Borrowers Cannot Waive Fair Market Value Protections, Court Rules

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 prevailed.

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 waiver.

As was anticipated by many, this decision was appealed to the Supreme Court, which affirmed it in February 2015.