For lenders in many jurisdictions around the United States, the risk of post-sale litigation expense for valuation determinations can be daunting. However, in a recent unpublished opinion, the Arizona Court of Appeals concluded that once a judgment is entered, the Arizona statute providing a right to a post-sale valuation hearing does not apply if the sale occurs after judgment is entered.

In states like Arizona, there are statutory protections for obligors that require a court to conduct a valuation hearing to determine the lender’s enforceable deficiency. Recently, Bryan Cave represented a lender in attempting to recover on a defaulted loan. In that case, the borrower/guarantors were convinced that the Arizona real property securing the loan was far more valuable than what the lender could recover at a non-judicial foreclosure sale (i.e., in Arizona, a trustee’s sale).

In our case, the lender commenced a trustee’s sale simultaneously with pursuing an action in state court on the note and guaranty (n.b., because some states limit enforcement rights, you should coordinate your enforcement strategy with an attorney knowledgeable with local law). To accommodate the borrower/guarantors’ interest in reducing deficiency liability, the lender proposed—and the borrower/guarantors agreed—that the borrower/guarantors could market and sell the property for a discrete timeframe, subject to lender approval for any proposed sale that nets less than the outstanding loan balance; in exchange, the borrower/guarantors stipulated to the entry of judgment in the amount of the outstanding loan balance, with interest and attorneys’ fees, in the event no sale closed by the stated deadline. The proposed judgment contained express language that the lender’s recovery on the judgment would be reduced by the price paid for the sale of the property, either at a private sale or at a trustee’s sale.

The borrower/guarantors could not sell the property within the specified time frame; the lender filed, and the court entered, the stipulated judgment. Within months, the property was foreclosed at a trustee’s sale, leaving a deficiency of approximately one third of the outstanding loan balance. Approximately 90 days later, the borrower/guarantors petitioned the court for a fair value hearing. When the request was denied, the borrower/guarantors appealed.

The Arizona Court of Appeals affirmed the lower court’s ruling. The borrowers/guarantors argued that Arizona law does not limit the time frame after the foreclosure sale within which a guarantor can seek a fair value hearing, citing A.R.S. § 33-814, which establishes the circumstances under which the borrower may request such a hearing. However, the Arizona Court of Appeals concluded that once the judgment was entered, A.R.S. § 33-814 no longer applied because that statute applies only to the pursuit of a deficiency judgment “after the date of sale of trust property under a trust deed.” See A.R.S. § 33-814. While an entirely different statutory scheme limits post-judgment valuation hearing rights in judicial foreclosure cases to 30 days after the sale, the Arizona Court of Appeals did not consider whether this statute applied to a post-judgment non-judicial trustee’s sale because the fair value request was made more than 30 days after the house was sold.

The borrower/guarantors have sought further review from the Arizona Supreme Court, but unless and until a different ruling is rendered, Arizona lenders should weigh the benefits of a limited valuation hearing request period when considering their loan enforcement options.