The law of the state where the property is located controls the foreclosure or trustee sale process. The links to this page deal solely with Arizona law as governing Arizona real property.
By Benzion J Westreich & Scott C Cutrow, Katten Muchin Rosenman LLP (This article was first published by the International Law Office.)
Since the California Supreme Court’s 1897 decision in Davis v Randall,(1) the law in California has clearly been that “whether a mortgage lien is merged in the fee … upon both being united in the same person” is a question of the intent of the grantee, with the presumption being that both interests will be treated separately if the grantee is also the holder of the mortgage. Most, if not all practitioners have relied on this decision and have therefore used this two-step process (deed in lieu followed by non-judicial foreclosure) to quickly obtain title to the property and remove any and all intervening liens. The endgame is to clean up the property and position it for resale with a clean title. For decades, this strategy worked, with title companies providing the necessary insurance upon the subsequent sale.Due to the 2008 economic downturn, the ensuing pervasive foreclosure actions and the fact that title companies felt embattled because of the extraordinary number of mechanic’s lien claims that they had to insure as a result of underwriting decisions made for business reasons (the prime factor being the decision to insure the priority of deeds of trust even though they were recorded after the commencement of construction), title insurance companies have refused to insure sales by lenders after their two-step foreclosures, citing the merger doctrine. Title companies were ignoring the nonmerger presumption in the case of mortgagees, as well as the fact that the presumption was invariably bolstered by specific non-merger provisions in the deed in lieu documents.
In Decon Group, Inc v Prudential Mortgage Capital Co, LLC,(2) a California appellate court recently affirmed this tenet of California law. The court found that Davis is alive and well and held that where a senior lienholder receives a grant deed containing an anti-merger clause in lieu of foreclosure on a property that is also subject to a junior lien, the senior deed of trust lien does not merge into title and the senior lienholder retains the right to foreclose on the property and to extinguish the junior lien. Decon should help to dispel the reluctance of title companies to insure title upon a sale after a twostep foreclosure.
A property owned by a borrower was subject to a first deed of trust held by a lender recorded in February 2008. In April 2009 after not being paid for renovations that it had performed for the property owner, Decon recorded a mechanic’s lien against the property.
In July 2009 the mechanic’s lien holder filed suit against the borrower and the lender for breach of contract and quiet title. In September 2009 the lender filed a notice of default and election to sell the property, thus commencing the foreclosure process. In November 2009, in a negotiated transaction, the lender accepted a deed in lieu from the borrower. The grant deed between the borrower and lender expressly provided that the interest of the grantee of the property would not merge with the interest of the lender upon transfer or assignment, but would instead remain separate and distinct.
In December 2009 the lender filed a notice of sale and in January 2010 an affiliate of the lender purchased the property at the foreclosure sale (apparently, as is the practice, to avoid transfer taxes the affiliate was also the holder of the deed of trust). In April 2010 the affiliate sold the property. Following the sale, the holder of the mechanic’s lien brought an action to foreclose its lien, challenging the lender’s foreclosure. The mechanic’s lien holder argued that the merger doctrine applied. They argued that the senior lender’s acceptance of a deed in lieu had extinguished the senior loan and deed of trust, merging them into a single interest. The mechanic’s lien holder further argued that the senior lender was thus unable to initiate foreclosure proceedings.
The trial court agreed with the mechanic’s lien holder and held that under the merger doctrine, the mechanic’s lien was not eliminated by the sale of the property and was first and primary to all other liens on the property.
On appeal, the court held that the senior lienholder’s acceptance of a deed in lieu of foreclosure did not eliminate the senior deed of trust. The court reiterated the longstanding California law that “the senior beneficiary’s lien and title do not merge when a deed in lieu is given if there are any junior lienholders of record”.(3) The court reaffirmed that there is a presumption against merger if the grantee is a senior lienholder, as the senior lienholder’s intent to avoid merger is assumed. Regarding the actual intent of the parties, the court stated that the foregoing presumption was buttressed by the non-merger provision in the deed in lieu, which clearly indicated the specific intent of the parties. Consequently, the merger doctrine did not apply and the mechanic’s lien was eliminated by the lender’s non-judicial foreclosure.
The Decon decision reaffirms the longstanding principle that a senior lienholder’s acceptance of a grant deed in lieu of foreclosure does not merge the lien into title. Further, the case demonstrates the importance of the parties’ intent and establishes that there is no merger where the senior lienholder does not intend that the lien be merged into title. As a practical result of the case, senior lienholders can protect themselves by making their intent to avoid merger clear in the terms of the grant deed, as any such intent expressed will weigh heavily against merger.
Lenders looking for additional protection may seek to defend themselves by ensuring that the grant deed is accepted and held by an entity separate from the lienholder. Because the merger doctrine applies only where a single owner holds a greater and lesser estate in the same parcel, forming two distinct entities to hold the respective interests can serve to defeat merger. For example, a lender’s creation of a separate LLC to receive title by way of the grant deed will sufficiently result in two different and distinct owners, thereby avoiding the consequences of merger. California’s transfer tax laws are somewhat unclear as to whether transfer tax must be paid if the deed of trust is not held by the transferee in the non-judicial foreclosure. California law specifically exempts lenders that hold a deed of trust from transfer tax if they accept a deed in lieu or purchase the property in a foreclosure sale. It is unclear what happens if this is done through a subsidiary. This is why the non-merger doctrine, as applied to foreclosing lenders, is so important.
In light of Decon, title companies have little basis for refusing to insure sales by lenders after a twostep foreclosure, especially where lenders have taken the aforementioned precautionary measures, because Decon reaffirms that a senior lienholder’s interests will be protected under California law. Decon makes one thing abundantly clear: the strong and effective drafting of a grant deed is fundamental to a lender’s ability to avoid the consequences of merger and take advantage of the benefits of accepting a deed in lieu of foreclosure.
The following is for the exclusive use of attorneys. This firm does not make any representations as to the accuracy or current status of any case cited herein.
In re Foster sides with the HOA basically stating that the assessments are a liability that runs with the land. I do not know where that leaves Congress’ leaving out 1328(a) as one of the exceptions to 523(a)(16), – basically it makes no difference even though Congress specifically excluded 1328(a). (L. Karandreas briefed 9/11)
HOA Notes: Post BAPCPA: Even though the pre-petition obligations are discharged in the chapter 7, the HOA most likely (check the CC&Rs) has a statutory lien for unpaid dues. Therefore the lien is not extinguished in a Chapter 7 even if the personal liability is discharged. But, there is a 3 year statute of limitations on the lien itself. ARS 33-1807(F) establishes a 3 year statute of limitations on each particular assessment, during which time the HOA must foreclose on that particular assessment, or the assessment is removed from the lien. So to the extent there is pre-petition unpaid HOA assessments that are older than 3 years old, then they are not a lien anymore. You will only need to take care of those that are less than 3 years old. But see Section 108 (c) (tolling during chapter 7) (c) Except as provided in section 524 of this title, if applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor, or against an individual with respect to which such individual is protected under section 1201 or 1301 of this title, and such period has not expired before the date of the filing of the petition, then such period does not expire until the later of—
(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
1) Statutory – Under Arizona planned community and condominium law (Title 33), an HOA has a statutory lien for unpaid assessments on the property which is subject to the CC&R’s. The statutory lien is subordinate only to property taxes and the first mortgage or deed of trust. Arizona law specifically gives an HOA the right to foreclose its statutory lien.
2) Judicial – Any judgment lien that an HOA obtains through a lawsuit would be subject to the same requirements and restrictions that any other judicial lien has, and is potentially voidable in a bankruptcy case.
Limitation Based on Length and Amount of Delinquency
The HOA/COA cannot foreclose unless:
• the owner has been delinquent in paying the amounts secured by the lien (excluding collection fees, attorney fees, charges for late payments, and costs incurred with respect to the assessments) for a period of one year, or
• the delinquent amount is $1,200 or more, whichever occurs first (Ariz. Rev. Stat. § 33-1807(A), § 33-1256(A)).
No Foreclosure for Penalties and Fees Only
Fines, in contrast to assessments, are the penalties that an HOA or COA imposes if you violate the CC&R’s or other governing documents. For example, letting your lawn become overgrown, leaving trash cans outside, and parking in forbidden areas can result in fines and associated fees. The HOA or COA can get a lien for penalties, fines, and related fees after the entry of a judgment in a civil suit, but it cannot foreclose that lien (Ariz. Rev. Stat. § 33-1807(A), §33-1256(A)). Basically, Arizona law makes a distinction between assessments and fines, and allows foreclosure actions only based on liens for unpaid assessments and related charges, but not for fines.
In re: Gebhart In consolidated Chapter 7 bankruptcy petitions in which the value of debtors’ homes increased so that they had equity in excess of the homestead exemptions, the bankruptcy court’s order approving the appointment of a real estate broker to sell the home for the benefit of the estate is affirmed where the fact that the value of the claimed exemption plus the amount of the encumbrances on the debtor’s residence was, in each case, equal to the market value of the residence at the time of filing the petition did not remove the entire asset from the estate.
A.R.S. Section 33-964: B. Except as provided in section 33-1103, a recorded judgment shall not become a lien on any homestead property. Any person entitled to a homestead on real property as provided by law holds the homestead property free and clear of the judgment lien. The protection of A.R.S. Section 33-964(B) is good, but not necessarily all-encompassing when the homestead’s equity exceeds $150,000.00. In Judge Haines’ Rand v. United Auto Group decision 400 B.R. 749 (Bankr. Az 2008), he mentioned creditors had another possible recourse, specifically A.R.S. Section 33-1105 whereby the creditor can require an execution sale and obtain a bid in excess of the consensual liens plus the homestead amount and the allowable costs of sale under Title 12. Also see, ARS 33-1103 (A)(4). Except – To the extent that a judgment or other lien may be satisfied from the equity of the debtor exceeding the homestead exemption under section 33-1101. See also Evans vs Young, 661 P.2d 1148 (Az Court of Appeals, Div 1, 1983) (“In conclusion, we find that a judgment lien obtained pursuant to A.R.S. § 33-964 does not extend to homestead property. Given the special protection of the homestead statutes, a judgment creditor can reach excess value in the property over the amount of the homestead exemption only by first invoking the appraisal procedure set forth in A.R.S. § 33-1105.”)
Note: The recorded judgment lien survives the bankruptcy. The creditor can go after real property the debtor owned at the time of filing the bankruptcy that secures that lien. This is the reason why these liens must be avoided under 522, irrespective of the Haines decision in Rand that the lien does not attach to debtor’s homestead. 522 addresses an “interest” in debtor’s property in support of a lien avoidance. Irrespective of the fact as to whether there is equity in the property, or that the homestead exemption is not affected by a lien, a debtor’s interest is impaired, and thus avoidance is appropriate, otherwise, what is the point of 522? The point of 522 is to give the debtor a fresh start and that is not achieved by the refusal to avoid a lien which will remain in place post discharge and could eventually be foreclosed when property values increase.
It appears that the judgment lien and the right to enforce that lien survive a Chapter 7. If the judgment creditor seeks to enforce its lien prior to the expiration of that lien, perhaps the owner could file a Chapter 13 and pay the creditor the value of the excess equity. Sales to enforce Judgment liens are done by Sheriff’s sale and somewhat rare. The expense in the form of bonding the Sheriff of this procedure make it very price prohibitive.
(not bankruptcy case)
U.S. DISTRICT COURT DISMISSES NON-JUDICIAL FORECLOSURE: MERS NOT AUTHORIZED TO FORECLOSE MAY 15 2011
Hooker v. Northwest Trustee Services, Bank of America, MERS District Court District of Oregon case no. 10-3111-PA
“Considering what is commonly known about the MERS system and the secondary market in mortgage loans, plaintiffs allege sufficient facts to make clear that defendants violated the Oregon Trust Deed Act by failing to record all assignments of the trust deed.
“While I recognize that plaintiffs have failed to make any payments on the note since September 2009, that failure does not permit defendants to violate Oregon law regulating non-judicial foreclosure.
” … MERS, and its registered bank users, created much of the confusion involved in the foreclosure process. By listing a nominal beneficiary that is clearly described in the trust deed as anything but the actual beneficiary, the MERS system creates confusion as to who has to do what with the trust deed.
“The MERS system raises serious concerns regarding the appropriateness and validity of foreclosure by advertisement and sale outside of any judicial proceeding. “MERS makes it much more difficult for all parties to discover who “owns” the loan. When a borrower on the verge of default cannot find out who has the authority to modify the loan, a modification, or a short sale, even if beneficial to both the borrower and the beneficiary, cannot occur.”
Differing opinions on whether to use date of filing or date of plan confirmation: In a real estate climate where values are quickly changing, the question arises when is the value of the residence determined? The date of filing of the Chapter 13 petition, the date of confirmation, the date of the hearing on for determining the value or some other day?
§ 506(a) provides: “Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.” The various approaches all prefer their approach as meeting this standard.
For the proposition that the date of valuation is the date of hearing/confirmation see In re Crain, 243 B.R. 75 (Bankr. C.D. Cal 1999); In re Boyd, 410 B.R. 95, 100 (Bankr.N.D.Cal. Aug 04, 2009). See also In re Zook, 2010 WL 2203172 (Bankruptcy D. Ariz. 2010) [Chapter 11 proceeding in front of Judge Haines.]
For the date of filing, see In re Dean, 319 B.R. 474 (Bankr.E.D.Va.2004) In re Young, 390 B.R. 480 (Bankr.D.Me.2008),
Some Courts ruled in favor a “flexible approach” or a determination of the “totality of circumstances.” In re Aubain, 296 B.R. 624, 636 (Bankr.E.D.N.Y.2003); Wood v. LA Bank (In re Wood), 190 B.R. 788, 794-96 (Bankr.M.D.Pa.1996) [Using an eleven factor analysis].
In re Veal, (9th Cir BAP) 6/10/11 Bk. No. 09-14808 Failure to properly document transfer of interest in note or other formalities results in lack of standing to foreclose: motion for relief from say denied
In this Chapter 13 case the ostensible agent for Wells Fargo Bank could not establish that Wells Fargo had possession of the note or had other right to payment. This lengthy opinion is a thorough stand-alone discourse on the key elements required for standing to foreclose (and hence assert a claim in bankruptcy), and draws an important distinction between assignment of the mortgage and assignment of the note.
Wrote the court: “We hold that a party has standing to seek relief from the automatic stay if it has a property interest in, or is entitled to enforce or pursue remedies related to, the secured obligation that forms the basis of its motion.”
“Thus, unlike the assignment from GSF to Option One, the purported assignment from Option One to Wells Fargo does not contain language effecting an assignment of the Note. While the Note is referred to, that reference serves only to identify the Mortgage. Moreover, unlike the first assignment, the record is devoid of any endorsement of the Note from Option One to Wells Fargo. As a consequence, even had the second assignment been considered as evidence, it would not have provided any proof of the transfer of the Note to Wells Fargo. At most, it would have been proof that only the Mortgage, and all associated rights arising from it, had been assigned.”
“Here, the Veals allege that neither Wells Fargo nor AHMSI have shown they have any interest in the Note or any right to be paid by the Veals. They seek to invoke prudential standing principles which generally provide that a party without the legal right, under applicable substantive law, to enforce an obligation or seek a remedy with respect to it is not a real party in interest.”
” .. while the failure to obtain the endorsement of the payee or other holder does not prevent a person in possession of the note from being the “person entitled to enforce” the note, it does raise the stakes. Without holder status and the attendant presumption of a right to enforce, the possessor of the note must demonstrate both the fact of the delivery and the purpose of the delivery of the note to the transferee in order to qualify as the “person entitled to enforce.”
“As to Wells Fargo, it had to show it had a colorable claim to receive payment pursuant to the Note, which it could accomplish either by showing it was a “person entitled to enforce” the Note under Article 3, or by showing that it had some ownership or other property interest in the Note.”
“In particular, because it did not show that it or its agent had actual possession of the Note, Wells Fargo could not establish that it was a holder of the Note, or a “person entitled to enforce” the Note. “In addition, even if admissible, the final purported assignment of the Mortgage was insufficient under Article 9 to support a conclusion that Wells Fargo holds any interest, ownership or otherwise, in the Note. Put another way, without any evidence tending to show it was a “person entitled to enforce” the Note, or that it has an interest in the Note, Wells Fargo has shown no right to enforce the Mortgage securing the Note. Without these rights, Wells Fargo cannot make the threshold showing of a colorable claim to the Property that would give it prudential standing to seek stay relief or to qualify as a real party in interest.”
“In the context of a claim objection, both the injury-in-fact requirement of constitutional standing and the real party in interest requirement of prudential standing hinge on who holds the right to payment under the Note and hence the right to enforce the Note. “With respect to Wells Fargo’s request for relief from the automatic stay, we hold that a party has standing to seek relief from the automatic stay if it has a property interest in, or is entitled to enforce or pursue remedies related to, the secured obligation that forms the basis of its motion.”
” … the purported assignment from Option One to Wells Fargo does not contain language effecting an assignment of the Note. While the Note is referred to, that reference serves only to identify the Mortgage. Moreover, unlike the first assignment, the record is devoid of any endorsement of the Note from Option One to Wells Fargo.”
“As a consequence, even had the second assignment been considered as evidence, it would not have provided any proof of the transfer of the Note to Wells Fargo. At most, it would have been proof that only the Mortgage, and all associated rights arising from it, had been assigned.
Homeowner’s Association Lien Foreclosure, by Jonathan Olcott, Arizona attorney, By Jonathan Olcott, Olcott & Shore, PLLC. www.olcottlaw.com – as published in the Arizona Journal of Real Estate & Business
Under A.R.S. Section 33-1256 (condos) and ARS Section 33-1807 (planned communities, an association has a lien for unpaid assessments, fines, attorney fees and interest. The lien is inferior to all first mortgages and certain government liens. It is superior to mechanics liens and second mortgages. It is also not subject to the homestead exemption. On its face, it is a powerful collection tool. It is largely a myth that associations take many homes from homeowners. Because of the homeowners’ financial realities, few homeowners lose their homes to associations.
My office filed approximately 50 lien foreclosure cases in 2002. In only two cases did the association obtain the title to the unit. The financial realities discussed below explain the low percentage of completed HOA foreclosures.
Example A. Jones lives in a planned community with a retention basin and a children’s play area. Because of the minimal amenities, the assessment is only $35.00 per month. She purchased the home for $140,000.00, with $20,000.00 down, and a $120,000.00 mortgage. It has amortized to a $110,000.00 principle balance, and appreciated to $150,000.00. Her monthly payment is $1100.00. She loses her job, and is not able to pay her bills.
Example B. Smith lives in a condominium with a clubhouse, pool and sport court. His assessment is $120.00 per month. He purchased the unit for $80,000.00, with a $10,000.00 down payment, and a mortgage for $70,000.00. It has amortized to a $75,000.00 principle balance, and appreciated to $85,000.00. His monthly mortgage payment is $600.00. He loses his job, and is not able to pay his bills.
In both examples, Jones and Smith have equity in the units. They both have homestead exemptions that cover the entire amount of the equity. In prioritizing payment of their bills, both if rational would remain current on obligations that preserve the equity, and would cut back on the credit card payments, and payments on other unsecured obligations.
If their financial positions worsen, they might be forced to skip the mortgage or association payment. If finances continue to deteriorate to where Smith and Jones will lose their houses, consider whether it is more rational to keep the association payment current, or the mortgage payment current.
If Jones stops paying the mortgage, Jones will keep $1100.00 in her pocket every month. In contrast, if Jones stops paying her association assessments, she keeps only $35.00 per month in her pocket. If Smith stops paying his mortgage, he will keep $600.00 per month in his pocket every month. If Smith stops paying the association assessments, he keeps only $120.00 in his pocket every month.
If both Smith and Jones stop paying both their mortgages and their association assessments, they will lose the units to the mortgage holders. That is so, because the trustee sale process is considerably more rapid than an association judicial foreclosure lawsuit. The judicial foreclosures take several months, with a six-month right of redemption. In many association foreclosure cases, the first mortgage holder begins the trustee sale process after the association has started the judicial foreclosure process, yet the first mortgage holder completes the trustee sale process before the HOA judicial foreclosure process is completed.
It follows that it is irrational for a homeowner to lose a home to an association. Our firm has experienced several foreclosure cases against homeowners who suffered from mental illnesses. In those cases, we work aggressively with adult protective services, the public fiduciary or the children of the homeowner. We do not foreclose on homeowners who suffer from mental problems. Neither do we foreclose on homeowners who genuinely work with us to pay the debt over time. In reality, there are quite few completed association lien foreclosure cases.
The few lien foreclosure cases that are completed can make headlines. As established below, there has been a failure in the few instances where a homeowner is current on the first mortgage, yet loses the home to an HOA. In the most recent case, an association began foreclosure proceedings against a woman. She appeared to have a genuine hardship (cancer). The attorney who handled the case was not an HOA industry attorney. He represented landlords. He treated the case like an eviction. Most HOA industry attorneys would have worked with the hardship case and resolved it.
In light of the recent headlines, the legislature is addressing these issues. The most common target is the lien. One industry faction proposes to drastically reduce the power of the HOA lien. It is certain that lien emasculation legislation would have far-reaching financial effects on the entire residential real estate market. The breadth and severity of the financial effects are not certain. It is troubling that the legislature would even consider lien emasculation legislation without studying the likely financial effects on the HOA industry.
The undersigned along with NICM has drafted two bills that are currently under consideration in both houses of the legislature. One bill is short, and provides disincentives for HOAs to refuse to participate in inexpensive binding arbitration for disputes with homeowners. The other is a comprehensive regulatory bill that licenses management companies. The comprehensive bill also contains a dispute resolution process similar to the Registrar of Contractors process.
The legislature is receptive to alternate dispute resolution for HOA conflicts. The HOA industry will be better served with inexpensive dispute resolution, than with legislation that emasculates the HOA lien.
Enforceability of HOA Regulations – By Stephanie M. Wilson, STOOPS, DENIOUS & WILSON P.L.C. as published in the Arizona Journal of Real Estate & Business, December 2003.
Homeowner Associations enforce numerous architectural restrictions governing the construction and appearance of homeowners’ properties including satellite dishes, energy devices, basketball hoops, children’s play equipment and landscaping, to name a few. Arizona statutes have provided little help in interpreting whether a Homeowner’s Association’s guidelines are enforceable. However, a recent Court of Appeals Division One case, Garden Lakes Community Association v. Madigan, 393 Ariz. Adv. Rep. (2003), sheds some light on this issue. The court held that the Homeowner’s Association’s architectural restrictions governing the construction and appearance of solar energy devices on homes within the subdivision was unenforceable under A.R.S. § 33-439(A) because the restrictions “effectively prohibited” the homeowners from installing or using solar energy devices.
William and Joan Madigan and Henry and LaVonne Speak owned homes in the Garden Lakes subdivision. The Madigans’ and the Speaks’ properties were governed by the Declaration of Covenants, Conditions, Restrictions and Easements for Garden Lakes (“CC&Rs”). The Association established an architectural review committee which issued guidelines regarding the construction and appearance of solar panels and equipment as follows:
“1. All solar energy devices Visible from Neighboring Property or public view must be approved by the Architectural Review Committee prior to installation.
2. Panels must be an integrated part of the roof design and mounted directly to the roof plane. Solar units must not break the roof ridgeline, must not be visible from public view and must be screened from neighboring property in a manner approved by the Board of Directors or its designee(s). Roof mounted hot water storage systems must not be Visible from Neighboring Property. Tracker-type systems will be allowed on when not Visible from Neighboring Property.
3. The criteria for screening set forth in Section III(M) “Machinery and Equipment”, shall apply to solar panels and equipment preserved.”
The Madigans and Speaks installed solar energy devices on the roofs of their respective homes without the Association’s or the architectural committee’s approval. The solar energy devices included solar panels to collect and transfer heat to their swimming pools. The Association sued the Madigans and the Speaks in separate actions for breach of the CC&Rs for failing to comply with the guidelines set forth in the CC&Rs and sought permanent injunctions compelling the removal of the energy devices, monetary penalties and attorneys’ fees and costs. The Madigans and Speaks defended on the basis of A.R.S. § 33-439(A) arguing that the CC&Rs were void and unenforceable. A.R.S. § 33-439(A) states:
“Any covenant, restriction or condition contained in any deed, contract, security agreement or other instrument affecting the transfer or sale of, or any interest in, real property which effectively prohibits the installation or use of a solar energy device as defined in A.R.S. §44-1761 is void and unenforceable.” (Emphasis added.)
During the trial, the court granted judgment as a matter of law in favor of the Madigans. The Speaks case went to a jury and after post-trial briefing, the court entered judgment in favor of the Speaks.
Burden of Proof. The Association argued that the Speaks had the burden of proving that the CC&Rs “inevitably precluded” the installation of their solar heating unit and that they failed to meet that burden of proof. The Speaks, relying on A.R.S. § 33-439, argued that the evidence showed that the Association’s requirements for installation of the solar heating device either could not be met or added so much cost to the installation that any homeowner would forego solar energy and opt instead for a gas or electric pool heater.
The Court of Appeals ruled that the burden of proof was on the homeowners to prove that the CC&Rs and guidelines effectively prohibited them from installing and using a solar energy device, but also held that the homeowners had met their burden.
Statute Interpretation. The Court of Appeals stated that their goal in interpreting statutes is to fulfill the intent and purpose of the legislature. With respect to A.R.S. § 33-439, the Court of Appeals stated that the legislative history does not reveal the precise meaning and application of the crucial phrase “effectively prohibits.” The Court of Appeals went on to state that while it might be desirable to have a bright line rule or formula to determine precisely whether an Association’s restriction effectively prohibits installation or use of solar energy devices, the legislature has not chosen to provide guidance beyond the phrase “effectively prohibits” and has instead adopted a practical, flexible standard that permits the many variations and restrictions and effects to be considered on a case-by-case basis.
The Court of Appeals rejected the Association’s argument that “effectively prohibits” must be interpreted as meaning that any restrictions on solar energy devices must “inevitably preclude” them before the restrictions should be deemed unenforceable. The Court of Appeals stated instead that to determine whether a deed restriction effectively prohibits the installation or use of solar energy devices, that there were numerous factors that were relevant which the court cited including, but not limited to: the content and language of the restrictions or guidelines; the conduct of the Association in interpreting and applying the restrictions, whether the architectural requirements are too restrictive to allow solar energy devices as a practical matter; whether feasible alternatives are available and whether any alternative design would be comparable in cost and performance. The Court stated that it was their intention to provide general guidance to parties and trial courts regarding restrictions effecting solar energy devices.
Alternative Designs. The Court of Appeals discussed in detail the testimony at trial that focused on two alternative designs that the Association argued were feasible and would comply with the guidelines.
The first alternative was a patio cover large enough to hold the Speaks’ solar panels. The Speaks’ expert testified that the size would be extensive; cover part of the pool and the cost would be nearly $5,000.00. There was also evidence introduced that the City of Avondale would not allow patios to encroach into pool set back areas.
The other solution suggested by the Association was an aesthetic screen. The court noted that the screen would cause some shading on the solar panels part of the year thereby decreasing solar efficiency.
The Association argued that the trial court should not have considered the increased cost to the Speaks for these alternative solutions. According to the Association, extra installation requirements might be deemed to be within the reach of a wealthy homeowner while the same requirement might be deemed to effectively prohibit a less affluent homeowner from installing the solar devices. The Court of Appeals held that the costs necessary to comply with the aesthetic and architectural restrictions is not dispositive but is a factor to be considered. The Court held that the focus should be on the motivation of the average homeowner within the Association to install a solar energy device given the financial burden and potential loss of solar efficiency imposed by the restrictions. To that end, there was testimony presented that most people would not buy a solar system that cost more than $4,500.00. The Court of Appeals held that there was evidence sufficient to support the finding that the alternatives suggested by the Association were not viable options.
Comparing Other Association Restriction Cases. The Association also argued that the Court of Appeals should follow the results in other Association restriction cases regarding enforcement of restrictions on animals and stored vehicles where the courts have upheld the Association’s restrictions as reasonable and enforceable. The Court of Appeals noted that those cases were readily distinguishable because no state law established a public policy preference for allowing homeowners to keep animals or store old vehicles and contrasted that with the case here where there is a specific statute, A.R.S. § 33-439(A), that nullifies the enforcement of restrictions that effectively prohibit the installation and use of solar energy devices. The Court of Appeals went on the state that A.R.S. § 33-439(A) does not eliminate the power of an Association to impose aesthetic and architectural restrictions on the installation and use of solar energy devices, but solar energy devices may not be explicitly prohibited or “effectively prohibited” by the Association’s CC&Rs or the Association’s interpretation and application of their restrictions and guidelines set forth in their CC&Rs.
In sum, the court held that in this case, the Association’s restrictions in effect would prohibit the installation of the solar energy devices in violation of A.R.S. § 33-439(A) and therefore, the restrictions were unenforceable.
What does this mean for an association trying to restrict solar energy devices? Associations needs to remember that Arizona law has prescribed limitations on the restrictions an Association can enforce with respect to solar energy devices when establishing, interpreting and applying their guidelines. As this case demonstrates, while an Association can set guidelines, these guidelines have to be reasonable for a homeowner and not diminish their ability to use their solar energy device. This includes taking into account the costs that the homeowner would have to expend for any alternative suggested by the Association.
This case provides a guideline that courts will look to regarding the validity of an Associations’ restrictions. Implicit in the Court of Appeals’ decision is that regulations and restrictions by an Association regarding matters that are not addressed in statutes, such as pets, parking, vehicles and similar restrictions would not meet such as stringent test from the court.
Deficiency Actions, by Michael T. Denious, Arizona attorney
In an earlier article we discussed the potential effect of the “anti-deficiency” statutes, which apply under certain circumstances to loans secured by residential dwellings consisting of a single or dual-family structure, on a lot consisting of 2.5 acres or less.
In the context of commercial properties, unimproved land, or residential properties with three units or more, those anti-deficiency statutes will not be of any help. In such cases, a borrower whose property has been foreclosed must be prepared for the deficiency action, in which the lender will seek to collect the remaining amounts owed, over and above what was recovered via the trustee’s sale or sheriff’s sale. In many cases, loans involving commercial properties or vacant land may include guarantors along with borrowers, all of whom will be liable for the deficiency.
Typically, the method of foreclosure will be via a trustee’s sale, which does not require the filing of a lawsuit. The deficiency action is a lawsuit, however, and must be filed by the lender / beneficiary not later than 90 days following the trustee’s sale. Where more than one trustee’s sale is conducted (as where more than one deed of trust exists as security for the loan), the 90 days runs from the date of the last sale. If this time period passes without the deficiency action being filed, under Arizona statute the proceeds obtained from the trustee’s sale, regardless of amount, are deemed to be “in full satisfaction of the obligation and no right to recover a deficiency in any action shall exist.” A.R.S. § 33-814(D). There are no exceptions to this deadline.
Assuming a deficiency action is brought within the 90-day period following the trustee’s sale, what does the lender have the right to recover? The difference between the amount recovered at the trustee’s sale and the balance of the loan? No. In 1990, following the last major real estate recession in Arizona, our state legislature imposed additional protections for the benefit of debtors from excessive deficiency judgments resulting from the forced sales of encumbered properties. See A.R.S. sections 12-1566, 33-725, 33-727 and 33-814(A); see generally Wells Fargo Credit Corp. v. Tolliver, 183 Ariz. 343, 345, 903 P.2d 1101, 1103 (App. 1995). One of these protections is the provision under A.R.S. 33-814(A), which governs a deficiency action following a trustee’s sale. Under that statute, the deficiency claim is limited to the difference between the total amount owed, less the greater of (a) the sale price of the trustee’s sale, OR (b) the fair market value of the property on the date of the trustee’s sale. Id.; see also A.R.S. § 12-1566(C).
As anyone familiar with the trustee’s sale process will agree, a trustee’s sale is not an example of a commercially reasonable sale. It is not advertised on the MLS; it does not involve fliers, open-houses, or even a showing to potential buyers. It involves no disclosure to potential buyers regarding the physical or environmental condition of the property (or the status of leases or income in the case of commercial properties). It also requires an up-front deposit of $10,000 by any bidder, along with the requirement that the prevailing bid price be paid in full by 5:00 p.m. on the next business day. Therefore, the sale price of most any trustee’s sale will be (and understandably should be) substantially below the fair market value of the property.
The provisions of A.R.S. § 33-814(A), reflecting these concerns, gives specific guidance on its definition of fair market value:
“Fair market value” shall mean the most probable price, as of the date of the execution, sale, in cash, or in terms equivalent to cash, or in other precisely revealed terms, after deduction of prior liens and encumbrances with interest to the date of sale, for which the real property or interest therein would sell after reasonable exposure in the market under conditions requisite to fair sale, with the buyer and seller each acting prudently, knowledgeably and for self-interest, and assuming that neither is under duress.
Id. (underlines added). Therefore, if the balance of a loan on a commercial property is $1,000,000.00, and the fair market value is $800,000.00, the borrower or guarantor can limit the amount of the deficiency to $200,000.00; even if the property sold at the trustee’s sale for only $400,000.00 (which otherwise would have resulted in a deficiency claim of $600,000.00).
Assuming a borrower (or guarantor, who also has the right to assert this provision) believes the fair market value of the property was higher than the price it sold for, he or she should, and has the right to, apply to the court for a determination of the fair market value of the property as of the sale date. Where the property was sold at a trustee’s sale, the borrower or guarantor may submit the application in the deficiency action, at which point the court is required to schedule a “priority hearing” to determine the fair market value, and hear whatever evidence the court may allow. The borrower or guarantor should be prepared to call a qualified appraiser to appraise the property and testify at the hearing, along with (subject to the court’s allowance) a real estate agent familiar with the relevant market.
Of course, under present market conditions the value of the property in question may be less than the total loan amount; nevertheless, it may also be substantially higher than the sale price at the trustee’s sale, and a borrower or guarantor should take every opportunity to mitigate, and potentially minimize, the amount of the deficiency the lender might otherwise be able to pursue. In addition, in cases where it appears that the fair market value of the property may be substantially higher than the price a trustee’s sale might obtain, a borrower or guarantor may be able to use this information in advance of a foreclosure to better negotiate a loan workout or settlement, such as a short sale or deed in lieu of foreclosure.
 This article focuses on deficiency actions following trustee’s sales – however, deficiency actions may also be brought following a judicial foreclosure, which are governed by A.R.S. § 12-1566, and are subject to the same “fair market value” standard as discussed herein. In cases involving a judicial foreclosure (which is a lawsuit seeking judgment on the loan and following such judgment a sale of the property), the borrower must make the application for determination of the fair market value of the property within 30 days following the sale of the property. A.R.S. § 12-1566(C).