In February 2007, MidFirst Bank extended Loop 101 a $15,600,000 loan to fund the construction of a commercial office building. The parties executed a promissory note secured by a deed of trust on the commercial property, and certain individuals guaranteed the loan. The promissory note and guaranty stated that guarantors waived the benefit of any statutory provision limiting the right to recover a deficiency judgment.
In June 2009, Loop 101 defaulted on the loan and MidFirst initiated non-judicial foreclosure proceedings. MidFirst assigned its rights under the loan to CSA 13-101 Loop, LLC (“CSA”) in an “intercompany loan transfer agreement.” CSA bought the commercial building at a trustee’s sale for $6,150,000 and then sued Loop 101 and the Guarantors for the deficiency.
Loop 101 and the Guarantors counterclaimed against CSA and filed third-party claims against MidFirst for breach of the implied covenant of good faith and fair dealing. CSA and MidFirst moved to dismiss the claims, which were interpreted as claims that the property’s price at the trustee’s sale was below fair market value. CSA and MidFirst argued that the Guarantors waived any rights to a fair market value determination and that Loop 101 had not made a written application for such a determination pursuant to A.R.S. § 33-814(A).
The superior court denied the motion to dismiss, ruling that parties cannot waive the rights protected by statute. The court held a fair market value hearing and, in a lengthy minute entry detailing factual findings and conclusions of law, the court found that the property’s fair market value was $12,500,000.
CSA and MidFirst moved for summary judgment on the same theories. The superior court denied CSA’s motion for summary judgment as untimely because it raised issues that had been tried at the fair market value hearing. Because the fair market value exceeded the deficiency, the court granted Loop 101 and the Guarantors’ cross-motions for summary judgment. CSA timely appealed.
The Court of Appeals affirmed, holding that parties cannot contractually waive their statutory rights to a judicial determination of a property’s fair market value under A.R.S. § 33-814(A). Although most rights may be waived, statutory rights may not be waived “where waiver is expressly or impliedly prohibited by the plain language of the statute.” Verma v. Stuhr, 223 Ariz. 144, 157 ¶ 68, 221 P.3d 23, 36 (App. 2009). The Court found that the statutory scheme of A.R.S. § 33-814(A) prohibits a borrower from waiving the protection of the statute. The legislature has authorized non-judicial foreclosures and established a detailed statutory scheme that balances the benefits of the extrajudicial remedy with a borrower’s need for protection. The statutory scheme must be strictly complied with by lenders. A.R.S. § 33-814(A) furthers the scheme by protecting the borrower from inequitable deficiencies. The Court noted that this approach is consistent with the Restatement (Third) of Property (Mortgages) § 8.4 (1997).
Parties may waive the statutory scheme in two instances not applicable to this case. Parties may waive the provisions when the deed is “executed for a principal purpose other than or in addition to securing the performance of a contract,” A.R.S. § 33-819, or when the parties themselves prohibit a deficiency judgment, A.R.S. § 33-814(F).
The Court dismissed CSA’s arguments regarding evidentiary errors in determining the property’s fair market value. The Court found that substantial evidence supported the superior court’s fair market value determination.
Judge Howe authored the unanimous opinion; Judges Norris and Gould concurred.
Posted by: Grace Rebling