The Last Word: Arizona Supreme Court Confirms that Fair Market Value Protection Cannot Be Waived
Arizona’s 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 court’s decision (see the Supreme Court’s 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 trustee’s 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 Arizona’s 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 Arizona’s anti-deficiency laws exist to prevent artificial deficiencies resulting from forced sales and to protect borrowers and guarantors from losing other assets to foreclosure.
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.