LAYING DOWN THE LAW – Election of remedies: can mortgagees have their cake and eat it too?

Laying Down the Law

Christopher J. Charles, Esq.
Provident Law

 

Most secured creditors have multiple options if the debtor defaults on payment. That is precisely why they require borrowers to pledge security (such as real estate) for the performance of the debt repayment – so that if the borrower defaults, the creditor is not limited to the borrower’s promise to repay the debt. In addition, the creditor can seek reimbursement from the sale of the secured asset. In other words, in most cases, the creditor can sue the borrower to obtain a judgment, and the creditor can maintain its security, e.g., real estate, business equipment, etc.

Notwithstanding confusion amongst many real estate professionals, the election of remedies doctrine should not minimize a mortgagee’s collection options. Many states, including Arizona, have statutes governing mortgages that prohibit separate actions that are pursued simultaneously: “If separate actions are brought on the debt and to foreclose the mortgage given to secure it, the plaintiff shall elect which to prosecute and the other shall be dismissed.” See, e.g, A.R.S. §33-722. But it is technically inaccurate to refer to these statutes as “election of remedies” statutes.

Since deeds of trust were introduced in the 1970s and lenders were given the right to foreclose non-judicially through the power of trustee sale, traditional mortgages have mostly retired to the annals of history alongside bell bottoms and electronic football. But prior to the introduction of the deed of trust, mortgagees had to file a civil lawsuit to foreclose judicially on a defaulting borrower. As a result, the above statute clarifies that mortgagees shall not maintain two separate lawsuits simultaneously (one lawsuit for the judicial foreclosure, and one lawsuit for money judgment regarding the unpaid balance of the debt).

Some, however, misinterpret the rule to mean that the options are mutually exclusive, and the lender must choose between suing on the debt and obtaining a judgment or foreclosing on the mortgage. Addressing this very question, the Arizona Supreme Court held long ago that it is “obvious” that “a mortgagee-creditor has two rights, first, to have the debt paid, and second, a separate and independent right, to have the debt paid out of the proceeds of the sale of the mortgaged property.” Smith v. Mangels, 73 Ariz. 203, 207, 240 P.2d 168, 170 (1952). One qualification to that rule is seen in Arizona’s election of remedies statute within the general law applicable to mortgages (not deeds of trusts). Under A.R.S. § 33–722, a mortgagee can foreclose and seek a deficiency judgment or can sue on the note and then execute on the resultant judgment but cannot bring both actions simultaneously. Mid Kansas Fed. Sav. & Loan Ass’n of Wichita v. Dynamic Dev. Corp., 167 Ariz. 122, 126, 804 P.2d 1310, 1314 (1991). The election statute is intended to protect the debtor from multiple suits and at the same time grant the creditor the benefit of the security. Id.

The law is different for deeds of trust, however: A.R.S. § 33–722 only applies if a lender who holds a deed of trust elects to judicially foreclose that deed of trust. Valley Nat’l Bank of Ariz. v. Kolhase, 182 Ariz. 436, 438, 897 P.2d 738, 749 (Ct. App. 1995) ([b]anks need not choose between conducting trustee’s sale and suing on note). Otherwise, Arizona does not have an election of remedies requirement for choosing between foreclosing on property or suing on the debt with respect to deeds of trust.

In addition, most deeds of trust today provide that the borrower expressly waives any argument that the election of remedies rule applies. And unlike Arizona’s anti-deficiency statute regarding mortgages, which expressly provides it cannot be waived, the election of remedies statute and the anti-deficiency statute regarding deeds of trust (A.R.S. §§ 33-814 and 33-722, respectively) contain no such protections. Cf. A.R.S. §33-729 (“…the judgment may not otherwise be satisfied out of other property of the judgment debtor, notwithstanding any agreement to the contrary.”)(emphasis added).

As a result, it is well-settled that where a debtor defaults on a promissory note secured by deed of trust, the lender can sue and obtain a judgment without waiving its deed of trust against the real property. This is helpful for secured creditors faced with a non-performing loan who may want or need to sue to obtain a judgment now, but are not yet ready to foreclose on the collateral.

If you or someone you know has questions regarding creditor’s rights, foreclosures, or any real estate matter, call our office today to schedule a consultation with Christopher Charles.

 

Christopher J. Charles is the founder and Managing Partner of Provident Law®. He is a State Bar Certified Real Estate Specialist and a former “Broker Hotline Attorney” for the Arizona Association of REALTORS® (the “AAR”). Mr. Charles holds the AV® Preeminent Rating by the Martindale-Hubbell Peer Review Ratings system which connotes the highest possible rating in both legal ability and ethical standards. He serves as an Arbitrator and Mediator for the AAR regarding real estate disputes; and he served on the State Bar of Arizona’s Civil Jury Instructions Committee where he helped draft the Agency Instructions and the Residential Landlord/Tenant Eviction Jury Instructions.

Christopher is a licensed Real Estate Instructor and he teaches continuing education classes at the Arizona School of Real Estate and Business. He can be reached at Chris@ProvidentLawyers.com or at 480-388-3343.