Arizona anti-deficiency law for residential property clarified by the Arizona Supreme Court.

Arizona Revised Statute: 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.

Clarification of Arizona Anti-Deficiency Laws

History: Property not yet fully constructed does not qualify as “limited to and utilized for one or two family dwelling” Borrowers never intended on residing in the real property. DEFICIENCY allowed.: Mid Kansas, id at 129, 804 P2d at 117. But the Court of Appeals put a bizarre twist on that concept in M&I vs Mueller, (Az Ct Appeals, Div 1, 12/27/11) 1 CA-CV 10-0804, CV 2009-031468 (explanation – in Mid Kansas, where the borrower was a corporation that never intended to occupy the property, the Muellers intended to live in the single-family home upon its completion.

FACTS: In 2005, the Muellers purchased a plot of vacant land (the “Property”) in Arizona. In June 2006, the Muellers borrowed $444,000 from M&I to construct a single-family home on the Property for their own use.  Several months into construction, the Muellers discovered that the contractor was behind schedule, and much of the construction was defective. The Muellers notified M&I that they would need advances on loan disbursements to remedy the defects. M&I did not disburse additional funds, and the Muellers abandoned the Property and defaulted on the note.

In September 2009, M&I foreclosed and sued to recover a deficiency judgment for $68,196.91, the difference between the appraised value of the home prior to the foreclosure sale. The trial court dismissed M&I’s deficiency claim, finding as a matter of law that the Muellers were entitled to anti-deficiency protection under Arizona Revised Statutes (“A.R.S.”) section 33-814(G) (2010). Court of Appeals upheld lower court.

Arizona Supreme Court anti-deficiency caseFINAL WORD: BMO Harris Bank N.A. v. Wildwood Creek Ranch, No. CV-14-0101-PR (AZ Sup. Ct. 1/23/2015 – vacated Court of Appeals decision in Wildwood and, in essence overturning Mueller) Finding: 1) there must be a completed structure on the property suitable for dwelling purposes and, 2) even the homeowner who has not yet moved into the completed residence would be entitled to anti-deficiency protection. “Mueller’s emphasis on intent arguably would extend anti-deficiency protection to owners of a vacant lot so long as they intend to build and eventually live in a residence.” ‘Our holding in Mid Kansas clarified, for purposes of the anti-deficiency statute, both what constitutes a dwelling” and when property is “utilized for” a dwelling.   A structure is a “dwelling” if it is suitable for residential purposes and a person resides in the structure, or the structure is intended for such use. Id. at 128, 804 P.2d at 1316. Thus, a property contains a “dwelling” for purposes of the anti-deficiency statute when a borrower has purchased but not yet occupied a home, given that the structure is suitable and intended for human abode.”

Below are several videos which may help to clarify this situation.  WARNING: this law applies only to Arizona property and is subject to change.

  1. “What are the Lender’s Foreclosure Rights in Arizona?
  2. “Should I keep my home or let it go into foreclosure?

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