Good News For Homeowners Regarding Arizona’s Anti-deficiency Laws

On August 28, 2012, the Arizona Supreme Court denied the request of more than a dozen banks to overturn the Arizona Court of Appeals decision in the 2011 case of M&I Marshall & Ilsley Bank v. Mueller, 1 CA-CV 10-804.

In the Mueller case, 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. A.R.S. § 33-814(G), protects certain borrowers from liability for a deficiency in the event of a foreclosure.

According to A.R.S. § 33-814(G), If trust property of two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling is sold pursuant to the trustee’s power of sale, no action may be maintained to recover any difference between the amount obtained by sale and the amount of the indebtedness and any interest, costs and expenses. (Emphasis added) The court in Mueller analyzed whether the Mueller’s property qualified as a property that was being utilized as a dwelling under the statute.

In the Mueller 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 Court of Appeals ruled that the lender was not entitled to a deficiency judgment against the couple even though the home was never completed or occupied.

The Court of Appeals distinguished the Mueller case from the 1991 Arizona Supreme Court case of Mid Kansas Federal Savings and Loan Association of Wichita v. Dynamic Development Corporation, 167 Ariz. 122, 804 P.2d 1310 (1991). In the Mid-Kansas case, the Court held that
A.R.S. § 33-814(G) did not apply to multiple residences under construction by a developer for eventual resale.

Unlike the developer in Mid Kansas, who never intended to personally reside in the properties, the borrowers in Mueller intended to occupy the property following completion. The court also emphasized the legislative intent behind the anti-deficiency statutes. The primary purpose of the statute, according to the court, is to protect “homeowners” as opposed to commercial developers as in Mid Kansas.

The anti-deficiency statute has been the subject of a couple of recent rulings (see our blog posts on May 24, 2012, and July 26, 2012) and the law is evolving.  Contact our office for assistance with your real estate questions and needs.