Hogan v. Washington Mutual Bank – 7/26/2011

August 4, 2011

Arizona Court of Appeals Divison One Holds That Deeds of Trust Are Not Negotiable Instruments Under The U.C.C.

Hogan’s home loan with Long Beach Mortgage Company was secured by a deed of trust.  Washington Mutual later substituted Long Beach as the trustee.  In October 2008, Hogan received notice that payments on the loan were overdue and that a Notice of Trustee’s Sale had been recorded.  Around the same time, the government closed Washington Mutual, appointed FDIC as a receiver, and Chase acquired certain Washington Mutual assets, including the right to service Hogan’s loan. 

Hogan sued, asking the court to stay the pending sale and to hold a hearing regarding the banks’ standing to have the trustee’s sale.  Hogan also asserted claims for: an accounting of the loan documents showing the succession from Long Beach to Chase; declaratory relief; sanctions under Arizona’s false documents statute, A.R.S. § 33-420; an injunction against the sale; and damages related to Washington Mutual’s takeover of the home.  Chase moved to dismiss.  In response, Hogan argued that if a bank wants to enforce rights under the promissory note, then it must prove it holds the note, citing A.R.S. § 47-3301, a provision of Arizona’s UCC.  Chase contended that UCC principles do not apply to mortgages and that the damages claims should be filed with the FDIC, not in state court.  The trial court dismissed the complaint and Hogan appealed.

The Court of Appeals affirmed in a unanimous opinion.  The Court first noted that Hogan had not challenged the trustee’s authority to hold a trustee’s sale.  After all, Hogan had not made loan payments and Arizona’s non-judicial foreclosure statute does not require the trustee to present the original note. 

Hogan argued that the bank could not foreclose on the note because the note was a “negotiable instrument” subject to the UCC and the bank did not qualify as a “person entitled to enforce” under A.R.S. § 47-3301.  Rejecting this theory, the Court explained that Chase was not suing on the note but instead was conducting a sale pursuant to the deed of trust.  A “negotiable instrument” under the UCC is an “unconditional promise or order” to pay money.  A deed of trust, in contrast, conveys property to a trustee “to secure the performance of a contract.”  A.R.S. § 33-801(8).  The UCC therefore does not govern a deed of trust because the deed is not an “unconditional promise” or an “order” to pay money. 

Finally, the Court rejected Hogan’s argument that a deed of trust could be subject to the UCC under A.R.S. § 47-3117, which states that separate agreements modifying negotiable instruments are a defense to the original obligation.  Hogan was not asserting as a defense that the deed of trust modified the obligation and that section, therefore, did not apply.

Judge Swann authored the opinion; Judges Irvine and Portley concurred.