First Financial Bank, N.A. v Claassen – 8/13/2015

August 31, 2015

Arizona Court of Appeals Division One holds that interest, late fees, and mandatory construction deposits are costs commonly associated with a mortgage and are purchase money sums for purposes of the anti-deficiency statutes.

Claassen borrowed $5,500,000 to fund construction of a home in a planned community in Paradise Valley.  Construction was never completed.

Claassen’s loan was secured by a deed of trust.  When he defaulted, the bank filed a complaint for breach and judicial foreclosure.  The bank sought a deficiency judgment in the amount of $1,119,676.67.  This amount related to line items in the budget for an interest reserve, a construction deposit, accrued interest, and late fees on the loan.  Neither Claassen nor his counsel participated in the bench trial, after which the trial court entered a deficiency in the total amount sought by the bank and awarded the bank its attorneys’ fees and costs.  Claassen moved for a new trial and to alter or amend the judgment.  The trial court found that his arguments were waived for failure to raise them previously.  Claassen timely filed a notice of appeal.

A.R.S. § 33-729 prohibits deficiency judgments for many residential properties.  The statute provides that the deficiency judgment cannot be satisfied out of other assets from the judgment debtor if the loan was “given to secure the payment of the balance of the purchase price, or to secure a loan to pay all or part of the purchase price, of a parcel of real property of two and one-half acres or less which is limited to and utilized for either a single one-family or single two-family dwelling[.]” 

The Court concluded that interest, late fees, and the mandatory construction deposit are purchase money obligations subject to the anti-deficiency statute.  The Court concluded that the same reasoning that allows a refinancing to be deemed a purchase money obligation allows these costs associated with a loan to be considered purchase money sums.  In holding this, the Court resolved an issue left open in its prior decision Helvetica Servicing, Inc. v. Pasquan, 229 Ariz. 493, 277 P.3d 198 (App. 2012).  Claassen did not raise on appeal and the Court did not decide whether the interest reserve amount was a purchase money obligation.

Citing earlier case law, the Court further held that a statutory right may not be waived “where waiver is expressly or impliedly prohibited by the plain language of the statute.”  Verma v. Stuhr, 223 Ariz. 144, 157 ¶ 68, 221 P.3d 23, 36 (App. 2009).  A.R.S. § 33-729 expressly prohibits borrowers from agreeing to waive the protections of the anti-deficiency statutes.  The Court th held that the trial court erred in finding that Claassen waived those protections.

The Court reversed the trial court’s determination that $914,403.33 of the $1,119,676.67 was non-purchase money obligations and remanded.  The Court further vacated the trial court’s award of attorneys’ fees and costs and remanded for reconsideration.

Judge Thompson authored the opinion; Judges Gould and Portley concurred.