In re Krohn

• Decision Date: 27 August 2002
• Docket Number: No. CV-01-0246-CQ.,CV-01-0246-CQ.
• Citation: 203 Ariz. 205,52 P.3d 774
• Parties: In re Linda Lorraine KROHN, Debtor. Linda Lorraine Krohn, Plaintiff, v. Sweetheart Properties, LTD. an Arizona Corporation; Citimortgage, Inc., Defendants.
• Court: Arizona Supreme Court

52 P.3d 774

203 Ariz. 205

In re Linda Lorraine KROHN, Debtor.

Linda Lorraine Krohn, Plaintiff, v. Sweetheart Properties, LTD. an Arizona Corporation; Citimortgage, Inc., Defendants.

No. CV-01-0246-CQ.

Supreme Court of Arizona, En Banc.

August 27, 2002.

Reconsideration Denied September 24, 2002.

Allen D. Butler, Tempe, Attorney for Linda Lorraine Krohn.

David L. Knapper, Phoenix, Attorney for Sweetheart Properties, Ltd.

Miles & Associates, L.L.P., By Jeremy T. Bergstrom, Las Vegas, Attorneys for Citimortgage, Inc.

Jaburg & Wilk, P.C., By Kathi M. Sandweiss, Lawrence E. Wilk, Roger L. Cohen, Phoenix, Attorneys for Amicus Curiae Arizona Trustee Association, Inc.

OPINION

FELDMAN, Justice.

¶ 1 Linda Lorraine Krohn (Krohn) filed a chapter 13 bankruptcy petition that was dismissed. Shortly after that dismissal, her home was sold to Sweetheart Properties, Ltd. (Sweetheart) at a trustee's sale conducted under authorization of a deed of trust. She filed a second bankruptcy petition seeking to have the sale of her home vacated for gross inadequacy of price. Bankruptcy Judge Redfield T. Baum certified a question of Arizona law to this court: "May a trustee's sale of real property [under a deed of trust] be set aside solely on the basis that the bid price was grossly inadequate?"

JURISDICTION

¶ 2 Sweetheart argues that we lack jurisdiction. Our jurisdiction to accept a certified question from a United States bankruptcy judge was settled by our recent decision in In re PriceWaterhouse Ltd. v. Decca Design Build, Inc., in which we held that A.R.S. § 12-1861 gives us jurisdiction to accept certified questions from federal bankruptcy courts. 202 Ariz. 397, 398 ¶ 1, 46 P.3d 408, 409 ¶ 1 (2002). "[T]he intent of the statute as it currently exists, coupled with our own supreme court rule allowing certification of questions from federal and tribal courts, sufficiently provides this court with the discretionary authority to answer the bankruptcy court's certified question. Ariz. S.Ct. R. 27(a)(1); see also 28 U.S.C.A. § 151 (1993) (bankruptcy judges constitute `a unit of the district court.')." Id. (emphasis in original).

¶ 3 Thus, we accepted jurisdiction. We answer the certified question in the affirmative.

FACTS

¶ 4 The facts of this case were well described by Judge Baum. The following facts are relevant to our disposition and are quoted from his minute entry of March 31, 2001:

The facts before the court are undisputed. Debtor filed this case on September 29, 2000. The debtor was in default on the payments on her home and her lender scheduled a trustee's sale. Prior to the scheduled sale, the debtor filed her first Chapter 13 case on February 27, 2000. That case was dismissed on August 28, 2000 because she had not complied with certain requirements in her Chapter 13 case. Prior to the dismissal, the lender moved for stay relief. In its motion, the lender stated that a trustee's sale "was originally scheduled for Jule 15, 2000 and that the Trustee's Sale was postponed and will be postponed from time to time, pending authorization from this Court that such Sale may take place." Debtor filed a response and contested the motion for stay relief.

On or about September 24, 2000, the debtor receive a letter from her lender, which stated in part:

"The mortgage for the property in which you are living is about to be foreclosing (sometimes referred to as repossessed). We expect that ownership of the property will be transferred to ______ probably within the next 60 to 90 days."

In fact, the trustee's sale was held on September 27, 2000. The amount paid at that sale was $10,304.00 by Sweetheart Properties, LTD, an Arizona corporation ("Sweetheart"). Sweetheart was a purchaser who bought in good faith and without any notice about the dealings between the debtor and her lender, including the letter described above.

The debtor states that her residence is worth at least $57,500.00 and no other evidence of value has been presented to the court by the parties. The foregoing facts are compounded by the fact that debtor is disabled and resides in the residence with her two daughters.

¶ 5 In the present case the winning (and only) bid was slightly more than $10,000 for a property worth $57,000. Judge Baum found "the price paid is not merely inadequate but under applicable case law `grossly' inadequate because the price was less than 20% of fair market value...." Our analysis of the question certified is informed by Judge Baum's finding that the price paid was grossly inadequate.

DISCUSSION

A. Judicial foreclosure

¶ 6 Sales in actions to foreclose mortgages are subject to judicial review for substantive fairness as well as for procedural compliance. Thus, it is well established that such sales can be overturned based on price alone. "Where a grossly inadequate price is bid, such as shocks one's conscience, an equity court may set aside the sale, thus insuring within limited bounds a modicum of protection to a party who has absolutely no control over the amount bid and this, in effect, insures that the foreclosed property is not `given away.'" Nussbaumer v. Superior Court, 107 Ariz. 504, 507, 489 P.2d 843, 846 (1971).

¶ 7 But this does not apply to bids that are merely inadequate when compared to the fair market value of the property. As our court of appeals has explained, the rule has a long history in this state:

Since the case of McCoy v. Brooks, 9 Ariz. 157, 80 P. 365 (1905) the general rule in Arizona dealing with vacation of execution sales because of inadequate bids is that mere inadequacy of price, where the parties stand on an equal footing and there are no confidential relations between them, is not, in and of itself, sufficient to authorize vacation of the sale unless the inadequacy is so gross as to be proof of fraud or shocks the conscience of the court.

Wiesel v. Ashcraft, 26 Ariz.App. 490, 494, 549 P.2d 585, 589 (1976) (citations omitted). The general rule is simply that judicial foreclosure sales are set aside when "the inadequacy [of price is] so great as to shock the conscience...." Graffam v. Burgess, 117 U.S. 180, 192, 6 S.Ct. 686, 692, 29 L.Ed. 839 (1886). While the rationale of setting aside judicial foreclosure sales for gross inadequacy is well understood, it is not the only basis for upsetting such sales. Judicial foreclosure sales have been set aside even in the absence of gross inadequacy when there has been some irregularity. "[W]here there is an inadequacy of price which in itself might not be grounds for setting aside the sale, slight additional circumstances or matters of equity may so justify." Mason v. Wilson, 116 Ariz. 255, 257, 568 P.2d 1153, 1155 (App.1977) (citing Johnson v. Jefferson Standard Life Ins., 5 Ariz.App. 587, 429 P.2d 474 (1967)). Thus, even in a judicial sale inadequate price cannot, alone, guarantee vacation of the sale. A sale may be set aside, however, for inadequate price combined with other irregularity or for grossly inadequate price. The question is whether the same rules are applicable to trustee's sales.

B. Deed of trust and borrower's protection from inequity

¶ 8 Unlike their judicial foreclosure cousins that involve the court, deed of trust sales are conducted on a contract theory under the power of sale authority of the trustee. They are therefore held without the prior judicial authorization ordered in a mortgage foreclosure. "[A] power of sale is conferred upon the trustee of a trust deed under which the trust property may be sold... after a breach or default in performance of the contract or contracts, for which the trust property is conveyed as security...." A.R.S. § 33-807(A).

¶ 9 The deed of trust scheme is a creature of statutes¹ that do not contain explicit provisions for courts to set aside non-judicial sales based on the price realized at the sale, and no policy for such action has yet evolved with these sales as there has in judicial foreclosure sales.

¶ 10 The deed of trust provisions were added to Arizona law in 1971 following complaints by representatives of the mortgage industry that the "mortgage and foreclosure process in Arizona [was] unnecessarily time-consuming and expensive."² It was said at the time that an uncontested $25,000 mortgage foreclosure could take eight months and a contested foreclosure twelve to fourteen months.³ The deed of trust alternative permitted lenders to bypass this time-consuming and expensive judicial foreclosure by simply using their new power of sale authority to sell the property securing a delinquent loan after complying with statutory procedural requirements. There is even a statutory presumption of procedural fairness and accuracy by the mere completion of a sale. "The trustee's deed shall raise the presumption of compliance with the requirements of ... this chapter...." A.R.S. § 33-811(B). Commenting on the two foreclosure methods, this court has said:

A mortgage generally may be foreclosed only by filing a civil action while, under a Deed of Trust, the trustee holds a power of sale permitting him to sell the property out of court with no necessity of judicial action. The Deed of Trust statutes thus strip borrowers of many of the protections available under a mortgage. Therefore, lenders must strictly comply with the Deed of Trust statutes, and the statutes and Deeds of Trust must be strictly construed in favor of the borrower.

Patton v. First Federal Sav. & Loan Ass'n, 118 Ariz. 473, 477, 578 P.2d 152, 156 (1978) (emphasis added).

¶ 11 Aside from the issue in this case, the primary loss in protection for deed of trust borrowers lies in the absence of redemptive right because purchasers at a deed of trust sale no longer take title subject to a mortgagor's six-month right of redemption.⁴ Most observers could regard that loss of right as quite disadvantageous to the mortgagor. However, an offsetting theory holds that because there is less uncertainty as a consequence of the elimination of redemptive rights...