Arizona Case Law Updates Related to Anti-Deficiency Statutes

By David W. Elston

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 qualified 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. The scope and breadth of the statutes have been the subject of three recent Arizona judicial decisions of which a brief summary of each are as follows: 

1.           In M&I Marshall & Ilsley Bank v. Mueller, 228 Ariz 478 (2011), the Arizona Court of Appeals expanded the scope of the Arizona anti-deficiency statutes to protect borrowers from a deficiency judgment after a foreclosure of a mortgage securing their loan in which the loan proceeds were used to construct the borrowers’ unfinished house.  Under Arizona’s anti-deficiency statutes, “utilization” of the house as a dwelling is one of three requirements that a borrower must meet in order to be protected from a deficiency judgment.  The Arizona Court of Appeals held that the Mueller case was distinguishable from prior Arizona cases in that in Mueller the borrowers used the loan proceeds to purchase and construct the property with the intent to occupy the dwelling upon its completion.  Therefore, the borrowers were protected from a deficiency judgment even though the house was not completed and had never been lived in.  On August 28, 2012, the Arizona Supreme Court denied the request of many lenders to overturn this Court of Appeals ruling.

2.           In Helveta Servicing, Inc. v. Pasquan, 229 Ariz. 493 (2012), the Arizona Court of Appeals held that a lender may obtain a deficiency judgment after a judicial foreclosure for any non-purchase money loan proceeds disbursed to the borrower (i.e., the loan proceeds were not used solely by the borrower to purchase the property, or in the case of a refinance transaction, the loan proceeds were not used solely by the borrower to pay off existing purchase money loan debt) to the extent that the non-purchase money proceeds could be segregated and traced.  The ruling, however, only applies to cases whereby a lender foreclosures upon the property in a judicial foreclosure action.  If the lender had elected to foreclose the property non-judicially pursuant to a power of sale provision, it would not have been entitled to recover a deficiency judgment against the borrower regardless of whether the refinanced loan proceeds were purchase money debt or non-purchase money debt.

The Court of Appeals in Helvetica also ruled that a construction loan qualifies as a purchase money loan if the loan proceeds are actually used to construct the house that otherwise qualifies for protection under the Arizona anti-deficiency statutes, and if the deed of trust securing the loan encumbers the land and the house built thereon.

3.           More recently, in Independent Mortgage Company v. Alaburda, 230 Ariz. 181 (2012), the Arizona Court of Appeals ruled that the owners of a vacation home (the owners owned a fractional interest in the property and they were entitled to use the property for a maximum of 28 days per year) qualified for protection under Arizona’s anti-deficiency statutes because the statutes do not limit its protection to only those that own all of the property.  The Court of Appeals rejected the lender’s argument that a 1/10^th interest in a vacation accommodation was not a “dwelling” entitled to anti-deficiency protection under the Arizona statutes in holding that what constitutes a one–family or two-family dwelling is not determined by how many families pass through the residence, but on the number of families there at a time.

Short Sale - Applicability of Anti-Deficiency Statutes.

Generally, while the specific language of the Arizona anti-deficiency statutes refer to qualifying properties sold by “trustee sale” or through a “judicial foreclosure”, any deficiency is also waived by the lender if it approves a short sale and releases the deed of trust or mortgage securing the debt, unless there is evidence of an agreement to the contrary made by the lender and borrower (i.e., where the lender agrees to release its mortgage or deed of trust to allow the short sale but requires that the borrower sign documentation thereby agreeing that a portion of the debt is still owed to the lender upon the short sale closing and release of the deed of trust or mortgage by the lender).