Judicial Foreclosure Creates Conflict for Redemption Rights and Fair Market Valuation

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[author: Valerie L. Marciano, Esq.]

Arizona borrowers are not accustomed to judicial foreclosures, as the vast majority of foreclosures in Arizona are non-judicial.  Typically referred to as a "trustee sale", borrowers who are either unable, or unwilling, to repay their mortgages see their real properties auctioned off at the courthouse steps by an appointed trustee; those properties either revert back to the lender or are purchased by a third party at the courthouse auction sale.  Once the trustee sale of the property is held, the sale is final, leaving no right to regain the property.  In Arizona, trustee sales are the preferred method for recovering on a lender's collateral.  It is the short timeframe involved in the trustee sale process, i.e., 90 days, and the finality of the trustee sale that appeal to the lender, as the borrower has no "redemption rights" after the trustee sale.

Conversely, a judicial mortgage foreclosure has a built-in mechanism that allows the borrower time to "redeem" the property after the foreclosure.  The redemption period is typically six months after the sheriff's sale of the property is conducted.  If a lender chooses to foreclose on the property judicially, the borrower has an extended period within which to find a way to pay to the lender the amount bid in at the sheriff's sale - and keep the property.  It is important to note, that even with redemption of the property, the lender may still have a deficiency judgment against the borrower.  Where a trustee sale only requires 90 days to complete, and provides no redemption rights to the borrower, it is understandable why the lender's choice of recovery method typically is a trustee sale.

However, there are both legal and strategic reasons why a lender might choose judicial foreclosure over a trustee sale.  For example, the lender may want to "accelerate" the full amount of the loan, rather than just receive the payments missed.  The lender may desire to recover both the residence, if that is underlying collateral for the loan, and obtain a "deficiency" judgment against the homeowner to the extent Arizona law allows it.  No matter the reason, when the lender chooses judicial foreclosure, two competing rights arise for the borrower.

The first and exclusive right afforded to the borrower by judicial foreclosure is the right of "redemption".  This is the borrower's right to buy back the property from the lender within six months following the sheriff's sale of the property for the amount bid at the sheriff's sale.  In a good real estate market, the six month redemption period may give the borrower adequate time to either raise the bid amount or to find someone who wants to buy the redemption rights.  For example, assuming that a judicial foreclosure is commenced rather than a trustee sale, if the lender is owed $400,000 and the property is sold for that amount at the sheriff's sale, but the fair market value of the property is actually $600,000, the borrower may be able to find someone who wants to buy the redemption rights.  The buyer of the redemption rights would pay the amount bid in for the property, $400,000, and own a property that is worth $600,000.

There is some similarity between the judicial foreclosure, and the rights granted with the trustee sale.  Each process allows the borrower, and guarantor if applicable, the right to a "valuation hearing" to establish the amount of the deficiency that the lender can recover from the borrower/guarantor if the value of the collateral does not pay the loan in full.  Using the example above, if the loan is $400,000 and the court determines that the property is worth $600,000 in a valuation hearing, no deficiency amount is owed.  The lender will be prohibited from recovering against other assets of the borrower.  On the other hand, if the property is worth $300,000 and the loan is $400,000, then the lender may be entitled to a $100,000 deficiency judgment, exposing the borrower to the loss of other assets to pay the judgment.

The right to redeem and the right to a valuation hearing, in the context of a judicial foreclosure, are competing rights and are mutually exclusive.  If the borrower requests a valuation hearing in a judicial foreclosure proceeding, which must be invoked within a set time frame, then the borrower is no longer entitled to "redeem" the property.  Therefore, the borrower must be thoughtful in selecting whether to redeem the property or to seek valuation of the real property.  What makes this more complicated is when two people, such as a husband and wife, are both borrowers under the loan.  Many would assume that spouses would have the same goal and make the determination together.  However, that may depend upon the particular set of circumstances.

For instance, in the case of Gold v. Helvetica Servicing, Inc., 631 Ariz.Adv.Rep. 23 (Div. 1 App. April 3, 2012), a husband and joint borrower under the loan and in the process of obtaining a divorce from his wife, solely exercised the right to the valuation determination.  Once the fair market valuation determination was requested by the husband, the redemption right of the wife, as joint borrower, ceased to exist. What is clear from Gold is that the particular form of protection - the right of redemption or the right to a fair market valuation - can be determined by any one borrower acting alone.  Thus, under Arizona law, one borrower, also known as a judgment debtor, can exercise the right to apply for a fair market value determination and thereby extinguish the right to redeem that another borrower might have exercised.

The case of Gold is instructive to both the lender and the borrower.  The lender will want to consider the benefits of foreclosing on property by way of judicial foreclosure to enhance any recovery available.  The borrower, on the other hand, will want to evaluate the benefits and risks of the competing and mutually exclusive right of redemption and the right to a fair market valuation if the lender selects the judicial foreclosure method to recover the real property.

About the author: Valerie L. Marciano is an attorney at the Phoenix law firm of Jaburg Wilk. She assists clients with real estate, foreclosure , bankruptcy and litigation issues. Val frequently writes on Arizona's foreclosure and anti-deficiency statutes and is a board member of AZCREW - Arizona's premier commercial real estate professional association for women. Val can be reached at 602.248.1025 or vlm@jaburgwilk.com .


This article is not intended to provide legal advice and only relates to Arizona law. It does not consider the scope of laws in states other than Arizona. Always consult an attorney for legal advice for your particular situation.