Under Arizona law, does a secured creditor need to file a deficiency action within 90 days after a trustee’s sale to preserve the unsecured portion of its claim in a bankruptcy case? Or is filing (or amending) a proof of claim sufficient? Two recent cases out of Arizona provide conflicting answers.

The two cases reached the issue based on a similar fact pattern. In both cases, the debtors stipulated to relief from the automatic stay to allow a trustee’s sale to occur. In both cases, the sales resulted in substantial, unsecured deficiencies. In both cases, the trustees objected to the unsecured portion of the unsecured claims based on the lenders’ alleged failure to comply with A.R.S. § 33-814(A), which requires a lender to maintain a deficiency action within 90 days after the date of the trustee’s sale. See Valley Nat’l Bank of Arizona v. Kohlhase, 182 Ariz. 436 (Ct. App. 1995). Despite the similar fact patterns, the courts reached conflicting results.

In In re Wright, 486 B.R. 491 (Bankr. D. Ariz. 2012), a Bankruptcy Judge held that a lender’s filing of a proof of claim for the full amount owing under its loan documents did not relieve the lender of its obligation to maintain a deficiency action within 90 days of the trustee’s sale. Because the lender failed to file a deficiency action and, instead, relied on its proof of claim, the Bankruptcy Court disallowed the unsecured portion of the lender’s claim in the borrower’s bankruptcy case.

In In re Rader (Pierce v. Carson), 488 B.R. 406 (B.A.P. 9th Cir. 2013), the Bankruptcy Appellate Panel reached the opposite result. The panel held that a lender does not need to file a deficiency action to preserve the unsecured portion of its claim. Instead, since the automatic stay and discharge injunction made it “impossible” for a lender to comply with the requirements of A.R.S. § 33-814(A) and conflicted with the efficient administration of a Bankruptcy Court’s administration of claims, the panel concluded that the procedural requirements of A.R.S. § 33-814(A) were preempted by federal bankruptcy law.

Wright seems to reach a terribly unfair result by exploiting an ambiguity in the parties’ stipulation, and Rader relies upon the rather extreme conclusion that A.R.S. § 33-814(A) is preempted by federal bankruptcy law. Although a lender may be able to distinguish both cases, the conflicting and non-binding results leave lenders in a difficult position.

To minimize the confusion, lenders that obtain relief from the automatic stay to complete a foreclosure sale should consider including a procedure for the preservation of the unsecured portion of their claim, if any, as part of the order granting relief from the automatic stay. Resolving the issue prior to completion of the trustee’s sale may alleviate some of the ambiguities created by these two cases.