CSA 13-101 Loop, LLC v. Loop 101, LLC – 12/31/2014

January 5, 2015

Arizona Supreme Court holds that parties may not prospectively waive their right under A.R.S. § 33-814(A) to have the fair market value of property securing a promissory note credited against the amount owed on the note when the property is sold at a trustee’s sale.

Loop 101, LLC (“Loop”) borrowed $15.6 million from MidFirst Bank in February 2007 to construct an office building.  The note was secured by a deed of trust and guaranteed by four individuals.  The promissory note, deed of trust, and guarantee all waived the fair market value provision of A.R.S. § 33-814(A).

In June 2009, Loop defaulted on the loan and MidFirst began a non-judicial foreclosure on the property securing the note pursuant to the deed of trust.  MidFirst later assigned its rights under the loan and deed of trust to CSA 13-101 Loop, LLC (“CSA”), which purchased the property at a trustee’s sale for a credit bid of $6.15 million.  CSA then sued Loop and the guarantors for a deficiency judgment of $5 million. 

Loop and the guarantors counterclaimed against CSA and filed a third-party claim against MidFirst for breach of the implied covenant of good faith and fair dealing.  CSA and MidFirst moved to dismiss the claims on the ground that Loop and the guarantors had waived their right to a fair market value determination.  The superior court denied the motion, ruling that the parties could not waive this statutory right.  The court also found the fair market value of the property to be $12.5 million.  Because the fair market value exceeded the amount owed on the note, the court ruled that no deficiency existed and granted summary judgment in the Loop and the guarantors’ favor.  The court of appeals affirmed and CSA appealed to the Arizona Supreme Court.

The Supreme Court affirmed the superior court’s judgment, holding that parties may not prospectively waive their right under A.R.S. § 33-814(A).  In Arizona, contract provisions are enforceable unless prohibited by law or otherwise contrary to identifiable public policy.  Parties may waive statutory rights granted solely for the benefit of individuals, but not rights enacted for the benefit of the public.  The key inquiry is whether an identifiable public policy clearly outweighs the interest in enforcing prospective waivers of a particular statutory provision.  The Court determined that the public’s interest in preventing artificial deficiencies and protecting borrowers generally weighs heavily against the interest in enforcing the waiver provision of the contracts at issue in this case.  The Court therefore affirmed the superior court’s judgment.

Chief Justice Bales authored the unanimous opinion of the Court.