Recent Appeals Court Case Expands Arizona Anti-Deficiency Protection for Arizona Homeowners

In the case of M&I Marshall & Ilsley Bank v. Mueller, 1 CA-CV 10-804, the Arizona Court of Appeals expanded Arizona’s anti-deficiency protection (under A.R.S. § 33-814(G)) to protect borrowers whose property is foreclosed upon even while it is under construction, so long as they intend to occupy the home upon completion.

In that case, the Muellers purchased a plot of vacant land and borrowed $444,000 from M&I Bank to construct a single-family home on the property for their own use. To secure the loan, the Muellers executed a deed of trust with M&I. Construction on the home began in March 2007, but several months later the Muellers discovered that the contractor was behind schedule and much of the construction was defective. The Muellers asked M&I to advance loan disbursements to remedy the defects, but M&I did not disburse additional funds. As a result, the Muellers abandoned the property and defaulted on the loan.

M&I Bank conducted a non-judicial trustee’s sale. After the trustee’s sale, M&I Bank timely filed a lawsuit seeking a deficiency judgment.The trial court ruled that the Muellers were entitled to anti-deficiency protection under § A.R.S. 33-814(G) on the basis that the Muellers intended to live in the home upon its completion. M&I Bank appealed the trial court’s decision. M&I asserted that the Muellers were not entitled anti-deficiency protection because a home was never constructed on the property, and therefore, the property was never “utilized” for a single-family home.

The appellate court rejected M&I’s argument and upheld the trial court’s decision. The court noted that the primary purpose of Arizona’s anti-deficiency statutes was to protect homeowners from deficiency judgments. Since the Muellers purchased the property with the purpose of occupying the dwelling upon completion, the court found that the anti-deficiency statute protected the Muellers from a deficiency judgment.

Keep in mind this decision comes from the appellate court. It could easily go up for review before the Arizona Supreme Court. Banks would have a significant interest in seeing this decision reversed.

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