June 28, 2013

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Arizona Anti-Deficiency Protection Cannot Be Waived

The Arizona appellate courts continue to reinforce Arizona's anti-deficiency law by finding that a prospective waiver of anti-deficiency protections violates public policy and is prohibited.

Many of us are familiar with Arizona's anti-deficiency statute, which prohibits deficiency judgments after a trustee's sale if the trust property is two and one-half acres or less and is utilized for a single one-family or single two-family dwelling. A.R.S. § 33-814(G). To avoid this limitation, some lenders attempt to rely on anti-deficiency waivers in their loan documents to circumvent the prohibitions on recovering against a defaulted borrower. The enforceability of such a contractual waiver had not previously been resolved by the Arizona appellate courts, until now.

In Parkway Bank & Trust Company v. Zivkovic, et al., 662 Ariz. Adv. Rep. 26 (June 13, 2013), the Arizona Court of Appeals addressed the enforceability of a loan clause requiring that Illinois law would govern any disputes. Contrary to Arizona's anti-deficiency law, Illinois law provides that the foreclosure of a mortgage does not affect the lender's rights to obtain a personal judgment against any person for a deficiency. Without that choice of law provision, the lender's deficiency action would have been barred under Arizona's anti-deficiency statute. The Arizona Court of Appeals held that the protections under the Arizona anti-deficiency statute cannot be prospectively waived. The effect of this holding is that anti-deficiency waivers in loan contracts are unenforceable.

Even if the parties have expressly agreed that another state's conflicting laws would apply, such a clause might not be enforceable either. In that case, the court must evaluate factors such as the location of contracting, negotiation, performance, subject-matter, and parties, to determine if the foreign state's law should still apply.

There are a few important points for lenders to take away from this case. First, a clause in the loan documents expressly waiving Arizona's anti-deficiency protection is likely unenforceable. Second, choice of law provisions that defy Arizona anti-deficiency law are not always enforceable. Third, lenders relying on a choice of law provision to circumvent Arizona anti-deficiency law must be certain that the facts and circumstances of the case favor the chosen state. A lender pursuing a deficiency action that would otherwise be barred under Arizona law should do a thorough review of the circumstances at the time of contracting, and consult legal counsel for an opinion, prior to engaging a potentially costly yet unsuccessful loan enforcement action.

The material contained here and in the following pages has been written, edited or compiled by Ryley Carlock & Applewhite to provide general information about legal developments. The information is not intended to be, nor does it constitute, legal advice to any recipient, nor does receipt of this information establish an attorney-client relationship between the recipient and Ryley Carlock & Applewhite or any of its attorneys. Legal advice should be sought only through direct contact with legal counsel.