In Re Krohn
52 P.3d 774, 203 Ariz. 205 (2002)
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Rule of Law:
A trustee's sale of real property conducted under a power of sale in a deed of trust may be set aside by a court solely on the basis that the bid price was grossly inadequate.
Facts:
- Linda Lorraine Krohn was in default on the payments for her home.
- Krohn's lender scheduled a non-judicial foreclosure, known as a trustee's sale.
- Around September 24, 2000, Krohn received a letter from her lender stating that ownership of her property would likely be transferred in the next 60 to 90 days.
- In fact, the trustee's sale was held only a few days later on September 27, 2000.
- Sweetheart Properties, LTD., the only bidder, purchased Krohn's home at the sale for $10,304.
- The undisputed fair market value of Krohn's home was at least $57,500.
- Sweetheart Properties was a good faith purchaser with no knowledge of the dealings between Krohn and her lender, including the misleading letter about the sale timeline.
Procedural Posture:
- Linda Krohn filed an initial Chapter 13 bankruptcy petition, which was dismissed.
- Following the dismissal, Krohn's home was sold at a trustee's sale to Sweetheart Properties, LTD.
- Krohn filed a second bankruptcy petition in the U.S. Bankruptcy Court.
- In the second bankruptcy proceeding, Krohn sought to have the trustee's sale vacated for gross inadequacy of price.
- The U.S. Bankruptcy Judge certified the legal question of whether a sale could be set aside on that basis alone to the Supreme Court of Arizona.
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Issue:
May a trustee's sale of real property conducted under a deed of trust be set aside solely on the basis that the sale price was grossly inadequate?
Opinions:
Majority - Feldman, J.
Yes, a trustee's sale of real property under a deed of trust may be set aside solely because the bid price was grossly inadequate. While deed of trust sales are statutory and designed for efficiency, they strip borrowers of significant protections available in judicial foreclosures, necessitating that the statutes be construed in favor of the borrower. The court adopts the Restatement (Third) of Property: Mortgages § 8.3, which holds that a grossly inadequate price can render a foreclosure sale defective, regardless of whether it is judicial or non-judicial. The court has long exercised its equitable power to vacate judicial sales for grossly inadequate prices that 'shock the conscience,' and there is no statutory prohibition against extending this principle to trustee's sales. Allowing speculators to reap windfall profits from grossly inadequate bids does not serve the public interest and creates an inequitable result, especially for debtors like Krohn who have significant equity in their property.
Dissenting - McGregor, V.C.J.
No, a trustee's sale of real property should not be set aside solely for a grossly inadequate price. The majority is legislating from the bench by adding a minimum bid requirement to a comprehensive and detailed statutory scheme that the legislature deliberately omitted. The court's inherent authority to supervise its own processes in judicial sales does not extend to non-judicial foreclosures, which are entirely creatures of statute. This decision creates a new cause of action without clear parameters, such as a limitations period, which will inject uncertainty into the market, chill bidding, and potentially harm debtors by reducing competition at sales. The policy concerns underlying the Restatement rule are already addressed by Arizona's deficiency judgment statutes, and the court should defer to the legislature to make any changes to the Deed of Trust Act.
Analysis:
This decision significantly alters Arizona's foreclosure law by extending the court's equitable oversight from judicial foreclosures to non-judicial trustee's sales. It establishes that substantive fairness, specifically a price that is not 'grossly inadequate,' is a prerequisite for a valid trustee's sale, even when all statutory procedures are meticulously followed. This creates a new avenue for debtors to challenge foreclosures, potentially reducing the finality of such sales and introducing new risks for third-party purchasers. The ruling prioritizes the protection of debtor equity against windfall profits for speculators over the absolute certainty of a procedurally correct, non-judicial sale, aligning Arizona with the modern approach of the Restatement (Third) of Property.
