Our Court of Appeals recently issued an opinion that raises a few questions without giving altogether satisfactory answers. In 3502 Lending, LLC v. CTC Real Estate Service, decided in late April, the court held that notice available to a lender precluded it from claiming the insufficiency of prior liens in a quiet title action. Seems that the appellant, 3502, signed an August, 2006 agreement with a junior trust deed holder (Camis, Inc.) under which it would substitute for that holder under a debt structure (secured by a Paradise Valley residence) where the lien it purchased from Camis held third position (had “third lien priority,” according to the opinion). It’s an expensive house, and it’s in Arizona; naturally, that means it was foreclosed upon, and 3502 ended up with title at the foreclosure auction on its third position note.
Not wanting to pay on the senior notes, 3502 sued to quiet title, seeking a declaration that the first and second position trust deeds were extinguished by the foreclosure. Why? Because they were re-recorded on May 10, 2006, after the initial recordings of the first and second lien instruments (in August, 2005) failed to include legal descriptions of the residence. Those instruments did have the residence’s street address and Maricopa County Tax Assessor’s Parcel numbers, however. “Inadequate under the deed of trust statutes!” howled 3502. But when the instruments were signed in August, 2005, so said an affidavit, the legal descriptions were attached – they just fell off before recording happened, I suppose.
The trial court rendered judgment for the senior secured party, on exactly what premise cannot be inferred from the opinion. 3502 raised two issues on appeal. First, it contended that the senior liens were void because they lacked a true legal description (Argument I). Second, it argued that even if the liens were not void, there should still be a finding of inferiority of those first and second encumbrances because 3502 had no actual or constructive notice of these liens (Argument II). Apparently, either 3502’s principals did not obtain a title commitment, or do a title search themselves, or did not read the results of anyone who did perform a title search. If all of those assumptions are true then the $156,475 deed of trust (the remaining balance on the third lien) 3502 picked off must have been acquired from Camis at a smokin’ price. (The credit bid that prevailed on 3502’s lien was $202,000, but that included fees and costs and fluff, more than likely).
The Court of Appeals consumed some ink and paper blunting Arguments I and II; it’s unclear how much of a service it did in the process. First, it seems to me that Argument II was easily disposed of by pointing out that the contract under which 3502 acquired the third lien position explicitly stated the lien priority. Bingo! Game over on Argument II; you contracted for a junior position, and that’s what you own. But the court proceeds to explain why 3502 had constructive notice of the senior liens, and cites an Arizona case, Watson Const. Co. v. Amfac Mortg. Corp., that isn’t great authority for the proposition – because what was missing in Watson was two pages of text of the deed of trust, not the legal description of the collateral. A better statement of the principle is found in In re Wonderfair Stores of Ariz., albeit it’s a federal appeals court decision with Arizona roots. I wouldn’t have offered to argue the point of constructive notice at all, in the circumstances.
Argument I is a tricky one. Citing an Alaskan case, the Court of Appeals says that since an unrecorded instrument is fully enforceable between its original parties, and since the legal description was attached to the original instrument, the senior deeds of trust, when executed, fully complied with the deed of trust statute. Okay, the initial proposition is a correct statement of the law, but that’s not what A.R.S. §33-802(A) provides for a trust deed; that statute says to refer to the parcel by its subdivision lot number, if it’s a lot identified in a recorded plat.
So, here’s a few things I would have ventured from the bench on Argument I:
One, I’m not sure that the statutory language is jurisdictional; there’s a pre-statute Arizona Supreme Court opinion that says that the “description of property mortgaged must be such as to identify it.” Granted, the legislature isn’t the court; but I’m not sure that, constitutionally, real property must be described in one fashion only – or the deed of trust is void. Two, a federal court said in 1938, interpreting Arizona law, that “as between the parties thereto and their successors in interest with actual notice,” an unacknowledged and unrecorded declaration of trust “was as good as though all formalities had been complied with.” Since Argument II was resolved by a finding (as a matter of law) by the Court of Appeals that there was actual notice of the senior trust deeds, the federal court opinion at a minimum could be bootstrapped upon to find that the supposedly invalidly-recorded deeds of trust here are no “worse” than the unrecorded deed of trust referenced in the federal case. Therefore, I might rule, the descriptions in the senior deeds of trust are sufficient as a matter of law. In effect, however, that would be overruling the statutory provision in §33-802; that’s some heavy lifting for the Court.
Three, I would have discussed the availability of the equitable subrogation to the senior lienholder under the circumstances presented – a doctrine that equity produces the just and proper result. In effect, that’s fundamentally the same as item “two” above – based upon the notion of actual notice of a prior lien, a junior lienholder equitably is denied seniority in rank. I think that may be the best justification for the resolution of Argument I. (In fairness to the Court, however, I don’t know if that was raised by the appellee as a basis for denying the appeal.) Four, in the worst case, I might have remanded the matter back to the trial court, to find out to whom the May 2, 2006 Notice of Trustee’s sale was mailed by the agent for 3502, so that I could hold as a matter of law that 3502 had waived its claim to have been harmed by the failure of attachment of a legal description to the senior trust deeds when they were recorded. In any event, the Court’s disposition of Argument I troubles me, without further Court explanation.