The Arizona appellate courts continue to reinforce Arizona's anti-deficiency law by finding that a prospective waiver of anti-deficiency protections violates public policy and is prohibited.

Many of us are familiar with Arizona's anti-deficiency statute, which prohibits deficiency judgments after a trustee's sale if the trust property is two and one-half acres or less and is utilized for a single one-family or single two-family dwelling. A.R.S. § 33-814(G). To avoid this limitation, some lenders attempt to rely on anti-deficiency waivers in their loan documents to circumvent the prohibitions on recovering against a defaulted borrower. The enforceability of such a contractual waiver had not previously been resolved by the Arizona appellate courts, until now.

In Parkway Bank & Trust Company v. Zivkovic, et al., 662 Ariz. Adv. Rep. 26 (June 13, 2013), the Arizona Court of Appeals addressed the enforceability of a loan clause requiring that Illinois law would govern any disputes. Contrary to Arizona's anti-deficiency law, Illinois law provides that the foreclosure of a mortgage does not affect the lender's rights to obtain a personal judgment against any person for a deficiency. Without that choice of law provision, the lender's deficiency action would have been barred under Arizona's anti-deficiency statute. The Arizona Court of Appeals held that the protections under the Arizona anti-deficiency statute cannot be prospectively waived. The effect of this holding is that anti-deficiency waivers in loan contracts are unenforceable.

Even if the parties have expressly agreed that another state's conflicting laws would apply, such a clause might not be enforceable either. In that case, the court must evaluate factors such as the location of contracting, negotiation, performance, subject-matter, and parties, to determine if the foreign state's law should still apply.

There are a few important points for lenders to take away from this case. First, a clause in the loan documents expressly waiving Arizona's anti-deficiency protection is likely unenforceable. Second, choice of law provisions that defy Arizona anti-deficiency law are not always enforceable. Third, lenders relying on a choice of law provision to circumvent Arizona anti-deficiency law must be certain that the facts and circumstances of the case favor the chosen state. A lender pursuing a deficiency action that would otherwise be barred under Arizona law should do a thorough review of the circumstances at the time of contracting, and consult legal counsel for an opinion, prior to engaging a potentially costly yet unsuccessful loan enforcement action.