The Arizona Court of Appeals Expands Anti-Deficiency Protection for Borrowers
On December 27, 2011, the Arizona Court of Appeals issued a decision that, if upheld on appeal, will negatively impact a lender’s ability to obtain a deficiency judgment under certain circumstances. See M&I Marshall & Ilsley Bank v. Mueller, 2011 Ariz. App. LEXIS 216 (Dec. 27, 2011). M&I Marshall and Ilsley Bank (M&I) recently appealed the Court of Appeals’ decision in M&I v. Mueller to the Arizona Supreme Court. M&I v. Mueller is a significant decision that marks a departure from the case law interpreting Arizona’s anti-deficiency statutes over the past 20 years. The purpose of this article is to alert you to the M&I v. Mueller decision and its potential impact, if affirmed on appeal.
In addition, the Arizona Rules of Civil Appellate Procedure permit amicus curiae briefs when a party has an interest in another case that might be affected by the decision on appeal. Therefore, because the ultimate decision in M&I v. Mueller could have a significant impact on current or future litigation you may be involved in, we also want to make you aware of the opportunity to file an amicus curiae brief on the issues presented in M&I v. Mueller.
What follows is a brief background on Arizona’s deed of trust anti-deficiency statutes and a discussion of the Court of Appeals’ decision in M&I v. Mueller.
Relevant Background of Arizona’s Deed Of Trust Anti-Deficiency Laws
Arizona’s deed of trust anti-deficiency statute provides:
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 sale and the amount of the indebtedness and any interest, costs and expenses.
Ariz. Rev. Stat. Ann. (A.R.S.) § 33-814(G) (emphasis added). The recognized legislative intent behind § 33-814(G) is “to protect certain homeowners from the financial disaster of losing their homes to foreclosure plus all of their nonexempt property on execution of a judgment for the balance of the purchase price.” See Baker v. Gardner, 160 Ariz. 98, 101, 770 P.2d 766, 769 (1988).
In 1991, the Arizona Supreme Court interpreted the scope of A.R.S. § 33-814(G) in Mid Kansas Federal Savings and Loan Association of Wichita v. Dynamic Development Corp., 167 Ariz. 122, (1991) (Mid Kansas). There, a commercial homebuilder sought protection under A.R.S. § 33-814(G) after it defaulted on a construction loan. Id. at 124-25. Observing that “[t]here is a difference between property intended for eventual use as a dwelling and property utilized as a dwelling,” the Supreme Court held that, under A.R.S. § 33-814(G), trust property “is not utilized as a dwelling when it is unfinished, has never been lived in, and is being held for sale to its first occupant by an owner who has no intent to ever occupy the property.” Id. at 129. On that basis, the Supreme Court found that the subject property was not “limited to and utilized for” a dwelling because it had never been occupied. Consequently, the Court held that the lender could obtain a deficiency judgment against the homebuilder.
The M&I v. Mueller Decision
Factual and Procedural Background:
The facts of M&I v. Mueller are fairly straightforward. In 2006, the Muellers borrowed $440,000 from M&I to construct a single-family residence on a vacant lot they owned. Id. at *1-2. The loan was secured by a deed of trust on the property. Id. After construction began, the Muellers discovered that the contractor was behind schedule and that much of the construction that had been completed was defective. Id. at *2. The Muellers requested advances on the loan disbursements from M&I to cure the construction defects. However, M&I did not disburse the additional funds. Id. Construction on the residence was never completed. Id. In September 2009, M&I commenced a non-judicial foreclosure of the property. Id.
After foreclosing on the property, M&I filed an action against the Muellers to recover a deficiency judgment for the difference between the amount the Muellers owed and the appraised value of the property prior to the foreclosure sale. Id. The trial court found that, as a matter of law, the Muellers were entitled to anti-deficiency protection under A.R.S. § 33-814(G) and dismissed M&I’s deficiency claim. Id.
Holding and Rationale:
The Court of Appeals affirmed the trial court’s ruling that the Muellers were entitled to anti-deficiency protection under A.R.S. § 33-814(G). In reaching this conclusion, the Court rejected M&I’s argument that it was entitled to a deficiency judgment under Mid Kansas since the Muellers did not complete construction on, or ever occupy, the home on the property. M&I v. Mueller, 2011 Ariz. App. LEXIS at *3. Instead, the Court found that because the Muellers, unlike the commercial homebuilder in Mid Kansas, “intended to live in the single-family home upon its completion,” M&I could not obtain a deficiency judgment against the Muellers. Id. at *4 (emphasis added). Thus, for the Court of Appeals, the fact that the property was not utilized as a dwelling was not dispositive. Instead, under the rationale of M&I v. Mueller, A.R.S. § 33-814(G) protects a borrower who intends to reside in the trust property even if no one ever actually does so (assuming the other requirements of § 33-814(G) are also met).
M&I v. Mueller marks a significant departure from Mid Kansas. In particular, the decision expands the anti-deficiency protection of A.R.S. § 33-814(G) to properties that are never actually “utilized for … a dwelling,” as the plain language of the statute appears to require. If upheld by the Arizona Supreme Court, M&I v. Mueller could significantly affect a lender’s ability to obtain a deficiency judgment where an individual borrower merely “intends” to occupy the property that secures the obligation, but never does so.
M&I appealed the Court of Appeals’ decision in M&I v. Mueller to the Arizona Supreme Court on February 23, 2012. As a result, lenders who could be affected by the decision have an opportunity to file an amicus curiae brief on the issues involved in the appeal. The Muellers’ response to M&I’s petition for review by the Arizona Supreme Court is due by March 29, 2012. Any amicus briefs are due within 21 days of that response.