Updated March 2015
Borrowers Cannot Waive
Fair Market Value Protections, Court Rules
See Related Article:
The Last Word: Arizona Supreme Court Confirms that
Fair Market Value Protection Cannot Be Waived (March 2015)
During the last couple of years, Arizona
courts have handed down a number of decisions that affirmed or
strengthened certain protections in the mortgage and deed of
trust statutes. The Arizona Court of Appeals' September 10,
2013, decision in
CSA 13-101 Loop, LLC v. Loop 101, LLC, No. CA-CV 12-0167, is
the latest example.
The case involved a commercial loan of
$15.6 million to build an office building adjacent to State
Route 101. The borrower signed a promissory note, and related
individuals also signed personal guaranties.
The promissory note and guaranty
expressly stated that the borrower and guarantors "waived the
benefits of any statutory provision limiting the right of [the
lender] to recover a deficiency judgment" after a foreclosure or
trustee's sale, including "the benefits of A.R.S. § 33-814."
That statute provides that, in a lawsuit to recover a
deficiency from the borrower, the borrower has a right to a
hearing on the fair market value of the property.
The Deed of Trust contained a similar
clause and also stated that the sales price at any trustee's
sale was "conclusively deemed to constitute the fair market
value" of the property.
In most of these cases, the
underlying facts are predictable, and the Loop 101 circumstances
are no exception. The borrower defaulted on the loan, and the
lender first transferred the note to a related entity that
initiated a trustee's sale (a non-judicial foreclosure). As
lenders are permitted to do in these circumstances, the lender
made a credit bid of $6.15 million. At that time, the loan
balance was about $11 million. The lender then filed a lawsuit
seeking a deficiency of nearly $5 million.
The borrower and guarantors
counterclaimed, contending that the lender violated the covenant
of good faith and fair dealing by, among other things, setting
an unreasonably low credit bid at the trustee's sale. The lender
sought to dismiss, arguing that a fair market value
determination was not available because it had been waived in
the loan documents.
The trial court denied the motion to
dismiss, holding that parties cannot waive the rights protected
by statute. The court held a fair market value hearing and found
the property's value was actually $12.5 million. There were
further events in the trial court, but eventually the case found
its way to the Court of Appeals, where the borrowers ultimately
The Court of Appeals affirmed, holding
that, even though the statute does not expressly state that
borrowers cannot waive the protection of the fair market value
requirement, the "statutory scheme" as written implies that
waiver of the protection is prohibited. In a footnote, the Court
noted another panel's recent decision that, as a matter of
public policy, a borrower cannot waive the anti-deficiency
protection provided by A.R.S. § 33-814(G), and stated that it was not
reaching the issue of whether public policy also prohibited the
As was anticipated by many, this decision was appealed
to the Supreme Court, which affirmed it in
Steve Benson is a Certified Specialist in Real Estate Law
(Arizona Board of Legal Specialization).