BREAKING NEWS: Arizona’s Newly Expanded Anti Deficiency Protection
In a move sure to cause shockwaves in the Arizona mortgage lending community, the Arizona Court of Appeals expanded Arizona Anti Deficiency Protection (under A.R.S. §33-814(G)) to protect borrowers whose property is foreclosed upon even while it is still under construction, so long as they intended to occupy the home upon completion.
Many lenders are concerned, as the decision, released on December 27, 2011, could not have been anticipate by a plain reading of A.R.S. § 33-814(G), which provides:
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 changes bring much needed relief for some concerned borrowers. But give pause to local hard money and construction lenders, specifically those focused on the homebuilding community, which have been acting in reliance on the former meaning of the statute.
In the recent test case, the Muellers bought a parcel of vacant land with a loan from M&I Bank secured by a deed of trust to construct a single-family home on the property for their personal use. Sometime later the Muellers abandoned the property and defaulted on the loan after they had discovered much of the construction was defective, that the contractor was behind schedule and were denied additional loan disbursements by M&I to remedy the defects. M&I instituted a trustee’s foreclosure sale of the Property and then later filed an action against the Muellers seeking to recover a deficiency judgment arguing that they the anti-deficiency statute does not apply because construction on the home was never finished and the property was never “utilized” as a single-family home. The trial court dismissed M&I’s claim and ruled that the borrowers were entitled to protection as a matter of law.
The Arizona Court of Appeals distinguished this case from the prior precedent in Mid Kansas Federal Savings & Loan v. Dynamic Development Corporation), which case involved a corporate homebuilder that would never have utilized (live in) the properties as a single-family home, even if they were completed. In Muller, the Court expanded the definition of “utilized for” a single-family dwelling to include the fact that the borrower intended to live in the home upon its completion. In expanding the breadth of protection, the Court reaffirmed that the primary purpose of the Arizona anti-deficiency statutes is to protect “homeowners” from deficiency judgments — not to afford protection to commercial homebuilders.”