Errors in Trustee's Sales: No Do-Overs in Credit Bids

A lender who completes a Trustee’s Sale based on a mistake in the bid price is not entitled to correct its mistake. Such “errors” take two common forms: (1) the trustee’s opening, or credit, bid is greater than the amount owed on the property (creating excess proceeds that should be paid to the borrower or others) and (2) the opening bid was “too high” and the lender wants to redo the sale to try to pursue a deficiency action (where anti-deficiency statutes do not apply). Although we have found numerous examples of efforts to correct both of these “errors,” Arizona law seems clear that a completed Trustee’s Sale cannot be canceled or undone after-the-fact.

Overview of Trustee’s Sales in Arizona

Arizona law allows a lender to foreclose on real property through non-judicial sale if the borrower and lender utilized a deed of trust to secure the lender’s loan. The Arizona Supreme Court has held that: “The Deed of Trust statutes thus strip borrowers of many of the protections available under a mortgage. Therefore, lenders must strictly comply with the Deed of Trust statutes, and the statutes and Deeds of Trust must be strictly construed in favor of the borrower.” Patton v. First Federal Sav. and Loan Ass’n of Phoenix, 118 Ariz. 473, 477, 578 P.2d 152, 156 (1978).

In order to foreclose through a non-judicial sale of the property, the lender, who is also the beneficiary of the deed of trust, must follow the statutory scheme that the Arizona Legislature has laid out. Arizona courts have held that “strict compliance” is essential to a valid non-judicial sale. LeDesma v. Pioneer Nat. Title. Ins. Co., 129 Ariz. 171, 173, 629 P.2d 1007, 1009 (Ct. App. 1981) (internal citations omitted). Next, the trustee must conduct the non-judicial sale, where the property must be sold to the highest bidder. Ordinarily, a cash bid is required, but the lender may make a credit bid up to the amount it is owed from the borrower.

A trustee’s sale is nothing more than a statutorily guided public auction. Under Arizona law, “[e]very bid shall be deemed an irrevocable offer until the sale is completed.” This is in line with the common law rules relating to auctions, which states that, “the highest bidder at an auction can be said to have entered into a contract for the sale of land on acceptance of the offeree's bid.” BT Capital, LLC v. TD Service Co. of Arizona, 229 Ariz. 299, 302, 275 P.3d 598, 601 (2012) (citing Restatement (Second) of Contract, § 28 (1981). “The sale shall be completed on payment by the purchaser of the price bid in a form satisfactory to the trustee” and “the beneficiary may make a credit bid in lieu of case at sale.” There is nothing in the Deeds of Trust statutes that entitle a trustee or beneficiary, once the trustee’s sale has occurred, to rescind the sale. A.R.S. § 33-801(A).

Mistakes in Successful Credit Bids Are Binding

Although lenders will commonly point to what they contend is the absence of controlling law in Arizona on the issue, the Arizona Supreme Court actually addressed this very issue nearly forty-five years ago in Nussbaumer v. Superior Court in and for Yuma County, 107 Ariz. 504, 507, 489 P.2d 843, 846 (1971). Nussbaumer answers in the negative whether a trustee who has completed a trustee’s sale and conveyed property to the successful credit bidder subsequently can undo the sale based on alleged errors in setting the credit bid.

In Nussbaumer, the lender who was the successful credit bidder after judicially foreclosing sought relief from the sale, asking to modify or vacate the sale on the grounds of a mistake in its bid. The trial court found that “it was ‘painfully evident’ that the $460,231.64 bid was a ‘substantial unilateral mistake on the part of the [lender’s] attorney.’” Id. The Arizona Supreme Court recognized the “general rule” applicable to overbids that “mere inadequacy of price, where the parties stand on an equal footing and there are no confidential relations between them, is not, in and of itself, sufficient to authorize vacation of the sale unless the inadequacy is so gross as to be proof of fraud or is so gross that it shocks the judgment and conscience of the court.” The Court applied the same test to overbids:

Where an overbid is made, which has in no way resulted from deceit, undue influence or other form of fraudulent inducement but is, rather, the result of one's own negligence, ignorance or inadvertence, we feel that equity should not intervene. Where the complaining party has access to all the facts surrounding the questioned transaction and merely makes a mistake as to the legal consequences of his act, equity should normally not interfere, especially where the rights of third parties might be prejudiced thereby.

The Nussbaumer court concluded that one who makes a mistake in its credit bid, “whether it be a mistake of fact or law,” is generally not entitled to be relieved of that mistake:

If a foreclosure sale could be set aside or modified simply because the bidder at such sale makes a bid which he later claims to be excessive, an uncertainty would be rendered in the judicial sale process which would seriously curtail the effectiveness and conclusiveness of such sales. It is for this reason that Arizona courts have long held that the general policy is to sustain judicial and execution sales.
Id. at 508, 489 P.2d at 847.

Notably, Arizona is not alone in refusing to allow a lender a do-over due to a mistake in a credit bid. In a similar context, the Massachusetts Supreme Court also has held that a lender’s “mistake in instructing its agent to bid more for the property than it was owed does not relieve the defendant of its obligation to give the surplus to the plaintiff.” Duclersaint v. Federal National Mortgage Assoc., 696 N.E.2d 536, 538 (Mass. 1998). The Massachusetts court observed that its decision was “consistent with sound public policy, because permitting a mortgagee to change the purchase price after the completion of the foreclosure sale would have a deleterious effect on the foreclosure process.” Id.

The fact that Nussbaumer was a judicial foreclosure case (it predated Arizona’s enactment of the Deeds of Trust statutes) and the alleged mistake in this case occurred in a non-judicial foreclosure sale does not make it less applicable to the instant case. It would make no sense to enforce sales based on mistaken credit bids in the judicial foreclosure context but allow a lender to unilaterally cancel and redo foreclosure sales in a non-judicial proceeding in which the lender has total control of the sale process. The finality of the non-judicial foreclosure process and the abbreviated timeline for any deficiency action would be utterly defeated if lenders and buyers could simply claim mistake and redo a trustee’s sale at their whim.
Indeed, other courts have applied the same rationale used in Nussbaumer to mistakes made in non-judicial foreclosure cases. In Spencer v. Jameson, for example, the Idaho Supreme Court refused to excuse a lender’s mistaken bids and held that the non-judicial foreclosures sales could not be undone. As the concurring judge wrote in that decision:

[A] credit bid exceeding the trust deed obligation has a chilling effect on the trustee’s ability to obtain the maximum amount of recovery for the debtor’s property. Allowing a beneficiary to submit a credit bid in excess of the debtor’s obligation would give the beneficiary an unwarranted competitive advantage over cash bidders who might be willing to pay more than the debtor’s obligation. Such a practice would also deprive the debtor of any excess sale proceeds that might otherwise be available for his or her benefit. A credit bid is designed to allow the beneficiary to bid up to the total owing on the trust deed obligation without having to produce cash in that amount at the trust deed sale, not to allow the beneficiary to avoid a competitive trustee’s sale.
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It is clear that the upper limit of a credit bid is the amount owing on the obligation secured by the trust deed. If the beneficiary were permitted to bid in excess of the amount owing on the obligation secured by the trust deed, without having to pay the excess in cash, there would be no need for a competitive auction—the beneficiary would always be able to outbid a cash purchaser.

Spencer v. Jameson, 211 P.3d 106, 116-17 (2009).

The fundamental legal concept underlying all of these cases is that one who bears the risk of a mistake is not entitled to relief from that mistake. As the beneficiary and credit bidder, the lender is responsible for instructing the trustee of the correct amount of the credit bid and is under no obligation to bid its entire credit balance. The law does not allow, and should not permit, the lender the opportunity to reconsider its credit bid after-the-fact.
Arizona’s Deeds of Trust statutes do not empower a trustee to unilaterally undo a Trustee’s Sale. Once the trustee completes the Trustee’s Sale, both he and the lender lack the authority to undo it and any attempts to rescind it are a legal nullity.

Flawed Methods for Attempting to Correct Mistakes

The most common method for trying to undo a trustee’s sale is the recording of an Affidavit of Erroneous Recording with the County Recorder in the county in which the trustee’s sale was conducted. The Affidavit of Erroneous Recording generally states that the Trustee’s Deed, the document signaling the successful completion of the Trustee’s Sale, was recorded in error. The Affidavit of Erroneous Recording, however, cannot negate the fact that a Trustee’s Sale took place or that the lender was the successful purchaser based on its credit bid. Such Affidavits of Erroneous Recording cannot erase the Trustee’s Sale or rewrite history. The misuse of the Affidavit of Erroneous Recording to try to correct mistakes in credit bids, therefore, is legally insufficient to undo the Trustee’s Sale.

A deed is a contract. A Trustee’s Deed Upon Sale is a contract that wipes out the prior owner’s interest in the property and the borrower’s deed of trust. It is axiomatic, then, that a trustee cannot unilaterally restore the parties to their prior positions of owner and beneficiary without, at a minimum, the agreement of all parties. As one Texas court has held:

When a party with a property interest wishes to challenge a sale's validity, the proper action is to bring a cause of action to set aside the sale and cancel the trustee's deed. It is incumbent on the party attacking the sale to plead and prove any irregularities rendering the sale invalid. However, in this case, instead of bringing a cause of action to challenge the sale, the mortgagee instructed the trustee to rescind and cancel the deeds of the completed sale.

The trustee under a deed of trust has limited authority to act as the mortgagor's agent only in the sale of the property. Although it is in the interest of both the mortgagor and the mortgagee to sell the property for the highest price available, the trustee is not responsible to obtain a good deal for the purchaser or to protect the purchaser's interests, even if that purchaser also happens to be the mortgagee. The trustee is only responsible to the mortgagee in the mortgagee's capacity as a creditor interested in satisfying the debt out of the proceeds of the sale; he is not responsible to the mortgagee in the capacity as a purchaser seeking to purchase the property for less than its fair value in opposition to the mortgagor's interest.

Once a sale is complete, there is no further express or implied authority to act as the mortgagor's agent in the cancellation or rescission of a sale. A trustee does not have the power to execute a “Cancellation of Deed” purporting to take back title to the property and resurrect the underlying debt. To imply a power in the trustee to nullify a sale after the sale is complete and the trustee's deed has been executed, delivered, and filed, would be to give the trustee powers never specified or contemplated by the deed of trust.

There must be a certain point in time at which the sale by the trustee may be said to have been completed and his duties and authority come to an end, except to the extent that he may still be a conduit through which the proceeds of that sale pass to the proper parties. Any subsequent action to avoid the sale must be brought by the parties as a cause of action.

Bonilla v. Roberson, 918 S.W.2d 17, 21-22 (Tex. App. 1996).

The finality of the Trustee’s Sale must be honored. If a lender is allowed to undo the Trustee’s Sale for a second bite at the apple, for whatever reason, it exposes the borrower to substantial risk and uncertainty. Where a lender erroneously sets an opening bid either too low or too high, it must bear the consequences of that error. If the erroneous credit bid results in excess proceeds, the lender must pay those excess proceeds to the borrower or other party that may be entitled to them. If the erroneous credit bid prevents the lender from proceeding with a deficiency action, then that is also a risk that the lender bears.