The Arizona Supreme Court has recently weighed in on the much-ballyhooed "show the note" defense that many homeowners have mistakenly been led to believe will help them avoid the consequences of not paying their mortgage. In its May 18, 2012 decision in Hogan v. Washington Mutual Bank, the Supreme Court affirmed prior Superior Court and Court of Appeals decisions dismissing John Hogan's lawsuit seeking to stop trustees sales on two properties he owned.
Hogan had borrowed money to purchase the two properties, and the properties were secured by deeds of trust allowing the banks to foreclose via Arizona's non-judicial foreclosure procedure in the event of a default. After Hogan defaulted he sued to stop the trustees' sales, asserting that the lenders could not proceed with the trustees sales until they "showed the promissory notes" signed by Hogan and the lender in connection with the underlying transaction. This popular defense is based on the theory that the party foreclosing should be able to show that they actually have the right to collect the amounts owed on the notes.
After the Superior Court dismissed the lawsuit and the Court of Appeals agreed, the Arizona Supreme Court decided to take up the issue to resolve a recurring question of statewide importance. Relying on the strict language of Arizona's deed of trust statutes (A.R.S. § 33-801-821), the Court determined that there is no "show the note" requirement to foreclose by non-judicial trustee's sale in Arizona:
We hold that Arizona's non-judicial foreclosure statutes do not require the beneficiary to prove its authority or "show the note" before the trustee may commence a non-judicial foreclosure.
The Court's decision significantly relied on Hogan's failure to allege that the banks were not the legitimate holders of the notes or that they otherwise lacked authority to enforce the notes:
The only proof of authority the trustee's sales statutes require is a statement indicating the basis for the trustee's authority...Hogan's complaints do not contest that each sale was noticed by a trustee who had recorded an instrument demonstrating that it was a successor in interest to the original trustee.
The Supreme Court agreed with Hogan's argument that the deed of trust and the promissory note are related but found that "the note and deed of trust are nonetheless distinct instruments that serve different purposes." Because the borrower did not dispute that he was in default under the deeds of trust and "alleged no reason to dispute the trustee's right," the Court found no reason to stop the sales.
Notwithstanding the Arizona Supreme Court's decision in Hogan v. Washington Mutual Bank, there are other valid reasons to challege a foreclosure in Arizona. If you are facing foreclosure and want to know your rights and obligations, please discuss the matter with an experienced Arizona real estate attorney as soon as possible.