The Arizona Court of Appeals Limits Application of Arizona’s Anti-Deficiency Statute.

Properties sold at a Trustees Sale rarely sell for amount sufficient to pay the mortgage on the property.  In some cases, lenders can pursue the remaining balance due on the promissory note (deficiency).  Arizona law, however, protects many homeowners from lender collection actions following foreclosure.  A.R.S. § 33-814(G) provides that:

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 the sale and the amount of the indebtedness and any interest, costs and expenses.

Most residential properties meet the definition of A.R.S. § 33-814(G) but does the statute apply to builders, properties under construction or vacant land on which the owner intended to build and occupy the home?

The Arizona Supreme Court held the anti-deficiency statute does not apply commercial developers building homes that would otherwise qualify under A.R.S. § 33-814(G).  Mid Kansas Federal Sav. and Loan v. Dynamic Development Corp., 167 Ariz. 122, 804 P.2d 1310 (Ariz. 1991).

In M&I Marshall & Ilsley Bank v.  Mueller, 228 Ariz. 478, 268 P.3d 1135 (App. 2011), the Arizona Court of Appeals extended A.R.S. § 33-814(G) to include residential property under construction if the owner intended to occupy the home after construction. 

In BMO Harris Bank N.A. v. Wildwood Creek Ranch, LLC, CA-CV 12-0728 (decided January 16, 2014) the Arizona Court of Appeals refused to extend A.R.S. § 33-814(G) to vacant land upon which the owners intended to build and occupy a home.  The Court of Appeals found the fact that no development of the property had occurred to be a significant factor in deciding Wildwood Creek RanchNo guidance was provided as to amount of development required to trigger A.R.S. § 33-814(G) protection or whether a party could start construction on a property solely for the purpose of avoiding a deficiency judgment.