When May an Arizona Mortgage Lender Pursue a Deficiency Judgment?

By November 3, 2020 Real Estate
When May an Arizona Mortgage Lender Pursue a Deficiency Judgment?

When a borrower defaults on a promissory note, Arizona lenders face the question of whether it would be more beneficial to foreclose on the property, accept a deed in lieu of foreclosure, or pursue a deficiency judgment. When making a choice, a lender must determine if there is sufficient collateral to cover the debt. If there is not, a lender will need to determine whether the debt is collectible, either through a deficiency judgment or suing on the note.

Many states, including Arizona, have statutes governing mortgages that prohibit separate actions that are pursued simultaneously. Some, however, misinterpret the rule to mean that the options are mutually exclusive, and the lender must choose between suing on the debt and obtaining a judgment or foreclosing on the mortgage.

Addressing this question directly, the Arizona Supreme Court held in Smith v. Mangels that it is “obvious” that “a mortgagee-creditor has two rights, first, to have the debt paid, and second, a separate and independent right, to have the debt paid out of the proceeds of the sale of the mortgaged property.”

One qualification to that rule is seen in Arizona’s election of remedies statute within the general law that applies to mortgages (not deeds of trusts). Under this statute, a lender can foreclose and seek a deficiency judgment or can sue on the note and then execute on the resultant judgment but cannot bring both actions simultaneously.

The law is different for deeds of trust where a lender that holds a deed of trust elects to judicially foreclose that deed of trust. In this case, lenders need not choose between conducting a trustee’s sale and suing on the note. Otherwise, Arizona does not have an election of remedies requirement for choosing between foreclosing on a property or suing on the debt with respect to deeds of trust.

In addition, most deeds of trust provide that the borrower expressly waives any argument that the election of remedies rule applies. And unlike Arizona’s anti-deficiency statute regarding mortgages, which expressly provides it cannot be waived, the election of remedies statute and the anti-deficiency statute regarding deeds of trust contain no such protections.

Therefore, when a debtor defaults on a promissory note secured by a deed of trust, the lender can sue and obtain a judgment without waiving its deed of trust against the real property. This is helpful for secured creditors faced with a non-performing loan that they may want or need to sue to obtain a judgment for now, but are not yet ready to foreclose on the collateral.

If you are a lender or a borrower facing issues involving judicial or non-judicial foreclosure, deficiency judgments, home improvement, or construction loans, the attorneys at Provident Law® are here to help. We are experienced in all aspects of financing and real estate transactions, from purchase contracts, mortgages, deeds of trust, to non-judicial and judicial foreclosures. Contact us for more details.