We finally have an answer to the question of whether parties can contractually waive the right to a “fair market value” hearing under Arizona law – and the answer, according to the Court of Appeals – is “no.”
In CSA 13-101 Loop, LLC v. Loop 101, LLC et al., No. 1CA-CV 12-0167 (Ariz. Ct. App. September 10, 2013), the Arizona Court of Appeals held that Arizona’s deficiency statute, A.R.S. § 33-814(A), prohibits a party from waiving the right to a “fair market value” hearing. This statute generally entitles borrowers and guarantors to an evidentiary “fair market value” hearing to determine the value of foreclosed property that should be applied towards repayment of the debt that was secured by the foreclosed property. It has long been an open question under Arizona law whether this right can be waived by contract.
In CSA, a bank loaned Loop 101, LLC $15,600,000 to build a commercial office building just off the Loop 101 freeway. The loan documents provided, expressly, that in the event of a default and foreclosure, the borrower and guarantors agreed that for the purposes of A.R.S. § 33-814(A), the “fair market value” of the property would equal the sales price at the trustee’s sale.
After the borrower constructed the building, it failed to repay the loan. The bank foreclosed and took title to the property at a trustee’s sale with a credit bid of $6,150,000. The bank sued the borrower and guarantors for the deficiency (i.e., the difference between the amount owed under the loan and the value of the collateral). The bank argued that the borrower and guarantors were prohibited from putting on evidence of “fair market value” in light of the contracts between the parties. The trial court disagreed, and the Court of Appeals affirmed.
Despite the express waiver language in the contracts, the Court of Appeals determined that the trustee’s sale statutory scheme “implies” a prohibition against the waiver of the right to a “fair market value” hearing. The ruling is not unexpected in light of the recent Parkway Bank & Trust Co. v. Zivkovic decision analyzing the public policy considerations of A.R.S. § 33-814(G), and is consistent with the comments to the Restatement (Third) of Property (Mortgages) § 8.4 (1997) prohibiting advanced waivers of “fair market value” protections.
However, the analysis of the CSA opinion is still somewhat dissatisfying in at least three ways: (i) it relies on an “implied” (as opposed to an express) statutory prohibition against waiver, (ii) it fails to discuss the competing public policy considerations of the freedom of contract versus “fair market value” rights, and (iii) fails to distinguish cases from other jurisdictions that enforced “fair market value” waivers in the absence of an “express” statutory prohibition barring such waivers. Each point is discussed briefly below.
First, by relying on an “implied” statutory prohibition against the right to waive “fair market value,” the Court of Appeal acknowledges the absence of any “express” prohibition. Swanson v. Image Bank, Inc., 206 Ariz. 264, 268, 77 P.3d 439, 443 (2009) (enforcing a contractual waiver of A.R.S. § 23-355 in the absence of an express statutory prohibition barring such a waiver). This Court of Appeals’ analysis presents a pure legal question that may be subject to review by the Supreme Court of Arizona.
Second, the opinion does not discuss Arizona’s well-recognized public policy that strongly favors the freedom of commercial parties to determine their respective rights, duties, and obligations to one another under a contract. 1800 Ocotillo, LLC v. WLB Group, Inc., 219 Ariz. 200, 202, 196 P.3d 222, 224 (2008). In light of Arizona’s strong policy of enforcing commercial contracts and the Arizona Supreme Court’s announcement that the purpose of A.R.S. § 33-814(A) was to protect consumers; not commercial actors, Baker v. Gardner, 160 Ariz. 98, 770 P.2d 766 (1988), the absence of any analysis of these issues in the opinion seems significant.
Last, LaSalle Bank, N.A., v. Sleutel, 289 F.3d 837 (5th Cir. 2002), JPMorgan Chase Bank, N.A. v. Specialty Restaurants, Inc., 243 P.3d 8 (Okla. 2010), and Gramercy Inv. Trust v. Lakemont Homes Nevada, Inc., 198 Cal.App.4th 903 (Ct. App. 2011) all hold that contracts waiving “fair market value” hearings are enforceable in the absence of an express statutory prohibition barring such a waiver. Each of these extra-jurisdictional cases analyzed the relevant foreclosure statutory scheme and, finding no express prohibition against the ability to waive the protections afforded by the statute at issue, enforced the waiver. Given the similar analytic approach taken by these authorities, it would have been helpful for the Court of Appeals to address and distinguish these, and similar, cases.
As it stands now, Arizona law bars a trial court from enforcing any contractual waiver of the right to a “fair market value” hearing under A.R.S. § 33-814(A). We will continue to monitor the case as it may be subject to review by the Arizona Supreme Court. Stay tuned.