Post Date: 5/12/2013

Eckley & Associates Video Article

Real Estate and Construction Attorney
Eckley & Associates

March 1, 2013

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I.      INTRODUCTION:  The Danger of  Legislators Who Feel the Need to “Do

        Something or Anything ‘Legislative’” to be “Politicians,” Forgetting Entirely that their Charge is rather to be “Statesmen”

     It’s always a spooky moment for common sense when state legislators get together.  Even when they seem to be well-meaning, since even those few with good intentions feel that they have to “legislate something, anything” in order to rationalize their role, when sometimes doing nothing on a given subject is the truest course of a statesman.  This is especially the case when the “something, anything” legislation is to endorse a bill pre-drafted by special- interests.  The wise are immediately aware when the lobbyist bearing these scrolls appears at their door that that someone’s ox is about to be gored.   The unwise just charge forward, hoping to boost their “active” image by having their names attached to a bill, any bill.  And that was so when Arizona state Senator Gail Griffith recently dropped SB 1141 into the legislative hopper.  SB1141 attempts to modify Arizona’s anti-deficiency laws to, as it recites, “help homeowners” when, in fact, it does the opposite by gutting the protections already offered homeowners under existing that law.   SB 1141 will harm homeowners, depress the marketplace and gratuitously reward the big banking community for its own notorious wrongdoing when it comes to homeowner’s rights.  An “SB 1141 Movement” – giving an anti-consumer law a name sounding like a pro-consumer law—is afoot under various numbers and in various guises to erode debt protections in other consumer-favoring states.  So even if the reader does not have any Arizona connections, read about the SB 1141 Plot in order to recognize and unmask those in other states.

The proposed legislation creates a new section as Arizona’s A.R.S. § 33-814.01, which essentially supplements ARS § 33-814, the statute which governs foreclosure trustee’s sales and, along with § 33-729,  limits deficiency actions (the collection of mortgage payoff shortfalls) in Arizona.   It makes a new law favorable to MORE deficiency actions, not less as it professes, by adding new and wholly gratuitous pre-short-sale occupancy requirements to qualify for non-deficiency treatment that presently has no such requirement.   The new statute would read (see emphasized portions):

A.  If trust property of two and one‑half acres or less that is limited to and utilized for either a single one‑family or a single two‑family dwelling is sold, 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 if all of the following apply:

1.  The trust property is sold in a transaction in which the beneficiary agrees to the sale of the secured trust property for an amount that does not satisfy the full indebtedness of the trustor under the deed of trust.

2.  The transaction is not a trustee's sale.

3. The secured trust property has been occupied as the primary principal residence of the trustor for an aggregate period of two years or more during the five year period ending on the date of the sale of trust property

B.  This section applies to beneficiaries of first deeds of trust who have agreed to the sale and any junior lien holders who have agreed to the sale, and their successors and assigns.

A quick reading of SB 1141 by someone unfamiliar with the existing law--already interpreted by the courts very favorably for homeowner and having no occupancy requirement at all—might suggest that it’s import is to add more anti-deficiency protections for Arizona borrowers who short sale their homes.  If passed, however, it does nothing of the kind.  The pre-occupancy requirement would detract from the consumer protections currently provided, which have no pre-occupancy time requirement at all.  It arbitrarily imports into the current law—which has barred deficiency claims after all short sales of properties secured with qualifying purchase money debts—an entirely new proviso, i.e. that the property must used as a principal residence for a specified time period.  This would make short sales that allowed no deficiency under today’s law suddenly capable of deficiencies if the law passed.  The proposed bill would actually increase deficiency treatments in short sales and impair existing homeowner rights and do so at a time when the market is just emerging from its collapse.  

The passage of SB 1141 would once again crush lender and borrower incentives to cooperate with alternatives to foreclosure for those homes where “the homeowner has not lived in the property long enough,” as these borrowers will simply let properties get foreclosed (where they are protected by existing law) rather than face lender arguments that there is liability after a short sale, which HB 1141 would make the law for the first time.  Limiting anti-deficiency protections to owner-occupied homes is not designed to benefit Arizona residents (and how would it?!), but rather, as is apparent from the legislative committee testimony behind it, as actually a concession to National Banks and the mortgage banking lobby.  The preamble holds it out as granting “short sale” protections for the consumer.  The sponsor apparently failed to notice these protections are already exist in the law.  Under the pretext of “fixing short sale loopholes in favor of the homeowner” SB 1141 actually pierces loopholes into the existing law to favor the lenders. 

Regardless of intent or how it is preambled, SB 1141 actually reverses and changes existing law which is favorable to the homeowner to deliver the homeowner defenselessly into the hands of the lenders by disqualifying about half of them from the anti-deficiency protections they now enjoy under existing law.  What’s more, the existing law is not “broken.”  It has actually already proven its virtue for the marketplace by making Arizona a leader in the national recovery—a fact made possible by Arizona’s strong anti-deficiency laws.  It is not coincidence that those states which permit across-the-board deficiency judgments on homeowner mortgage shortfalls are also at the very end of the recovery lineup. Arizona’s law—one of the most productive for consumers in the nation--is not “broken” and requires no “fixing” by the legislature.   SB 1141-- like past banker conspiracies launched through innocent and no-so-innocent legislators—is a pro-deficiency wolf  in sheep’s clothing. Preambled as a compassionate bill to “save” the consumers, it actually removes the protective shepherd of the existing law and clears the way for lender attack.  SB 1141 is actually a fit of frustration by banks and its lackeys:  What the banks could not attain in the courts (which have stood firmly behind the consumer of late and denied the banks any such deficiencies) they now attempt to “back door and by-pass” by adverse legislation.  Read this clearly:  The banks have given nothing whatsoever to consumers for them to owe anything back.  If the billion-dollar judgments and orders levied by the law against the dark practices of the banks virtually every day tell us anything, it is that these are bad-boy players who have routinely broken major rules, lied about virtually everything and in general run amok over consumers to the point this country was brought to the brink of collapse…and might even still collapse.  They Banks have earned no “gimmies” the like of SB 1141.  Arizona homeowners have done nothing to deserve the punishment of SB 1141. 

Some readers could stop at the above summary and confidently vote “yes” on continuing the consumer rights by pushing their legislators to vote a flat “no” on SB 1141.  Some  might need more legal analysis, as dry as that is to read (and far dryer to write).  For those, a very dry but more “legal” discussion follows.

II.   Empirical Evidence Suggests Arizona’s Anti-Deficiency Laws have No

Negative Impact and Only a Positive Impact on Arizona’s Nation-leading Housing Recovery.

New legislation to “repair” something bears the burden of proving that what it “repairs” is “broken”.  No one has offered any empirical evidence that Arizona homeowners have suffered under the current law.  What empirical evidence there is actually runs against the notion that homeowners have been ill-protected under existing law and suggest, in fact, that it has actually enabled a recovery.

See, for example, the January 2013 report published by the Arizona State University W.P Carey Center for Real Estate Theory and Practice, currently the most authoritative empirical market analysis in Arizona.  It is available at  For those claiming the current anti-deficiency laws have “hurt” Arizona, how then is Arizona with those same laws leading the nation in housing recovery with the median sales price up 35.3% year-over-year from $120,500 to $163,000, and with the supply of distressed homes now down 38% year-over-year?  The report notes that homeowners in Arizona receive a 20% higher average price for a short sale than a foreclosure and that short sales even still comprise 13% of the local market.  That incredibly productive trend was produced and made possible by the laws as they currently are and that legal stability needs to continue and not to be aborted by the meddling of SB 1141.  There is more empirical evidence and, again, it runs against the supposition of SB 1114 that urgent “help” is needed by the ridiculously anti-intuitive act of making more deficiencies possible.  The respected S&P/Case-Schiller Index lists Arizona as leading the nation with a 23.2% increase in average home prices year-over-year, and continuing with a 1.1% month-over-month increase from December 2012 to January 2013, typically a slow period for Arizona sales.  What’s broken under current law?  Why would Arizona homeowners need a new law at grants MORE deficiencies rather than LESS and takes away a legal framework that has already proven itself he most effective in the nation?  Who would want such a law—a friend or a foe of the consumer? One is tempted to conclude there is nothing “innocent” at all in the hearts of those who drafted and support SB 1141’s notorious retreat in consumer protections.

And Arizona needs that stability to continue as the state is not out of the woods, yet.  In 2012, Arizona remained among the States with the highest market percentage of distressed sales, reaching 34% of all sales according to the Year End and Q4 2012 U.S. Foreclosure and Short Sale Sales Report by RealtyTrac.  See for the full report.   Disqualifying more homeowners from the process that has worked and attempting to levy more liability on homeowners than existing law has permitted threatens many who have not recovered from their housing issues yet and that kills that budding recovery.   As written, this bill would do worse than that.  It would go back to those who already completed their no-further-liability short sale and impose liability on them.  It threatens even the recovery progress already attained.   In sum, there is no empirical evidence whatsoever that the market recovery is sagging under the current law or that SB 1114 will remedy that.  In fact, all of the empirical evidence holds that Arizona’s recovery with its existing non-deficiency laws has been the most remarkable in the nation and it does not take a rocket scientist to understand that a law that makes tens of thousands of Arizona homeowners ineligible for the debt relief that the current law makes them eligible for is a retreat from the formula that has predicated the market recovery.    SB 1141’s  sponsor even agrees that lenders will use any bludgeon they can to squeeze money from broken borrowers (even including threats that in any other environment would constitute fraud and extortion).  See the comments of President Pro-Tem Gail Griffin, in the February 21, 2013 Senate Government and Environment committee meeting.  How then does one go from “feeling for the consumer” to eliminating at least half of the consumers from their current legal protections?    How does one go from lamenting the bludgeoning to handing the assailant a heavy club though SB 1141?  Is it merely being “misinformed?”  Or is so complicit in a new assault as to be something worse?

III.  Existing Arizona Law Already Protects Homeowners from Deficiencies

            Following Short Sales Involving Otherwise Protected Properties and Loans

The law regarding liability for a deficiency following a short sale where the borrower would otherwise be protected following a trustee’s sale or judicial foreclosure is not “unclear” – the Courts have already made it crystal clear and have routinely barred these claims.  The appearance of “confusion” is merely the taking at face value the lender’s misrepresentations to the borrower that the law allows them to harm the consumer in ways which the law does not in fact allow.  That’s not called “confusion.”  Its call B-ll Sh-t!  If one incorrectly believes the current law allows lenders to abuse the homeowners the way they have, then perhaps you legislate.  But you must first ascertain that the current abuse is legal under existing law.  There is the premise on which SB 1114 fails.  The current abuse by banks in insisting on debt collection rights they do not legally have is NOT legal under existing Arizona laws.  That the banks are willing to miscast law and abuse homeowners by insisting they have rights they do not is exactly what has predicated billions of dollars in successful lawsuits and settlements against the banks!  All on EXISTING law! The banks that SB 1411 says it wants to reach have not won a single major litigation with the law precisely as it is!

 No bill is needed to “fix” the law is thus needed, least of all one that actually creates uncertainty where there was judicial clarity before and actually reduces a borrower’s protections where they were already so thoroughly protected that the banks have already been ordered to pay fortunes to the homeowners in damages for just that abuse.  It’s hard to believe that the SB 1141 sponsor ever read a newspaper to have missed these sensational and universal banking repudiations, admonitions and sanctions, one of which recently produced more millions of dollars in awards to Arizonans who were abused precisely by the wrongful debt collections by Banks on precisely the issues SB 1141 wants to “correct”.  In point of fact, many of these consumer predations would have been lawful had SB 1141 then been in effect!  Or is that, in fact, the general idea of SB 1141?

Let’s get more technical, yet.  The lenders who have been continuously sanctioned by the courts for abusing consumers under existing law contend that there is “no anti-deficiency protection after a short sale” because neither A.R.S. § 33-729(a)(which applies to judicial foreclosures) nor A.R.S. § 33-814(g)(which applies to trustee’s sales) expressly discuss “short sales.”  There is a good reason for that.  The word “short sale” in the real estate context did not exist when the anti-deficiency statutes were passed 40 years ago – it is a recently coined term taken from the world of securities sales (stocks and bonds) and one will not find it in any real estate glossaries of more than 10 years vintage. Moreover, in securities law, the term does not mean selling stocks, bonds or real estate for less than a mortgage on them.  Not even close.  Accordingly the absence of the words “short sale” in a 40-year old law certainly cannot suggest that the legislators of 4 decades ago intended to exclude “short sales” that did not exist in any real estate lexicon.

More importantly, Arizona’s Supreme Court has unequivocally rejected attempts by lenders to obtain deficiencies by suing on the promissory note where the lender would not in any event be entitled to a deficiency after a judicial foreclosure or trustee’s sale.  Before addressing the case law, a brief introductory explanation will help. 

In addition to a judicial foreclosure (§33-729) or a trustee’s sale (§33-814), each coming with a slight different anti-deficiency protection, there is a third option for lenders, which is that under A.R.S. § 33-722, the lender can elect to “waive the security” and “sue on the note” instead of foreclosing in some fashion. When the lender elects this option, the homeowner can keep the home but must still pay the debt.  In addition, it is important to note that pursuant to ARS § 33-721 and ARS §33-814(E), a lender may elect to treat a deed of trust – by far the prevailing instrument in Arizona – as a mortgage and foreclose by the more expensive and complex judicial foreclosure process.  This brings one to the difference between ARS § 33-729 and ARS § 33-814, which is that only § 33-729 (governing mortgages) requires that the borrower’s loan was used, at least in part, to purchase the home for anti-deficiency protection to apply.  Under ARS § 33-814, on the other hand, if a lender conducts a trustee’s sale, the lender cannot, regardless of the purchase money character of the loan, obtain a deficiency. 

The distinctions bring one to the Supreme Court’s opinion in the seminal case, Baker v. Gardner, 160 Ariz. 98, decided almost a quarter-century ago in 1988.  Baker v. Gardner did not involve either a judicial foreclosure or trustee’s sale, and yet the Court afforded the borrowers the anti-deficiency protections – thus defeating the common lender argument, above, which is “if there is neither a trustee’s sale or foreclosure, the anti-deficiency statutes do not apply.”  In Baker, the Plaintiff lender, who had a purchase-money loan and could not get a deficiency by trustee’s sale or judicial foreclosure, elected its option under ARS § 33-722 and filed a suit on the promissory note, waiving the security.  Id. at 99, 770 P.2d at 767. 

The Supreme Court rejected this “end-run” around the anti-deficiency protections.  The Court held that if the loan is purchase-money such that  the lender cannot get a deficiency in either a judicial foreclosure or a trustee’s sale, then the lender could not take its third option and “sue on the note” under A.R.S § 33-722, as this would “effectively destroy the anti-deficiency legislation,” the purpose of which was to “abolish the personal liabilityof those who give trust deeds encumbering properties of two and one-half acres or less and used for single-family or two-family dwellings.”  Id. at 106, 770 P.2d at 772.  The Court states that the anti-deficiency protections “demonstrates the legislature's objective of protecting consumers from financial ruin” while placing the burden of a general decline in the marketplace – which is undoubtedly what is to blame for the vast majority of Arizona defaults – on the lender, who takes a security interest in residential property and is vastly better situated to evaluate and absorb the risks.  Ok, I said this “legal explanation” would be dry! Remember?  Let’s mush on.

            In light of Baker, it is important to remember that there is no fourth option in the statutes for a lender – it can proceed by judicial foreclosure, trustee’s sale, or where available, it can sue on the note.  But not more. The promissory note is the only financial obligation and the only basis for a lawsuit against the borrower in the first place.  After a short sale, the lender has one potential choice of these three options \-- suit on the note – because it no longer has any ability to do the others, i.e. foreclose or conduct a trustee’s sale. But that third “action on the note” option does not exist in qualifying residential property as that bumps squarely into the Baker decision, which prohibits such an action.  The Supreme Court’s said in no uncertain or ambiguous words in Baker that the law“forbid[s] the circumvention” of the protections of the non-deficiency statutes like that.   The Baker decision left no room at all for any argument that a lender may sue on the note (from which the debt arises) where it cannot obtain a deficiency on the foreclosure itself  (which includes “short sales” or any other alleged route which would circumvent the intent of the statute, which was to “forbid” a deficiency in any guise).  There was no distinction made by the court as to whether the consumer “occupied” the property or not to be eligible for immunity.  End of story.   SB 1411 dies in its alleged mission in being at least legally superfluous if not trying that same “end run” around the anti-deficiency statute that Baker Court prohibited.

In the post-short sale-liability context, one other Court of Appeals opinion is important to note, primarily because lenders have misstated its holding as supporting the right to sue on a note after a short sale.  That case is a Court of Appeals case, Tanque Verde Anesthesiologists, LTD v. Proffer Group, Inc., 172 Ariz. 311, 836 P.2d 1021 (App. 1992).   In Tanque Verde, the Arizona Court of Appeals granted anti-deficiency protections to a borrower following what is now called a “short sale.”  The Court describes a transaction that is, without question, the same thing as a short sale, writing: “Tanque Verde release[d] its deeds of trust to effectuate the sale . . . in consideration for the payment [of less than the total outstanding loan balance]”) 171 Ariz. at 313, 836 P.2d at 1021.  Unlike in the Baker case, however, the loans in Tanque Verde were used to pay off debts and to repair properties, and were thus not “purchase-money.”  Where the loan is non-purchase money, such as a loan to purchase something else than the property secured by property as in the above case (sort of like a HELOC used to buy a Hummer, for instance), the lender can obtain judgments for shortfalls if it sues for it.  In such cases, the lender can elect a suit on the note under Baker   But there is still this caveat:  A lender cannot get a deficiency after judicial foreclosure when the loan was used to purchase the residence purchase money, and also cannot get one in a trustee’s foreclosure sale because ARS § 33-814 does not differentiate between purchase or non-purchase and bars a deficiency whether the loan was used to purchase the property or not.  In those cases, the Baker Court explained, the lender still could not sue on the note.  Rightfully, the law was designed to protect consumers in their homes.  Not in their Hummers.  This seems fair.

            The Tanque Verde Court agreed when it held that:

Although no trustee's sale occurred in this case, we agree . . . that, based on the holdings of Baker, supra, and Mid Kansas, supra, and absent evidence of an agreement to the contrary, when Tanque Verde signed the deed of release and reconveyance, it thereby waived its right to seek a deficiency judgment.  Id.


The most recent trial case on the issue to the date of this writing happened in late 2012 and was consistent with the position stated in this article. The Maricopa County Superior Court held that a lender is barred from a deficiency after trustee’s sale or judicial foreclosure and cannot get a deficiency after a short sale, either.  See M & I Bank v. Bregman, CV2011-010361.  In that case, the Hon. Judge George Foster, Jr., faced with this exact question and hearing the lender’s arguments, recited the recent Helvitica appellate case and ruled against the lender, holding as follows:

The case law is clear that where a purchase money obligation is taken in the residential real estate lending process, public policy dictates that a lender cannot by waiver, or in this case by release (a distinction without a real difference in this case), of its security subject the borrower to personal liability. Rather, the lender is to look to the security to satisfy, to the best of its ability, the debt. Helvetica Servicing, Inc. v.Pasquan, ---P.3d----, 2012 WL925566 Ariz.App. Div. 1, 2012 (March 20, 2012). In the traditional scenario, the lender attempts to waive the lien and sue directly on the note in an attempt to avoid the provision of A.R.S. §§ 33-729 or 33-814. Here, the lender devised a slightly different scheme which was to release its security and in doing so, provide for the right (indirect as it may be) to sue for a deficiency on the “breach” of contract. The problem in this case is that the lender’s premise regarding its release was faulty. Contrary to its release language, Plaintiff has not demonstrated that it had any right to a deficiency because the loan was purchase money and the law, for public policy reasons, prohibits obtaining a deficiency judgment if the lender forecloses or otherwise seeks to obtain a deficiency by any other means. The Plaintiff has failed to show any real substantive distinction between a release and a waiver.

IV.  SB 1141 is a Lender’s Bill, Legalizing Abusive Lender Conduct that is Now

Prohibited Under Existing Law.  It “Patches” Nothing but the Lender’s Pockets which are Already Filled with Stolen Wealth.

           The current anti-deficiency laws have done Arizona well and judging by the above empirical studies showing Arizona as a front-runner in the real state recovery and the cases showing that the law already affords full consumer protections, no repairs are required.  Especially ones that actually dismantle the consumer protections that made for recovery success.       

Unhappy that the courts have routinely denied their attempts to circumvent the anti-deficiency laws already on the books, Banks are now trying an “end run” with SB 1141 to amend the very statutes the Courts are following when they protect consumers from the Banks.  Notably, not a single Arizona appellate case has agreed with the Banks in this interpretation!.  Not one.  Not Ever. There is nothing to patch.

             SB 1141 is Trojan Horse--a wrecking ball to hard-won and already-had consumer rights which is disguised as a “tribute” to consumer law.  The realty:  SB 1141 is not the kind of ambush to the plebiscite which Statesmen do.  The sadder lesson to Arizona and all states:  “Beware of Bank-Owned Legislators bearing ‘gifts’.”

 ‘Nuff said.