 P.2d 832 (1994).
The nature of the residential real property protected by the anti-deficiency statutes is further explored in PNL Credit, L.P. v. Southwest Pacific Investments, Inc., 179 Ariz. 259, 877 P.2d 832 (1994). This case followed a lender’s trustee sale under a deed of trust that encumbered at the time of sale four (4) condominium units. The lender’s credit bid to purchase these four (4) units was less than the loan balance then remaining due and lender sued the borrower to recover the difference. The trial court granted borrower’s summary judgment motion deciding that the action was a deficiency action barred by A.R.S. § 33-814(G). The Court of Appeals reversed noting that A.R.S. § 33-814(G) focuses on the nature of the trust property subject to the deed of trust. Specifically:
The anti-deficiency statute requires the trust property to not only be utilized as a dwelling, but also be limited to a single one-family or a single two-family dwelling. The trust property here consisted of four single family condominium units. Interpreting the statute to protect trust property consisting of multiple single-family dwellings would violate the language of the statute.
Id. at 265, 877 P.2d at 838 (emphasis in original).
Arizona Authorities
A. PNL Credit L.P. v. Southwest Pacific Investments, Inc., 179 Ariz. 259, 877 P.2d 832 (1994).
This case is discussed above with regard to the scope of the anti-deficiency statutes, but also bears mention here. In PNL Credit, the lender’s initial lawsuit was filed against both the borrower and the guarantors to recover the deficiency that remained after the non-judicial foreclosure and sale of several condominium units. According to the fact recitation, the trial court granted the guarantors’ motion for summary judgment ruling that A.R.S. § 33-814(G) barred a deficiency action against them. In that regard, the trial court also determined that the guarantors had not in their guaranty agreement waived available statutory defenses. This ruling was challenged on appeal.
However, since the Court of Appeals decided that the blanket deed of trust against several condominium units did not implicate the anti-deficiency protections of A.R.S. § 33-814(G), the Court of Appeals declined to address the issue of the guarantors’ liability for the deficiency. This case is noteworthy because it indicates that at least one Superior Court judge is of the opinion that A.R.S. § 33-814(G) precludes a lender from recovering a deficiency an independent guarantor following non-judicial foreclosure of a deed of trust.
B. W. D. Long v. Corbet, 181 Ariz. App. 153, 888 P.2d 1340 (1995).
This case immediately appears helpful in that it offers a headnote that flatly states:
Anti-deficiency statutes were not intended to protect assets of guarantor who did not own residence given as security for business loans and did not have any other type of interest in it.
Id., at headnote 9.
Research indicates that at least a few commentators and treatises have cited Long v. Corbet for just this proposition. See, e.g., Restatement (Third), Property (Mortgages) § 8.4, Reporters Note, p. 602; Ariz. Prac., Business Law Deskbook § 36:24 (2008-2009 ed.). The Opinion, however, requires additional scrutiny before too much weight is given the headnote.
The case arose out of a loan made by a fellow named Long to a limited partnership called Dominican Farming Enterprises. Repayment of the loan was secured by a second position deed of trust against a residence owned by Martinez whose interest in Dominican, if any, is not spelled out in the Opinion. Repayment of the loan was also personally guaranteed by Corbet. After Dominican’s default, Long filed suit to judicially foreclosure his second position deed of trust and to enforce the guaranty against Corbet. While Long’s lawsuit was pending, the first position lender non-judicially foreclosed its deed of trust. The sale generated proceeds in excess of the amount needed to satisfy the first position lender and Long successfully recovered these excess sales proceeds through separate action. The recovered sales proceeds were applied against the indebtedness. Long’s motion for summary judgment against Corbet for the balance due under the guaranty was granted by the trial court.
On appeal, Corbet presented an interesting argument. According to Corbet, since Long had accepted the benefit of the excess sales proceeds generated through the non-judicial foreclosure of the first position deed of trust, Long’s remedies and his pending lawsuit should then be determined based upon the deed of trust statutes. In turn, according to Corbet, the anti-deficiency provisions of A.R.S. § 33-814(G) prohibited a deficiency judgment against him as a guarantor.
The Court of Appeals begin its analysis by briefly discussing A.R.S. § 33-814(G) applicable to deeds of trust and the Arizona Supreme Court’s decision in Baker v. Gardner, 160 Ariz. 98, 770 P.2d 766 (1988). The court goes on to actually decide the case under the mortgage statutes. Since Long’s loan was not a purchase money obligation, Long was perfectly able under A.R.S. § 33-729(A) to judicially foreclose its deed of trust and thereafter seek judgment for any deficiency against Corbet as the guarantor. The court held:
The senior creditor’s election of non-judicial foreclosure did not define Long’s remedies; Long had chosen to foreclose judicially, and he was still entitled to sue on the guaranty given by Corbet.
Long, supra, at 157, 888 P.2d at 1344.
The court further concluded that the simple fact that Long received excess funds generated by a trustee’s sale commenced by a senior lien holder cannot be characterized as an election by Long to collect his debt by non-judicial foreclosure. Id.
Although not necessary to the court’s holding, the court did go on to discuss the anti-deficiency component of Corbets’ argument in a general and somewhat convoluted way. It is the following portion of the case that resulted in headnote 9 cited above. The opinion is quoted at length:
We also find that A.R.S. section 33-814(C) provides another explanation for why Arizona’s statutory anti-deficiency scheme does not prevent creditor Long’s action against guarantor Corbet.
* * *
[According to A.R.S. § 33-814(C)], if the creditor does not hold a trustee’s sale, it may enforce the guaranty if the guarantor has agreed that the creditor need not hold a trustee’s sale before recovering on the guaranty . . . [W]e conclude that as to Long, there was no trustee’s sale.
* * *
In his guaranty, Corbet agreed that his obligation thereunder would not be affected or impaired if Long failed to exercise any other right, power or remedy for recovery. He also agreed that Long was entitled to resort to Corbet for payment of any of the debt regardless of whether Long had resorted to any property securing the debt. Thus, Long was entitled to enforce his obligation against Corbet, who was not a trustor, because Corbet had so agreed. See A.R.S. § 33-814(C). Because no sale was held on Long’s deed of trust, he was entitled to proceed against Corbet to collect the outstanding balance of the debt without regard to the statutes dealing with deficiency judgments. Thus, the deficiency and anti-deficiency provisions of A.R.S. § 33-814(A) and (G) did not apply to Long’s action on Corbet’s guaranty.
Our conclusion is consistent with the purpose of the anti-deficiency statutes. As our supreme court discussed in Baker, the anti-deficiency statutes for both mortgages and deeds of trust evince the legislature’s desire to protect certain homeowners from the financial disaster of losing their homes to foreclosure plus all their nonexempt property on execution of a judgment for the balance of the purchase price.
* * *
Corbet did not own the residence given as security for the loan, nor did he have any other type of interest in it. The loan Corbett guaranteed was a business loan; it was not for the purchase of the home that was subject to the deed of trust. The anti-deficiency statutes were not intended to protect the assets of a guarantor such as Corbet.
Id. at 158-159, 888 P.2d at 1345-1346.
The holding in Long is simply that a lender that judicially forecloses a non-purchase money mortgage or deed of trust may sue the guarantor for any resulting deficiency. That the lender received excess proceeds from a senior lien holder’s trustee’s sale, does not change this result. The court’s discussion of the anti-deficiency statutes and the broad statement that is summarized in headnote 9 is arguably dicta.
VII. California decisions
Baker v. Gardner, supra, recognizes that Arizona’s anti-deficiency statutes are similar to the anti-deficiency statutes on the books in California and that cases from California are of particular interest because Arizona has adopted much of its redemption and mortgage statutes from that state. Id. at 102, 770 P.2d at 770. Specifically, California’s anti-deficiency scheme prohibits deficiency judgments after the sale of real property under a deed of trust or mortgage given to secure payment of the balance of the purchase price of real property. Cal. Code Civ. Proc. § 580b. Additionally, California prohibits deficiency judgments any time a mortgage or deed of trust is non-judicially foreclosed though exercise of the power of sale contained in such mortgage or deed of trust. Cal. Code Civ. Proc. § 580d.
A. Gottschalk v. Draper Companies, 100 Cal.Rptr. 434 (Cal. App. 1972).
Several cases consider whether a guarantor of a purchase money obligation in which another individual or legal entity is primarily liable is protected by California’s anti- deficiency statute, Cal. Code Civ. Proc. § 580b. One oft-cited case is Gottschalk v. Draper Companies, 100 Cal.Rptr. 434 (Cal. App. 1972). That case involved a lender’s action against a guarantor after lender’s second position purchase money deed of trust was foreclosed. To address the guarantor’s arguments, the court made clear:
[T]hat a guarantor of a purchase money transaction in which another individual or legal entity is primarily liable is not protected by the provisions of Code of Civil Procedure section 580b. The protection afforded by this code section is confined to the purchaser-debtor’s obligation which is secured by the purchased property. The guarantor’s obligation is not within this delineation, is not secured by the property, and is not the debtor’s obligation. The guarantee is simply an additional security for the obligor’s debt and is enforceable against the guarantor.
Gottschalk v. Draper Companies, 100 Cal.Rptr. 434, 436 (Cal. App. 1972). Citing Heckes v. Sapp, 40 Cal.Rptr 45 (1964); Roberts v. Graves, 75 Cal.Rptr. 130 (1969).
B. Bauman v. Castle, 93 Cal.Rptr. 565 (Cal.App. 1971).
Another case is Bauman v. Castle, 93 Cal.Rptr. 565 (Cal.App. 1971). That case involved a lender’s action against guarantors for a deficiency following the non-judicial foreclosure of a second position purchase money deed of trust. The court rejected the guarantors’ arguments that California’s anti-deficiency statutes provided them some protection.
[T]he instant case is one which falls within the well established rule that the protective provisions of the Code of Civil Procedure (sections 580b and 580d) shield only the principal debtor and not the guarantors, such as the defendants, who were separately and independently liable to plaintiff.
Id., at 586.
Deeds of trust have been recognized in Arizona for many years. See A.R.S. § 33-705 (1956). Historically, and prior to 1971, a deed of trust was simply treated as a mortgage. In response to criticism from the mortgage banking industry concerning the time and expense necessary to judicially foreclose a deed of trust and the attendant uncertainly created by redemption requirements, the legislature adopted a comprehensive Deed of Trust Act in May, 1971. See A.R.S. § 33-801, added by laws 1971, Chapter 136, Section 7, effective August 13, 1971. See also Lawyer, The Deed of Trust: Arizona’s Alternative to the Real Property Mortgage, 15 Ariz. L. Rev. 194 (1973).
The legislature included in the Deed of Trust Act anti-deficiency protection at A.R.S. § 33-814(E) (1971). Also In 1971, the legislature added A.R.S. § 33-729(A) which is the anti-deficiency statute applicable to mortgages. Generally speaking, these anti-deficiency statutes were intended to provide protection to homeowners. See, Baker v. Gardner, 160 Ariz. 98, 770 P.2d 776 (1989).
Limitation on Deficiency Action Applicable to Deeds of Trust
It should be briefly noted that the deed of trust anti-deficiency provision applies to all deeds of trust not just purchase money obligations. One court has suggested that this important difference between the mortgage and deed of trust anti-deficiency statutes is justified because non-judicial foreclosure denies the borrower the ability to protect against low credit bids through the exercise of a right of redemption that is allowed as part of the judicial foreclosure process. Mid Kansas Federal Savings and Loan Association of Wichita v. Dynamic Development Corporation, 167 Ariz. 122, 127, 804 P.2d 1310, 1315 (1991) (footnote 3).
Important Arizona Cases Discussing the Anti-Deficiency Statutes
A. Baker v. Gardner, 160 Ariz. 98, 770 P.2d 776 (1989).
The first important authority considering the scope of the anti-deficiency statutes is Baker v. Gardner, 160 Ariz. 98, 770 P.2d 776 (1989). In that case, the Bakers assisted the Gardners with the purchase of the Baker’s home by financing a portion of the purchase price through a carry-back note secured by a carry-back deed of trust recorded in second position after the deed of trust the Gardners granted to a mortgage lender. The Gardners defaulted and the lender noticed a trustee’s sale for the non-judicial foreclosure of its first position deed of trust. In hopes of securing some advantage, the Bakers immediately filed suit to enforce the carry-back note. The trial court granted summary judgment in favor of the Gardners deciding that the anti-deficiency statutes prohibited the Bakers from waiving the security granted by the carry-back deed of trust and electing to sue on the note. The Arizona Supreme Court affirmed.
The precise issue considered by the Arizona Supreme Court was whether the anti-deficiency statutes limited the Bakers’ ability to rely on A.R.S. § 33-772 to waive the security granted by the carry-back deed of trust and in turn to elect to enforce the carry-back note. The court first discussed the legislative intent behind anti-deficiency protection.
The legislature enacted both anti-deficiency statutes in 1971. . . . These statutes were to preclude artificial deficiencies resulting from forced sales. More importantly, the statutes created the direct benefit of the elimination of hardships resulting to consumers who, when purchasing a home, fail to realize the extent to which they are subjecting assets besides the home to legal process.
* * *
Therefore, we read both anti-deficiency statutes—§§ 33-729(A) and 33-814(E) —as evincing the legislature’s desire to protect certain homeowners from the financial disaster of losing their homes to foreclosure plus all their other nonexempt property on execution of a judgment for the balance of the purchase price.
Id. at 160 Ariz. 101, 770 P.2d at 769 (citations omitted).
Focusing solely on the anti-deficiency statute applicable to deeds of trust, the court concludes that the legislature’s objective in enacting A.R.S. §33-814 was to abolish the personal liability of those who give deeds of trust encumbering properties of two and one-half acres or less and used for single-family or two-family dwellings. According to the court, this legislative objective can only be furthered by a rule that the holder of a note and security device that is covered by the anti-deficiency statutes may not, by waiving the security and bringing an action on the note, hold the maker liable for the entire unpaid balance. Id. at 104, 770 P.2d at 772.
B. Mid Kansas Federal Savings and Loan Association of Wichita v. Dynamic Development Corporation, 167 Ariz. 122, 804 P.2d 1310 (1991).
The case of Mid Kansas Federal Savings and Loan Association of Wichita v. Dynamic Development Corporation, 167 Ariz. 122, 804 P.2d 1310 (1991) considers whether commercial developers of residential property who borrow for business purposes are entitled to the protections granted by Arizona’s consumer anti-deficiency statutes, A.R.S. § 33-729(A) and A.R.S. § 33-814(G). The case arose out of ten (10) loans granted to a developer secured by separate deeds of trust against ten (10) unimproved residential lots. The loan funds were used by the developer to construct homes on the lots on a speculative basis.
The court began its analysis by revisiting its pronouncement in Baker v. Gardner, supra., that the anti-deficiency statutes were intended to protect homeowners. Noting that the anti-deficiency statutes themselves do not expressly limit their application to homeowners, the court readily decided that the anti-deficiency statutes equally protect homeowners and developers of residential real estate. It is the nature of the residential real property that is subject to the mortgage or deed of trust that must then be considered.
Both anti-deficiency statutes require that the property be: (1) two and one-half acres or less, (2) limited to and utilized for a dwelling that is (3) single one-family or single two-family in nature. A “dwelling” for the purpose of these statutes means a “shelter in which people live” Id. at 129, 804 P.2d at 1317, citing, In Northern Arizona Properties v. Pinetop Properties Group, 151 Ariz. 9, 725 P.2d 501 (App. 1986). Recognizing, however, that there was a difference between property being utilized as a dwelling and property intended for eventual use as a dwelling, the court goes on to hold as follows:
We hold that commercial residential properties held by the mortgagor for construction and eventual resale as dwellings are not within the definition of properties “limited to” and “utilized for” single-family dwellings. The property is not utilized as a dwelling when it is unfinished, has never been lived in, and is being held for sale to its first occupant by an owner who has no intent to ever occupy the property.
Id. at 129, 804 P.2d at 1317 (emphasis in original).
Since the homes that were newly constructed by the developer were not limited to and utilized for dwellings the developer was not entitled to the protections of the anti-deficiency statutes. The court went on to resolve the case favorably to the developer based upon a merger analysis not applicable to this Memorandum.
C. PNL Credit, L.P. v. Southwest Pacific Investments, Inc., 179 Ariz. 259, 877 P.2d 832 (1994).
The nature of the residential real property protected by the anti-deficiency statutes is further explored in PNL Credit, L.P. v. Southwest Pacific Investments, Inc., 179 Ariz. 259, 877 P.2d 832 (1994). This case followed a lender’s trustee sale under a deed of trust that encumbered at the time of sale four (4) condominium units. The lender’s credit bid to purchase these four (4) units was less than the loan balance then remaining due and lender sued the borrower to recover the difference. The trial court granted borrower’s summary judgment motion deciding that the action was a deficiency action barred by A.R.S. § 33-814(G). The Court of Appeals reversed noting that A.R.S. § 33-814(G) focuses on the nature of the trust property subject to the deed of trust. Specifically:
The anti-deficiency statute requires the trust property to not only be utilized as a dwelling, but also be limited to a single one-family or a single two-family dwelling. The trust property here consisted of four single family condominium units. Interpreting the statute to protect trust property consisting of multiple single-family dwellings would violate the language of the statute.
Id. at 265, 877 P.2d at 838 (emphasis in original).
Arizona Authorities
A. PNL Credit L.P. v. Southwest Pacific Investments, Inc., 179 Ariz. 259, 877 P.2d 832 (1994).
This case is discussed above with regard to the scope of the anti-deficiency statutes, but also bears mention here. In PNL Credit, the lender’s initial lawsuit was filed against both the borrower and the guarantors to recover the deficiency that remained after the non-judicial foreclosure and sale of several condominium units. According to the fact recitation, the trial court granted the guarantors’ motion for summary judgment ruling that A.R.S. § 33-814(G) barred a deficiency action against them. In that regard, the trial court also determined that the guarantors had not in their guaranty agreement waived available statutory defenses. This ruling was challenged on appeal.
However, since the Court of Appeals decided that the blanket deed of trust against several condominium units did not implicate the anti-deficiency protections of A.R.S. § 33-814(G), the Court of Appeals declined to address the issue of the guarantors’ liability for the deficiency. This case is noteworthy because it indicates that at least one Superior Court judge is of the opinion that A.R.S. § 33-814(G) precludes a lender from recovering a deficiency an independent guarantor following non-judicial foreclosure of a deed of trust.
B. W. D. Long v. Corbet, 181 Ariz. App. 153, 888 P.2d 1340 (1995).
This case immediately appears helpful in that it offers a headnote that flatly states:
Anti-deficiency statutes were not intended to protect assets of guarantor who did not own residence given as security for business loans and did not have any other type of interest in it.
Id., at headnote 9.
Research indicates that at least a few commentators and treatises have cited Long v. Corbet for just this proposition. See, e.g., Restatement (Third), Property (Mortgages) § 8.4, Reporters Note, p. 602; Ariz. Prac., Business Law Deskbook § 36:24 (2008-2009 ed.). The Opinion, however, requires additional scrutiny before too much weight is given the headnote.
The case arose out of a loan made by a fellow named Long to a limited partnership called Dominican Farming Enterprises. Repayment of the loan was secured by a second position deed of trust against a residence owned by Martinez whose interest in Dominican, if any, is not spelled out in the Opinion. Repayment of the loan was also personally guaranteed by Corbet. After Dominican’s default, Long filed suit to judicially foreclosure his second position deed of trust and to enforce the guaranty against Corbet. While Long’s lawsuit was pending, the first position lender non-judicially foreclosed its deed of trust. The sale generated proceeds in excess of the amount needed to satisfy the first position lender and Long successfully recovered these excess sales proceeds through separate action. The recovered sales proceeds were applied against the indebtedness. Long’s motion for summary judgment against Corbet for the balance due under the guaranty was granted by the trial court.
On appeal, Corbet presented an interesting argument. According to Corbet, since Long had accepted the benefit of the excess sales proceeds generated through the non-judicial foreclosure of the first position deed of trust, Long’s remedies and his pending lawsuit should then be determined based upon the deed of trust statutes. In turn, according to Corbet, the anti-deficiency provisions of A.R.S. § 33-814(G) prohibited a deficiency judgment against him as a guarantor.
The Court of Appeals begin its analysis by briefly discussing A.R.S. § 33-814(G) applicable to deeds of trust and the Arizona Supreme Court’s decision in Baker v. Gardner, 160 Ariz. 98, 770 P.2d 766 (1988). The court goes on to actually decide the case under the mortgage statutes. Since Long’s loan was not a purchase money obligation, Long was perfectly able under A.R.S. § 33-729(A) to judicially foreclose its deed of trust and thereafter seek judgment for any deficiency against Corbet as the guarantor. The court held:
The senior creditor’s election of non-judicial foreclosure did not define Long’s remedies; Long had chosen to foreclose judicially, and he was still entitled to sue on the guaranty given by Corbet.
Long, supra, at 157, 888 P.2d at 1344.
The court further concluded that the simple fact that Long received excess funds generated by a trustee’s sale commenced by a senior lien holder cannot be characterized as an election by Long to collect his debt by non-judicial foreclosure. Id.
Although not necessary to the court’s holding, the court did go on to discuss the anti-deficiency component of Corbets’ argument in a general and somewhat convoluted way. It is the following portion of the case that resulted in headnote 9 cited above. The opinion is quoted at length:
We also find that A.R.S. section 33-814(C) provides another explanation for why Arizona’s statutory anti-deficiency scheme does not prevent creditor Long’s action against guarantor Corbet.
* * *
[According to A.R.S. § 33-814(C)], if the creditor does not hold a trustee’s sale, it may enforce the guaranty if the guarantor has agreed that the creditor need not hold a trustee’s sale before recovering on the guaranty . . . [W]e conclude that as to Long, there was no trustee’s sale.
* * *
In his guaranty, Corbet agreed that his obligation thereunder would not be affected or impaired if Long failed to exercise any other right, power or remedy for recovery. He also agreed that Long was entitled to resort to Corbet for payment of any of the debt regardless of whether Long had resorted to any property securing the debt. Thus, Long was entitled to enforce his obligation against Corbet, who was not a trustor, because Corbet had so agreed. See A.R.S. § 33-814(C). Because no sale was held on Long’s deed of trust, he was entitled to proceed against Corbet to collect the outstanding balance of the debt without regard to the statutes dealing with deficiency judgments. Thus, the deficiency and anti-deficiency provisions of A.R.S. § 33-814(A) and (G) did not apply to Long’s action on Corbet’s guaranty.
Our conclusion is consistent with the purpose of the anti-deficiency statutes. As our supreme court discussed in Baker, the anti-deficiency statutes for both mortgages and deeds of trust evince the legislature’s desire to protect certain homeowners from the financial disaster of losing their homes to foreclosure plus all their nonexempt property on execution of a judgment for the balance of the purchase price.
* * *
Corbet did not own the residence given as security for the loan, nor did he have any other type of interest in it. The loan Corbett guaranteed was a business loan; it was not for the purchase of the home that was subject to the deed of trust. The anti-deficiency statutes were not intended to protect the assets of a guarantor such as Corbet.
Id. at 158-159, 888 P.2d at 1345-1346.
The holding in Long is simply that a lender that judicially forecloses a non-purchase money mortgage or deed of trust may sue the guarantor for any resulting deficiency. That the lender received excess proceeds from a senior lien holder’s trustee’s sale, does not change this result. The court’s discussion of the anti-deficiency statutes and the broad statement that is summarized in headnote 9 is arguably dicta.
VII. California decisions
Baker v. Gardner, supra, recognizes that Arizona’s anti-deficiency statutes are similar to the anti-deficiency statutes on the books in California and that cases from California are of particular interest because Arizona has adopted much of its redemption and mortgage statutes from that state. Id. at 102, 770 P.2d at 770. Specifically, California’s anti-deficiency scheme prohibits deficiency judgments after the sale of real property under a deed of trust or mortgage given to secure payment of the balance of the purchase price of real property. Cal. Code Civ. Proc. § 580b. Additionally, California prohibits deficiency judgments any time a mortgage or deed of trust is non-judicially foreclosed though exercise of the power of sale contained in such mortgage or deed of trust. Cal. Code Civ. Proc. § 580d.
A. Gottschalk v. Draper Companies, 100 Cal.Rptr. 434 (Cal. App. 1972).
Several cases consider whether a guarantor of a purchase money obligation in which another individual or legal entity is primarily liable is protected by California’s anti- deficiency statute, Cal. Code Civ. Proc. § 580b. One oft-cited case is Gottschalk v. Draper Companies, 100 Cal.Rptr. 434 (Cal. App. 1972). That case involved a lender’s action against a guarantor after lender’s second position purchase money deed of trust was foreclosed. To address the guarantor’s arguments, the court made clear:
[T]hat a guarantor of a purchase money transaction in which another individual or legal entity is primarily liable is not protected by the provisions of Code of Civil Procedure section 580b. The protection afforded by this code section is confined to the purchaser-debtor’s obligation which is secured by the purchased property. The guarantor’s obligation is not within this delineation, is not secured by the property, and is not the debtor’s obligation. The guarantee is simply an additional security for the obligor’s debt and is enforceable against the guarantor.
Gottschalk v. Draper Companies, 100 Cal.Rptr. 434, 436 (Cal. App. 1972). Citing Heckes v. Sapp, 40 Cal.Rptr 45 (1964); Roberts v. Graves, 75 Cal.Rptr. 130 (1969).
B. Bauman v. Castle, 93 Cal.Rptr. 565 (Cal.App. 1971).
Another case is Bauman v. Castle, 93 Cal.Rptr. 565 (Cal.App. 1971). That case involved a lender’s action against guarantors for a deficiency following the non-judicial foreclosure of a second position purchase money deed of trust. The court rejected the guarantors’ arguments that California’s anti-deficiency statutes provided them some protection.
[T]he instant case is one which falls within the well established rule that the protective provisions of the Code of Civil Procedure (sections 580b and 580d) shield only the principal debtor and not the guarantors, such as the defendants, who were separately and independently liable to plaintiff.
Id., at 586.
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John G. Sinodis
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