CSA 13-101 Loop, LLC v. Loop 101, LLC

• Decision Date: 31 December 2014
• Docket Number: No. CV–14–0029–PR.,CV–14–0029–PR.
• Citation: 236 Ariz. 410,703 Ariz. Adv. Rep. 32,341 P.3d 452
• Parties: CSA 13–101 LOOP, LLC, an Oklahoma Limited Liability Company, Plaintiff/Appellant, v. LOOP 101, LLC, an Arizona Limited Liability Company; Paul S. Anton and Valerie J. Christie, Husband and Wife; Oscar E. Swanky and Helen L. Swanky, as Co–Trustees of the Oscar E. Swanky and Helen L. Swanky Revocable Family Trust, Created July 19, 1997, as Amended, Defendants/Appellees.
• Court: Arizona Supreme Court

236 Ariz. 410

341 P.3d 452

703 Ariz. Adv. Rep. 32

CSA 13–101 LOOP, LLC, an Oklahoma Limited Liability Company, Plaintiff/Appellant

v.LOOP 101, LLC, an Arizona Limited Liability Company; Paul S. Anton and Valerie J. Christie, Husband and Wife; Oscar E. Swanky and Helen L. Swanky, as Co–Trustees of the Oscar E. Swanky and Helen L. Swanky Revocable Family Trust, Created July 19, 1997, as Amended, Defendants/Appellees.

No. CV–14–0029–PR.

Supreme Court of Arizona.

Dec. 31, 2014.

Sean K. McElenney (argued), J. Alex Grimsley, Gregory B. Iannelli, Bryan Cave LLP, Phoenix, for CSA 13–101 Loop, LLC.

Timothy Berg (argued), Carrie Pixler Ryerson, Kevin M. Green, Fennemore Craig, P.C., Phoenix, for Loop 101, LLC; Paul S. Anton and Valerie J. Christie; and Oscar E. Swanky and Helen L. Swanky, et al.

Scott B. Cohen, Bradley D. Pack, Engelman Berger, P.C., Phoenix, for Amicus Curiae Arizona Bankers Association.

Chief Justice BALES authored the opinion of the Court, in which Vice Chief Justice PELANDER and Justices BERCH, BRUTINEL, and TIMMER joined.

Opinion

Chief Justice BALES, opinion of the Court.

¶ 1 When a deed of trust secures a promissory note and the trust property is sold at a trustee's sale, A.R.S. § 33–814(A) entitles judgment debtors, including guarantors, to have the fair market value of the property credited against the amount owed on the note. We hold that parties may not prospectively waive this provision.

I.

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

¶ 3 Loop defaulted on the loan in June 2009, and MidFirst began a non-judicial foreclosure under the deed of trust. At the time, nearly $11.2 million remained outstanding on the loan. MidFirst assigned its rights under the loan and deed of trust to CSA 13–101 Loop, LLC (“CSA”), which bought 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 approximately $5 million plus interest. 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.

¶ 4 CSA and MidFirst moved to dismiss the claims on the ground that Loop and the guarantors had waived their right under A.R.S. § 33–814 to a fair market value determination. The superior court denied the motion, ruling that the parties could not waive this statutory right. After holding an evidentiary hearing, the court found the fair market value of the property to be $12.5 million. On cross-motions for summary judgment, the court ruled that no deficiency existed because the property's fair market value exceeded the amount owed on the note.

¶ 5 The court of appeals affirmed. CSA 13–101 Loop, LLC v. Loop 101, LLC, 233 Ariz. 355, 362 ¶ 24, 312 P.3d 1121, 1128 (App.2013). We granted review because whether A.R.S. § 33–814(A)'s fair market value provision may be waived is a recurring issue of statewide importance. We have jurisdiction pursuant to Article 6, Section 5(3) of the Arizona Constitution and A.R.S. § 12–120.24.

II.

¶ 6 Contract provisions are enforceable unless prohibited by law or otherwise contrary to identifiable public policy. 1800 Ocotillo, LLC v. WLB Group, Inc., 219 Ariz. 200, 202 ¶ 7, 196 P.3d 222, 224 (2008). Our law values the private ordering of commercial relationships and seeks to protect parties' bargained-for expectations. Id. at 202 ¶ 8, 196 P.3d at 224. Accordingly, if a contractual term is not specifically prohibited by legislation, courts will uphold the term unless an otherwise identifiable public policy clearly outweighs the interest in the term's enforcement Id.; Restatement (Second) of Contracts § 178.

¶ 7 Consistent with these principles, we have sometimes observed that waivers of statutory rights may “impliedly” be prohibited. See Swanson v. Image Bank, Inc., 206 Ariz. 264, 268 ¶ 13, 77 P.3d 439, 443 (2003). Our past decisions have also stated that parties may waive statutory rights granted solely for the benefit of individuals, Holmes v. Graves, 83 Ariz. 174, 178, 318 P.2d 354, 357 (1957), but rights enacted for the benefit of the public may not be waived, Elson Dev. Co. v. Ariz. Sav. & Loan Ass'n, 99 Ariz. 217, 224, 407 P.2d 930, 935 (1965). The key inquiry, however, is whether an identifiable public policy clearly outweighs the interest in enforcing prospective waivers of particular statutory provisions. See 1800 Ocotillo, 219 Ariz. at 202 ¶ 8, 196 P.3d at 224 ; Restatement (Second) of Contracts § 178.

¶ 8 We discern public policy from our constitution, statutes, and judicial decisions. Wagenseller v. Scottsdale Mem'l Hosp., 147 Ariz. 370, 379, 710 P.2d 1025, 1034 (1985) ; Restatement (Second) of Contracts § 179. Statutory provisions are examined in light of the overall legislative scheme, including its history and purpose. Restatement (Second) of Contracts § 179 cmt. b. Even when not expressly prohibited, contract terms may be invalidated “if the legislature makes an adequate declaration of public policy which is inconsistent with [them].” Shadis v. Beal, 685 F.2d 824, 833–34 (3d Cir.1982). We therefore turn to the public policy concerns reflected in § 33–814(A) and the deed of trust scheme more generally.

A.

¶ 9 In 1971, the Arizona Legislature enacted the deed of trust scheme, A.R.S. §§ 33–801 to –821, as an alternative to the often cumbersome mortgage and judicial foreclosure system. In re Krohn, 203 Ariz. 205, 208 ¶ 10, 52 P.3d 774, 777 (2002) ; see generally, Gary E. Lawyer, Note, The Deed of Trust: Arizona's Alternative to the Real Property Mortgage, 15 Ariz. L.Rev. 194 (1973). A deed of trust allows for the sale of the property at a trustee's sale (often referred to as a non-judicial foreclosure) rather than exclusively through judicial process. A.R.S. § 33–807. Once the trust property is sold pursuant to the trustee's power of sale, the statute limits the lender's right to seek a deficiency judgment against the debtor. Deficiency judgments are barred altogether for most residential properties. A.R.S. § 33–814(G). For other properties, the debtor may credit the fair market value of the trust property against the amount owed on the debt. A.R.S. § 33–814(A). Similar limits on deficiency judgments exist for debts secured by mortgages. See A.R.S. §§ 33–727, 33–729(A).

¶ 10 A.R.S. § 33–814(A) governs deficiency recovery actions against parties liable on debts secured by deeds of trust. The statute provides, in relevant part:

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, as determined by the court less the fair market value of the trust property on the date of the sale as determined by the court or the sale price at the trustee's sale, whichever is higher.

Id.

¶ 11 The fair market value provision applies equally to guarantors and borrowers. Id. Moreover, the statute does not draw distinctions based on the resources or sophistication of the parties, nor does it distinguish between commercial and residential transactions. “[S]o long as the subject properties fit within the statutory definition, the identity of the mortgagor as either a homeowner or developer is irrelevant.” Mid Kan. Fed. Sav. & Loan Ass'n of Wichita v. Dynamic Dev. Corp., 167 Ariz. 122, 128, 804 P.2d 1310, 1316 (1991).

¶ 12 The fair market value provision, as well as the deed of trust framework generally, accords with Arizona's long-recognized public policy of protecting debtors. Cf. Forbach v. Steinfeld, 34 Ariz. 519, 526–27, 273 P. 6, 9 (1928) (noting that “the public policy of the state” is to maintain important legal protections for debtors). In line with this public policy, Arizona's deed of trust framework streamlines the foreclosure process but maintains protections for borrowers and the public. It does this by protecting against artificially increased deficiency judgments.

¶ 13 The fair market value provision, unlike the anti-deficiency statutes, does not bar deficiency judgments altogether. Compare A.R.S. § 33–814(A) (reducing deficiency by property's fair market value), with A.R.S. §§ 33–729(A), 33–814(G) (prohibiting deficiency judgments). But the statutes share a common purpose of protecting borrowers. Section 33–814(A) protects against artificially inflated deficiencies by preventing windfalls resulting from below-market credit bids. The anti-deficiency statutes prevent artificial deficiencies resulting from forced sales and further protect certain borrowers from exposing other assets to the risk of default. Baker v. Gardner, 160 Ariz. 98, 101, 770 P.2d 766, 769 (1988). Thus, both the fair market value provision and anti-deficiency protections serve to alleviate the harmful effects of economic recession on borrowers. Cf. Mid Kan., 167 Ariz. at 127, 804 P.2d at 1315 (“As with virtually all anti-deficiency statutes, the Arizona provisions were designed to temper the effects of economic recession on mortgagors by precluding artificial deficiencies resulting from forced sales.”) (internal quotation marks omitted).

B.

¶ 14 We must next decide whether the public policy of preventing artificial deficiencies outweighs the interest in enforcing the waiver provisions here. See Restatement (Second) of Contracts § 178. Routine waiver of A.R.S. § 33–814(A) would seriously disrupt the statute's public purpose of preventing artificial deficiencies and protecting borrowers. Consistent with the statute's purpose and the overall statutory scheme, we hold that A.R.S. § 33–814(A)'s fair market value provision cannot be prospectively waived.

¶ 15 When Loop defaulted on its debt, CSA (or its predecessor in interest, MidFirst Bank) could have obtained...