May 15, 2014

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Lenders Beware – the Steinberger Decision Leaves Lenders Vulnerable to a Defaulting Homeowner's Delay Tactics

As if lenders don't have enough on their plates, dealing with a slowly rebounding economy and debtors struggling to make payments, on January 30, 2014, the Arizona Court of Appeals issued a decision that is bound to wreak more havoc upon lenders. In essence, Steinberger v. McVey ex rel. Cnty. of Maricopa, 1 CA-SA 12-0087, 2014 WL 333575 (Ariz. Ct. App. Jan. 30, 2014) held that a defaulting borrower may defend against a foreclosure action by challenging the trustee's authority to conduct the trustee's sale, thereby hindering what may otherwise have been a straightforward foreclosure.

In Steinberger, the residential mortgage loan was initially issued in 2005 to Plaintiff Katrina Steinberger's 87-year-old father, who died two years later, leaving her the real property/home. By 2008, she was having difficulty making the payments on the home, and asked IndyMac Bank, FSB ("IndyMac") to consider a loan modification. She was advised that she must first default, and she did so. Subsequently, during the following two years, she negotiated with IndyMac for a loan modification wherein Steinberger received conflicting and confusing information and communications from IndyMac, such as assurances that the loan modification had been approved, the noticing of (and then vacating of) foreclosure dates, and assertions by IndyMac that she had not, in fact, submitted all of the paperwork required for a modification.

Finally, in November 2010 she filed an action in the Superior Court of Maricopa County against IndyMac to prevent the trustee's sale and sought a declaratory judgment on the basis that IndyMac lacked authority to conduct the trustee's sale. Upon filing a $7,000 bond, she obtained a temporary restraining order to prevent the foreclosure, even though the Superior Court later dismissed Steinberger's Complaint. Steinberger subsequently filed a special action which was accepted by the Arizona Court of Appeals.

The Court of appeals granted relief in part, and denied relief in part. Specifically, the Court of Appeals held that there was a lack of a proper chain of title to the deed of trust. In so doing, the Court of Appeals appears to have assumed that no foreclosure would be permissible in the absence of evidencing a chain of assignments from the originator of the loan.

The Court of Appeals relied upon Hogan v. Wash. Mut. Sav. Bank, 230 Ariz. 584, 277 P.3d (2012), wherein the Arizona Supreme Court held that "Arizona's non-judicial foreclosure statutes do not require the beneficiary [of a deed of trust] to prove its authority. Here, the Court of Appeals, construed this statement to mean that the beneficiary need not prove its authority unless the borrower alleges a lack of authority in her complaint. There was no such allegation in Hogan, but there was in Steinberger.

Is the Court of Appeals correct in requiring a valid chain of title to the deed of trust in order to foreclose under Arizona law? Probably not, and this is why – Arizona not only has adopted the common law rule that the mortgage follows the note1, but even has a statute, A.R.S. § 33-817, which states 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." So if the note is transferred, no separate assignment of the deed of trust should be necessary, thus extinguishing Steinberger's requirement for a valid chain title to a deed of trust.

However, since Hogan established that evidence of holding the note is not necessary in order to foreclose, what is necessary in order to foreclose? If Steinberger remains unchallenged, lenders will undoubtedly have to think twice about pursuing foreclosure lawsuits, and be prepared to defend themselves against claims challenging a trustee's authority to foreclose upon property.

1 Notably, Steinberger never challenged whether IndyMac was the holder of the Note, thereby presumably accepting IndyMac as the valid holder.