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New Arizona Anti-Deficiency Laws Clarify Intent to Utilize

Categories: Foreclosure, Article

AZ Anti-deficiency laws

Arizona anti-deficiency laws were recently amended by the Arizona legislature and will become effective January 1, 2015.  Previously, the two laws, A.R.S. § 33-729 and A.R.S. § 33-814, generally provided that a loan secured by a parcel of property of 2½ acres or less, which is utilized as a one or two family dwelling, is not subject to a deficiency claim if the fair market value of the property is less than the outstanding balance of the loan.  

To most attorneys, including myself, the statutes appeared to be clear and unambiguous. To qualify under the laws, the property must have a livable structure constructed on it and someone must have inhabited the structure.  Despite this common belief and practice, and presumably based upon the public policy considerations, the Arizona Court of Appeals held otherwise in M & I Marshall & Ilsley Bank v. Mueller, (App. Div.1 2011) 228 Ariz. 478, 268 P.3d 1135.  The Court ruled that "the intent to utilize as a single family home" was sufficient under that statute.  In Mueller, the lender foreclosed on a partially constructed house that was uninhabitable.  Despite the failure to qualify under the statutes clear language, the Court ruled that Mueller's stated "intent to utilize the home" protected it from any deficiency claim under Arizona's anti-deficiency laws.  

In the most recent session of the Arizona legislature, the legislature appears to have examined the holding in Mueller and amended both A.R.S. § 33-729 and A.R.S. § 33-814.  Their apparent intent was to remove any misconception or confusion created by the Court of Appeals Mueller decision and to assure no future misreadings of the statute.  

Limited to only deeds of trusts and mortgages originated after December 31, 2014, the legislature enacted the following changes to both statutes therein limiting the protected class and property under the statute.  

The following persons and property are NOT protected:

  1. Persons engaged in constructing homes for resale in which the loan is obtained to facilitate construction financing
  2. Property intended to be utilized as a dwelling but that is never substantially completed, nor inhabited as a dwelling 
  3. Property that contains a dwelling, but is never actually utilized as such.

To avoid any future litigation as to what is "substantially completed" the legislature went further and included a definition.  

A structure is not substantially completed if:

  1. A final inspection is not completed, and building permit issued, in the event that such government body requires such; or
  2. If a final inspection is not 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 for the dwelling.

The new laws only apply to loans made after December 31, 2014 and the holding in Mueller is still a viable decision for loans entered into prior to 2015.  The new legislation clearly illustrates Arizona's intent as to the prior statutes.  There still remain open issues such as the definition of utilization of property not intended for use by the owner and any protection provided to spec homebuilders. Future litigation, which is based upon the Mueller decision, may result in courts considering the past laws in light of the amended current laws for the purpose of clarifying any remaining inconsistencies.  


About the Author: Lawrence E. Wilk is an equity partner at the law firm of Jaburg Wilk, and practices in the areas of Bankruptcy, Creditor's Rights, Workouts, Real Estate and Foreclosures. He is also an Adjunct Professor at Arizona State University's Law School teaching Foreclosures and Receiverships.


This article is not intended to provide legal advice. Always consult an attorney for legal advice for your particular situation.