How does federal bankruptcy law affect the 90-day deadline to file a deficiency action under Arizona real estate law after a trustee sale (non-judicial foreclosure)? That was the question addressed in In re Rader.
Under Section 33-814 of Arizona real estate statutes, in order to pursue collection of a deficiency, a lender must file or maintain a lawsuit within 90 days after the trustee sale. Otherwise, the debt is deemed satisfied/paid in full for the amount for which the property was sold at the trustee sale. Of course, a lender may only file a claim for a deficiency if the claim is not barred by one of Arizona’s two anti-deficiency statutes.
But, what happens if the borrower is in bankruptcy? The short answer is that bankruptcy law prevails and controls, not state law, if there is a conflict. Specifically, once a bankruptcy is filed, the creditor must comply with bankruptcy law and, to the extent that conflicts with state law, the creditor is basically excused from abiding by state law.
In Rader, the borrowers filed bankruptcy, thus triggering the automatic stay. The automatic stay prevents the creditor from taking action to enforce or collect the debt, except as allowed in the bankruptcy, unless the creditor obtains relief from the automatic stay. Here, the creditor ultimately obtained relief from the stay to sell the property that was collateral for the loan at a trustee sale. The property was eventually sold for less than the total amount due on the loan; thus, there was a deficiency.
The creditor had timely filed a proof of claim in the bankruptcy, but never filed an action to collect the deficiency as otherwise required by Arizona law. The bankruptcy trustee objected to the claim since the lender never filed a deficiency action. The Ninth Circuit Bankruptcy Appellate Panel addressed whether the creditor was excused from doing so based on bankruptcy law.
The Court found that it was legally impossible for the lender to comply with both bankruptcy law (and the automatic stay) and Arizona law (requiring the lender to pursue a deficiency action within 90 days). Although the lender had obtained relief from the automatic stay, the order for relief was ambiguous, such that the lender was justified in not filing a deficiency action under state law after the sale of the real estate. Federal bankruptcy law supersedes state law. Therefore, the court found that the lender’s claim was not barred.
Please note that the Rader court’s analysis was based on the specific facts and circumstances of that case. Most importantly, the court spent considerable time evaluating and interpreting the order lifting the automatic stay and allowing the lender to sell the property. Ultimately, the court held that the order did not expressly authorize the lender to also file a deficiency action, such that it was prohibited from doing so under bankruptcy law. As a result, its proof of claim in the bankruptcy was allowed.
Indeed, how a case turns out under Arizona real estate law almost always depends on the contract, other documents and specific facts of the situation. Please consult one of our real estate attorneys if you have any questions.