By Jones Osborn II

The primary reason for using a deed of trust instead of a mortgage is speed of foreclosure.

A traditional mortgage requires the filing of a lawsuit, which is then followed by a sheriff's sale of the property. Even after the sheriff's sale the debtor usually has a period of time to buy it back, normally six months. This is known as the right of redemption. By the time all is said and done, it can take more than a year and thousands of dollars to complete the foreclosure process.

With a deed of trust, however, a private sale can be conducted after 90 days notice, and there is no right of redemption. The trustee's sale is final, quick, and inexpensive.

Because of this accelerated procedure, the courts construe the deed of trust statutes strictly against the lender. If there is any ambiguity or question about the validity of a foreclosure proceeding, the decision will usually be in the borrower's favor.

An Example. An actual example illustrates this point. A borrower signed a note providing that if a payment was missed, the lender could not accelerate the note until the borrower had been given 30 days written notice. During the 30 days, the note allowed the borrower to make the late payment, plus any late charges, and thereby avoid foreclosure.

In this particular case, the borrower did default. The lender sent a written notice of the default, as required by the note, and one day later gave the statutory 90-day notice of the trustee's sale. The lender then completed the sale at the end of 90 days, and the borrower sued to set it aside.

The Question. Did the lender have to give a 30-day notice plus a 90-day notice, or could both notices run at the same time?

The Arguments. The borrower argued that he was entitled to receive the 30-day notice and the 90-day notice consecutively. In other words, the lender would have to first give the 30-day notice specified in the note, and only after 30 days had passed without a cure could the lender give the 90-day notice, or 120 days total. Under this theory, the borrower could cure during both the 30-day period contained in the note and during the 90-day period prior to the sale by making the late payment plus any late charges and expenses.

The lender argued that there was no reason these two periods could not run concurrently. The borrower received the 30 days required by the note and the 90-day notice required by law for the trustee's sale, even though they both ran at the same time.

The Decision. As you surely guessed, the court resolved the issue in favor of the borrower. The court said that if a note requires notice, that notice must be given and the time to cure must expire before the statutory 90-day notice may even be given. The result is that whenever a note gives the borrower the right to receive notice of default and an opportunity to cure, the borrower is entitled to receive two notices and two cure periods, one after the other.

The Lesson. Always be very careful to comply fully with all the terms of the note and applicable law when foreclosing a deed of trust, and resolve all ambiguities in favor of the borrower. Usually it is advisable to obtain experienced legal counsel to conduct the foreclosure. In addition, if you are a lender, be reluctant to provide lengthy cure periods in the note or deed of trust, because these will only add to the time it takes to foreclose if there is a default.

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See Schaeffer v. Chapman, 176 Ariz. 326, 861 P.2d 611 (Ariz. App. 1993).