The Arizona Supreme Court has resolved a recurring question: does the trustee have to “show the promissory note” in order to be able to foreclose by non-judicial trustee sale. No, said the Supreme Court in its May 18, 2012 decision in Hogan v. Washington Mutual Bank.
The case involved two properties purchased by the borrower, John Hogan. When Hogan received loans from Long Beach Mortgage Company (“Long Beach”), the properties were encumbered with deeds of trust. Hogan defaulted on the loans, so the trustee under the deeds of trust recorded notices of trustee sales, in which it named Washington Mutual Bank and Deutsche Bank as the beneficiaries.
Hogan sued to stop the trustee sales, claiming that the Banks couldn’t foreclose unless they “showed the promissory notes,” unless they could prove that they were entitled to collect the amounts owed on the notes. The Superior Court dismissed Hogan’s lawsuit, thus allowing the trustee sales to proceed. The Court of Appeals agreed. The Arizona Supreme Court took up the issue because it involved a recurring question of statewide importance. After reviewing and evaluating the deed of trust statutes and confirming that the deed of trust is separate from the promissory note, the Supreme Court found for the Banks. There is no requirement for the trustee to “show the note” in order to foreclose by non-judicial trustee sale.
Deeds of trust and trustee sales are strictly governed by statute. A.R.S. § 33-801 to 821. According to the Supreme Court,
When parties execute a deed of trust and the debtor thereafter defaults, A.R.S. § 33-807 empowers the trustee to sell the real property securing the underlying note through a non-judicial sale. Hogan contends that before a trustee may exercise that power of sale, the beneficiary must show possession of, or otherwise document its right to enforce, the underlying note. Nothing in our statutes, however, requires this showing. Section 33-809(C) requires only that, after recording notice of the trustee’s sale under § 33-808, the trustee must send the trustor notice of the default, signed by the beneficiary or his agent, setting forth the unpaid principal balance.
The Court agreed that the deed of trust and promissory note go together, such that only the lender entitled to enforce the note may foreclose. But, there is nothing in the deed of trust statutes requiring the lender to show the note in order to foreclose. And Hogan did not allege or prove that the Banks in this case did not have the right to enforce the notes. He just claimed that they had to actually show the promissory notes and prove their right to enforce the loans before foreclosing. The Court rejected that claim based on the absence of any such requirement in the statutes.
That is not to say that borrowers do not have rights if a lender forecloses without having a right to do so or a right to enforce the note. Indeed, the Court noted that the trustee “owes the trustor (borrower) a fiduciary duty, and may be held liable for conducting a trustee’s sale when the trustor is not in default.”
Trustee sales are designed as an efficient and quick method of foreclosure. Requiring proof of the right to enforce the note would frustrate those objectives, and impose a requirement not found in the deed of trust statutes. Thus, the Court affirmed the dismissal of Hogan’s lawsuit to stop the trustee sales.