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Conflicts of Laws, Deficiency Actions, and Statutes of Limitations – Oh My!

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By: Ben Reeves

What law governs a deficiency action if the choice-of-law provisions in the note and deed of trust conflict? The Arizona Court of Appeals answered that very question in ZB, N.A. v. Hoeller, No. 1 CA-CV 16-0071 (Ct. App. April 15, 2017).  It turns out, the note controls.

The Facts

In ZB, ZB, N.A. (ZB), a Utah bank, lent money to the Hoellers to purchase a commercial property in Missouri.  The note included a choice-of-law provision stating that Utah law governed the debt.  The deed of trust securing the commercial property, however, provided that Missouri law controlled “procedural matters related to the perfection and enforcement of [ZB’s] rights and remedies against the [p]roperty.”  In 2012, the Hoellers defaulted, and the bank recovered the property through a trustee’s sale.

Two years later, the bank sued the Hoellers in Arizona for the deficiency resulting from the foreclosure. The Hoellers moved to dismiss, arguing that Utah’s 90-day statute of limitations on deficiency actions barred ZB’s action.  ZB countered that Missouri’s 5-year period applied, because statutes of limitations are generally procedural such that the deed of trust’s choice-of-law provision controlled.  The trial court agreed with the bank, and ultimately entered judgment against the Hoellers.  On appeal, the judgment was reversed.

Legal Analysis

The Court of Appeals’ Opinion reached several interesting conclusions.

First, it agreed that trustee’s sales are procedural and, therefore, governed by the law of the state where the property is located. Nevertheless, it held that deficiency actions are substantive and, therefore, controlled by the law governing the underlying debt. See Restatement (Second) Conflict of Laws § 229.  Because the note required application of Utah law, the Court of Appeals determined that the deficiency action was, indeed, time barred.


Second, the Court of Appeals held that “[t]he deed of trust is effectively extinguished after a trustee’s sale of the security property.” It reached this holding in response to ZB’s claim that the deed of trust included a special remedial section, in which the parties agreed to apply the law of whichever jurisdiction would uphold ZB’s ability to maintain a deficiency action.  ZB argued, reasonably, that this agreement allowed Missouri’s longer statute of limitations to apply.  The Court of Appeals rejected this argument, because deeds of trust do not survive a trustee’s sale and—therefore—cannot give a lender additional contractual rights and remedies post-foreclosure.


Take Away Points

The ZB Opinion reveals a couple compelling take away points.  First and foremost, if there is any question about what state’s statute of limitations will apply, it is best to file the action before the earlier period runs.  Second, since a deed of trust does not survive a trustee’s sale, lenders should memorialize important post-foreclosure contractual rights and remedies in the note or other loan agreement to avoid having those rights swept away at foreclosure.