Arizona Appeals Court Rejects Banksters' Use Of Credit Bid As Sole Basis In Calculating Debt Deficiency Owed By Foreclosed Property Owners, Guarantors

From a client alert from the law firm Snell & Wilmer:

• In MidFirst Bank v. Chase, 640 Ariz. Adv. Rep. 9, __ P.3d __ (App. 2012), the Arizona Court of Appeals recently held that the amount of a successful credit bid at a trustee’s sale does not constitute admissible evidence of “fair market value” of the foreclosed property for the purposes of Ariz. Rev. Stat. (A.R.S.) § 33-814(A).(1)
  
  In other words, the opinion requires a lender to introduce evidence of “fair market value” as part of its prima facie case in a deficiency action, even if the debtor does not request a “fair market value” hearing under A.R.S. § 33-814(A). As a result of this decision, lenders will generally be required to obtain an appraisal or broker's price opinion to ensure they have admissible evidence of the fair market value of the collateral.
  
  The facts of the case describe a rather ordinary fact pattern. In 2008, the secured lender loaned $1,620,000 to a borrower. The loan was secured by a deed of trust recorded against real property, and was guaranteed by two individuals – Mike and Linda Chase (the “guarantors”). The borrower and guarantors defaulted and the lender exercised its right to conduct a trustee’s sale of its real property collateral.
  
  The secured lender was the successful bidder at the trustee’s sale with a credit bid of $486,000. Even after applying the credit bid to the then outstanding balance of the loan, the secured lender was left with a deficiency of $1,325,044.09.
  
  The lender moved for summary judgment against the borrower and guarantors for the full deficiency amount based solely on its credit bid. The guarantors argued that summary judgment was not appropriate, because they alleged that the “fair market value” of the real property serving as collateral was greater than the debt. The guarantors did not support their assertion with any evidence and never filed an application for a “fair market value” hearing under A.R.S. § 33-814(A).
  
  The trial court rejected the guarantors’ defense, finding that “[n]o reasonable juror could find for the Chases on the issue of fair market value based upon the record presented.” Thus, the trial court granted summary judgment for the secured lender.(2) The guarantors timely appealed and the Court of Appeals reversed.(3)

For more, see Lender’s Credit Bid is Not Evidence of Fair Market Value.

For the ruling, see MidFirst Bank v. Chase, 640 Ariz. Adv. Rep. 9, __ P.3d __ (App. 2012).

(1) Ariz. Rev. Stat. (A.R.S.) § 33-814(A) is the Arizona state law that governs deficiency judgments. According to the Arizona appeals court:

• The primary purpose of the statute is to "prohibit a creditor from seeking a windfall by buying property at a trustee's sale for less than fair market value." First Interstate Bank of Ariz., N.A. v. Tatum & Bell Ctr. Assoc., 170 Ariz. 99, 103, 821 P.2d 1384, 1388 (App. 1991). Because of the nature of a trustee's sale, the statute does not contemplate that the purchase price will necessarily reflect the fair market value of the property. Dewey v. Arnold, 159 Ariz. 65, 70, 764 P.2d 1124, 1129 (App. 1988).
  
  For this reason, the statute requires a determination by the court of the fair market value before a deficiency judgment may be awarded. A.R.S. § 33-814(A). The court is directed then to subtract from the amount owed the higher of the sales price or the fair market value.

(2) To add insult to injury, the trial court also granted the foreclosing bank's request for attorneys' fees of $80,550.91.

(3) For earlier posts relating to foreclosing lenders' attempts to score deficiency judgments from foreclosed property owners, see

• Failure To File Motion Within 90 Days Of Deed Delivery Consummating NY Foreclosure Sale Sinks Lender's Move To Score Deficiency Judgment,
• Missouri High Court: F'closure Deficiency Damages Calculation To Be Based On Deflated Auction Sale Price, Despite Property's Higher Fair Market Value,
• Fla. Appeals Court Nabs Sneaky F'closing Lender In Attempt To Improperly Go After Foreclosed Property Owner's Personal Assets To Satisfy Unpaid Debt,
• Implied Duty Of Good Faith, Fair Dealing & The Collection Of Deficiency Judgments In Foreclosure Actions,
• Wisconsin Appeals Court OKs Debt Recovery Approach For Foreclosing Lender Holding Two Mortgages On Same Property, Despite Waiving Deficiency Rights.