BMO Harris Bank v. Wildwood Creek Ranch, LLC – 1/23/2015

February 3, 2015

Arizona Supreme Court holds that Arizona’s anti-deficiency laws do not bar a deficiency judgment against an owner of a vacant lot.

The Arizona Supreme Court limited the reach of Arizona’s anti-deficiency protections for homeowners who default on home loans.  The Court held that the anti-deficiency laws protect a residential borrower only if the borrower’s dwelling is completed. 

The owners of Wildwood used the LLC to borrow money from the bank to fund construction of a home on a vacant lot.  The home was never built.  As is typical, the loan was secured by a deed of trust on the land.  After Wildwood defaulted, the bank foreclosed and held a trustee’s sale, but the sale amount was much less than the amount still owed on the loan.  The bank sued the borrowers for a deficiency judgment in the amount still owed.

Because Arizona law provides for extra-judicial foreclosure and trustee’s sales, the law includes various protections for borrowers.  A.R.S. § 33-814(G) prohibits deficiency judgments for many residential properties.  Specifically, the statute applicable to all deeds of trust that pre-date December 2014 provides that “no action may be maintained to recover” any deficiency amount remaining after the sale of trust property “utilized for either a single one-family or a single two-family dwelling.” 

Citing an earlier case, the Court explained that a “dwelling” under the statute is a structure that is “suitable for residential purposes and a person resides in the structure, or the structure is intended for such use.”  Mid Kan. Fed. Sav. & Loan Ass’n of Wichita v. Dynamic Dev. Corp., 167 Ariz. 122, 128 (1991).  It is not enough that a structure is intended to become a dwelling, however.  The statute requires that the property be “utilized for” a dwelling.  Clarifying comments in Mid Kansas that were “imprecise,” the Court held that a structure cannot be “utilized for” a dwelling until the structure is “completed.”  In so holding, the Court overruled M& I Marshall & Ilsley Bank v. Mueller, 228 Ariz. 478 (App. 2011), where the Court of Appeals held that § 33-814(G) protected the owner of a partially built home because “the borrower intended to live in it upon completion.” 

Applying its interpretation of “utilized for” to the property at issue, the Court held that the vacant lot was not “utilized for” a dwelling, even if the original plan was to construct a dwelling on the property.  Thus, the anti-deficiency laws do not protect the Wildwood borrowers.

Justice Bales authored the unanimous opinion.