Arizona’s Broad Anti-Deficiency Protection Confirmed

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The non-judicial foreclosure process affords banks and lenders a relatively “cheap” means of executing on their collateral in the event of a borrower’s defaults. That cheaper process comes at a price, however. Arizona has a number of statutory protections for borrowers that either outright limit the amount lenders may recover from them or create procedures that may have a similar effect. A.R.S. Section 33-814(G), for example, precludes lenders from recovering any deficiency between the amount of a loan and the amount realized from the non-judicial foreclosure and sale of property that is two and one half acres or less and is utilized for either a single one-family or a single two-family dwelling. Likewise, in circumstances where a lender may seek a deficiency after a non-judicial foreclosure, A.R.S. Section 33-814(A) entitles a borrower, upon request, to a hearing on the fair market value of the trust property at the date of the trustee’s sale, and to have that value deducted from the amount owed in determining the amount of the deficiency judgment. Not surprisingly, lenders often attempt to maximize the amount recoverable from a non-judicial foreclosure by requiring borrowers to waive these anti-deficiency protections in their loan agreements, deeds of trust, and notes. In the last six months, however, the Arizona Court of Appeals has published two different decisions suggesting that lenders abandon the notion that these waivers will be effective.

The first of these decisions is Parkway Bank and Trust Co. v. Zinkovic, 2013 Ariz. App. LEXIS 112, 304 P. 3d 1109 (App. 2013). In 2006, pursuant to a written agreement, Equinox Development Corporation received a loan from Parkway. As security for the loan, Equinox’s President, Zinkovic, executed a Deed of Trust on his residential property in favor of Parkway. The Deed of Trust included a provision waiving any anti-deficiency protection otherwise afforded to Zinkovic. In 2009, the parties re-negotiated their arrangement, which resulted in Zinkovic substituting for Equinox as the borrower under the 2006 loan agreement. In connection with this transaction, Zinkovic executed a new note which extended the original note’s maturity date and incorporated its terms and provided that Illinois law – which would not afford Zinkovic anti deficiency protection – would govern the deal. After Zinkovic defaulted under the loan agreement, Parkway foreclosed on the Deed of Trust and sold the residential property at a trustee’s sale. Parkway brought a lawsuit against Zinkovic for the deficiency between the residential property’s fair market value and the amount realized from its sale. The trial court granted summary judgment in favor of Parkway, concluding that Illinois law applied based on the parties’ agreement and, as a result, Zinkovic could not rely on A.R.S. Section 33-814(G) to protect him.

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