RECENT CASE CLARIFIES THE COURT’S INTERPRETATION OF THE ARIZONA ANTI-DEFICIENCY LAW
In December 2011 the Arizona Court of Appeals Division One (Phoenix), in the case of M&I Marshall & Ilsley Ban v Mueller, clarified the interpretation of the Arizona anti-deficiency law.
In 2005 Muellers borrowed $444,000 from M&I bank to build a single family home on a lot they had purchased. Construction started in 2005. Months into construction Muellers discovered that the contractor was not only behind schedule but also much of the construction was defective. Muellers notified the bank of the dilemma. Eventually M&I “foreclosed” on the Muellers. At the sale the house generated less proceeds than the amount that was owed to M&I. Thus there was a deficiency. The question was whether the Muellers are liable to M&I Bank for the deficiency. Obviously, neither the Muellers nor M&I were responsible for the faulty construction.
Following the public sale M&I Bank sued the Muellers for the bank’s claim for a deficiency judgment. The property, which was an unfinished house and never physically occupied, sold at the public sale for less than the amount of the existing deed of trust owed to the bank by the Muellers. The primary issue concerned whether M&I was entitled to collect the deficiency from the Muellers where the Muellers had contracted to build a home but due to circumstances with the contractor, it was not completed and consequently never occupied.
As you know there are generally three requirements to avoid an anti-deficiency action. The first is that the property must be a single family residence or a duplex. The second requirement is the residence (duplex) must be situated on two and one half acres or less. Finally the property must have been “utilized” as a dwelling. The question here is whether the property had been “utilized” as a dwelling thus entitling the Muellers to the protection of the Arizona anti-deficiency law.
There is a relevant previous Arizona case of Mid Kansas Federal Savings and Loan Association of Wichita v Dynamic Development Corporation, 167 Ariz. 122, 804 P2d 1310 decided in 1991. In that case a commercial homebuilder was the borrower and defaulted on a loan that was to be used to construct homes for resale. When foreclosed upon, the contractor sought protection under the anti-deficiency law. The lender in that case argued successfully that the homes were not fully constructed and were not being “utilized” for a single-family home and thus the homebuilder should not receive protection under the anti-deficiency law. The Arizona court decided that the residential properties were being constructed by the borrower for eventual resale as dwellings and therefore do not fall within the definition of properties “utilized for” single-family dwellings.
In the M&I case the court distinguished the facts of the Mid Kansas case. The court noted that in the Mid Kansas case the borrower was a corporation that never intended to occupy the property as opposed to the Mueller’s situation. The Muellers were individuals and they borrowed the funds to construct a single family home in which they did intend to live upon its completion. The court stated that the purpose of the anti-deficiency law is to protect “homeowners” from deficiency judgments – not to afford protection to commercial home builders building homes for resale.
The court went on to state that to require that the home actually had to be physically inhabited would create a ‘blurry and artificial line’. The court gave an example of why the requirement of the home being actually physically ‘occupied as a residence’ interpretation is not relevant. It pointed out that to give a strict interpretation to the word “utilized as a residence” could create a scenario of where a house could be occupied for a single day and would be deemed appropriately physically “utilized” versus a home where someone had simply not yet moved into a new, fully-constructed home and would not be entitled to protection because the home had not yet been actually physically “utilized” as a residence. The court felt that could create unfair distinctions.
This may not be the final word on this issue. M&I could appeal this decision to the Arizona Supreme Court. If that occurs, it is my opinion that the Court of Appeals decision would be affirmed and the Muellers would not be liable for the deficiency to M&I Bank.