New Arizona Case Says Homeowners Cannot Prospectively Waive Anti-Deficiency Protections

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In yet another case favorable to homeowners, the Arizona Court of Appeals (Division One) determined that borrowers cannot contractually waive the anti-deficiency protections afforded by Arizona statutory law. The Arizona anti-deficiency statute protects most homeowners (exceptions do apply – see an attorney for help with this) from paying for the difference owed on their homes if they are foreclosed upon and their homes are sold for less than what is owing.

In Parkway Bank and Trust Co. v. Zivkovic, a borrower contractually agreed to waive all rights or defenses he might have under anti-deficiency law. The borrower eventually defaulted and the lender foreclosed. The house sold at foreclosure for less than what was owed, and the lender proceeded to sue the borrower for the difference. The borrower argued he could not be sued for the difference because of Arizona’s anti-deficiency statute but lost. He then appealed.

The Appellate Court concluded that the Legislature in creating the anti-deficiency statute (see A.R.S. 33-814) intended to protect consumers from the risks associated with borrowing to purchase homes by eliminating the hardships consumers would suffer for failing to fully appreciate the extent to which they were subjecting their personal assets to legal process. Instead, the legislature allocated to the lenders the “risk of inadequate security” in hopes that this would deter unbridled lending and overvaluation of collateral, and would also protect consumers against general downturns in the real estate market.

The Appellate Court reasoned that to do otherwise would make these public policy goals “illusory” if a personal borrower could waive these rights as a condition for obtaining the loan, because every lender would build this into their contracts. As a result, the Appellate Court found as a matter of first impression that a borrower cannot prospectively waiver his or her anti-deficiency protections under Arizona law.

This is a great result for Arizona homeowners, but that is not the end of the story in this case. There was an additional issue addressed regarding a “choice of law” provision in the contract between the parties which identified Illinois law to be controlling. In deciding this, the Court was guided by the Restatement (Second) of Conflict of Laws. Under this body of law, because the anti-deficiency protections could not be contractually waived, the court then was required to perform a “balancing test” to determine which state’s laws should apply in regards to a deficiency action. Illinois law permits a deficiency action, Arizona law does not.

The Court of Appeals sent the case back down to the trial court to make a factual determination of which state’s laws to apply based upon this balancing test. So, although the borrower prevailed on one point, the door was left open where the borrower could still lose because even though he cannot waive his anti-deficiency protections under Arizona law, the court must now balance which state’s laws are to be applied. How that
will come out is still uncertain. In the meantime, the lesson learned here for homeowners is to obtain loans where Arizona law will be applied. Otherwise, you risk losing Arizona’s anti-deficiency protection.

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