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Arizona Court Determines Statute of Limitations Applicable to a Claim for Reformation of a Deed of Trust (and a Related Claim for Declaratory Judgment)

Former Counsel
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By:  Kevin J. Parker

In a recent Arizona Court of Appeals case, Deutsche Bank National Trust Co. v. Pheasant Grove LLC, 798 Ariz. Adv. Rep. 15 (August 23, 2018), the Court of Appeals addressed the question of what statute of limitations was applicable to a declaratory judgment claim.  In that case, a bank’s deed of trust inadvertently omitted one of the lots that was supposed to secure that bank’s loan.  The deed of trust should have covered lots 8 and 9, but by its terms covered only lot 8.  A different bank subsequently recorded a deed of trust that encumbered lot 9.  In connection with the second bank’s foreclosure of its deed of trust, the first bank sought reformation and a declaratory judgment with regard to its deed of trust, seeking to have that deed of trust cover both lots 8 and 9, as intended.  The trial court determined that the first bank’s reformation claim was filed too late, and also determined that the declaratory judgment claim was filed too late, beyond the applicable statute of limitations.  The first bank appealed.  The Court of Appeals affirmed, agreeing with the trial court.  The precise legal question was: what statute of limitations applies to a declaratory judgment action?  The Court of Appeals held that in order to determine the applicable statute of limitations for a declaratory judgment claim, the court must look to the underlying legal theory.  In that case, the bank’s underlying core claim was its request for reformation of its deed of trust to include lot 9.  The court held that the reformation claim was subject to a three year statute of limitations; and therefore, the declaratory judgment claim was likewise subject to a three year statute of limitations.