By Combs Law Group
On March 20, 2012, the Arizona Court of Appeals in the Helvetica decision (1CA-CV 10-0418) made a significant ruling relating to “cash out” refinancing. The Arizona Court of Appeals ruled that, after a judicial foreclosure was completed, a lender was entitled to a deficiency judgment for the amount of the “cash out.”
[Note: a judicial foreclosure requires a foreclosure lawsuit, service of process, and a court-ordered sale conducted by the sheriff.]
In a recent REALTOR® publication a local real estate attorney wrote, in discussing the Helvetica decision, that: “Following a foreclosure, the lender may therefore seek to recover a deficiency judgment [for the amount of the ‘cash out’ refinancing.]”
The Helvetica decision, however, was specifically limited “to the judicial foreclosure context.” In other words, the Helvetica decision only applies to judicial foreclosures of homes. In Arizona judicial foreclosures of homes are less than 3% of all foreclosures of homes; more than 97% of foreclosures in Arizona are non-judicial trustee’s sale foreclosures.
Therefore, although under the reasoning of the Helvetica decision the lender may have the right to file a collection lawsuit for the amount of the “cash out” refinancing, the lender will only have a claim for a deficiency after foreclosure if the lender does a judicial foreclosure. If the lender does a non-judicial trustee’s sale foreclosure, the lender will not have a right to a deficiency for the “cash out,” and will have waived any right to file a collection lawsuit for the amount of the “cash out.”
1) A major difference between judicial foreclosures and non-judicial trustee’s sale foreclosures is regarding a foreclosure of non-purchase money mortgage loans on a home. The most common non-purchase money mortgage loan is a home equity line of credit (“HELOC”). For example, if the borrower has a $500,000 HELOC, and the lender forecloses by judicial foreclosure and gets $300,000 at the sheriff’s sale, then the lender can sue for the
$200,000 deficiency. If the lender forecloses by a trustee’s sale, however, the lender cannot sue for the $200,000 deficiency.
2) The time and expense of a judicial foreclosure generally limits judicial foreclosures to large amounts. For example, the deficiency judgment sought by the lender in Helvetica was almost $2,000,000.00.
[This article is reprinted with permission from the Combs Law Group, 2200 E. Camelback Rd., Suite 221, Phoenix, 85016. For more on commercial or residential transactions, financing, potential litigation, HOA issues, estate planning or other legal matters, you can call Combs Law Group at (602) 957-9810 and arrange for an initial consultation.]