By: Ben Reeves
In Parkway Bank & Trust Co. v. Zivkovic, 662 Ariz. Adv. Rep. 26 (Ct. App. 2013), the Arizona Court of Appeals held that provisions in loan documents purporting to waive the applicability of A.R.S. § 33-814(G) violate Arizona public policy and, therefore, are not enforceable under Arizona law.
A.R.S. § 33-814(G) provides that if a lender has a trustee’s sale foreclose of a “property of two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling . . . [then] no action may be maintained to recover any difference between the amount obtained by sale and the amount of the indebtedness and any interest, costs and expenses.” This statute is generally referred to as the “anti-deficiency” statute as it generally prevents lenders from suing homeowners for the difference between the amount owed on their mortgage and the value of their home.
In Parkway, the individual borrower defaulted on a $894,703.85 loan secured by his home. The lender foreclosed, but $277,966.06 remained due and owing after the foreclosure sale (i.e., the “deficiency”). The bank then sued the borrower for the deficiency despite A.R.S. § 33-814(G) relying upon two prospective waivers of the anti-deficiency statute in the loan documents: (i) an Illinois choice of law provision (since Illinois law allows for deficiency judgments); and (ii) an agreement that “waived all rights or defenses arising from anti-deficiency law.” The trial court concluded that Illinois law governed and, therefore, granted the bank judgment for the deficiency.
The Court of Appeals, however, reversed and remanded the case back to the trial court to apply a conflict of laws analysis under Restatement (Second) Conflicts of Laws § 188. This analysis was necessary because the A.R.S. § 33-814(G) protections “reflect a legislative determination that lenders, rather than borrowers, should bear the risk of loans secured by overvalued property” such that public policy prohibits an individual from contravening this public purpose through a private agreement.
On remand, the Court of Appeals instructed the trial court to determine whether Illinois law applied based on the Restatement § 188 factors and, if so, to apply Illinois law unless “application of Illinois law is contrary to a fundamental Arizona policy and Arizona has a ‘materially greater interest’ in the anti-deficiency determination than Illinois.” See Restatement § 187(2)(b).
We can draw four points from the opinion. First, we now know that Arizona law will not enforce a prospective waiver of A.R.S. § 33-814(G) (i.e., a provision in a loan document executed at or about the time the loan was made that waives the protections afforded by the anti-deficiency statute). Second, while the instructions on remand leaves open a slight possibility that a choice of law provision could circumvent this prohibition under Arizona law, the opinion strongly suggests that a mere choice of law provision will not circumvent Arizona law on this issue. Third, the opinion does not foreclose the possibility of a waiver of A.R.S. § 33-814(G) occurring in a forbearance agreement or in the midst of some other work out. Finally, the opinion expressly declines to answer the question of whether a guarantor (as opposed to a borrower) may waive A.R.S. § 33-814(A) or (C) – leaving that an open question under Arizona law.