WAIVING SECURITY & SUING ON THE PROMISSORY NOTE – ARIZONA SPECIFIC
August 29, 2022
By Diane Drain Attorney & Retired Law Professor
Resolution Trust Corp. v. Segel, 173 Ariz. 42, 839 P.2d 462 (App.1992), we examined the impact of the Baker holding on non-purchase-money loans that were secured by second-position deeds of trust on residential property of less than two and one-half acres with a one- or two-family residence. In Segel, the court held that because the lender did not institute trustee’s sale proceedings and the deeds of trust secured non-purchase-money obligations, the lender was entitled to waive its security and sue directly on the notes under A.R.S. section 33-722. Id. at 44-45, 839 P.2d at 464-65.
Suit on the note: Following a judicial foreclosure by a senior lienholder, a junior lienholder can sue on Note (unless property is anti-deficiency in character) A.R.S. 33-722 Wells Fargo Credit v Tolliver, 183 Ariz. 343, 903 P.2d 101 (App. 1995). Lender may waive its security in the real property and sue on the note. Darnell v. Denton, 137 Ariz. 204, 669 P.2d 81 (App. 1990). Also, foreclosure of a senior lien extinguishes the junior lien, therefore no need to “release” the junior lien. Wells Fargo, supra. Lender may not sue on the Note so long as the property fits within the anti-deficiency statutes (dwelling, 2 ½ acres or less, one or two family dwelling – ARS Section 33-814) Baker v. Gardner, 160 Ariz. At 105, 770 P.2d at 773 (1988) (first and second purchase money debts). First lender noticed trustee’s sale and second (Bakers) elected to sue on Promissory Note). Clarification in a supplemental opinion that the court did NOT mean to prohibit the non-PMSI creditor from waiving the security and suing on the note.
Suit on Promissory Note or “Show me the Note”: A lender may waive their lien on real property and sue on the Promissory Note. That waiver is an “abandonment and release” of the lien and must be “evidenced by a recorded release of the lien”. ARS Section12-1566(F) All limitations of Baker v Gardner and Mid Kansas apply. But see: Smith v. Mangels, 240 P.2d 168 (1985) and Deming v. Walraven, 651 P.2d 1203 (App. 1982) (Mortgage not waived by going to judgment on the Note)
Lender accepts less than what is owed on residential property, releases deed of trust, then sues borrower for deficiency. TANQUE VERDE ANESTHESIOLOGISTS, L.T.D. PROFIT SHARING PLAN, 836 P.2d 1021, 172 Ariz. 311 (App. 1992) “Although no trustee’s sale occurred in this case, we agree with Proffer (borrower) that, based on the holdings of Baker, supra, and Mid Kansas, supra, and absent evidence of an agreement to the contrary (emphasis added), when Tanque Verde (lender) signed the deed of release and reconveyance, it thereby waived its right to seek a deficiency judgment.” ((The assuming lender (Tanque Verde) signed the deed of release and included in the release language that the borrower is not released on the underlying debt. The borrower (Proffer) did not sign the deed of release. Nor, was there any other signed agreement where the borrower acknowledged that the debt was not released. Correct conclusion. This outcome will be different for short sales because there is almost always a new contract which details the agreement between the seller and the lender. That short sale contract is signed by the seller/borrower, therefore will be binding on the seller/borrower.
By Diane Drain|Published On: August 29th, 2022|Last Updated: August 29th, 2022|
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