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In Arizona, many homeowners who lose their home to foreclosure are not required to pay their lender for any deficiency between what they owed on the home and the price that the home is sold for at a trustee’s sale. This protection from liability is found in Arizona’s “anti-deficiency” laws.

However, Arizona’s anti-deficiency statutes do not protect all property owners from liability for a deficiency in the event of a foreclosure. In these instances, in order to determine the correct amount of the deficiency, the fair market value of the property must first be established. In MidFirst Bank v. Chase, 1 CA-CV 11-0013, the Arizona Court of Appeals found that a bank’s bid price for a property sold in a Trustee Sale is not evidence of the property’s fair market value for purposes of calculating a deficiency judgment.

In MidFirst Bank v. Chase, the lender, MidFirst Bank (“MidFirst”) loaned $1,620,000 to a borrower. The loan was secured by a deed of trust recorded against real property, and was guaranteed by two individuals, Mike and Linda Chase (the “Chases”). The Chases defaulted and MidFirst purchased the property at the trustee’s sale for a credit bid of $486,000.

MidFirst then moved for summary judgment against the Chases seeking a deficiency judgment of $1,325,044.09. The Chases argued that there was no deficiency because the “value of the Property far exceeds anything that could be owed on the Loan.” The trial court granted MidFirst’s motion for summary judgment. The trial court reasoned that, “No reasonable juror could find for [the Chases] on the issue of fair market value based upon the record presented.” The Chases appealed and the Court of Appeals reversed the trial court’s decision.

The Court of Appeals examined the language in A.R.S. §33-814(A), which is the statute that governs deficiency judgments. The statute reads:

“The deficiency judgment shall be for an amount equal to the sum of the total amount owed the beneficiary as of the date of the sale, as determined by the court less the fair market value of the trust property on the date of the sale as determined by the court or the sale price at the trustee’s sale, whichever is higher.”

The court explained that the primary purpose of the statute is to” prohibit a creditor from seeking a windfall by buying property at a trustee’s sale for less than fair market value.” “For this reason, the statute requires a determination by the court of the fair market value before a deficiency judgment may be awarded.”

The Court of Appeals found that MidFirst did not present evidence that the sale price equaled the fair market value, but merely asserted that it had “put forth unchallenged evidence as to what we’re owed based on the credit bid.” For this reason, the Court of Appeals reversed the trial court’s award of summary judgment.

What this means is that if you are sued for a deficiency on a home that has been foreclosed upon, you will need to present evidence of the fair market value of the home – and the bid price is not necessarily fair market value.

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