By: Ben Reeves
In 2013, we blogged about the Arizona Court of Appeals’ determination that prospective contractual waivers of “fair market value” hearings are unenforceable as a matter of public policy. The link to our prior blog post is here. Although we noted some deficiencies in the Court of Appeals’ reasoning, we recognized that the holding reached a defensible legal result. On review, the Arizona Supreme Court reached the same outcome…but with a more robust legal analysis. See CSA 13-101 Loop, LLC v. Loop 101, LLC, et al., No. CV-14-0029 (Ariz. Dec. 31, 2014).
The Arizona Supreme Court held that although Arizona’s anti-deficiency statutory scheme did not expressly prohibit contractual waivers of “fair market value” hearings, Arizona’s overall public policy behind the trustee’s sale process entitled borrowers and guarantors to the protection afforded by a “fair market value” hearing.
The court noted that the trustee’s sale statutes were designed to “temper the effects of economic recession on mortgages by precluding artificial deficiencies resulting from forced sales.” Enforcing private contractual waivers of “fair market value” hearings would undermine the entire system, because most commercial agreements include these waiver provisions. Accordingly, if most or all agreements provide for such a waiver, then those private agreements would effectively eradicate the protections afforded by “fair market value” hearings. The Arizona Supreme Court did not believe it would be appropriate for private agreements to undermine this public interest.
This outcome is somewhat of a setback for commercial lenders in Arizona, but is consistent with Arizona case law and the Restatement. Regardless, this issue – which generated much litigation during the recent downturn – is now fully and finally decided once and for all.
 The Arizona Supreme Court relied on Arizona precedent, explained the policy behind the anti-deficiency statutory scheme, followed the Restatement (Third) of Property (Mortgages) § 8.4 (1997) to reach its holding, and distinguished cases from other jurisdictions reaching contrary results. Thus, the analysis filled in all of the holes we noted in our prior critique of the Court of Appeals’ decision.