Stripping Liens in Bankruptcy: Can my debtor do this?The Arizona Court of Appeals recently ruled on Compass v. Bennett, holding that second-position lenders are not required to “affirmatively and expressly” release a deeds of trust in order to “elect to waive the security” as a prerequisite to suing on a note.

The case arose when the Bennetts obtained a $1 million home equity loan from Compass, which was not “purchase money” or used to build any improvement or structure at their Paradise Valley home.  The loan transaction included a note, a security agreement, and a second-position deed of trust against the house.  The Bennetts had already obtained a couple of other loans to finance the home, including a first-position loan from Bank of America.  When the Bennetts defaulted on loan payments, Bank of America issued a notice of a trustee’s sale on its first-position loan.  After receiving notice of the trustee’s sale, but prior to the sale taking place, Compass filed a lawsuit against the Bennetts, seeking to enforce the note for the second-position $1 million home equity loan.

Both parties moved for summary judgment.  The Bennetts argued that Compass should have expressly waived its rights under the second-position deed of trust before suing and that failure to do so barred the lawsuit.  Compass cross-moved for summary judgment based on the Bennett’s admitted failure to repay the $1 million home equity loan.

The superior court entered judgment in favor of Compass, holding that Compass’s failure to exercise the rights it possessed to foreclose on its deed of trust constituted a waiver of such rights.  The court noted that not only did Compass fail to exercise its rights, but the rights were extinguished by the trustee’s sale on the first position loan.

The Court of Appeals affirmed.  The court found no precedent to support the Bennetts’ argument that Compass was required to “affirmatively and expressly” waive its rights under the deed of trust.  Moreover, the Bennetts conceded that had Compass served them with the lawsuit even a mere day after the trustee’s sale on the first-position deed of trust, such a delay would have constituted a proper waiver.  Basically, the fact that Compass might have “sued a few weeks too early” was irrelevant.

Additionally, the court found that Bank of America’s decision to execute a trustee’s sale did not constitute a choice by Compass to exercise its nonjudicial foreclosure rights.  Both the junior lender and senior lender have a choice of remedy, and that choice does not have to be the same.

The attorneys at Windtberg & Zdancewicz, PLC provide clients with experienced legal representation in all litigation and bankruptcy matters. We are experienced in creditor’s rights prosecuting and defending garnishments, charging orders, attachment, property execution, trustee’s sales, foreclosures, judgments, judgment collection, domestication of foreign judgments, and creditor’s issues in bankruptcy cases. If you need assistance with your collection matters, please contact us at (480) 584-5660.