The Last Word: Arizona Supreme Court Confirms that Fair Market Value Protection Cannot Be Waived
Arizonas anti-deficiency laws exist to prevent
artificial deficiencies resulting from forced sales and to protect borrowers and
guarantors from losing other assets to foreclosure.
In a September 2013 article, we reported on an Arizona
Court of Appeals decision holding that parties may not prospectively waive the
statutory right to credit the fair market value (FMV) of property against the
amount owed (see Borrowers Cannot Waive Fair
Market Value Protections, Court Rules). The Arizona Supreme Court has
reviewed and upheld the lower courts decision (see the
Supreme Courts decision
in CSA 13-101 Loop, LLC v. Loop 101).
In the controversy resolved by this decision, the borrower
had defaulted on a loan secured by a deed of
trust and personal guaranties. The promissory note, deed of trust and guarantee
each contained a waiver of the fair market value protection provided by
A.R.S. § 33-814(A). The property was purchased at a trustees sale by a credit
bid of roughly $6 million, which was about $5 million less than the balance due
on the loan. The borrower and the guarantors were then sued for $5 million.
The trial court found that the statutory right to a fair
market value hearing cannot be waived and that, as the fair market value was in
excess of $12 million, there was no deficiency. The Court of Appeals affirmed
and held that, under Arizonas statutory scheme, fair market value protection
cannot be waived.
Supreme Court Decision
In affirming the Court of Appeals decision, the Arizona
Supreme Court provided a more in-depth legal analysis, finding that:
contract provisions are enforceable unless they are prohibited by law or are contrary to and outweighed by an identifiable public policy;
A.R.S. § 33-814(A), mentioned above, furthers the public interest of protecting borrowers and preventing artificially increased deficiency judgments; and
the public policy of protecting debtors outweighed the right to enforce the waiver provisions in the note, deed of trust, and guarantee.
The Supreme Court ruled that the fair market value
provision of A.R.S. § 33-814(A) not only shields individual borrowers and
guarantors, it also protects the economy as a whole. The Court also noted that
its ruling is in accord with the general legal rules that form our common law,
with preeminent legal authorities also holding that waivers of fair market value
protection are ineffective.
The overriding principle is that Arizonas
anti-deficiency laws exist to prevent artificial deficiencies resulting from
forced sales and to protect borrowers and guarantors from losing other assets to
Impact on Lenders, Borrowers and Guarantors
With the Arizona Supreme Court having now conclusively
decided the issue, borrowers and guarantors in Arizona cannot waive in advance
their fair market value rights under Arizona law. Thus, even if the note, deed
of trust, guaranty and other loan documents contain a waiver of the fair market value protection,
such waiver is ineffective, and the borrower and guarantor can request a fair
market value hearing.