The Supreme Court of Arizona recently held that recording a notice of trustee’s sale, by itself, is not an affirmative act that accelerates the debt. Therefore, the Court held, the foreclosure at issue in the notice of trustee’s sale in this case was not time-barred.
A copy of the opinion in Bridges v. Nationstar Mortgage LLC is available at: Link to Opinion.
A borrower obtained a loan for which he executed a promissory note secured by a deed of trust against his residential property. The promissory note and deed of trust included optional acceleration clauses authorizing the lender to accelerate the debt if the borrower defaulted. To initiate the acceleration clauses, the promissory note required that the borrower be given notice of acceleration, and the deed of trust also required that the lender provide notice to the borrower of “(a) the default; (b) the action required to cure the default; (c) a date . . . by which the default must be cured; and (d) that failure to cure the default . . . may result in acceleration . . . and sale of the property.”
The borrower eventually defaulted on the loan. The lender sent the borrower a notice of default, but it did not state that failure to cure the default would result in the acceleration of the loan or sale of the property. The borrower did not cure the default, which led to two notices of trustee’s sales being recorded. However, neither notice invoked the optional acceleration clause, and the property was not sold.
Eventually, the borrower sought declaratory relief, arguing that the current servicer could not foreclose on the property because Arizona’s six-year statute of limitations had expired. See A.R.S. § 12-548(A)(1). The borrower then moved for summary judgment, asserting that the notices of trustee’s sales accelerated the debt, triggering the statute of limitations, and that the statute of limitations had run.
The servicer responded and cross-moved for summary judgment, arguing that the notices of trustee’s sales did not accelerate the debt and that the borrower presented no evidence that the servicer intended to accelerate the debt. The trial court granted the borrower’ summary judgment motion, concluding that the notices of trustee’s sales accelerated the debt. The servicer appealed.
On appeal, the intermediate appellate court reversed the trial court’s ruling and held that “absent an express statement of acceleration in the notice of trustee’s sale, or other evidence of an intent to accelerate, recording a notice of trustee’s sale, by itself, does not accelerate a debt.” The borrower timely appealed to the Arizona Supreme Court.
The borrower argued that recording a notice of trustee’s sale accelerates the debt as a matter of law because the debtor has a reasonable expectation that the lender intends to sell the property and collect on the entire debt, notwithstanding the requirements for acceleration in the note and deed of trust.
However, the Supreme Court of Arizona noted that parties are generally “free to contract as they please,” Shattuck v. Precision-Toyota, Inc., 115 Ariz. 586, 588 (1977) (quoting Naify v. Pacific Indem. Co., 76 P.2d 663, 667 (Cal. 1938)), and when entered into voluntarily, courts will enforce the contract’s provisions. 1800 Ocotillo, LLC v. WLB Grp., Inc., 219 Ariz. 200, 202 ¶ 8 (2008).
The Supreme Court of Arizona determined that the promissory note gave the lender discretion to accelerate the debt, rather than automatically accelerating the debt upon default. See Prevo v. McGinnis, 142 Ariz. 298, 302 (App. 1984). Additionally, the promissory note required the lender to give notice of acceleration. Thus, the Court concluded that it had to enforce the provisions of the promissory note, and the parties were bound by their agreement.
Nevertheless, the Supreme Court of Arizona also recognized that a deed of trust “is a creature of statutes.” In re Krohn, 203 Ariz. 205, 208 ¶ 9 (2002); see also A.R.S. §§ 33-801 to -821. The deed of trust statutory scheme allows lenders to sell property without judicial action, and “thus strip[s] borrowers of many of the protections available under a mortgage.” Krohn, 203 Ariz. at 208 ¶ 10 (emphasis omitted) (quoting Patton v. First Fed. Sav. & Loan Ass’n, 118 Ariz. 473, 477 (1978)). For this reason, courts should interpret a deed of trust consistent with its plain language and in favor of protecting borrowers. Id.; see also Schaeffer v. Chapman, 176 Ariz. 326, 328 (1993).
Here, the Court held that the deed of trust’s plain language did not create a self-executing or automatic acceleration upon default. Consequently, the debt was not automatically accelerated under the provisions contained in the deed of trust. See Schaeffer, 176 Ariz. at 328
Furthermore, the notices of trustee’s sale in this case did not refer to or invoke the deed of trust’s optional acceleration clause. Therefore, the Supreme Court of Arizona concluded that recording the notices did not accelerate the borrower’s debt.
The Court also ruled that the plain language of A.R.S. § 33-813(A), which sets forth the procedure for reinstating a defaulted contract secured by a deed of trust, supports this conclusion. Section 33-813(A) provides that “[i]f . . . all or a portion of a principal sum . . . of the contract . . . secured by a trust deed becomes due or is declared due by reason of a breach or default,” the debtor “may reinstate by paying . . . the entire amount then due” — not the entire loan balance — as late as the day before the trustee’s sale. Accordingly, the Court held that when a trustee’s sale is merely noticed under § 33-813(A), the entire debt is not accelerated because, under the plain language of the statute, a debtor can cure the default and reinstate the contract by paying only the “amount then due” before the trustee’s sale is held.
Despite this plain language, the borrower cited Baseline Financial Services v. Madison, 229 Ariz. 543 (App. 2012) to urge the Supreme Court of Arizona to create a bright-line rule that would establish that the recording of a notice of trustee’s sale accelerates a debt even when the terms of the deed of trust do not require notice of acceleration. The appellate court in Baseline held that, to exercise its option to accelerate the debt, a creditor “must undertake some affirmative act to make clear to the debtor it has accelerated the obligation,” even if the parties agreed the option to accelerate does not require notice to the debtor. Id. ¶ 8
However, the Supreme Court of Arizona held that recording a notice of trustee’s sale, by itself, is not an affirmative act that accelerates the debt. The Court’s conclusion was bolstered by the fact that the lender did not accelerate the debt by exercising its right to sell the borrower’s property and Section 33-813(A)’s plain language that allows the debtor to cure its default and reinstate the contract by paying the entire amount in arrears before the trustee’s sale.
Accordingly, the Court reversed the trial court’s ruling and remanded for entry of summary judgment in favor of the servicer.