The Arizona Court of Appeals (Division 2) recently issued an opinion regarding the extent to which parties must be noticed in a tax lien foreclosure action.
In this case, the subject real property (the "Property") was owned by Robert and Carri Anderson. The Property had a first position Deed of Trust, securing the Promissory Note. The Deed of Trust designated EquiFirst as the Lender and the Mortgage Electronic Registration System ("MERS") "as a nominee for Lender and Lender’s successors and assigns," as the "beneficiary under the Security Instrument," and as the legal title holder.
In 2005, EquiFirst endorsed the Note "Without Recourse, Pay to the Order of" to Wells Fargo. EquiFIrst also transferred the Note’s servicing rights to Homecomings Financial, LLC, a subsidiary of GMAC. GMAC subsequently became the holder of the Note, and placed it into trust, appointing U.S. Bank as trustee.
In February 2007, Delo purchased a tax lien on the Property from the Pinal County Treasurer on a property. In June 2010, after the statutory three-year waiting period has passed, Delo initiated a tax lien foreclosure action. Delo named as Defendants in the case, the Andersons, EquiFirst, and the San Tan Heights Homeowners Association. However, DELO did not name MERS or any of the GMAC parties.
None of the named Defendants appeared to defend or paid of the tax lien, and Delo obtained a default judgment. On October 7, 2010, the Pinal County Treasurer issued a Treasurer’s Deed for the Property to Delo.
In the meantime though, the Andersons had defaulted on the Note and MERS instructed the trustee to initiate a trustee’s sale to sell the Property. In May 2010, before the Treasurer issued Delo the Treasurer’s Deed, the trustee recorded a Notice of Trustee’s Sale, setting an August 31, 2010 sale date. GMAC, represented by U.S. Bank, was the highest bidder at the sale and a Trustee’s Deed was issued to U.S. Bank.
In December 2010, Delo filed a quiet title action against the GMAC parties. The trial court ruled in favor of Delo concluded that because Delo had recorded a Lis Pendens against the Property on August 12, 2010, before any recorded interest of the GMAC parties, the GMAC parties had received notice and an opportunity to intervene in the Delo’s tax lien foreclosure action. The trial court further concluded that having failed to intervene, the GMAC parties could not claim that their interests were prior to Delo’s interest.
The GMAC parties appealed the trial court decision arguing that as the holder of the Note they had the right to enforce it. They further argued that the lack of a recorded assignment of the Note had no bearing on the case because MERS, as GMAC’s agent, held a valid legal interest before Delo initiated his tax lien foreclosure action.
The Court of Appeals reversed the trial court ruling that "due process requires a tax lien holder to engage in ‘diligent search and inquiry’ for persons and entities holding a legal or equitable interest in property before interests can be foreclosed by default."
The Court of Appeals concluded that the Deed of Trust designated MERS as nominee for the lender, its successors and assigns, the beneficiary of the Deed of Trust, and the legal title holder, and that it was recorded in September 2005. Accordingly, the Court of Appeals reasoned, MERS’ interest in the Property vested long before Delo acquired any interest in the Property, and MERS should have been named in Delo’s tax lien foreclosure action.
In the end, the Court of Appeals dispelled with this appeal pretty simply by stating that Delo knew that MERS was an interested party all along, as MERS was identified as the beneficiary under the Deed of Trust, which was identified in the limited report that Delo ordered.
One take away for any tax lien holder or attorney representing a tax lien holder is order a litigation guarantee from the title company, as the title company would have identified the exact parties that would have needed to be named in the action. A limited title report typically would not have such a section in the report.
The other take away from this opinion is found in Footnote 3, where the Court stated that there is no requirement that an endorsement of a promissory note be recorded to be valid. The Court relied on the recent Arizona Supreme Court case – In re Vasquez – that ruled recording an assignment of a deed of trust is not required prior to filing a notice of trustee’s sale. This case established in Arizona that simply holding the note provides the power to perform a trustee’s sale. This Footnote emphasizes the general trend towards a recognition of the MERS system nationally – though not every state has jumped on board that train.
When in doubt – name every party that MIGHT have an interest. Better to spend a few hundred dollars extra on service of process then have a Treasurer’s Deed overturned.