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FL Receivables Trust 2002-A v. Arizona Mills, L.L.C. - 6/21/2012

Arizona Court of Appeals Division One Holds That (1) U.C.C. Article 9 Does Not Create a Cause of Action for Interference with Collateral; (2) Retroactive Application of the Remedies Provision in the Revised Article 9 Does Not Unconstitutionally Abrogate Contract Rights; and (3) Every Aspect of the Disposition of Collateral Must be Commercially Reasonable, Including the Deadline for the Disposition.


This case involves a dispute between Arizona Mills, L.L.C. (“Mills”), the owner of the Arizona Mills mall, and FL Receivables Trust 2002-A (the “Trust”), the assignee of the interests of a lender to a tenant of the mall, following a default by the tenant.

In 2000, the tenant needed additional financing, and Mills agreed to subordinate its rights in the building, the improvements, and the equipment (but not the underlying land) to the tenant’s lender.  Under the agreement between Mills and the lender (the “Consent”), the lender had the right to enter onto the premises to repossess, remove, or deal with the equipment and improvements for no longer than 30 days, during which time the lender was required to pay rent.  The Consent also gave the lender the right, but not the obligation, to cure the tenant’s default.  The lender could also take possession under the lease and assign the tenant’s interest to a third party.  The Consent also permitted the lender to enter into a new lease with Mills upon payment of all fees due by the tenant within 30 days after the termination of the lease for incurable default.

After the tenant defaulted, the Trust requested access to the premises to deal with the collateral and to market the premises.  Mills allowed access so that the Trust could deal with the collateral, but not for marketing purposes because the Trust had not cured the tenant’s default.  The Trust did not pay the tenant’s outstanding rent or enter into a new lease with Mills.  The Trust did enter into negotiations with four possible tenants, but the negotiations were unsuccessful. 

A dispute arose between the Mills and the Trust regarding their respective rights in the building and improvements.  The Trust claimed it had a security interest senior to Mills’s interest, and Mills claimed the Trust’s interests had terminated or were waived because the Trust refuse to cure the tenant’s default or enter into a new lease under the Consent.  The Trust filed suit alleging various claims, and Mills asserted various counterclaims.

The trial court held an evidentiary hearing on the Trust’s claims for declaratory relief that Mills had subordinated its rights to the Trust and that the Trust’s rights had not expired.  The court ruled in favor of Mills on both questions, but the Court of Appeals reversed, holding that, under Article 9 of the U.C.C., the Trust’s interests were superior to Mills’s because Mills had consented to subordination of its rights.  The Court of Appeals remanded for further proceedings.

On remand, based on the Court of Appeals decision, the trial court entered judgment declaring that the Trust had first priority interest in the building, equipment, and fixtures superior to Mills’s interest.  Also based on the Court of Appeals decision, the court granted the Trust’s motion for partial summary judgment on Mills’s counterclaims. 

Mills argued in a motion for partial summary judgment that the Trust’s remedies were governed by an earlier version of the U.C.C., but the court concluded that the revised version was applicable retroactively and that retroactive application was not unconstitutional.

The trial court then ordered the parties to market the property right away.  Mills presented two letters of interest from prospective tenants, but the Trust rejected the offers.  The Trust filed a motion for partial summary judgment seeking damages for Mills’s alleged interference with the collateral.  The trial court denied the motion.  Mills filed a motion asking the court to determine the date on which the Trust’s security interest in the building and fixtures would expire.  The court concluded that the security interest would expire “six months after the current recession ends,” and told the parties they could present evidence on this issue at trial. 

The court held a bench trial on the following issues:  whether Mills interfered with the Trust’s use of the collateral under the U.C.C.; whether there was a covenant of good faith and fair dealing implied in the Consent and whether Mills breached it; and whether the Trust was harmed by Mills’s conduct and in what amount.  The court found that Mills had not interfered with the collateral and that Mills had not breached the covenant of good faith and fair dealing.  The court further rejected Mills’s claim that the Trust was responsible for certain expenses because Mills was the owner of the property, and concluded that the Trust was obligated to dispose of the property in a commercially reasonable manner, which it was doing by marketing the property through a broker approved by Mills.

Both parties appealed.  The Court of Appeals affirmed and remanded for further proceedings regarding disposition of the collateral. 

First, the Court addressed and rejected the Trust’s argument that it was entitled to damages under A.R.S. §§ 47-9315(A) and 47-9102(A).  The Trust claimed that these U.C.C. provisions allowed it to recover damages for Mills’s interference with its right to market the property.  The Court concluded that the U.C.C. does not create a cause of action for interference with collateral.  Instead, the provisions at issue “establish that a creditor has a security interest in a claim based on interference, if such claim exists.”  (Emphasis added.)  “A typical circumstance would involve a tort claim, where the recovery is based on the amount to restore the collateral to its pre-tort value.  The secured party would have a security interest in the amount recovered as the claim was based on the loss or damage to the secured party’s collateral.”  In contrast, the statutes do not allow for a general claim for interference with collateral, and “[w]hen the legislature has set forth certain remedies and not others in a comprehensive statutory scheme, [the Court] will not imply or interpret additional remedies.”  The Court also noted, however, that, even if there were a claim for interference with collateral, the Trust had not established that interference by Mills had caused it to lose the rental income it claimed as damages.

The Court also rejected the Trust’s claim that the trial court had erred in refusing to find that Mills had breached the covenant of good faith and fair dealing by failing to recognize the Trust’s superior interest in the collateral.  The Court noted that Mills’s position was not inconsistent with the terms of the Consent, and the superior court initially accepted Mills’s position before being reversed by the Court of Appeals.  The fact that the Court of Appeals eventually determined that the Trust held the superior interest did not make Mills’s conduct a breach of the covenant.

The Court next addressed and rejected Mills’s argument that the trial court erred in applying a version of the U.C.C. Article 9 that was enacted after the Consent was executed.  The revised version gives a secured creditor additional remedies in connection with collateral.  In enacting the revised version of Article 9, the legislature expressly provided that it would apply retroactively.  The Court also concluded that retroactive application of the revised Article 9 was not an unconstitutional abrogation of Mills’s contract rights because the language of the Consent did not purport to limit the Trust’s remedies as Mills claimed.

The Court also rejected Mills’s argument that the trial court erred in granting the Trust’s motion for partial summary judgment on Mills’s counterclaims.  Mills’s counterclaims for trespass and unjust enrichment were based on the Trust’s failure to remove the collateral from the property.  The Court concluded that Mills could not maintain these causes of action against the Trust because Mills itself owned the collateral. 

The Court also rejected Mills’s claim that the Trust had breached the covenant of good faith and fair dealing because the Consent did not require the Trust to either remove the collateral or cure the debt and obtain a new lease.  It therefore could not breach the Consent by failing to choose either of these options.

The Court also declined to find that the Trust’s security interest in the collateral had expired as a matter of law.  Because Mills had consented to the superior security interest, the applicable statute, A.R.S. § 47-9334(F), did not provide for expiration within a “reasonable time,” as argued by Mills.

The Court did agree with Mills that the trial court had erred in setting a deadline for disposition of the collateral of six months after the end of the current recession.  Every aspect of the disposition is required to be “commercially reasonable,” and the deadline did not comport with that requirement.  The Court remanded to the trial court to determine whether the Trust’s actions to rent the property had been commercially reasonable and other issues in connection with disposition of the collateral.

Judge Thompson authored the opinion; Judges Portley and Gemmill concurred.

Posted by: Kathy O'Meara

Posted On: 7/2/2012