May 6, 2014
by David W. Cowles
Tiffany & Bosco, P.A. – USFN Member (Arizona, Nevada)
Earlier this year, the Arizona Court of Appeals shed a little bit of light on Arizona’s developing post-foreclosure anti-deficiency protection in BMO Harris Bank, N.A. v. Wildwood Creek Ranch, LLC, 234 Ariz. 100 (Ariz. Ct. App. 2014). Until late in 2011, Arizona’s anti-deficiency protection was relatively clear and stable. The anti-deficiency statute only applied to property of 2.5 acres or less that is “limited to and utilized for either a single one-family or a single two-family dwelling.” A.R.S. § 33-814(G). As a consequence, if a borrower did not actually use the property as a dwelling, the protection did not apply. Borrowers would go to extremes to use the property as a dwelling — by camping out inside the barely framed, under-construction dwelling, for example.
In late 2011, the court of appeals issued its opinion in M&I Marshall & Ilsley Bank v. Mueller, 228 Ariz. 478 (Ariz. Ct. App. 2011), pet. rev. denied. Mueller changed the landscape by holding that if the borrower intended to use the property as a single one-family or a single two-family dwelling, that intention is dispositive. There was no need for the Muellers to camp out in their under-construction home to fall within the scope of anti-deficiency protection. What was a fairly easily applied bright-line rule was eliminated in favor of the elusive notion of intent.
The court of appeals in the recent Wildwood case cut back application of the new Mueller rule by holding that anti-deficiency protection does not apply where, as in Wildwood, the property was vacant and construction had not begun. Wildwood thus seems to restore some clarity, at least in cases where construction has unambiguously not begun. But the special concurrence in Wildwood notes that the “new” rule is not at all clear. If construction has begun, when does the Mueller rule of intent come into play? This is not at all clear. Similarly, it is not at all clear when construction does begin. Does construction begin when the plans are drawn, or when the grading begins, or when? Will borrowers now go to their vacant lots as soon as possible to put a two-by-four in the ground or to move some dirt? We will have to wait to see.
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