Banks and investors should review their legal documents and procedures when canceling trustee sales after the Arizona Court of Appeals issued a ruling this week regarding Arizona’s statute of limitations on secured financing.
In Miller Designs v. US Bank, et al., 1 CA-CV 16-0723 (2/13/2018), a bank loaned two-million-dollars to a borrower to purchase a Paradise Valley property. The loan was secured by a deed of trust on the property.
In 2009, after the borrower defaulted, the bank accelerated the loan and commenced foreclosure proceedings by recording a notice of trustee’s sale. However, the bank never foreclosed and in 2012, it recorded a cancellation of the notice of trustee’s sale.
In 2013, the borrower failed to pay HOA assessments and the HOA obtained a judgment against the borrower for the unpaid HOA assessments. The HOA judgment was a junior lien against the property subject to the bank deed of trust. Miller, an investor, purchased the judgment from the HOA in 2015 and conducted a sheriff’s sale on the judgment, which resulted in Miller purchasing the property for only $41,000.
Subsequently, the bank attempted to again foreclose on its deed of trust after the borrower defaulted a second time. This time, Miller sued the bank for an order stopping the foreclosure and argued that bank could no longer enforce repayment of the loan under Arizona’s six-year statute of limitations because six years had passed from the time that the bank accelerated the loan. The trial court agreed and granted judgment in favor of Miller and issued an order restraining the bank from enforcing repayment or foreclosing – a major windfall to Miller.
The bank appealed the trial court judgment and the Court of Appeals reversed the trial court decision for essentially one technical reason: When the bank recorded its notice cancelling the trustee’s sale, it also included simple language stating that the bank was revoking its acceleration of the loan. The Court of Appeals held that this kind of language puts the parties back into the positions they were before acceleration and resets the six-year statute of limitations from the date of the cancellation notice. This means that Miller cannot stop the bank’s collection efforts and will either have to pay the amounts due under the loan to the bank or the bank can proceed with its foreclosure sale, which would extinguish the ownership interest Miller obtained from his foreclosure of the HOA judgment. While Miller can appeal the decision to the Arizona Supreme Court, it is not likely that the Arizona Court of Appeal’s decision will be reversed.
Therefore, banks and investors that have issued financing secured by a deed of trust should exercise caution when cancelling a trustee’s sale. They should be certain that they are aware of the time that has elapsed from the time that they have accelerated repayment of a loan. More importantly, whenever it they cancel a trustee’s sale, the notice should include language that expressly revokes acceleration. Failing to do so could bar collection efforts if the borrower defaults in the future.