Arizona's Statutory Anti-Deficiency Protections May Not Be Waived

In a new decision by Division One of the Arizona Court of Appeals, the Court has determined that Arizona's statutory anti-deficiency protections "serve an important public purpose and may not be waived." This decision, Parkway Bank and Trust Company v. Zivkovic, which was filed by the Court on June 13, 2013, is the first case in Arizona to address the question of whether Arizona law precludes a party from prospectively waiving the statutory anti-deficiency protections. It also provides significant guidance in cases where the parties' contract includes a choice-of-law provision selecting the application of another state's law.

This case involved a mortgage loan with a promissory note signed by the borrower that included a provision that "expressly waived 'all rights or defenses arising' from 'anti-deficiency law.'" The agreement further provided that, although the property was located in Arizona, the law of Illinois would govern any dispute. The Court's decision indicates that, absent these provisions, the lender's deficiency claim would have been barred by A.R.S. Section 33-814(G).

After the borrower failed to pay on the note the property was sold at a trustee's sale and the lender sued for the balance that was not recovered from the foreclosure sale. The borrower contended that Arizona law should apply to the action and that the deficiency claim was barred by the statute. After both sides filed motions for summary judgment, the superior court ruled in favor of the lender and the borrower appealed.

Beginning its analysis first with the question of whether Arizona or Illinois law applied, the Court of Appeals determined that in order to answer that question it first had to decide whether Arizona law allows a waiver of the anti-deficiency protections. If such a waiver was allowed, the Court stated that the Illinois choice-of-law provision would control. In a waiver was not allowed, then the question of which law applied would have to be decided by appplying a separate balancing test.

The Parkway Bank Court considered similar cases in other states and noted that "Arizona courts have... noted significant public policy concerns addressed through Arizona's anti-deficiency statutes." Citing its 2012 decision in Helvetica Servicing, Inc. v. Pasquan, the Court further stated:

The anti-deficiency statutes 'allocate the risk of inadequate security' to lenders, 'thereby discouraging overvaluation of the collateral.' Additionally, 'if inadequacy of the security results, not from overvaluing, but from a decline in property values during a general or local depression, [the anti-deficiency statutes] prevent the aggravation of the downturn that would result if defaulting purchasers were burdened with large personal liability.'

The Court of Appeals decided that in light of these public policy interests, "permitting a prospective waiver of anti-deficiency protections would violate a policy choice made by the Arizona Legislature."

Having determined the waiver issue, however, the Court then needed to address the question of whether Arizona or Illinois law applied. Ultimately, rather than deciding this issue, the Court found that the superior court had erred in weighing the factors required to make the choice of law decision and remanded the case to the superior court to make that determination, so the question of the borrower's liability was not fully resolved. Nonetheless, this decision clarifies that even if a contract includes an express waiver of the State's anti-deficiency protections, that waiver will not allow the lender to pursue a deficiency otherwise precluded by the anti-deficiency statute.