841 P.2d 198 (Ariz. 1992), CV-92-0022, Cardon v. Cotton Lane Holdings, Inc.

Docket Nº:CV-92-0022-SA.
Citation:841 P.2d 198, 173 Ariz. 203
Opinion Judge:[10] Corcoran
Party Name:CARDON, an Arizona general partnership, f/k/a Cardon Oil Co., an Arizona general partnership; Wilford A. Cardon and Phyllis R. Cardon, husband and wife; Elijah A. Cardon and Marjorie Kay Cardon, husband and wife; Craig A. Cardon and Jane Doe Cardon, husband and wife, Petitioners, v. COTTON LANE HOLDINGS, INC., an Arizona Corporation, Respondent and
Attorney:[7] Beus, Gilbert & Morrill, by David V. Sanderson, Sara J. Vance, Phoenix, and Law Offices of Neil Vincent Wake, by Neil Vincent Wake, Robert C. Van Voorhees, Phoenix, Attorneys for Petitioners. [8] Gammage & Burnham, by Richard K. Mahrle, Phoenix, Attorneys for Respondent and Real Party in Inte...
Case Date:September 24, 1992
Court:Supreme Court of Arizona
 
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Page 198

841 P.2d 198 (Ariz. 1992)

173 Ariz. 203

CARDON, an Arizona general partnership, f/k/a Cardon Oil Co., an Arizona general partnership; Wilford A. Cardon and Phyllis R. Cardon, husband and wife; Elijah A. Cardon and Marjorie Kay Cardon, husband and wife; Craig A. Cardon and Jane Doe Cardon, husband and wife, Petitioners,

v.

COTTON LANE HOLDINGS, INC., an Arizona Corporation, Respondent and Real Party in Interest,

The Honorable I. Sylvan Brown, Judge of the Superior Court of Maricopa County; the Superior Court of the State of Arizona, in and for the County of Maricopa, Respondents.

No. CV-92-0022-SA.

Supreme Court of Arizona.

September 24, 1992

Page 199

[173 Ariz. 204] Beus, Gilbert & Morrill by David V. Sanderson, Sara J. Vance, and Law Offices of Neil Vincent Wake by Neil Vincent Wake, Robert C. Van Voorhees, Phoenix, for petitioners.

Gammage & Burnham by Richard K. Mahrle, Phoenix, for respondent and real party in interest.

OPINION

CORCORAN, Justice.

Petitioners, Cardon, formerly known as Cardon Oil Co., Wilford A. Cardon, Phyllis R. Cardon, Elijah A. Cardon, Marjorie Kay Cardon, Craig A. Cardon and Jane Doe Cardon (collectively Cardon), filed this special action seeking review of the trial court's denial of Cardon's motion for summary judgment in a deficiency judgment action brought against Cardon by Respondent Cotton Lane Holdings, Inc. Cardon contends that, as a matter of law, Cotton Lane is not entitled to a deficiency judgment because California law, which does not permit a deficiency judgment following a trustee's sale, governs this case. We accepted jurisdiction of this special action because the trial court incorrectly ruled that Cotton Lane may pursue a deficiency judgment against Cardon, and because Cardon would not have an adequate remedy on appeal. 1

We have jurisdiction under Ariz. Const. art. 6, § 5(3), and Rule 8, Arizona Rules of Procedure for Special Actions.

FACTS AND PROCEDURAL HISTORY

In 1984 and 1985, Petitioner Wilford A. Cardon (Mr. Cardon) made several trips to Los Angeles, California to negotiate a loan for Cardon Oil Co. from Imperial Bank of Commerce (Imperial Bank), a bank chartered in Canada. On these occasions, Mr. Cardon negotiated with the general manager of the Los Angeles office of the San Francisco Agency of Imperial Bank. Imperial Bank agreed to loan Cardon Oil Co. $10 million, and the bank's attorneys drafted a Revolving Credit Agreement (Credit Agreement) and a Revolving Note (Note) evidencing the loan. Imperial Bank's attorneys also drafted a Deed of Trust with Assignment of Rents (Deed of Trust) on approximately 1,000 acres of real property located in Maricopa County, Arizona as security for the Note. The Credit Agreement and the Note contain California choice of law clauses; the Deed of Trust contains an Arizona choice of law clause, as well as a clause stating that the terms of the Credit Agreement control any conflict between the terms of the Deed of Trust and the terms of the Credit Agreement. These provisions underlie the dispute in this case.

Cardon Oil Co. made loan payments to Imperial Bank's Los Angeles office for almost 4 years. Cardon defaulted on the Note in early 1989, and the real property subject to the Deed of Trust was later sold at a trustee's sale. Cotton Lane, as assignee of the Note and Imperial Bank's interest in the Deed of Trust, purchased the property with a credit bid. Cotton Lane then filed an action in Maricopa County Superior Court seeking a deficiency judgment against Cardon for approximately $4.4 million. Cardon filed a motion for summary judgment, claiming that California law governed

Page 200

[173 Ariz. 205] the action and California law prohibited a deficiency judgment. The trial court denied the motion, ruling that Arizona law governs the deficiency action and that, under Arizona law, Cotton Lane is entitled to pursue a deficiency judgment.

Approximately 4 months after the trial court's ruling, Cardon sought special action relief in the court of appeals. The court of appeals declined jurisdiction. Cardon then filed a petition for special action in this court. We accepted jurisdiction. 2

DISCUSSION

The issue we must decide is whether Arizona law or California law applies to Cotton Lane's deficiency judgment action against Cardon. If Arizona law applies, Cotton Lane may pursue a deficiency judgment against Cardon; if California law applies, summary judgment must be granted in favor of Cardon.

  1. Arizona and California Deficiency Judgment Laws Conflict

    Under both Arizona and California law, the trustee of a deed of trust may, after a default, either sell the trust property at a trustee's sale or pursue a judicial foreclosure on the trust property. See A.R.S. § 33-807 (authorizing trustee's sale or judicial foreclosure under deed of trust); Cal.Civ.Proc.Code § 725a (West 1976 & Supp.1992) (authorizing judicial foreclosure under deed of trust); Coppola v. Superior Court, 211 Cal.App.3d 848, 866, 259 Cal.Rptr. 811, 819 (1989) (creditor may enforce debt secured by deed of trust by conducting private trustee's sale, initiating action for judicial foreclosure, or suing for personal judgment in amount of debt). However, Arizona law and California law differ regarding the right to pursue a deficiency judgment following a trustee's sale. Under A.R.S. § 33-814(A),

    within ninety days after the date of sale of trust property under a trust deed pursuant to [the power of sale in the trust deed], an action may be maintained to recover a deficiency judgment against any person directly, indirectly or contingently liable on the contract for which the trust deed was given as security.... In any such action against such a person, the deficiency judgment shall be for an amount equal to the sum of the total amount owed the beneficiary as of the date of the sale ... less the fair market value of the trust property on the date of the sale ... or the sale price at the trustee's sale, whichever is higher. 3

    Under Cal.Civ.Proc.Code § 580d (West 1976 & Supp.1992), however,

    [n]o judgment shall be rendered for any deficiency upon a note secured by a deed of trust ... upon real property ... in any case in which the real property has been sold by the ... trustee under power of sale contained in ... [the] deed of trust.

    See also United States v. Haddon Haciendas Co., 541 F.2d 777, 781 (9th Cir.1976) (California law prohibits a deficiency judgment following foreclosure by non-judicial sale). 4 Because the trustee in this case did

    Page 201

    [173 Ariz. 206] not pursue a judicial foreclosure but sold the trust property at a trustee's sale, Cotton Lane's right to pursue a deficiency judgment against Cardon depends upon whether Arizona law or California law applies to Cotton Lane's deficiency action.

  2. California Law Governs This Case

    To determine whether Arizona or California law governs this case, we must first decide whether Cotton Lane's deficiency action is a procedural matter or a substantive matter. Procedural matters are generally governed by the law of the forum state, Restatement (Second) of Conflict of Laws § 122 (1971) (Restatement ), whereas substantive matters are governed by "the law of the jurisdiction to which the court is referred by the choice-of-law rules of the forum." Annotation, Conflict of Laws As to Application of Statute Proscribing or Limiting Availability of Action for Deficiency After Sale of Collateral Real Estate, 44 A.L.R.3d 922, 925 (1972).

    1. A Deficiency Judgment Action is a Substantive Matter

    Cotton Lane takes the position that because a trustee's sale held in Arizona is conducted in accordance with the procedures mandated by Arizona statute, the pursuit of a deficiency judgment after a trustee's sale is also a procedural matter governed by Arizona law. Once Arizona foreclosure procedure is invoked for a trustee's sale, "all aspects of the foreclosure provided for in the statutes should be applied," including the right to pursue a deficiency judgment. We disagree.

    Cotton Lane is correct that the trustee's sale itself is a procedural matter and is governed by the law of the situs. See Restatement § 229; California Fed. Sav. & Loan Ass'n v. Bell, 6 Haw.App. 597, 735 P.2d 499, 504 (1987); Gate City Fed. Sav. & Loan Ass'n v. O'Connor, 410 N.W.2d 448, 450 (Minn.App.1987). The situs in this case is Arizona, and the trustee's sale was conducted correctly in accordance with Arizona law. A deficiency judgment, on the other hand, is a matter of substantive law. Greater Ariz. Sav. & Loan Ass'n v. Gleeson, 5 Ariz.App. 577, 582, 429 P.2d 464, 469 (1967) (Hardy, J., dissenting in part), citing Kresos v. White, 47 Ariz. 175, 54 P.2d 800 (1936); Citibank v. Errico, 251 N.J.Super. 236, 597 A.2d 1091, 1094 (1991); Gate City, 410 N.W.2d at 450; see also Catchpole v. Narramore, 102 Ariz. 248, 250, 428 P.2d 105, 107 (1967) (California anti-deficiency statute is substantive). As a substantive matter, a deficiency action is governed by Arizona choice of law rules, and in Schwartz v. Schwartz, 103 Ariz. 562, 565, 447 P.2d 254, 257 (1968), this court expressly adopted the Restatement (Second) of Conflict of Laws as our guide in resolving choice of law questions. See also Estate of Levine, 145 Ariz. 185, 189, 700 P.2d 883, 887 (App.1985) (Arizona courts follow Restatement to determine choice of law questions in contract actions), citing Burr v. Renewal Guaranty Corp., 105 Ariz. 549, 468 P.2d 576 (1970); Herma Hill Kay, Theory into Practice: Choice of Law in the Courts, 34 Mercer L.Rev. 521, 556 & n. 223 (1983) (as of 1983, Arizona one of 14 states relying on Restatement in choice of law cases). The Restatement states that a deficiency action is governed by the law applicable to the underlying debt (i.e., the Note), not the law of the situs. Restatement § 229 comment...

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