By Jeffrey Messing
June 2, 2015
In Arizona Bank & Trust v. James R. Barrons Trust, T-Group, LLC, 1CA-CV 13 0096 (Div. One 5/28/2015), the Arizona Court of Appeals in a published opinion held that a guarantor, unlike a borrower, can waive the protection of Arizona’s anti-deficiency statute, A.R.S. § 33-814(G), if appropriate language is included in the guaranty (1).
The Court reasoned that the anti-deficiency statute, which only applies to loans secured by a deed of trust on a single one-family or two-family dwelling, was intended to protect borrowers who have lost their homes from complete financial ruin. After considering the statutory history and attendant public policy, the Court concluded that a guarantor was not the type of person the Legislature intended to protect because a guarantor does not risk losing a home to foreclosure in the wake of a default. Equally important, the Court noted that prohibiting a guarantor from waiving the anti-deficiency protection would defeat the purpose of the guaranty as the guarantor risks nothing other than the funds to cover a deficiency.
The Court explained:
[I]f § 33-814(G) cannot be waived by a guarantor, there would be no financial downside (other than a potential blemish on a credit report) for failing to pay the guaranteed amount. Such a guaranty would be illusory, and there would be little or no reason for lenders to seek loan guaranties or to proffer loans that would not otherwise be available without a guaranty.
In addition, the Court further held that the separate provision in A.R.S. § 33 814(A) that provides for a credit of the higher of the successful bid at a trustee sale or the fair market value of the property, cannot be prospectively waived by guarantors (2). The Arizona Court of Appeals adopted the majority approach (also followed by Oklahoma, Ohio and Idaho courts) in the interpretation and waiver of anti-deficiency protection.
In this case, the Court specifically held that the language in the guaranty wherein the Guarantor waived “any and all rights or defenses based on suretyship or impairment of collateral including, but not limited to, any rights or defenses arising by reason of (A) any ‘one action’ or ‘anti-deficiency’ law or any other law which may prevent [the Lender] from bringing any action, including the claim for deficiency, against Guarantor” constituted a valid waiver. The waiver did not have to specifically reference A.R.S. § 33-814(G).
(1) “If trust 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 is sold pursuant to the trustee’s power of sale, 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.” A.R.S. § 33-814(G).
(2) “Except as provided in subsections F, G and H of this section, within ninety days after the date of sale of trust property under a trust deed pursuant to section 33-807, an action may be maintained to recover a deficiency judgment against any person directly, indirectly or contingently liable on the contract for which the trust deed was given as security including any guarantor of or surety for the contract and any partner of a trustor or other obligor which is a partnership. In any such action against such a person, the deficiency judgment shall be for an amount equal to the sum of the total amount owed the beneficiary as of the date of the sale, as determined by the court less the fair market value of the trust property on the date of the sale as determined by the court or the sale price at the trustee’s sale, whichever is higher. A written application for determination of the fair market value of the real property may be filed by a judgment debtor with the court in the action for a deficiency judgment or in any other action on the contract which has been maintained. Notice of the filing of an application and the hearing shall be given to all parties to the action. The fair market value shall be determined by the court at a priority hearing upon such evidence as the court may allow. The court shall issue an order crediting the amount due on the judgment with the greater of the sales price or the fair market value of the real property. For the purposes of this subsection, “fair market value” means the most probable price, as of the date of the execution sale, in cash, or in terms equivalent to cash, or in other precisely revealed terms, after deduction of prior liens and encumbrances with interest to the date of sale, for which the real property or interest therein would sell after reasonable exposure in the market under conditions requisite to fair sale, with the buyer and seller each acting prudently, knowledgeably and for self-interest, and assuming that neither is under duress. Any deficiency judgment recovered shall include interest on the amount of the deficiency from the date of the sale at the rate provided in the deed of trust or in any of the contracts evidencing the debt, together with any costs and disbursements of the action.” A.R.S. § 33-814(A).