ANTI-DEFICIENCY PROTECTION & PURCHASE MONEY DEBT
August 29, 2022
By Diane Drain Attorney & Retired Law Professor
Helvetica Servicing Inc. v. Pasquan Arizona Supreme Court, 8/25/20 (the 5th appeal). To resolve the fact question of whether a residential purchase money loan is a construction loan or a home improvement loan, the Arizona Supreme Court held that a trial court must consider the totality of the circumstances surrounding the loan. Here, the Court identified five non-exclusive factors indicating whether a loan is a construction loan for purposes of anti-deficiency protection under A.R.S. § 33-729(A): (1) whether there was a complete or substantially complete demolition of an existing structure and a new building constructed in its place; (2) the intent of the parties when executing the loan documents; (3) whether the structure was inhabitable or inhabited during construction; (4) whether the structure was largely preserved and improved or substantially expanded; and (5) whether the project is characterized as “home improvement” or “construction” in the loan documents and in the permits or other official documents. The distinction between the loans is significant because statutory anti-deficiency protection is afforded to construction loans but not to home improvement loans – so lenders may not seek a money judgment against the borrower over a construction loan.
Baker v. Gardner Ariz.,1988. 770 P.2d 766 Holder of purchase money note and trust deed on premises sought to bring suit to collect on note and waived security deed of trust. The Superior Court, Maricopa County, No. C-587681, Michael J. O’Melia, J., found action precluded by anti-deficiency statute. On appeal, the Court of Appeals reversed in a memorandum decision. The Supreme Court, Feldman, V.C.J., held that: (1) holders of purchase money note and security device could not hold maker liable for entire unpaid balance by waiving security, and (2) election of remedies could occur except where anti-deficiency statute applied.
Cely v. DeConcini, McDonald, Brammer, Yetwin & Lacy, P.C., 166 Ariz. 500, 505, 803 P.2d 911, 916 (App.1990). A “purchase money mortgage” for purposes of Arizona’s anti-deficiency statutes is one that encumbers the property being sold.
Junior wiped out by senior’s foreclosure or trustee’s sale – NO DEFICIENCY if also purchase money lien Nydam v. Crawford, 181 Ariz. 101, 887 P.2d 631 (App. 1994). DEFICIENCY – consolidated second loan, used to pay off original second, plus credit cards, etc. Am. Gen. Fin.Serv. V. Dinwiddie, 2008 WL 4182862 (Ariz. Ct. Apps. 2/26/2008) (unreported)
Multiple lenders with multiple notes: Junior lender can sue on Note after foreclosure by first lender unless property is purchase money, 2 ½ acres or less and utilized as a one or two family dwelling. Wells Fargo Credit v Tolliver, 183 Ariz. 343, 903 P.2d 1101 (App. 1995); W.D. Lang v Corbet, 181 Ariz. 153 (888 P.2d 1340 (App. 1994) (junior could pursue sue on note and collect excess sale proceeds from sale of first lender).
About the Author: Diane Drain
Diane is a well respected Arizona bankruptcy and foreclosure attorney. As a retired law professor, she believes in offering everyone, not just her clients, advice about bankruptcy and Arizona foreclosure laws. Diane is also a mentor to hundreds of Arizona attorneys.
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