In an opinion issued last week, the Arizona Court of Appeals held that commercial borrowers and guarantors ‎cannot prospectively waive their right to limit their damages in a deficiency action on the basis of the fair market value of property ‎sold through a trustee’s sale, potentially impacting any loan agreements that provide for such ‎waivers.‎ The holding does not affect most residential loans, for which lenders are generally precluded from recovering deficiencies.

Background

A.R.S. § 33-814(A) provides that borrowers, and by extension guarantors, are entitled to a credit ‎on the underlying debt for the greater of the trustee’s sale price or the fair market value of the ‎trust property at the time of the sale, as determined by the court at a priority hearing. The ‎purpose of these provisions is to protect borrowers from inequities that may result if the property ‎is sold below market value. In an effort to avoid litigation, lenders sometimes include language ‎in loan documents stating that borrowers and guarantors waive the ability to seek a determination ‎of market value.‎

The Arizona Court of Appeals Abolishes Prospective Waivers of the Fair Market Value Defense

A prospective waiver of a fair market defense hearing was at issue in CSA 13-101 Loop, LLC v. ‎Loop 101, LLC., No. 1 CA-CV 12-0167, 2013 WL 4824461 (Ariz. App. Sept. 10, 2013). In that ‎case, a lender made a $15.6 million loan, which was secured by a deed of trust. In the note and ‎guaranty, the borrower and guarantors waived “the benefits of any statutory provision limiting ‎the right of [lender] to recover a deficiency,” including the benefits of A.R.S. § 33-814. Even ‎more specific, the deed of trust stated that the sales price at the trustee’s sale would conclusively ‎establish the fair market value of the property and that the borrower and guarantors waived their ‎ability to seek a fair market value determination.‎

Following a default, the lender initiated a trustee’s sale, at which the lender’s assignee purchased ‎the property with a credit bid of $6.15 million. At the time, about $11.2 million remained due on ‎the note. The lender’s assignee then brought a deficiency action against the borrower and ‎guarantors for the difference. The borrower and guarantors counterclaimed, asserting that the ‎credit bid was unreasonably low. The court denied a motion to dismiss the counterclaims, ‎holding the borrower and guarantors were entitled to a fair market value hearing ‎notwithstanding the written agreements to the contrary. ‎

The Court of Appeals affirmed, holding that the deed of trust statutes impliedly prohibit ‎prospective waivers of fair market value hearings. The court relied on the purpose of the deed of ‎trust statutes, the comprehensiveness of the protections, and the legislative history, which the ‎court stated was to protect borrowers from the unfairness that results if a property is sold at a ‎trustee’s sale below its market value. According to the court, allowing parties to prospectively ‎waive the protection of a fair market value hearing would effectively undo the statutory scheme ‎and undermine an important purpose of the deed of trust statutes.‎

Conclusion

Arizona’s appellate courts have shown increased interest of late in foreclosure-related cases. ‎Earlier this summer, Division One of the Arizona Court of Appeals abolished prospective ‎waivers by borrowers of the residential anti-deficiency protections under A.R.S. § 33-814(G) based on public ‎policy grounds. Parkway Bank & Trust Co. v. Zivkovic, 232 Ariz. 286, 304 P.3d 1109 (App. ‎‎2013). In another decision out last week, Division Two of the Arizona Court of Appeals, citing ‎Parkway Bank, declined to consider whether a guarantor can waive same the protections of A.R.S. § ‎‎33-814. First Credit Union v. Courtney, No. 2 CA-CV 2013-0005, slip op. (Ariz. App. Sept. 12, ‎‎2013).