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​Guarantor’s Waiver of Anti-Deficiency Protections Is Enforceable, Says Arizona Court of Appeals

Financial Institutions Law Update Scott A. Klundt

Lenders are familiar with Arizona's anti-deficiency statutes, which preclude a lender from filing a lawsuit to recover any deficiency remaining after a trustee's sale of certain residential property. Specifically, A.R.S. §33-814(G) provides:

"If trust property of two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling is sold pursuant to the trustee's power of sale, no action may be maintained to recover any difference between the amount obtained by sale and the amount of the indebtedness and any interest, costs and expenses."

Earlier court decisions have held that, because of public policy considerations, a borrower's purported waiver of this protection is invalid. On May 28, 2015, the Arizona Court of Appeals held that those considerations will not invalidate a guarantor's waiver of those protections. Arizona Bank & Trust v. James R. Barrons Trust, T-Group, LLC, et al., No. 1 CA-CV 13-0096 (Ariz. Ct. App. 5/28/15).

As explained in the opinion, Arizona Bank & Trust provided an acquisition and development loan in connection with a commercial borrower's purchase of several vacant residential lots. The loan was secured by a blanket construction deed of trust encumbering all of the lots. Several individuals and entities executed unconditional loan guarantees that included express waivers of any protection under anti-deficiency statutes. Later, the bank provided two individual construction loans for the construction of homes on two of the lots. Each of the construction loans was secured by an individual deed of trust on the lot on which the home was to be constructed. Both loans specified that they were secured by the original guarantees.

When the borrower defaulted on both construction loans, the bank foreclosed on each deed of trust, purchasing the properties at trustee's sales with credit bids that were less than the amounts owed, leaving deficiency balances of several hundred thousand dollars. The bank then sued the guarantors to recover a judgment for the deficiency balance.

The trial court granted summary judgment in favor of the bank on the issue of the guarantors' liability for the deficiency balances, finding that the guarantors' waiver was enforceable. The Court of Appeals affirmed that decision.

Today's ruling won't affect individual consumer borrowers whose loans are secured by the homes in which they reside. It will affect guarantors of commercial loans obtained by homebuilders and other commercial borrowers whose loans are secured by deeds of trust encumbering individual residential properties. Lenders should make sure that the guarantee forms they are using for such loans include provisions waiving the protections afforded by Arizona's anti-deficiency statutes.

For more information, please contact Scott Klundt at (602) 229-5212 / or your local Quarles & Brady attorney.