Arizona’s non-judicial foreclosure statutes do not require the beneficiary to prove its authority or “show the note” before a trustee may commence a non-judicial foreclosure, the Arizona Supreme Court has ruled.
The May 18, 2012, decision in Hogan v. Washington Mutual Bank, N.A. et. al should have a significant impact on pending and future mortgage foreclosure-related litigation in Arizona, as it flatly rejects a legal theory frequently advanced by borrowers in an attempt to avoid foreclosure.
Sitting en banc, the court was asked to decide whether Arizona law permits a trustee to foreclose on a deed of trust without the beneficiary first having to show ownership of the note that the deed of trust secures. This legal theory, often referred to as the “show me the note” theory, is commonly employed by delinquent borrowers against both trustees and beneficiaries in an attempt to prevent trustee’s sales from moving forward.
The Hogan case involved two parcels of property, each subject to a 2004 deed of trust. When the plaintiff went into default under those deeds of trust, separate notices of trustees’ sales were recorded, with Washington Mutual and Deutsche Bank named as the beneficiaries. Neither beneficiary was an original lender.
The plaintiff filed suit seeking to enjoin the trustees’ sales unless the beneficiaries proved that they were entitled to collect on their respective notes. Both the trial court and the Arizona Court of Appeals rejected the plaintiff’s claims, holding that Arizona’s non-judicial foreclosure statute does not required presentation of the original note before commencing foreclosure proceedings.
In a case of first impression, the Arizona Supreme Court also rejected the plaintiff’s “show me the note” claim, holding that nothing in Arizona’s non-judicial foreclosure statutes mandates that a beneficiary of the deed of trust must show possession of, or otherwise document its right to enforce, the underlying note prior to the trustee’s exercise of the power of sale.
Instead, the court held that the “only proof of authority the trustee’s sale statutes require is a statement indicating the basis for the trustee’s authority.” The court noted that “[r]equiring the beneficiary to prove ownership of a note to defaulting trustors before instituting non-judicial foreclosure proceedings might again make the mortgage foreclosure process ... time-consuming and expensive, and re-inject litigation, with its attendant cost and delay, into the process.”
The court also rejected the plaintiff’s theory of liability under Arizona’s Uniform Commercial Code. The plaintiff argued that before a trustee’s sale can go forward, the trustee under the deed of trust is required to demonstrate its authority to collect on the underlying note. The court held that the theory failed because the trustee is not attempting to collect on the underlying note and Arizona’s Uniform Commercial Code does not govern liens on real property.
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