Arizona Supreme Court to Decide if Borrowers and Guarantors Can Waive Fair Market Value Defense
In September 2013, the Arizona Court of Appeals held that commercial borrowers and guarantors cannot prospectively waive their right to seek a fair market value hearing to limit their potential deficiency liability following foreclosure. The Arizona Supreme Court recently decided to review that decision. The ultimate resolution could have a significant impact on commercial lending relationships, including the validity of fair market value waivers in many lenders’ standard guaranties.
Except for certain residential property, borrowers and guarantors are potentially liable for a deficiency after foreclosure if the remaining debt owed exceeds the trustee’s sale price. A.R.S. § 33-814(A) provides that borrowers, and by extension guarantors, are entitled to a credit on the underlying debt for the greater of the trustee’s sale price or the fair market value of the property at the time of the sale, as determined by the court at a priority hearing. Lenders, however, sometimes include language in loan documents stating that borrowers and guarantors waive the ability to seek a fair market value determination.
In the Case Now Being Reviewed by the Arizona Supreme Court, the Arizona Court of Appeals Invalidated Prospective Waivers of the Fair Market Value Defense
In the case now pending before the Arizona Supreme Court, the Arizona Court of Appeals rejected a prospective waiver of a fair market value hearing. In that case, CSA 13-101 Loop, LLC v. Loop 101, LLC, 233 Ariz. 355, 312 P.3d 1121 (App. 2013), the lender made a $15.6 million loan, which was secured by a deed of trust. In the note and guaranty, the borrower and guarantors waived “the benefits of any statutory provision limiting the right of [lender] to recover a deficiency,” including the benefits of A.R.S. § 33-814. Even more specific, the deed of trust stated that the trustee’s sale price would conclusively establish the fair market value of the property and that the borrower and guarantors waived their ability to seek a fair market value determination. The lender’s assignee made a $6.15 million credit bid, while $11.2 million remained due on the note. The borrower and guarantors sought a fair market value hearing, and the trial court held that they were entitled to one notwithstanding the written agreements to the contrary. Finding that the fair market value exceeded the loan balance, the court entered judgment for the borrower and guarantors.
The Court of Appeals affirmed, holding that the deed of trust statutes impliedly prohibit prospective waivers of fair market value hearings. The court relied on the purpose of the deed of trust statutes, the comprehensiveness of the protections, and the legislative history, which the court stated was to protect borrowers from the unfairness that results if a property is sold at a trustee’s sale below its market value. According to the court, allowing parties to prospectively waive the protection of a fair market value hearing would effectively undo the statutory scheme and undermine an important purpose of the deed of trust statutes.
The Arizona Supreme Court Grants Review
The lender’s assignee sought review in the Arizona Supreme Court. It argues that courts should give effect to parties’ contractual arrangements (especially in commercial settings), previous Arizona decisions have upheld waivers of statutory rights, and the statute does not contain anti-waiver language even though related statutes do. An amicus brief filed by the Arizona Bankers Association mirrors these arguments, emphasizing the commercial nature of the transaction and the broader negative effects the Court of Appeals decision could have on freedom of contract.
The borrower and guarantors argued that the fair market value defense applies equally to all borrowers, commercial or otherwise, and the foreclosure statutes were enacted for the public benefit and cannot be waived. They also contend that lenders could maximize the deficiency by purposely bidding below market value at the trustee’s sale, potentially securing themselves a windfall if there were no fair market value protection for the borrower or guarantor.
The Arizona Supreme Court granted review and will hear oral argument on November 18, 2014.
The Arizona Supreme Court’s ruling in Loop 101 is likely to definitively state whether prospective waivers of fair market value hearings will be enforceable in Arizona. If the Arizona Supreme Court affirms the Court of Appeals, fair market value hearings will always be required if lenders seek to recover a deficiency after a trustee’s sale, even if the loan or guaranty documents say otherwise. This could significantly alter commercial lending relationships and increase the costs associated with collecting commercial debts.
Lenders, borrowers, and guarantors should consider how this case might affect their existing and prospective lending relationships.