Arizona Court of Appeals Expands Arizona Anti-Deficiency Protection to Unfinished Homes with Intent to Occupy Upon Completion

The Arizona Court of Appeals in M&I Marshall & Ilsley Bank v Mueller, 1 CA-CV 10-0804 (December 27, 2011), has expanded the scope of the Arizona anti-deficiency statute to include: (i) trust properties of two and one-half acres or less; (ii) which are limited to a single one-family or a single two-family dwelling; (iii) where construction of the house has not been completed; and (iv) the property was purchased by the borrower with the purpose of occupying the dwelling upon its completion (emphasis added).

A.R.S. § 33-814(G) (the “Statute”) provides and Arizona case law has held that the property must be “utilized” as a dwelling unit in order for the Statute to apply and preclude a deficiency action by a lender against a borrower after a non-judicial foreclosure of the property.

The Court of Appeals distinguished the Mueller facts from the Arizona Supreme Court case of Mid Kansas Federal Savings & Loan Association of Wichita v. Dynamic Development Corp., 167 Ariz. 122, 804 P. 2d 1310, in that the borrower in Mueller intended to live in the single-family home upon its completion, whereas in Mid Kansas, the borrower was a corporation that never intended to occupy the property. The Court of Appeals further stated that the primary purpose of the Arizona anti-deficiency statutes is to protect “homeowners” from deficiency judgments – not to afford protection to commercial homebuilders and that its interpretation of Mid Kansas was consistent with the intent of the Arizona legislature to protect homeowners.

Thus, the Court of Appeals in dismissing the lender’s deficiency claim against the borrowers held that the borrowers were entitled to anti-deficiency protection under the Statute even when the construction of the house is not completed and unoccupied where the borrower has the intent to occupy the house upon its completion.

Each case a business or individual may face is unique and may require legal advice. If you would like additional information regarding the content of this article, please contact the author, David Elston, or the Chair of our Real Estate Department, Lee Esch.