Wednesday, June 8, 2011

Arizona's Anti-Deficiency Laws

by David Elston

This summary of the Arizona Anti-Deficiency Laws relating to obligations that are secured by liens on residential properties is not intended to be a definitive or exhaustive treatment of such laws, but, rather, will serve as a brief introduction to and discussion of certain issues in such legal area.

Arizona's anti-deficiency statutes were enacted in 1971. The purpose of the anti-deficiency statutes is to bar a homeowner's personal liability after losing a residential property to foreclosure under certain circumstances. The statutes prohibit execution against and attachment of a borrower's assets when the property foreclosed upon either judicially or through a trustee sale is (i) a qualified property and (ii) the debt is a qualified loan. See A.R.S. § 33-729 (applicable to mortgages and deeds of trust that are judicially foreclosed as mortgages) and A.R.S. § 33-814 (applicable to deeds of trusts that are enforced though a trustee sale).

(i) Qualified Property. A.R.S. § 33-814(G) states that 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 a trustee's power of sale, no action may be maintained to recover any difference between the amount obtained for sale and the amount of the indebtedness and any interest, costs and expenses (the "Deficiency").

The Arizona Courts have broadly defined this requirement that the property be "utilized" as a dwelling. In Northern Arizona Properties v. Pinetop Properties Group, 151 Ariz. 9, 725 P.2d 501 (Ct. App. 1986), the Court of Appeals held that an investment condominium, which was occasionally occupied by the owners and third party renters, fell within the statutory definition. In deciding that the condominium was utilized as a dwelling, the Court employed the definition of a "dwelling" in Webster's Dictionary. In Mid Kansas Federal Savings and Loan Association of Wichita v. Dynamic Development Corporation, 167 Ariz. 122, 804 P.2d 1310 (1991), the Arizona Supreme Court held that commercial residential properties being constructed and for their eventual resale as dwellings are not "utilized" as dwellings when they are unfinished and have never been lived in. Thus, if the dwelling has at least occasionally been occupied by the owners or by third parties, then it most likely will qualify as having been utilized as a dwelling.

In the context of a mortgage, the applicable statutory provision, A.R.S. § 33-729 (A) applies and defines the qualified property in the same manner as the deed of trust statute cited above.

Qualified Property may include ownership in residential property held in a condominium unit or though stock in a housing cooperative, as well as outright fee interests.

(ii) Qualified Loan. This element requires that (except as otherwise discussed below) the mortgage or deed of trust must be a purchase money mortgage ("PMM"). A PMM is a mortgage or deed of trust given concurrently with the conveyance of the subject real property between a buyer and seller and given to secure the loan, the proceeds of which are used to purchase the real property.

In addition, a refinance of a PMM has also been held to be a PMM for purposes of the anti-deficiency statutes. The Court of Appeals in Bank One, Arizona, N.A. v. Edward R. Beauvais, 188 Ariz. 245, 934 P.2d 809 (Ct. App. 1997) held that a note that was an extension, renewal or refinancing by the same lender of an original PMM note retained its character as a purchase money note. A lien securing debt, the proceeds of which are used for improvements on the residential property, will most likely not be treated as a PMM.

It is noteworthy is that the court in Beauvais did not resolve the issue of whether a borrower who refinances a PMM note and borrows funds in addition to the unpaid balance of the original loan amount receives protection under the anti-deficiency statutes for the total amount of the new loan, or whether the amount can be bifurcated to determine which amount is a PMM and which amount is non PMM. In Beauvais, the borrower borrowed $75,000 from the bank to pay off an earlier loan which was wrapped into the new loan amount of $240,000 to purchase the new home for a total new consolidated loan of $315,000, and a new promissory note in this amount was executed by the borrower. The note was secured in part by a second lien deed of trust on the new home. Three years later, a new note (the "Workout Note") in the amount of $190,000 (the remaining balance due on the consolidated loan) was executed which was characterized by the bank as "renewal" of the $315,00 note and an extension of the earlier $75,000 loan. The Court of Appeals held that even though that bifurcation issue was raised in the trial court, the bank made no such argument on appeal concerning the bifurcation of the Workout Note, and, thus, the Court of Appeals did not consider this issue. While it is likely that this issue will be resolved in subsequent cases, it has not been resolved as of this writing.

As stated above, if the property is a qualified property and the loan is a qualified loan, the anti-deficiency statutes will prohibit a lender who forecloses judicially or non-judicially through a power of sale provision, to bring an action against the borrower for any deficiency resulting upon the sale of the property. It is also clear under Arizona law that if the mortgage or deed of trust is a PMM, the lender may not waive the lien and sue on the note. See Baker v. Gardner, 160 Ariz. 98, 770 P.2d 766 (1988).

Finally, a PMM that is assumed by a buyer in connection with the buyer's acquisition of the subject property does not retain its character as a PMM as to that buyer. Southwest Savings and Loan Association v. Ludi, 122 Ariz. 226, 594 P.2d 92 (1979). See also Cely v. DeConcini, McDonald, Brammer, Yetwin & Lacy, P.C., 166 Ariz. 500, 803 P.2d 911 (Ct. App. 1990).

(iii) Protections where a Non-PMM Is Foreclosed Non-Judicially. Generally, if the debt or loan secured by a deed of trust is not a PMM, the anti-deficiency statute will apply and prohibit an action against the borrower for any deficiency if the qualified property is sold through the power of sale provision at a trustee sale. See Mid Kansas, 167 Ariz. at 124, 804 P.2d at 1313. However, a lender can obtain a deficiency judgment on a non-PMM if the lender elects to sue the borrower on the note and forecloses judicially; or, except as discussed above in the case of a PMM, the lender may elect to waive the lien and sue on the note. Thus, the holder of a non-PMM secured by a junior lien can sue on the note where the senior lienholder forecloses non-judicially pursuant to a power of sale provision and the second lien is eliminated by the trustee sale.

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