Opinion ID: 867575
Heading Depth: 2
Heading Rank: 2

Heading: Deed of trust and borrower's protection from inequity

Text: ¶ 8 Unlike their judicial foreclosure cousins that involve the court, deed of trust sales are conducted on a contract theory under the power of sale authority of the trustee. They are therefore held without the prior judicial authorization ordered in a mortgage foreclosure. [A] power of sale is conferred upon the trustee of a trust deed under which the trust property may be sold... after a breach or default in performance of the contract or contracts, for which the trust property is conveyed as security.... A.R.S. § 33-807(A). ¶ 9 The deed of trust scheme is a creature of statutes [1] that do not contain explicit provisions for courts to set aside non-judicial sales based on the price realized at the sale, and no policy for such action has yet evolved with these sales as there has in judicial foreclosure sales. ¶ 10 The deed of trust provisions were added to Arizona law in 1971 following complaints by representatives of the mortgage industry that the mortgage and foreclosure process in Arizona [was] unnecessarily time-consuming and expensive. [2] It was said at the time that an uncontested $25,000 mortgage foreclosure could take eight months and a contested foreclosure twelve to fourteen months. [3] The deed of trust alternative permitted lenders to bypass this time-consuming and expensive judicial foreclosure by simply using their new power of sale authority to sell the property securing a delinquent loan after complying with statutory procedural requirements. There is even a statutory presumption of procedural fairness and accuracy by the mere completion of a sale. The trustee's deed shall raise the presumption of compliance with the requirements of ... this chapter.... A.R.S. § 33-811(B). Commenting on the two foreclosure methods, this court has said: A mortgage generally may be foreclosed only by filing a civil action while, under a Deed of Trust, the trustee holds a power of sale permitting him to sell the property out of court with no necessity of judicial action. The Deed of Trust statutes thus strip borrowers of many of the protections available under a mortgage. Therefore, lenders must strictly comply with the Deed of Trust statutes, and the statutes and Deeds of Trust must be strictly construed in favor of the borrower. Patton v. First Federal Sav. & Loan Ass'n, 118 Ariz. 473, 477, 578 P.2d 152, 156 (1978) (emphasis added). ¶ 11 Aside from the issue in this case, the primary loss in protection for deed of trust borrowers lies in the absence of redemptive right because purchasers at a deed of trust sale no longer take title subject to a mortgagor's six-month right of redemption. [4] Most observers could regard that loss of right as quite disadvantageous to the mortgagor. However, an offsetting theory holds that because there is less uncertainty as a consequence of the elimination of redemptive rights and because there is no judicial oversight, bidders can afford to offer higher prices at a deed of trust sale. Model deed of trust procedures include notice requirements and bidder qualification intended to encourage more vigorous bidding in order to produce a price closer to the property's fair market value than would otherwise be possible.... 4 RICHARD R. POWELL, POWELL ON REAL PROPERTY § 37.42[5] (Michael Allan Wolf ed., 2000) (citing Uniform Land Security Interest Act § 509(b) (1985)). The Powell treatise, however, does not take the position that judicial consideration of gross inadequacy as a ground for upsetting a sale is forbidden. Like a Judicial sale arising out of foreclosure by auction, a sale under a power may not be attacked on the ground of mere inadequacy of price unless the bid was so low as to shock the conscience of the court or elements of unconscionable action or chilling of the bidding are present. Id. at § 37.42[6] (emphasis added). ¶ 12 Our court of appeals has held that the setting aside of a trustee sale for inadequacy of price  was not part of Arizona law. Security Sav. & Loan Ass'n v. Fenton, 167 Ariz. 268, 270, 806 P.2d 362, 364 (App.1990) (emphasis added). The policy articulated in Fenton is correct as to inadequacy of price and, as noted, applies also to judicial sales. See ante ¶ 7. But Fenton did not involve a price found to be grossly inadequate, one that shocked the conscience of the court. [5] Thus, the Fenton court did not consider the question before us now. The RESTATEMENT OF PROPERTY takes a view that encompasses both judicial and non-judicial sales: Adequacy of Foreclosure Sale Price: (a) A foreclosure sale price obtained pursuant to a foreclosure proceeding that is otherwise regularly conducted in compliance with applicable law does not render the foreclosure defective unless the price is grossly inadequate. (b) Subsection (a) applies to both power of sale and judicial foreclosure proceedings. RESTATEMENT (THIRD) OF PROPERTY: MORTGAGES § 8.3 (hereinafter RESTATEMENT). ¶ 13 The present case is one of first impression as neither we nor our court of appeals has ever considered the particular issue of setting aside a deed of trust sale for gross inadequacy of price. We also note that the statutes dealing with deeds of trust are silent on that question. Moreover, as we have already discussed, we have always followed the rule that courts of equity have the power to vacate a judicial sale for gross inadequacy of price compared to fair market value even though there is no express statutory authorization to do so.