Arizona Court of Appeals Division One Holds That (1) a Party May Sue to Forestall a Trustee’s Sale by Asserting That the Trustee Lacks Authority to Conduct the Sale, and (2) if a Lender or Its Agent Offers to Modify a Loan, the Lender Must Act Reasonably in Processing the Loan Modification.

Plaintiff Katrina Steinberger owned a house encumbered by a deed of trust for a loan issued by IndyMac Bank, FSB (the “Bank”).  Between 2008 and late 2010, Steinberger negotiated with the Bank for a loan modification to reduce her monthly payments.  Steinberger received a series of confusing communications from the Bank concerning the modification, including statements that the modification was being approved or that trustee’s sales had been noticed for the property.  By January 2011, the loan modification had not come to fruition and another trustee’s sale was set for January 10, 2011.  Steinberger filed suit to prevent the trustee’s sale and asserted eleven causes of action, including a claim challenging the authority of the trustee to conduct the sale, as well as a claim that the Bank acted negligently in processing her loan modification.  The superior court granted Steinberger a temporary restraining order prohibiting the Bank from conducting the trustee’s sale, but later granted the Bank’s motion to dismiss Steinberger’s complaint.  Steinberger petitioned for special action relief.  

The Arizona Appeals Court accepted special action jurisdiction because the petition raised a purely legal question, Steinberger had no equally plain, speed, or adequate remedy by appeal.  The Court granted relief in part and denied relief in part.  The Court first held that Steinberger had pleaded a cause of action to prevent the trustee’s sale based on the trustee’s lack of authority to conduct the sale.  The Court relied on Eardley v. Greenberg, 164 Ariz. 261, 792 P.2d 724 (1990), an Arizona Supreme Court decision holding that a trustor could challenge a trustee’s authority to conduct a sale. The Court noted that although trustee’s sales are meant to operate quickly and efficiently, trustor’s must be afforded the opportunity to challenge a trustee’s authority, even if such a challenge slows down the process.  

The Court next held that Steinberger had adequately stated a claim for negligent performance of an undertaking based on her allegation that the Bank lured her into defaulting on her loan with the prospect of the loan modification, and had negligently administered the modification process.  The Court explained that Arizona recognizes the tort of negligent performance of an undertaking as summarized in the Restatement (Second) of Torts § 323, and that an alleged increase in the risk of economic harm may be sufficient to state such a claim.  See McCutchen v. Hill, 147 Ariz. 401, 404, 710 P.2d 1056, 1059 (1985). 

The Court also held that based on the specific allegations in her complaint, Steinberger adequately pled claims for negligence per se based on alleged violations of A.R.S. § 39-161, breach of contract, unconscionability, and discharge of debt.  The Court, however, affirmed the dismissal of Steinberger’s claims to quiet title, fraudulent concealment, common law fraud, consumer fraud, and a portion of Steinberger’s unconscionability claim. 

Judge Gould authored the opinion; Presiding Judge Gemmill and Judge Swann concurred.