In this edition, we have included articles regarding Arizona's anti-deficiency statutes applied to short sales, and the impact of a Form 1099-C on a lender's efforts to collect a debt. As with all of our newsletters, we hope that you will find this issue interesting, informative and, in the case of the Legal Ease below, funny! If you have any questions or suggestions, please let us know.
Kent Berk & Frank Moskowitz
While not law-related, this story was too funny to not pass along to our readers: After every flight, UPS pilots fill out a form, called a 'gripe sheet,' which tells mechanics about problems with the aircraft. Here is a sample:
P: Left inside main tire almost needs replacement.
S: Almost replaced left inside main tire.
P: Test flight OK, except auto-land very rough.
S: Auto-land not installed on this aircraft.
P: Something loose in cockpit.
S: Something tightened in cockpit.
P: Dead bugs on windshield.
S: Live bugs on back-order.
P: Evidence of leak on right main landing gear.
S: Evidence removed.
P: DME volume unbelievably loud.
S: DME volume set to more believable level.
P: Friction locks cause throttle levers to stick.
S: That's what friction locks are for.
P: IFF inoperative in OFF mode.
S: IFF always inoperative in OFF mode.
P: Suspected crack in windshield.
S: Suspect you're right.
P: Aircraft handles funny.
S: Aircraft warned to straighten up, fly right and be serious.
P: Target radar hums.
S: Reprogrammed target radar with lyrics.
P: Noise coming from under instrument panel. Sounds like a midget pounding on something with a hammer.
S: Took hammer away from midget.
Short Sales and Arizona's Anti-Deficiency Statutes
In our December edition, we opined that Arizona's anti-deficiency statutes may not apply to short sales. Although there are no reported decisions regarding short sales, we have continued our research and analysis on this issue.
As previously explained, the statutes expressly only apply to completed foreclosures. Since a short sale is not a completed foreclosure, arguably, the statutes do not apply. But, the analysis may not stop there.
There is case law, albeit not involving a short sale, holding that a purchase money loan on "qualifying property" is a non-recourse loan, meaning that the lender is limited to pursuing the property, and cannot waive the lien on the property and sue on the debt. In that case, however, the junior lienholder attempted to sue on the debt after the senior lienholder foreclosed on the property.
Arguably, that holding may apply in the context of a short sale because in a short sale a lender releases the collateral. As a result, the lender may not then be able to sue for the balance of the debt IF the debt is a purchase money loan on qualifying property.
On the other hand, if the debt is not a purchase money loan, the lender is entitled to waive the collateral and sue on the debt. Thus, in the event of a short sale, a non-purchase money lender may be entitled to pursue a claim for the deficiency. Also, if the property is not a qualifying property, the anti-deficiency protections would not apply in the event of foreclosure or a short sale.
Even if the lender otherwise has the right to pursue a deficiency, it may waive that right in the loan documents or short sale agreement.
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1099-C is Not Conclusive Evidence that Debt Was Forgiven
The Arizona Court of Appeals recently decided a case involving the impact of a bank issuing a Federal Form 1099-C ("Cancellation of Debt" form) on its ability to later sue to recover the debt.
According to the Court, the issuance of a "Cancellation of Debt" form may not automatically be a cancellation of the debt. Rather, the issuance of the form is merely prima facie evidence that the debt was released. The lender can rebut that presumption with other evidence that, for example, it issued the form pursuant to regulatory requirements, without actually intending to waive the right to recover the debt.
The Court relied on federal regulations that require lenders to issue a form 1099-C when the debt has been unpaid for a certain amount of time, irrespective of whether the lender is pursuing or intends to pursue collection. Thus, while the issuance of a 1099-C creates a presumption that the debt was released, the lender can overcome the presumption with evidence that it was following internal or federal regulations and issued the form even though it did not intend to forgive the debt.