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Guarantor Waivers of Arizona Anti-Deficiency Protection

The Arizona Court of Appeals rules that, while borrowers are not permitted to waive anti-deficiency protection, guarantors may do so.

Stephen Aron Benson  

Stephen Aron Benson


Arizona is one of 15 states[1] that provide anti-deficiency protection for most residential transactions, meaning that lenders generally cannot pursue borrowers for a deficiency after a foreclosure or, more commonly, a trustee sale.[2] Moreover, the Arizona courts have held that a borrower cannot waive anti-deficiency protection.[3]

While there is relatively little legislative history on anti-deficiency protection, some commentators believe that legislators considered the anti-deficiency provisions as a method of controlling any residential housing pricing bubble, as it was believed that lenders would be more conservative if they were aware that their only security was the residence.

Over the years, Arizona courts have been fairly liberal about applying anti-deficiency protection. However, a relatively recent case, Arizona Bank & Trust v. James R. Barrons Trust,[4] may have signaled a change of direction. Specifically, the Court of Appeals held that, although borrowers are not permitted to waive the protection of the anti-deficiency statutes, guarantors may do so.

In Barrons Trust, the Court has opened up the possibility that residential lenders which do not use the forms provided by various guaranteeing agencies (FHA, VA, etc.) might structure their residential loans so that the customer will be asked to form a new borrowing entity. Such a provision would allow the person who would have been the borrower to instead act as a guarantor and, consequently, be able to waive the statutory protection.

We have not yet seen any loan documents that take this approach, and the Court has cautioned against “sham transactions,” but we shall see how this develops. A scenario in which this arrangement might occur would likely involve a high-end residential transaction.

Of course, we are always available to discuss how this development might impact your business or plans.

[1] As of March 2017, the 15 states are Alaska, Arizona, California, Connecticut, Hawaii, Iowa, Minnesota, Montana, Nevada, New Mexico, North Carolina, North Dakota, Oregon, Washington and Wisconsin.

[2] To qualify for anti-deficiency protection, a property must meet the criteria laid out in A.R.S. § 33-814(G) and 33-729(A).

[3] Parkway Bank & Trust Co. v. Zivkovic, 232 Ariz. 286, 304 P.3d 1109 (App. 2013), as amended on reconsideration (Aug. 28 2013).

[4] 237 Ariz. 401, 351 P.3d 1099 (App. 2015), review denied (Oct. 27, 2015).