M&I Bank, FSB v. Coughlin

• Citation: 805 F.Supp.2d 858
• Decision Date: 09 August 2011
• Docket Number: No. CV09–2282–PHX–NVW.,CV09–2282–PHX–NVW.
• Parties: M & I BANK, FSB, Plaintiff, v. Ty COUGHLIN, et al., Defendants.
• Court: United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. District of Arizona

805 F.Supp.2d 858

M & I BANK, FSB, Plaintiff,

v.Ty COUGHLIN, et al., Defendants.

No. CV09–2282–PHX–NVW.

United States District Court, D. Arizona.

Aug. 9, 2011.

Kathleen Ann Weber, Larry Omer Folks, Folks & O'Connor PLLC, Phoenix, AZ, Rachel M. Dollar, Sean M. Beehler, Jon Ac Vonderhaar, Smith Dollar PC, Santa Rosa, CA, for Plaintiff.

Barry Lance Entrekin, Law Offices of Lance Entrekin PC, Brian James Cosper, Fidelity National Law Group, Phoenix, AZ, for Defendants.

ORDER

NEIL V. WAKE, District Judge.I. Introduction

The question posed is whether an Arizona statute, A.R.S. § 33–814(D), bars a lender's action against third parties associated with a deed of trust loan transaction—that is, persons other than the borrower or others liable on the note—if the lender brings that action more than 90 days after the trustee's sale disposing of the property securing the note.

Plaintiff M & I Bank alleges that it was tricked into funding a $285,300 real estate loan to Defendant Ty Coughlin. His annual income was represented as exceeding $360,000, when it was only about $24,000. He was supposed to contribute $32,521.86 to the closing, but the seller funded the closing. As alleged, this was a flagrant seller and buyer fraud on the lender. The brokerage contract with M & I made the mortgage broker the guarantor of the loan application, putting the burden of due diligence and the risk of fraud on the broker. The escrow agent agreed, among other things, to accept funds only from the borrower's verified account and to disclose all relevant information to M & I.

Coughlin defaulted and the property—a parcel of vacant land—was sold at a non-judicial trustee's sale. M & I was the successful bidder for $125,375.46, far less than the full amount of its note. That is, M & I made a partial credit bid, not a full credit bid. M & I then resold the property for less than the amount of its partial credit bid.

Based on these alleged facts, M & I brought suit against Coughlin, the seller, the broker, and the escrow agent, alleging fraud, breach of the brokerage contract, breach of the escrow agreement, negligent misrepresentation, and other claims. As damages, M & I requests (among other things) the difference between the amount it lent Coughlin and the amount of its winning bid at the trustee's sale. The prayer for damages is “no less than $159,838.54.” (Doc. 32.) This action was brought more than 90 days after the trustee's sale.

The seller, the broker, and the escrow agent (but not the borrower, Coughlin) now move for judgment on the pleadings.¹ (Docs. 80, 81, 95.) They seek to dismiss M & I's claims against them based on the following language from Arizona's statutes regulating trustee's sales of real property:

If no action is maintained for a deficiency judgment within the time period prescribed in subsections A and B of this section [usually 90 days after the trustee's sale], the proceeds of the sale, regardless of amount, shall be deemed to be in full satisfaction of the obligation and no right to recover a deficiency in any action shall exist.A.R.S. § 33–814(D). Defendants contend that the plain language of this subsection —which the Court will sometimes refer to as “subsection D”—dictates dismissal because M & I's attempt to recover its losses on the Coughlin loan is effectively an “action ... for a deficiency judgment” brought more than 90 days after the trustee's sale and M & I's debt is deemed paid in full, though it was not in fact paid in full. They thus contend there is no loss to the lender and no damage to support any claim against anyone else in connection with the loan.

Defendants' argument, if correct, would have far-reaching consequences. It would require lenders to uncover all wrongdoing related to a bad real estate loan and identify all of its perpetrators far more rapidly than statutes of limitations relating to their conduct would require. See, e.g., A.R.S. § 12–543(3) (three-year limitations period for fraud, which begins to run upon “discovery by the aggrieved party of the facts constituting the fraud or mistake”); A.R.S. § 12–548 (six-year limitations period for action on written contract executed within the state). Indeed, it would protect scam artists clever enough to avoid detection for 90 days after the trustee's sale.

The Court does not take subsection D as yielding this surprising result. A thorough examination of the Arizona Deed of Trust Act, its evolution, its use of terms of legal art, and its structure and purposes shows that the statute can and should be read as limiting only the obligation of a borrower and “any person directly, indirectly or contingently liable on the contract for which the trust deed was given as security.” A.R.S. § 33–814(A). In short, borrowers, partners, guarantors, and other persons “directly, indirectly or contingently liable on the contract” are protected by subsection D's 90–day limit for bringing a deficiency action. Defendants are not among the class of persons so protected, and therefore subsection D does not shield Defendants from liability, even if M & I is eventually awarded damages calculated with respect to the indebtedness that M & I was unable to recover through the trustee's sale.

II. Legal Standard

“Rules 12(b)(6) and 12(c) are substantially identical.” Strigliabotti v. Franklin Resources, Inc., 398 F.Supp.2d 1094, 1097 (N.D.Cal.2005). Rule 12(c) motions for judgment on the pleadings are therefore reviewed under the standard applicable to a Rule 12(b)(6) motion to dismiss for failure to state a claim. See Aldabe v. Aldabe, 616 F.2d 1089, 1093 (9th Cir.1980). In ruling on a Rule 12(c) motion, the Court must “determine whether the facts alleged in the complaint, to be taken for [the purposes of a Rule 12(c) motion] as true, entitle the plaintiff to a legal remedy.” Strigliabotti, 398 F.Supp.2d at 1097. “If the complaint fails to articulate a legally sufficient claim, the complaint should be dismissed or judgment granted on the pleadings.” Id. A Rule 12(c) motion is thus properly granted when, taking all the allegations in the pleading as true, the moving party is entitled to judgment as a matter of law. Knappenberger v. City of Phoenix, 566 F.3d 936, 939 (9th Cir.2009).

III. The Deed of Trust ActA. Origins and Purposes

The contractual instrument known as a “deed of trust” has existed for a long time in Arizona, but “historically it has been treated as a mortgage.” Gary E. Lawyer, The Deed of Trust: Arizona's Alternative to the Real Property Mortgage, 15 Ariz. L.Rev. 194, 194 n. 5 (1973). A “realty mortgage must be foreclosed by judicial action,” which can be a lengthy and expensive process, followed by a six-month redemption period that further delays the foreclosing party's realization of value from the property. See id. at 194–95, 199; see also Lane Title & Trust Co. v. Brannan, 103 Ariz. 272, 277, 440 P.2d 105, 110 (1968) (“in Arizona ... a mortgage can only be foreclosed by court action, with a definite redemption period”). Indeed, before 1971, deed of trust terms purporting to grant a power of extrajudicial sale were invalid, and the deed of trust therefore required judicial foreclosure. See, e.g., Schwertner v. Provident Mut. Bldg. Loan Ass'n, 17 Ariz. 93, 94, 148 P. 910, 910 (1915).

In 1971 the legislature added chapter 6.1 to title 33 of the Arizona Revised Statutes. See 1971 Ariz. Sess. Laws, ch. 136 § 7 ( codified at A.R.S. § 33–801 to –821). Through chapter 6. 1, known as the Deed of Trust Act, Arizona for the first time recognized the deed of trust (or “trust deed”) as a real property security device distinct from a mortgage. The Act set forth detailed provisions governing formation and administration of trust deeds, and introduced procedures that differ markedly from the procedures governing mortgages.

One of the most notable differences enacted by the Deed of Trust Act was recognition of the “power of sale.” This power permits the trust deed beneficiary (typically the lender) to cause the trust property to be sold and to apply the proceeds of that sale to a defaulted loan, without going to court. Unlike mortgage foreclosures, which always begin with the filing of a lawsuit, a sale under the power of sale begins when a trustee (appointed by the beneficiary) files a notice of trustee's sale giving the defaulting borrower 90 days to get current. If the borrower does not do so, and if the trustee complies with all of the Act's requirements, the trustee can then auction the property. The borrower has no right of redemption after such a sale, and the successful bidder is entitled to immediate possession. If the winning bid does not fully repay the beneficiary, the Act establishes requirements for a court judgment against the borrower for the balance of the contract debt, excepting debts incurred to purchase certain residential properties. See Lawyer, supra, at 202–10.

The trustee's sale does not determine that the borrower was in default on the note or adjudicate any other substantive matter between the borrower and the beneficiary. The borrower may bring a plenary action to adjudicate that he was not in default and that the trustee's sale was therefore wrongful. If the court so adjudicates, the trustee's sale and deed are invalidated, and the beneficiary will be liable for breach of the note and the deed of trust and for wrongful eviction if the borrower has lost possession in the mean time. See, e.g., In re Hills, 299 B.R. 581 (Bankr.D.Ariz.2002); In re Steiner, 251 B.R. 137 (Bankr.D.Ariz.2000); Schaeffer v. Chapman, 176 Ariz. 326, 861 P.2d 611 (1993).²

Thus, assuming the beneficiary and trustee follow appropriate procedures, the Deed of Trust Act eliminates the need for judicial proceedings before conducting a trustee's sale of the property securing the trust deed. Instead, judicial proceedings should only arise if the borrower elects to challenge the claim of default in a later action, or if a debt remains after the trustee's sale...