CSA 13-101 Loop, LLC v. Loop 101, LLC , 236 Ariz. 410 ( 2014 )


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  •                                 IN THE
    SUPREME COURT OF THE STATE OF ARIZONA
    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
    Filed December 31, 2014
    Appeal from the Superior Court in Maricopa County
    The Honorable John A. Buttrick, Judge (Ret.)
    No. CV2009-034774
    AFFIRMED
    Opinion of the Court of Appeals, Division One
    
    233 Ariz. 355
    , 
    312 P.3d 1121
    (App. 2013)
    VACATED IN PART
    COUNSEL:
    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.
    CSA 13-101 LOOP, LLC V. LOOP 101, LLC
    Opinion of the Court
    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
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    CSA 13-101 LOOP, LLC V. LOOP 101, LLC
    Opinion of the Court
    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
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    CSA 13-101 LOOP, LLC V. LOOP 101, LLC
    Opinion of the Court
    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.
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    CSA 13-101 LOOP, LLC V. LOOP 101, LLC
    Opinion of the Court
    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
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    CSA 13-101 LOOP, LLC V. LOOP 101, LLC
    Opinion of the Court
    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
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    CSA 13-101 LOOP, LLC V. LOOP 101, LLC
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    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
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    CSA 13-101 LOOP, LLC V. LOOP 101, LLC
    Opinion of the Court
    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 a judgment for the entirety of
    the outstanding debt by suing on the note alone. A.R.S. § 33-722 (mortgagee
    may elect between action on the debt or foreclosure of the mortgage given
    to secure it); 
    Baker, 160 Ariz. at 106
    , 770 P.2d at 774 (“[U]nder § 33-722 a
    creditor can elect to forego [sic] foreclosure and sue on the note in all cases
    except those involving the mortgages and deeds of trust to which the anti-
    deficiency statutes apply.”). But CSA chose to foreclose and seek recovery
    under the deed of trust scheme. Because this scheme “is a creature of
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    CSA 13-101 LOOP, LLC V. LOOP 101, LLC
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    statutes,” 
    Krohn, 203 Ariz. at 208
    9, 52 P.3d at 777
    , CSA is limited to the
    recovery the statutes provide. See Register v. Coleman, 
    130 Ariz. 9
    , 14, 
    633 P.2d 418
    , 423 (1981) (“When a statute creates a right and also creates a
    remedy for the right created, the remedy thereby given is exclusive.”). And
    because the deed of trust scheme strips borrowers of many of the
    protections afforded under the mortgage laws, we strictly construe the
    statutes in favor of borrowers. Patton v. First Fed. Sav. & Loan Ass’n of Phx.,
    
    118 Ariz. 473
    , 477, 
    578 P.2d 152
    , 156 (1978).
    ¶16           Unlike some real property statutes, A.R.S. § 33-814(A) is silent
    as to advance waiver. Cf. A.R.S. § 33-729(A) (providing for anti-deficiency
    protection “notwithstanding any agreement to the contrary”). CSA argues
    we should read this omission as the legislature’s implied endorsement of
    waiver. Cf. Ballesteros v. Am. Standard Ins. Co. of Wis., 
    226 Ariz. 345
    , 349
    ¶ 15, 
    248 P.3d 193
    , 197 (2011) (declining to construe an insurance statute to
    require a Spanish language form where other statutes explicitly require it).
    But here the omission cuts both ways, as the legislature also has expressly
    allowed waiver in other statutes. See, e.g., A.R.S. § 33-819 (allowing parties
    to waive deed of trust provisions when deed is not given to secure a
    contract). Because the legislature has sometimes allowed and sometimes
    prohibited waiver in the deed of trust statutes, the omission of a term
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    CSA 13-101 LOOP, LLC V. LOOP 101, LLC
    Opinion of the Court
    addressing waiver in § 33-814(A) is not conclusive as to the legislature’s
    intent.
    ¶17              As discussed above, ¶¶ 9 - 
    13, supra
    , the fair market value
    protection of A.R.S. § 33-814(A) furthers the public interest of preventing
    artificial deficiencies and protecting borrowers generally. Such deficiencies
    harm not only individual debtors but also the regional economy.                Cf.
    DeBerard Props., Ltd. v. Lim, 
    976 P.2d 843
    , 849 (Cal. 1999) (explaining that a
    “key purpose” of California’s anti-deficiency law “is to stabilize the state’s
    economy, to the benefit of all”). This identifiable public policy weighs
    heavily against the interest in enforcing the waiver provisions of the
    contracts here.
    ¶18              The Restatement (Third) of Property further counsels against
    allowing waiver. Section 8.4 provides fair market value protection similar
    to that in A.R.S. § 33-814(A):
    If it is determined that the fair market value is greater than the
    foreclosure sale price, the persons against whom recovery of
    the deficiency is sought are entitled to an offset against the
    deficiency in the amount by which the fair market value, less
    the amount of any liens on the real estate that were not
    extinguished by the foreclosure, exceeds the sale price.
    Restatement (Third) of Property: Mortgages § 8.4(d). Absent controlling
    authority to the contrary, we generally follow the Restatement when it sets
    forth sound legal policy. 
    Krohn, 203 Ariz. at 210
    18, 52 P.3d at 779
    .
    10
    CSA 13-101 LOOP, LLC V. LOOP 101, LLC
    Opinion of the Court
    ¶19           Like Arizona’s statute, Restatement § 8.4 is silent as to
    advance waiver of its provisions. But the comment explains that “[a]ny
    agreement in or created contemporaneously with the mortgage documents
    by which any person against whom a deficiency may be sought purports to
    waive the protection of this section is ineffective.” Restatement (Third) of
    Property: Mortgages § 8.4 cmt. b. If advance waiver were permitted, “most
    mortgage forms would routinely incorporate waiver language and the
    impact of this section would be significantly weakened.” 
    Id. Reporters’ Note.
    And by barring waivers by both guarantors and borrowers, the
    Restatement “seeks to ensure that its primary goal of preventing unjust
    enrichment of the mortgagee is not subverted by the routine exaction of
    waivers from guarantors and sureties.” 
    Id. ¶20 CSA
    argues that the Restatement’s prohibition of waiver is
    inapposite because § 8.4 is modeled after statutes expressly prohibiting
    waiver. The Reporters’ Note does state that the section is “consistent with”
    California and Pennsylvania statutes that expressly prohibit waiver. 
    Id. (citing Cal.
    Civ. Code. § 2953 and 42 Pa. Cons. Stat. § 8103(e)). We note that
    Reporters’ Notes are not endorsed by the American Law Institute, but
    instead reflect the views of the Reporter. See, e.g., American Law Institute,
    Capturing the Voice of the American Law Institute: A Handbook for ALI Reporters
    11
    CSA 13-101 LOOP, LLC V. LOOP 101, LLC
    Opinion of the Court
    and Those Who Review Their Work 45 (2005) (“Unlike the Introduction,
    Introductory Notes, black letter, and Comment (including Illustrations), the
    Reporter’s (or Reporters’) Notes are regarded as the work of the Reporter
    (or Reporters).”). But more importantly, the Reporters’ observation that
    § 8.4 is “consistent with” these statutes does not make the provision rise or
    fall with the language of those statutes. Rather, the text of § 8.4, like that of
    A.R.S. § 33-814(A), is silent as to waiver. The comment therefore indicates
    that § 8.4 bars waiver even without express language to that effect.
    ¶21           Like the Arizona deed of trust scheme, Restatement § 8.4
    seeks to protect against artificially increased deficiencies. And consistent
    with Arizona law, the Reporters’ Note recognizes that allowing waiver
    would result in lenders routinely exacting this term as a matter of course.
    See 
    Forbach, 34 Ariz. at 526
    , 273 P. at 9 (“If the [lender] has the right to
    demand a waiver of statutory rights, he will almost certainly do it, and the
    [debtor] generally is in no position to protect himself.”); see also Brunsoman
    v. Scarlett, 
    465 N.W.2d 162
    , 167 (N.D. 1991) (“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.”). Thus, allowing waiver
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    CSA 13-101 LOOP, LLC V. LOOP 101, LLC
    Opinion of the Court
    would seriously disrupt the public purpose of A.R.S. § 33-814(A)’s fair
    market value protection.
    C.
    ¶22            CSA urges us to follow other jurisdictions that have
    interpreted their fair market value statutes to allow waiver. Most directly
    on point is LaSalle Bank Nat’l Ass’n v. Sleutel, 
    289 F.3d 837
    (5th Cir. 2002),
    recently endorsed by the Texas Supreme Court in Moayedi v. Interstate
    35/Chisam Rd., L.P., 
    438 S.W.3d 1
    , 6 (Tex. 2014). In LaSalle Bank, the Fifth
    Circuit interpreted a Texas statute that, like Arizona’s, provides for a fair
    market value credit but is silent as to advance 
    waiver. 289 F.3d at 839
    - 40
    (discussing Tex. Prop. Code Ann. § 51.003). Although the borrower argued
    that allowing waiver would violate the public policy of protecting
    borrowers from unfair lending practices, the court held that this concern
    did not apply to transactions between lenders and guarantors. 
    Id. at 841.
    The court also found dispositive the fact that the Texas Legislature had
    addressed waiver in other statutes. 
    Id. In agreeing
    with LaSalle Bank, the
    Texas Supreme Court added that it would prohibit waiver of a statutory
    right only when its legislature clearly proscribes such waivers. 
    Moayedi, 438 S.W.3d at 6
    .
    13
    CSA 13-101 LOOP, LLC V. LOOP 101, LLC
    Opinion of the Court
    ¶23           LaSalle Bank and Moayedi are distinguishable from this case in
    material respects. First, unlike the Texas statute, A.R.S. § 33-814(A) applies
    both to borrowers and guarantors.          The public policy of protecting
    borrowers thus applies with equal force to guarantors and is relevant to our
    analysis. Second, although our legislature has expressly prohibited waiver
    in other statutes, it also has expressly allowed it. Neither LaSalle Bank nor
    Moayedi addressed whether other Texas statutes expressly allow waiver,
    but the fact that Arizona statutes do means we cannot draw a determinative
    inference from the omission in A.R.S. § 33-814(A). Finally, unlike the Texas
    Supreme Court, we do not require that the legislature “speak clearly” to
    prohibit waiver, 
    Moayedi, 438 S.W.3d at 6
    , but can instead find that a statute
    impliedly prohibits it as a matter of public policy.
    ¶24           Because the identifiable public policy served by A.R.S.
    § 33-814(A) clearly outweighs the interest in enforcing prospective waiver
    terms, we hold that such terms are unenforceable. We note, however, that
    our holding does not preclude a borrower from agreeing, after a non-
    judicial foreclosure commences, not to seek a fair market value
    determination.     See A.R.S. § 33-814(A) (“A written application for
    determination of the fair market value of the real property may be
    filed . . . .”) (emphasis added). Though some statutory rights may not be
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    CSA 13-101 LOOP, LLC V. LOOP 101, LLC
    Opinion of the Court
    waived prospectively, a party may still forgo enforcing them in litigation.
    Cf. 
    Forbach, 34 Ariz. at 527
    , 273 P. at 9 (distinguishing prospective waiver of
    statute of limitations from borrower’s decision not to raise the defense once
    the action has commenced).
    III.
    ¶25           We vacate paragraphs 12 - 24 of the court of appeals’ opinion,
    affirm the superior court’s judgment, and award attorney fees to Loop and
    the guarantors pursuant to A.R.S. § 12-341.01.
    15