In last month’s AZREIA newsletter, I wrote regarding an investor’s rights when a trustee’s fails to release a trustee’s deed after a completed, valid sale.  The article did not address those instances where a trustee need not release the deed – when the sale was in fact invalid.  Arizona law provides only two statutory instances where a completed sale is considered a nullity, requiring a rescheduling of the sale.  First, a sale conducted in violation of bankruptcy law is invalid.  See, A.R.S. § 33-810(C).  Second, a sale is “not complete” if it violates an undisclosed court order enjoining the sale.  A.R.S. § 33-811(D).  As explained in the February, 2011 article, it is our firm’s position that because the legislature provided only two specific instances where sales are not valid, any other sales are conclusively valid and a trustee must release a deed.  

             A.R.S. § 33-810(C) provides that “a sale shall not be completed if the sale as held is contrary to or in violation of any federal statute in effect because of an unknown or undisclosed bankruptcy.”  Therefore, it doesn’t matter if the trustee or bidder knew of the bankruptcy – the sale is invalid if the bankruptcy was filed.  The important question that arises is one of timing.  When does the bankruptcy have to be filed to invalidate a sale?  Many people are under the assumption that the sale is valid as long as the bankruptcy is filed after the auctioneer bangs the gavel.  However, at least one court has held otherwise.  In, In re Benson, 293 B.R. 234 (Bankr. D. Ariz. 2003), a United States Bankruptcy Court held that the sale is retroactively deemed invalid as long as the bankruptcy is filed prior to the purchaser paying for the property.  The Court cited the language of A.R.S. § 33-810(A) which provides that a sale is deemed completed upon payment “by the purchaser of the price bid.”  Therefore, the Court held that the sale wasn’t completed until the full price was paid, and any intervening bankruptcy would invalidate the sale.  The Court found it irrelevant that the bidder had paid the initial $10,000 deposit.  Of course, this is only one holding by a bankruptcy judge, with limited precedential effect; however, the decision is well reasoned.

             The second instance in which a sale is invalid is if it is completed in violation of a previously entered court order.  This exception references the mandate of A.R.S. § 33-811(C), which requires an owner seeking to stop a sale to obtain a court injunction on 5:00pm the day before the scheduled sale.  As with the bankruptcy, it is irrelevant if the trustee or the bidder knew of the order – if it was timely obtained, then the sale is invalid.  While on its face this doesn’t appear to help investors, this statute is actually very beneficial.  The statutory mandate that an owner obtain an injunction is often used by the investor in defending lawsuits by former owners seeking to invalidate sales.  In such cases, an investor is able to clear title based upon the former owner’s failure to obtain judicial relief prior to the sale. 

             While there is no guiding statutory language, the presumption is that a bidder at an invalid sale is only entitled to a return of its paid funds, and no damages.  Of course, if a trustee failed to timely return the funds, a bidder may have a claim for damages.   In both instances where the sale is invalid, it must be continued and rescheduled.  One the trustee has obtained the necessary relief to reschedule the sale, the trustee must notify by registered or certified mail all bidders of the new sale date and time.  However, depending on the reason for the delay, it may take several months before another sale is held.