BMO Harris Bank N.A. v. Wildwood Creek Ranch, LLC – 1/21/2014

January 27, 2014

Arizona Court of Appeals Division One Holds That Arizona’s Anti-Deficiency-Judgment Statute, A.R.S. § 33-814(G), Does Not Apply to Vacant Land.

In 2006, Wildwood Creek Ranch, LLC (“Wildwood”) bought an unimproved, vacant lot with a loan from BMO Harris Bank’s predecessor, which was secured by a deed of trust on the land.  Shaun and Kristina Rudgear, Wildwood’s sole members, personally guaranteed the mortgage note.  There was never any construction on the property.  In 2011, Wildwood and the Rudgears defaulted on their obligations.  BMO foreclosed through a trustee’s sale and sued Wildwood and the Rudgears to obtain a deficiency judgment for the unpaid balance of the loan.

The parties filed cross-motions for partial summary judgment regarding the applicability of A.R.S. § 33-814(G), the anti-deficiency-judgment statute.  The Rudgears argued that BMO could not recover the unpaid balance of the loan because, as they asserted in affidavits, they intended to build a house on the property and occupy it as their primary residence.  BMO submitted evidence that the Rudgears owned three separate parcels, each of which they purportedly intended to use as a primary residence.  The superior court ruled in favor of Wildwood and the Rudgears, concluding that no material evidence contradicted the Rudgears’ affidavits and that their intent to build a residence on the property precluded BMO from obtaining a deficiency judgment.

The Court of Appeals reversed.  A.R.S. § 33-814(G) prohibits an action to obtain a deficiency judgment if the property at issue (1) was encumbered by a deed of trust, (2) was sold at a trustee’s sale, (3) consists of two-and-a-half acres or less, and (4) “is limited to and utilized for either a single one-family or a single two-family dwelling.”  Only the last requirement was disputed in this case.  In an earlier case, M&I Marshall & Isley Bank v. Mueller, 228 Ariz. 478, 268 P.3d 1135 (App. 2011), the court held that the anti-deficiency-judgment statute did apply, but in that case, construction of a dwelling had commenced.  In this case, the property at issue was vacant, and there had never been any construction.  Unimproved, vacant land is not a “dwelling” as required by the statute.

Judge Kessler specially concurred to discuss his views on what triggers the applicability of the statute.  Judge Kessler concluded that “once construction has begun, a court should determine whether the debtor is protected from a deficiency judgment based on a totality of the circumstances to see if the debtor intended the structure under construction to be utilized as his or her dwelling.”  In other words, if any construction has occurred, the borrower’s intent regarding the use of the building under construction would be determinative.

Judge Gould authored the opinion in which Judge Brown joined; Judge Kessler issued an opinion specially concurring.