Arizona Bank & Trust v. James R. Barrons Trust (5/28/2015)

June 12, 2015

Arizona Court of Appeals Division One holds guarantors may prospectively waive the protections of Arizona’s anti-deficiency statute.

An investment company bought a subdivision of vacant lots, which it financed with a loan from Arizona Bank & Trust.  Several individuals and entities executed written loan guaranties, expressly waiving any protection under anti-deficiency statutes.  Arizona Bank later financed the construction of homes in the subdivision, which were also secured by the previously-executed guaranties.

The investment company defaulted on the loans and the guarantors failed to bring the loans current.  Arizona Bank foreclosed and, through a trustee’s sale, purchased the properties for less than the amount owed on the loans.  In other words, the foreclosure did not make the bank whole.  Arizona Bank then sued the guarantors to recover the deficiency.  The trial court granted summary judgment in the bank’s favor and the guarantors appealed.

The legislature created the deed-of-trust framework to provide an alternative to judicial foreclosures.  That same framework also limits the lender’s ability to recover a deficiency judgment on deeds of trust that finance certain single or two-family residences.  When a covered property is sold at a trustee’s sale, “no action may be maintained to recover any difference between the amount obtained by sale and the amount of the indebtedness.”  A.R.S. § 33-814(G)

On appeal, the guarantors argued that under A.R.S. § 33-814(G) guarantors should not be able to waive anti-deficiency protection.  In Parkway Bank & Trust Co. v. Zivkovic, the court held that on public policy grounds, borrowers may not waive the anti-deficiency protections of § 33-814(G). 232 Ariz. 286, 290 ¶ 16 (App. 2013).

The court of appeals held that § 33-814(G) does not prohibit a guarantor from waiving anti-deficiency protection.  The terms of a contract will ordinarily be upheld absent a strong public policy to the contrary.  Assuming that the protections against anti-deficiency apply to guarantors, guarantors are not covered by the clear expression of public policy that prevents a borrower from waiving anti-deficiency protections.  The court of appeals found that none of the other states that provide anti-deficiency protection prevent guarantors from waiving that protection.  Further, prohibiting guarantors from waiving anti-deficiency protections would undermine the purpose of a guaranty and make its protections illusory.       

Presiding Judge Cattani authored the opinion; Judges Downie and Brown concurred.