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A State’s Legislature Overrules Key Anti-Deficiency Case

Posted By USFN, Monday, August 11, 2014
Updated: Tuesday, October 13, 2015

August 11, 2014


by David W. Cowles
Tiffany & Bosco, P.A.
USFN Member (Arizona, Nevada)

Arizona’s post-foreclosure anti-deficiency protection has enjoyed quite a bit of attention recently from the Arizona Court of Appeals and the Arizona legislature. To understand where Arizona now stands, some context is in order. 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. That there was some clarity and stability did not mean that there were not Herculean efforts made by borrowers who wanted anti-deficiency protection. For example, borrowers would camp inside a barely framed, under-construction dwelling, while holding a copy of the newspaper to indicate the date, thus hoping to demonstrate that the property was “utilized for a ... dwelling.”

This all changed when, in late 2011, the court of appeals issued its opinion in M&I Marshall & Ilsley Bank v. Mueller, 228 Ariz. 478 (Ct. App. 2011) (pet. rev. denied). The Mueller court held 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 borrowers to camp out in their under-construction homes 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.

Earlier this year, the court of appeals carved vacant land out of the Mueller rule in BMO Harris Bank, N.A. v. Wildwood Creek Ranch, LLC, 234 Ariz. 100 (Ct. App. 2014). In Wildwood, the court of appeals held 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 as clear as it might look. If construction has begun, when does the Mueller rule of intent come into play? When does construction begin — is it when the plans are drawn or when the grading begins or when else? 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?

In April, the Arizona legislature and the governor seem to have answered many of these questions by enacting House Bill 2018, which the governor signed on April 22, 2014. House Bill 2018 essentially overrules Mueller for deeds of trust originated after December 31, 2014. (Mueller’s rule still applies to deeds of trust originated earlier, subject to Wildwood’s carve-out.) Specifically, HB 2018 exempts from anti-deficiency protection trust property “that contains a dwelling that was never substantially completed,” and trust property “that contains a dwelling that is intended to be utilized as a dwelling but that is never actually utilized as a dwelling.” The phrase “substantially completed” is defined disjunctively: either the final inspection, if required by the body that issued the building permit, has taken place, or, if no such final inspection is required, “the dwelling has been completed in all material respects as prescribed in the applicable ordinances and regulations of the governmental body that issued the building permit.”

House Bill 2018 also exempts from anti-deficiency protection trust property owned by one who constructs and sells dwellings, if acquired in the course of that business and is subject to a deed of trust securing a construction loan for sale to another.

These developments — Wildwood and House Bill 2018 — provide some much-needed clarity to Arizona’s anti-deficiency protection. They do not seem to clear everything up, though, and we can expect further development in the case law and perhaps even more from the Arizona legislature in the months and years to come.

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Summer 2014 USFN Report

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