Arizona Court of Appeals Division OneHolds That Borrowers May Not Prospectively Waive Statutory Anti-Deficiency Protections.

Parkway Bank made a loan to a company for which Joseph Zivkovic acts as president; as collateral, Zivkovic and his wife executed a Deed of Trust and Assignment of Rents on a property in Mesa in favor of Parkway.  The Deed of Trust expressly waived all rights or defenses arising from “anti-deficiency law.”  The loan was subsequently renegotiated, with the Deed of Trust incorporated by reference.  The renegotiated agreement contained a provision choosing Illinois as the governing law.

Zivkovic defaulted and the Mesa property was sold at a trustee’s sale, leaving a deficiency of $278,000 on the debt.  Parkway filed suit, and the superior court granted Parkway partial summary judgment that the anti-deficiency rule of A.R.S. § 33-814(G) did not protect Zivkovic because the parties chose Illinois law, and Illinois does not provide anti-deficiency protections.  Zivkovic timely appealed.

In a unanimous decision, the court reversed the decision below applying Illinois law, holding that the superior court’s application of the Restatement (Second) of Contracts was both erroneous and inadequate, and remanded for further consideration.  To reach this decision, the court first addressed whether a conflict exists between Arizona and Illinois law, or if Arizona law permits borrowers to waive anti-deficiency protections as Illinois does.  This is an issue of first impression in Arizona.

The court held that Arizona borrowers may not prospectively waive anti-deficiency protections, citing numerous other jurisdictions which reached the same conclusion regarding their own anti-deficiency statutes.  In adopting the anti-deficiency statute, the legislature intended to protect consumers from financial ruin when they fail to realize that purchasing a home puts other personal assets besides the home itself at risk.  The legislature also intended to fully allocate to lenders the risks of collateral overvaluation and market-based reductions in value.  These policy goals would be illusory if lenders were able to force borrowers to waive the anti-deficiency protections as a condition of the loan.

In a footnote, the court declared “inapposite” a prior decision permitting a defaulted borrower to agree to pay some or all of any potential deficiency as part of default negotiations.  Tanque Verde Anesthesiologists, L.T.D. Profit Sharing Plan v. Proffer Group, Inc., 172 Ariz. 311, 836 P.2d 1021 (App. 1992).  Although borrowers may agree to cover a deficiency after a default as part of a settlement, such an agreement cannot be made prospectively as a condition of the loan.

Judge Hall authored the opinion; Judges Thompson and Cattani concurred.