New Arizona Court of Appeals Decision Adds Confusion to the
Interpretation of the Anti-Deficiency Statutes
By: Neal H.
Bookspan
In a new decision issued on December 27, 2011, the Arizona Court
of Appeals held that Arizona's anti-deficiency statute applies to
debtors who purchase vacant land with the intent
to reside on the property upon completion of construction of a home
even if they do not complete construction or actually occupy the
property.
In M&I Marshall & Ilsley Bank v. Mueller,
1 CA-CV 10-0804, http://azcourts.gov/Portals/89/opinionfiles/CV/CV100804.pdf
the debtors purchased a vacant lot on which they intended to
construct a single-family home. The debtors borrowed
approximately $440,000 from M&I Bank to finance the
construction. Many months into the construction the debtors
experienced construction delays. The debtors defaulted on the note
and M&I conducted a non-judicial foreclosure
on the property. After foreclosure, M&I sued the debtors for
the resulting deficiency. The trial court held that the
debtors were entitled to protection under Arizona's anti-deficiency
statute.
This seemingly is a change in Arizona law. The Arizona
Court of Appeals distinguished its ruling from the twenty year old
Arizona Supreme Court holding in Mid Kansas Federal Savings
& Loan Association of Wichita v. Dynamic Development
Corp., 167 Ariz. 122, 129, 804 P.2d 1310, 1317
(1991). In the Mid-Kansas case, a commercial builder
sought protection under the anti-deficiency statute after
defaulting on a loan on partially constructed homes. The Arizona
Supreme Court held that the anti-deficiency statute did not protect
the debtor in Mid Kansas. The court specifically stated
that debtors are not entitled to the protections of the
anti-deficiency statute where property cannot be utilized as a
dwelling, is unfinished, has never been lived in, and the owner has
no intent to ever occupy the property.
In citing the Mid-Kansas decision, M&I argued that
the debtors were not entitled to the protections of the
anti-deficiency statute because the residence was never constructed
and therefore never utilized as a single family home. The
Court of Appeals distinguished the Mid Kansas decision
finding that when a lot is purchased by a debtor who intends to
personally occupy the property, the anti-deficiency statute
applies. The issue of the debtors' intent trumped that construction
of the residence was not complete and the debtors never occupied
the property.
While we anticipate that this case will be eventually heard by
the Arizona Supreme Court, in the interim we surmise that this will
be raised as a defense to anti-deficiency actions by debtors that
have construction loans which have been foreclosed on. At
issue will be the debtor's intent. We will provide updates to
you.
About the author: Neal
Bookspan is a partner at the Phoenix law firm of Jaburg Wilk. He assists
creditors with bankruptcy
and collection
matters. Neal can be reached at 602.248.1009 or nhb@jaburgwilk.com.
This article is not intended to provide legal advice and
only relates to Arizona law. It does not consider the scope of laws
in states other than Arizona. Always consult an attorney for
legal advice for your particular
situation.