Guarantors Beware! A.R.S. § 33-814 May Not Save You from a Deficiency Judgment

In First Credit Union v. Courtney, 309 P.3d 929, 669 Ariz. Adv. Rep. 18 (Ct. App. 2013), the Arizona Court of Appeals rejected three creative arguments that A.R.S. § 33-814 protected the guarantors from paying on their guaranty.  The opinion provides a stark reminder that Arizona courts will usually enforce a guarantor’s contractual obligation to repay a debt.

In 2006, First Credit made a $3.56 million construction loan to Orange Grove I, L.L.C. (the “Borrower”).  First Credit secured the loan with a lien against commercial real property called the Appian Estates.  The Courtneys guaranteed repayment of the loan.  In 2009, the Courtneys granted the lender a second lien against their home as additional security for the loan.  Nevertheless, the Borrower defaulted in 2011, and First Credit foreclosed against the Appian Estates (but not against the Courtneys’ home).  Nine days later, First Credit sued the Courtneys (but not the Borrower) on their guaranty and ultimately obtained an approximately $1.4 million deficiency judgment against the guarantors.  The Courtneys appealed.

On appeal, the Courtneys made three arguments that A.R.S. § 33-814 barred the lender’s action.  Although the lender argued that the Courtneys, as guarantors, waived the protections of A.R.S. § 33-814 in their guaranty, the Court of Appeals rejected all three of the Courtneys’ arguments without deciding whether a guarantor (as opposed to a borrower)[1] can waive the protections afforded by Arizona’s anti-deficiency statute.

First, the Courtneys argued that the deficiency action against them was premature, because the bank never foreclosed against the additional collateral (i.e., the Courtneys’ home).  The first argument was easily dismissed, because: (i) the guarantors waived the right to compel a lender to proceed first against the collateral in the guaranty, and (ii) nothing in A.R.S. § 33-814 required a lender to wait until all collateral had been foreclosed upon to initiate a deficiency suit.

Second, the Courtneys argued that the lender could not proceed with a deficiency action because A.R.S. § 33-814(G) does not authorize a lender to obtain a deficiency judgment after a foreclosure of a protected “dwelling” such as the Courtneys’ home.  Again, the Court of Appeals rejected the Courtneys’ argument, because: (i) the lender never conducted a foreclosure sale of the home; and (ii) regardless, Arizona law authorizes a creditor to waive the security, sue directly on the debt, and obtain a deficiency judgment so long as the loan secured by the “dwelling” is not a purchase money loan.

Third, the Courtneys argued that they could not be liable because the debt owed by the Borrower had been discharged by operation of A.R.S. § 33-814(D).  This statute provides that if a deficiency suit is not filed within ninety (90) days after a trustee’s sale, the proceeds from the sale are deemed to have satisfied the debt in full.  First Credit elected to not sue the Borrower, and the guarantors argued that the failure to name the borrower caused a discharge of the debt and, therefore, precluded First Credit from recovering from the guarantors.  The Court of Appeals again disagreed, finding that the language of A.R.S. § 33-814 did not require the lender to sue the borrower, and that in any event, Arizona law allowed the guarantors to be liable even if the suit against the primary obligor (i.e., the Borrower) was otherwise barred.

All in all, the First Credit decision will be a very helpful tool for lenders going forward.  The case accurately interprets the statute, intelligently discusses the relevant case law, and cuts off several arguments that, if successful, would allow guarantors to escape liability due to procedural decisions by the lender.

The most interesting part of the opinion, however, is the express recognition that it is possible that guarantors could waive the protections of A.R.S. § 33-814 in the guaranty contract.  We will be sure to report if, and when, this critical issue is decided.