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ZB, N.A. v. Hoeller

Court of Appeals of Arizona, First Division

April 25, 2017

ZB, N.A., a National Banking Association, Plaintiff/Appellee,
DANIEL J. HOELLER, an individual; and AZAR F. GHAFARI, an individual, Defendants/Appellants.

         Appeal from the Superior Court in Maricopa County No. CV2014-054267 The Honorable Aimee L. Anderson, Judge

          Porter Law Firm, Phoenix By Robert S. Porter Counsel for Plaintiff/Appellee

          Ardeo Law, PLLC, Gilbert By Kate Miller Counsel for Defendants/Appellants

          Presiding Judge Randall M. Howe delivered the opinion of the Court, in which Judge Lawrence F. Winthrop and Judge Jon W. Thompson joined.


          HOWE, Judge

         ¶1 This appeal is from a deficiency action that lender ZB, N.A. brought against Daniel J. Hoeller and Azar F. Ghafari (collectively, "Borrowers") on a loan used to finance the purchase of commercial real estate in Missouri, secured by a deed of trust on the property. Borrowers moved for summary judgment, arguing that because the promissory note included a Utah choice-of-law provision, the action was time-barred by Utah's 90-day statute of limitations. The trial court denied the motion, finding that the deed of trust's Missouri choice-of-law provision applied and that the lawsuit was timely under Missouri's five-year statute of limitations. ZB subsequently moved for summary judgment on the merits, and the trial court granted the motion.

         ¶2 We hold that the promissory note's choice-of-law provision- not the deed of trust's - applies to the deficiency action because deficiency actions stem from the underlying debt. We further conclude that the deed of trust is effectively extinguished after the security property is sold at a trustee's sale and therefore provides no remedies to the lender beyond the trustee's sale. Accordingly, we reverse and remand for entry of judgment in Borrowers' favor.


         ¶3 In the summer of 2004, Borrowers - then California residents-purchased commercial real estate located in Missouri. Borrowers financed the purchase through a loan from ZB - principally located in Utah- secured by a deed of trust to the property. The promissory note contained a choice-of-law provision stating that it "will be governed by, construed and enforced in accordance with federal law and the laws of the State of Utah." The note also contained a fee provision which provided for the award of ZB's expenses, including attorneys' fees, to collect on the note if Borrowers did not pay. The provision was silent on Borrowers' right to receive payment for its expenses in successfully defending an action by ZB on the note.

         ¶4 The deed of trust similarly required that the laws of Utah govern it, "except and only to the extent of procedural matters related to the perfection and enforcement of Lender's rights and remedies against the Property, which matters shall be governed by the laws of the State of Missouri." One remedy provided for by the deed of trust in case of a default on the loan was the ability to foreclose on the property and collect any resulting deficiency from Borrowers with interest. "In the event that the enforceability or validity of any provision of this Deed of Trust is challenged or questioned, " the deed continued, "such provision shall be governed by whichever applicable state or federal law would uphold or would enforce such challenged or questioned provision."

         ¶5 Borrowers made payments on the loan for eight years. But in 2012, Borrowers could not continue making payments and consequently defaulted on the loan. ZB foreclosed on the property and at the trustee's sale purchased the property for a credit bid for $102, 469-an amount less than the unpaid balance on the debt. This left a principal deficiency amount of $147, 374.73 plus accruing interest.

         ¶6 In September 2014, ZB initiated this deficiency action against Borrowers-who had since moved to and become residents of Arizona-to recover that unpaid amount. Representing themselves, Borrowers moved to dismiss the action. They argued that the action was time-barred under A.R.S. § 33-814, which requires that a deficiency action be filed within 90 days after the sale of trust property. ZB opposed the motion, arguing that under the deed of trust's terms regarding its "rights and remedies against the property, " Missouri law and its five-year statute of limitations applied.

         ¶7 The trial court agreed with ZB and denied Borrowers' motion. In making its ruling, the trial court looked to the Restatement (Second) of Conflict of Laws § 187, which requires the application of the "laws of the state chosen by the parties to govern their contractual rights . . . if a particular issue is one which the parties could have resolved by explicit provision in their agreement directed to that issue." The court noted the applicable statute of limitations was "clearly . . . one such issue." Thus, the court concluded that because the deed of trust specified that Missouri law must govern procedural matters relating to the enforcement of ZB's rights and remedies against the property, the Missouri statute of limitations applied and the action was not time-barred.

         ¶8 Borrowers again moved to dismiss, arguing that Utah's laws and statute of limitations applied because the promissory note's choice-of-law provision required that Utah's laws apply to it. Borrowers also argued that the provision requiring the application of Missouri's laws in the deed of trust applied only to ZB's remedies against the property itself, not the ...

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