Anti-Deficiency Update + AAR's Efforts to Protect Your Rights

Throughout the years, Arizona’s anti-deficiency statute has been litigated to determine under what circumstances the statute is applicable. Of particular interest has been the phrase “utilized for a . . . dwelling.” The statute, A.R.S. §33-814, states:

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.)

One of the first litigated cases to consider what “utilized for a . . . dwelling” entailed occurred in 1986 in the case of Northern Arizona Properties v. Pinetop Properties Group. In this case, the parties argued over whether an investment property was afforded deficiency protection under Arizona law when the property was occasionally utilized by the owners. While a structure existed and was in fact utilized, the lender argued that the term “dwelling” as used in the statute required permanent residency, not property held for investment purposes. Contrary to the lender’s position, the Court of Appeals held that “dwelling” did not constitute a permanent residence. Accordingly, as long as a structure was lived in or occasionally occupied by a person, the borrower would be afforded deficiency protection under Arizona law.

In 1991, in Mid Kansas Fed. Sav. and Loan Ass’n of Wichita v. Dynamic Dev. Corp., a developer who built and sold residential and commercial property defaulted on its loans and the lender pursued the deficiency. Amongst other issues, the parties argued over whether Arizona’s anti-deficiency statute applies when the encumbered properties are not actually used as residences. The Supreme Court of Arizona held that the anti-deficiency statute did not apply to houses owned by a developer that had never been utilized as dwellings and were not yet susceptible of being utilized as dwellings.

Approximately 20 years later, in 2011, the Court of Appeals in M&I Marshall & Ilsley Bank v. Mueller made a drastic change to how the statute had previously been interpreted when it determined that intent to live in a residence upon its completion was sufficient to fulfill the “utilized for a . . . dwelling” requirement. In Mueller, the borrowers purchased vacant land and had not completed construction of a residence on the property when the lender foreclosed and pursued them for the deficiency. Thus, while the previous cases established that a structure must exist and be utilized, the holding in Mueller eliminated that requirement by extending deficiency protection to a borrower based on the borrower’s intent to utilize an uncompleted property.

On January 23, 2015, the Arizona Supreme Court in the case of BMO Harris Bank, N.A. v. Wildwood Creek Ranch, LLC overruled Mueller when it held that the anti-deficiency statute does not apply until a dwelling is completed on a property. In analyzing the anti-deficiency statute and the cases previously mentioned, the Supreme Court noted that the Mueller holding could inappropriately extend deficiency protection to a vacant lot owner in the event the owner intended to construct and utilize a residence not yet built on the property. Accordingly, in overruling Mueller, the Supreme Court restored the former understanding that a home must be completed in order to be “utilized for a . . . dwelling.” Stated differently, the court restored the law to what it had been from the statute’s inception through the Mueller decision in 2011.

Notably, Arizona’s anti-deficiency statute was recently revised to clarify when the statute is applicable. Included in part of the revision is that a trust property must be substantially completed in order to receive deficiency protection. See A.R.S. §33-814(H). This is applicable to deeds of trusts originated after December 31, 2014. Id. Consequently, now that Mueller has rightfully been overruled, case law and Arizona’s anti-deficiency statute are again in-line with each other.

About the author: Nikki J. Salgat, Esq. is associate counsel to the Arizona Association of REALTORS®. This article is of a general nature and reflects only the opinion of the author at the time it was drafted.  It is not intended as definitive legal advice, and you should not act upon it without seeking independent legal counsel.

Wondering what anti-deficiency means for you and how AAR works to protect anti-deficiency legislation? Liz Recchia, AAR’s 2015 Legislative Committee Chair shares some insight in our newest video.