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Guarantors Can Waive Anti-Deficiency Protections

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By:  Richard H. Herold and Ben Reeves

In Arizona, guarantors can now be held liable for deficiencies even where borrowers avoid liability due to Arizona’s anti-deficiency statute.

Arizona courts have been active in the last few years in addressing the law governing post-trustee’s sale deficiencies under Arizona’s anti-deficiency statute, A.R.S. §33-814(G), which provides that no deficiency action may be maintained “if trust property of two and one-half acres or less which is limited to and utilized for either a single one-family or single two-family dwelling is sold pursuant to [a] trustee’s…sale.” The deficiency is determined by crediting the borrower and guarantor with the higher of: (a) the fair market value of the property on the date of the trustee’s sale; or (b) the sale price at the trustee’s sale, to reduce the total balance due and owing.

In 2013, we noted in our blog that prospective waivers of fair market value hearings were held unenforceable against borrowers as a matter of public policy. A link to this 2013 blog post addressing Parkway Bank & Trust Co. v. Zivkovic is here.

In 2014, we noted that where there has been a foreclosure of vacant land, where no construction has occurred, the owner-developer cannot invoke the anti-deficiency statute as a matter of law – even if the borrower intended to build and reside on that land in the future. A link to our 2014 post on BMO Harris Bank v. Wildwood is here.

In 2015, the Court of Appeals just recently held that, although borrowers cannot waive the protection of the anti-deficiency statute, guarantors can do so. Arizona Bank & Trust v. James R. Barrons Trust, 713 Ariz. Adv. Rep. 25. The Court offered multiple rationales for its holding, including the following:

  1. A bargained-for guaranty is an important, enforceable contract, consistent with the high value placed on “the private ordering of commercial relationships” and the “protect[ion of] bargained for expectations” under Arizona law, unless contrary to a statute or public policy;
  2. It has long been recognized in Arizona that a guaranty may provide for greater liability than that of the borrower;
  3. “Prohibiting a guarantor from waiving anti-deficiency protections would be inconsistent with the basic purpose of a guaranty” and would render the guarantee illusory, yielding no financial downside for the guarantor and leaving lenders with “little or no reason” to “seek loan guaranties or to proffer loans that would not otherwise be available without a guaranty”; and
  4. The absence of any express reference to guarantors as a protected class of persons in A.R.S. §33-814(G), as compared to subsection (A).

This holding is somewhat of a surprise in light of the recent cases that affirmed the important public policy principles behind the anti-deficiency statute, and the protections that it provides to borrowers and guarantors. Nevertheless, it is a big win for creditors, and surely not the last litigation we will see on this issue. Indeed, it may even end up before the Supreme Court of Arizona one day.