No "Show Me the Note" Defense
Available in Arizona
By: Valerie
L. Marciano
While Arizona has experienced boom and bust real estate cycles in
the past, they were less deep and shorter in duration that the
current cycle is. Residential home values have plunged
between 40 and 60 percent or higher - in the 2007 to 2011 values -
across the Valley from the height of the market and are one of the
reasons that some Arizona homeowners are facing foreclosure.
The saving grace for many Arizona homeowners is Arizona's
anti-deficiency statute. 30 years ago Arizona's state
lawmakers decided to protect most homeowners who could not, for a
variety of reasons, continue to pay on their mortgages. The
anti-deficiency statute is designed to protect most homeowners from
losing their other assets to the lenders that hold the mortgage
used for the purchase of the residence after the homeowners have
lost their homes to foreclosure.
In other words, most homeowners can walk away from
their purchase money mortgage, and feel secure that they will not
be facing a lawsuit filed by their lender for the deficiency or
difference between the debt left owing on their home and the home's
current market value. There are some circumstances, however,
when the anti-deficiency statutes will not apply.
Even with the anti-deficiency statute protection, some homeowners
are not locking their doors and walking away from the homes.
Instead, they are choosing to contest the validity of the trustee
sales pending against their homes. In other states, one
common challenge is the "original note" theory. This
challenge to the validity of the trustee sale encompasses the
homeowners asking the courts to force the lenders, through the
trustee conducting the trustee sale, to produce the "original note"
which is the document that evidences the mortgage debt. The
homeowners are arguing that production of the "original note" is
required before a non-judicial foreclosure, known in Arizona as a
trustee sale or foreclosure sale, can be held.
The
"Show me the Note" defense, however, has been preliminarily
declined by at least two Arizona trial courts. Multiple opinions
issued by the United States District Court for the District of
Arizona echo the rejection of the "Show me the Note" theory. Those
courts have rejected a borrower's demand to see during the
foreclosure proceedings the "Original" promissory note that he or
she signed when the loan was originated. The courts have
permitted the foreclosure actions, or trustee sales, to proceed
without the production of the "Original" promissory note by the
party who commenced the foreclosure action or trustee sale.
In other jurisdictions and states, a court may require a party
conducting the foreclosure action or trustee sale proceeding to
produce the "Original" promissory note to show it to the borrower
before the foreclosure action or trustee sale can be
completed. In light of the length of time that may have
transpired between the signing of the "Original" promissory note
and the foreclosure proceeding, producing the "Original" promissory
note may be difficult for the party conducting the foreclosure
proceeding. In those other jurisdictions, a borrower facing a
judicial foreclosure may be successful in obtaining the "Original"
promissory note because a forum would be in place in which to make
the demand for the production of the document. When the
foreclosure is a trustee sale, the borrower would need to file a
court action in an attempt to force the party conducting the
trustee sale to produce the "Original" promissory
note.
Before spending money to mount an offense to stave off a pending
trustee sale in Arizona, it would be wise to investigate the
challenges that other Arizona homeowners have made to the validity
of trustee sales of Arizona residences to determine whether the
theory for invalidating the trustee sale makes sense either legally
or economically.
About the author: Valerie
Marciano is a partner at the Phoenix law firm of Jaburg Wilk. She assists clients
with business issues, creditor's rights issues, guaranty actions
and deficiency issues. Val can be reached at vlm@jaburgwilk.com
or 602.248.1025.
This article is not intended to provide legal advice and
only relates to Arizona law. It does not consider the scope
of laws in states other than Arizona. Always consult an
attorney for legal advice for your particular situation.
3200 North Central Avenue
. Phoenix . Arizona