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Arizona Supreme Court Holds a Credit Bid at a Trustee’s Sale Should Not be Credited to a Title Insurer Under a Standard Lender’s Title Policy To the Extent the Bid Exceeds the Collateral’s Fair Market Value

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By:  Richard H. Herold

The Arizona Supreme Court recently addressed what impact, if any, a lender’s credit bid at an Arizona trustee’s sale has on an insurer’s liability under Sections 2, 7 and 9 of the standard’s lender’s title policy (“Policy”), holding in Equity Income Partners, LP v. Chicago Title Insurance Company, 241 Ariz. 334, 387 P.3d 1263 (February 7, 2017) as follows:

  1. Section 2 of the Policy, entitled “Continuation of Insurance,” not Section 9, entitled “Reduction of Insurance; Reduction or Termination of Liability,” applies when a lender acquires property at a trustee sale by “either a full- or partial-credit bid” since Section 2 directly addresses the existence and amount of coverage in such circumstances. Id. at 1267.
  2. A full- or partial-credit bid does not constitute “payment” or a “payment made” under Section 2 or 9 of the Policy because those terms are not defined in the Policy and, as such, are construed according to their plain and ordinary meaning.  The Policy’s “language should be examined from the viewpoint of one not trained in the law or in the insurance business.”  Expressly noting that Arizona’s statutory scheme for non-judicial foreclosures treats a credit bid as having the same effect as a “payment” from a borrower, due to the state’s long-standing policies protecting debtors, the Court distinguished that context from its Policy analysis.  The Court observed that, “[i]n the insurer/insured context…, Arizona’s public policy protects insureds,” thus requires that the Policy be construed in favor of coverage and against the title insurer, and does not support treating the credit bid as a payment under the Policy.  The Court went on to suggest to insurers that they could, in the future, expand the ordinary meaning of “payment” or “payments made” by defining those terms in the Policy to include credit bids. Id. at 1267-68.
  3. A full- or partial-credit bid does not terminate coverage under Section 2(a)(i)of the Policy, reduce coverage under Section 2 of the Policy, or terminate or reduce liability under Section 7 of the Policy.  Instead, only the fair market value of the real property on the date of the sale should be credited against the amount due and owing under the Policy. Id. at 1270.

In short, the Arizona Supreme Court, responding to three certified questions from the Ninth Circuit Court of Appeals, clarified that, while a credit bid on collateral at a trustee’s sale must be fully credited as a payment against a loan balance even if the credit bid exceeds the fair market value of the collateral, only the fair market value of the collateral (not a higher credit bid) may be credited to an insurer under a standard lender’s title insurance policy.

[Author’s note:  in the Conclusion, in conflict with its earlier statements in the case, the Court suggests that the above holdings are limited to cases involving full-credit bids — and therefore not applicable to partial-credit bid cases.]