Parkway Bank v. Zivkovic

• Decision Date: 13 June 2013
• Docket Number: No. 1 CA–CV 12–0612.,1 CA–CV 12–0612.
• Citation: 232 Ariz. 286,668 Ariz. Adv. Rep. 9,304 P.3d 1109,662 Ariz. Adv. Rep. 26
• Parties: PARKWAY BANK AND TRUST COMPANY an Illinois banking association, Plaintiff/Appellee, v. Joseph ZIVKOVIC and Deanna Zivkovic, husband and wife; Equinox Development Corporation, an Illinois corporation, Defendants/Appellants.
• Court: Arizona Court of Appeals

232 Ariz. 286

304 P.3d 1109

662 Ariz. Adv. Rep. 26

668 Ariz. Adv. Rep. 9

PARKWAY BANK AND TRUST COMPANY an Illinois banking association, Plaintiff/Appellee,

v.Joseph ZIVKOVIC and Deanna Zivkovic, husband and wife; Equinox Development Corporation, an Illinois corporation, Defendants/Appellants.

No. 1 CA–CV 12–0612.

Court of Appeals of Arizona, Division 1, Department A.

June 13, 2013.

Charles L. Firestein, P.C. by Charles L. Firestein, Phoenix, Leighton & Abdo, PLLC by Nicholas C. Abdo, Jason D. Leighton, Joshua W. Leighton, Scottsdale, Attorneys for Appellant.

Tiffany & Bosco, P.A. by Michael A. Bosco, Jr., Kevin P. Nelson, Paul D. Cardon, Phoenix, Attorneys for Appellee.

OPINION

HALL, Judge.^*

[232 Ariz. 287]¶ 1 This appeal presents the issue whether the anti-deficiency protections afforded by Arizona Revised Statutes (A.R.S.) section 33–814(G) (Supp. 2012) may be prospectively waived by the trustor. Because we conclude that such protections serve an important public purpose and may not be waived, we vacate the partial summary judgment for Parkway Bank and Trust Company (Parkway)and remand for proceedings consistent with this Opinion.

FACTS AND PROCEDURAL BACKGROUND

¶ 2 The following facts are not disputed. On November 21, 2006, Parkway provided an $894,703.85 loan to Equinox Development Corporation (Equinox), an Illinois corporation of which Joseph Zivkovic acts as President. As consideration for the loan, Equinox executed a promissory note in favor of Parkway. On the same date, Zivkovic and his wife executed a Deed of Trust and Assignment of Rents to a property in Mesa, Arizona (the property) in favor of Parkway. The Deed of Trust contained a provision that expressly waived “all rights or defenses arising” from “anti-deficiency law.”

¶ 3 In May 2009, Parkway and Joseph Zivkovic renegotiated the terms of the loan to Equinox. On May 21, 2009, Joseph Zivkovic executed a promissory note in favor of Parkway, becoming the named borrower for the $894,703.85 loan originally extended to Equinox. The promissory note provided that Joseph Zivkovic would make “interest only” payments each month and the principal and any accrued and unpaid interest would be paid in full upon maturity, on May 21, 2010. The promissory note also incorporated by reference the 2006 Deed of Trust and Assignment of Rents and contained a provision choosing the law of Illinois as the governing law. As additional security, Equinox executed a commercial guaranty in favor of Parkway, guaranteeing full performance of Joseph Zivkovic's obligations under the promissory note. On the same date, Deanna Zivkovic executed a modification of Deed of Trust removing her name from the 2006 document.

¶ 4 Joseph Zivkovic failed to pay the amount due on May 21, 2010. On July 22, 2010, Parkway declared Joseph Zivkovic in default on the loan. On December 9, 2010, the property was sold through a trustee's sale. Parkway was the successful bidding party with a bid of $675,000.

¶ 5 On March 8, 2011, Parkway filed a complaint against the Zivkovics and Equinox seeking (1) a deficiency judgment for the “remaining balance due, including principal, interest, late charges [in the amount of] $277,966.06,” and (2) damages for waste relating to damage to the property allegedly caused by the Zivkovics before they vacated the property. Soon thereafter, the parties each filed a motion for partial summary judgment on the deficiency judgment claim. Parkway argued that, applying Illinois law, as expressly chosen by the parties in the 2009 promissory note, the deficiency (the difference between the amount realized at the trustee's sale and the amount owed on the loan) was recoverable. See735 Ill. Comp. Stat. 5/15–1511 (1987) ( “[F]oreclosure of a mortgage does not affect a mortgagee's rights, if any, to obtain a personal judgment against any person for a deficiency.”). The Zivkovics, on the other hand, argued Arizona law applies to the action and the deficiency is not recoverable pursuant to A.R.S. § 33–814(G) (barring an action “to recover any difference between the amount obtained by [trustee's] sale and the amount of the indebtedness” for qualifying properties).

¶ 6 The superior court granted Parkway's motion and denied the Zivkovics' motion. Finding that the parties did not dispute any material facts, namely that the deed of trust was foreclosed by a non-judicial sale and the successful bid reflected the fair market value of the property, the court held, in relevant part:

Illinois law applies to this case because the parties voluntarily chose it. All of the factors under the law, including the Restatement, have been satisfied to establish [t]he parties agreed that Illinois law would govern the substantive matters attendant to the right to a deficiency.

¶ 7 Thereafter, the superior court reduced its minute entry ruling to a signed Rule 54(b) judgment awarding Parkway $283,360.33 plus interest, attorneys' fees and costs. The Zivkovics timely appealed. We have jurisdiction pursuant to A.R.S. § 12–2101(A)(1) (Supp. 2012).

DISCUSSION

¶ 8 The Zivkovics contend that the superior court erred by granting partial summaryjudgment in favor of Parkway. Specifically, the Zivkovics argue that the superior court erred by finding that Illinois law governed the action rather than Arizona law.

¶ 9 A court shall grant summary judgment when “there is no genuine dispute as to any material fact and [ ] the moving party is entitled to a judgment as a matter of law.” Ariz. R. Civ. P. 56(a).¹ Summary judgment should be granted “if the facts produced in support of the claim or defense have so little probative value, given the quantum of evidence required, that reasonable people could not agree with the conclusion advanced by the proponent of the claim or defense.” Orme Sch. v. Reeves, 166 Ariz. 301, 309, 802 P.2d 1000, 1008 (1990). If the evidence would allow “a jury to resolve a material issue in favor of either party, summary judgment is improper.” United Bank of Ariz. v. Allyn, 167 Ariz. 191, 195, 805 P.2d 1012, 1016 (App.1990).

¶ 10 In reviewing a summary judgment, our task is to determine de novo whether any genuine issues of material fact exist and whether the trial court incorrectly applied the law. L. Harvey Concrete, Inc. v. Agro Constr. & Supply Co., 189 Ariz. 178, 180, 939 P.2d 811, 813 (App.1997). We review the facts in the light most favorable to the party against whom summary judgment was entered. Riley, Hoggatt & Suagee v. English, 177 Ariz. 10, 12–13, 864 P.2d 1042, 1044–45 (1993).

¶ 11 Whether a creditor may bring an action on a deficiency judgment “is a matter of substantive law.” Cardon v. Cotton Lane Holdings, Inc., 173 Ariz. 203, 206, 841 P.2d 198, 201 (1992). “As a substantive matter, a deficiency action is governed by Arizona choice of law rules,” meaning we look to “the Restatement (Second) of Conflict of Laws as our guide in resolving choice of law questions.” Id. A deficiency action is governed by the law applicable to the underlying debt. Restatement (Second) of Conflict of Laws § 229, cmt. e. “The rules for ascertaining the state whose local law governs the underlying debt” are set forth in Restatement (Second) §§ 187–88. Id.

¶ 12 “If a contract includes a specific choice-of-law provision, we must determine whether that choice is valid and effective under Restatement § 187.” Swanson v. The Image Bank, Inc., 206 Ariz. 264, 266, ¶ 6, 77 P.3d 439, 441 (2003) (internal quotation marks omitted). “Choice-of-law issues are questions of law, which we decide de novo.” Id.

¶ 13 Section 187(1) of the Restatement (Second) provides:

The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue.

The parties agree that Illinois law allows a party to waive anti-deficiency protection. Thus, we must decide whether Arizona law likewise allows a waiver. If so, the parties' Illinois choice-of-law provision is controlling. See Cardon, 173 Ariz. at 208, 841 P.2d at 203 (finding that, because the parties could have contractually prohibited a default judgment under Arizona or California law, the parties' contractual choice to apply California substantive law was dispositive); see also Restatement (Second) § 187 cmt. c (explaining “there is no need [ ] to determine the state of the applicable law” when the issue “would be decided the same way by the relevant local laws of [ ] the potentially interested states”).

¶ 14 If, however, Arizona law does not permit parties to waive anti-deficiency protections contractually, the court applies the “local law of the state selected by application” of the balancing test set forth in Restatement (Second) § 188 to determine whether the parties could have resolved this particular issue by explicit agreement. See Restatement (Second) § 187 cmt. c. Under A.R.S. § 33–814(G), deficiency judgments are not permitted after a trustee's sale if the trust property is two and one-half acres or less and is utilized for either a single one-family or a single two-family dwelling.

¶ 15 Whether Arizona law bars a party from prospectively waiving its statutory anti-deficiency protections is a question of first impression.² Other states with similar anti-deficiency statutes, however, have concluded that a debtor may not prospectively waive anti-deficiency protections. See, e.g., Brunsoman v. Scarlett, 465 N.W.2d 162, 167 (N.D.1991) (explaining the “rights and defenses granted debtors by the anti-deficiency judgment law would be largely illusory if a prospective creditor could compel a prospective debtor to waive them at the time the mortgage is executed”); Chemical Bank v. Belk, 41 N.C.App. 356, 255 S.E.2d 421, 427 (1979) (holding that allowing a debtor to waive protections of anti-deficiency statutes would violate important public policy concerns); Freedland v. Greco, 45 Cal.2d 462, 289 P.2d 463,...