Arizona Supreme Court Holds Narrowly for Lenders in Vasquez v. Saxon Mortgage, Inc.

On November 18, the Arizona Supreme Court filed its decision in Vasquez v. Saxon Mortgage, Inc., et al.¹ The case centered on whether the defendant Deutsche Bank could foreclose on Tucson homeowner Julia Vasquez, even though Deutsche Bank was not the beneficiary of record on the deed of trust. Saxon Mortgage, the originator of the loan and co-defendant, was still the beneficiary of record on the deed of trust because the assignment to Deutsche Bank had not been recorded. In a narrow holding based in Arizona statutory law, the court held that Deutsche Bank could foreclose on Julia Vasquez.

The United States Bankruptcy Court for the District of Arizona certified two questions to the Arizona Supreme Court:

1. Is the recording of an assignment of deed of trust required prior to the filing of a notice of trustee’s sale under A.R.S. § 33-808 when the assignee holds a promissory note payable to bearer?
2. “Must the beneficiary of a deed of trust being foreclosed pursuant to A.R.S. § 33-807 have the right to enforce the secured obligation?”

The court held that an assignment of a deed of trust does not need to be recorded prior to the filing of a notice of trustee’s sale to enforce the secured obligation against a mortgagor. The court only answered the first certified question because the second certified question was “not determinative” of the case.

The court stressed that Arizona deed of trust law “is a creature of statutes,” and, as a result, viewed its role as “entirely one of statutory construction.” The court based its reasoning on A.R.S. §§ 33-808, 33-412(B), 33-817, and 33-411.01.

A.R.S. § 33-808 regulates a notice of trustee’s sale. This section does not overtly require the recording of an assignment of a deed of trust before the trustee’s sale. It noted that the policy behind recording statutes is to “protect interests in property against claims of subsequent purchasers or creditors without notice.” The court also considered A.R.S. § 33-412(B)—providing that “[u]nrecorded instruments, as between the parties and their heirs … shall be valid and binding”—as further proof that recording statutes are meant to protect such interests. They do not, the court noticed, “affect a deed’s validity as to the obligor.”

The heart of the opinion revolved around A.R.S. §§ 33-817 and 33-411.01. A.R.S. § 33-817, in the view of the court, stands for a “mortgage follows the note” theory. The section provides that “[t]he transfer of any contract or contracts secured by a trust deed shall operate as a transfer of the security for such contract or contracts.” The Court could find no logical reason to imply a recording requirement into §33-808 when “§33-817 does not require separate documentation of an assignment of the deed of trust when the secured note is transferred.” A.R.S. § 33-411.01 imposes a consequence on those who fail to record the transfer of a deed of trust:

indemnification of legal fees in “any action in which the transferee’s interest in such property is at issue.” Although the section states that deeds “shall be recorded,” the court noted that the section did “not impose a recording requirement.” Similarly, the court found that the section did not “suggest that a notice of trustee’s sale on a previously assigned deed of trust is valid only if the assignment was recorded.”

Finally, the court dismissed the argument that such a recording of an assignment is necessary to give effect to A.R.S. § 33-807.01, “which requires lenders to ‘explore options’ with borrowers at least thirty days before recording a notice of trustee’s sale.” While the Attorney General argued as amicus curiae that unless so interpreted “homeowners will not know with whom to ‘explore options,’” the Court noted that the statute “requires the lender to contact the homeowner, not the other way around.”

The court declined to address the second certified question, finding it moot because Deutsche Bank held the promissory note and had the legal right to record the notice of trustee’s sale.

Julia Vasquez’s case now returns to the U.S. Bankruptcy Court. Given the unusual issues that have arisen in this case so far, it could easily remain in the public eye.