Arizona Court of Appeals Division One Holds That Payday Lender That Breached Its Lease After Arizona’s Law Authorizing Payday Lending Expired Could Not Invoke the Frustration of Purposes Doctrine to Avoid Liability.

Consumer Lending Associates (“CLA”) was a payday lender.  In June 2007, CLA entered into a five-year commercial lease with Next Gen Capital’s predecessor (Next Gen took over as plaintiff after buying the property).  When CLA entered the lease, it was operating under Arizona’s statutes authorizing payday lending companies or, as the statutes call them, “deferred presentment companies.”  Those statutes (and the ability to operate as a payday lender) expired on July 1, 2010, pursuant to sunset provisions in the statutes.  After the 2010 expiration, CLA promptly vacated the property with almost two years left on the lease. 

Next Gen demanded payment for all rent due through the end of the lease.  CLA refused, contending that the lease terminated “by operation of Arizona law.”  Next Gen sued and eventually the superior court granted Next Gen summary judgment.  After the superior court denied CLA’s motion for new trial and entered judgment awarding damages, CLA appealed.

The Court of Appeals affirmed.  CLA argued that the doctrine of frustration of purposes excused liability for breach.  The “frustration of purposes” is an equitable doctrine that “has been severely limited to cases of extreme hardship.”  The party invoking the doctrine must prove that “the supervening frustrating event was not reasonably foreseeable.”  In addition, the Restatement (endorsed in an earlier Arizona case), requires the party avoiding the contract to satisfy a four-factor test.  The frustration must (1) “have been a principal purpose of that party;” (2) “be so severe that it is not to be regarded as within the risks assumed;” (3) “the non-occurrence . . . must have been a basic assumption” of the contract; and (4) there is no relief if “the frustrating occurrence or the loss caused thereby, should properly be placed on the party seeking relief.”  See 7200 Scottsdale Rd. Gen. Partners v. Kuhn Farm Mach., Inc., 184 Ariz. 341, 347-48, 909 P.2d 408, 414-15 (App. 1995) (quoting Restatement (Second) of Contracts § 265 cmts. a-c (1981)).

The Court held that CLA could not satisfy the third factor, that the “non-occurrence . . . must have been a basic assumption.”  The Court noted that at the time of the lease, the statutes authorizing and governing payday lending were on the books, as was the sunset provision that would cause those laws to expire.  Thus, CLA “had noticed that absent further legislative action, it could not continue to operate past that date.”  Given that leasing parties are presumed to know the law when they enter a lease, CLA could not now argue that the “non-occurrence” of the expiration of the payday-lending statutes was a “basic assumption” of the lease.  In other words, “it was reasonably foreseeable in 2007 that CLA would have to end its payday loan operation.”  The Court, therefore, held that the frustration of purposes doctrine did not apply.

The Court also rejected CLA’s argument that there were material issues of fact concerning whether NextGen made reasonable efforts to mitigate its damages.  In any breach of contract action, the plaintiff has a duty to mitigate its damages from the breach.  As the breaching party, CLA, however, had the burden to show “that mitigation was reasonably possible but not reasonably attempted.”  Next Gen submitted an affidavit calculating the costs and savings of its efforts to re-lease the space.  Although CLA challenged the merit of this evidence, it did not introduce any evidence of its own on mitigation.  Thus, because CLA did not adduce any evidence to carry its burden or refute Next Gen’s evidence, the Court held that there was no genuine issue for trial on mitigation.

Judge Portley authored the unanimous opinion; Judges Gemmill and Cattani concurred.