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Amendments to Arizona’s Anti-deficiency Statute Exclude Homebuilders from Anti-Deficiency Protection

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By:  Ben Reeves

Last Tuesday, April 20, 2014, Arizona’s Governor, Jan Brewer, signed HB 2018 into law.  This bill closes a long-standing loophole that allowed commercial homebuilders to take advantage of Arizona’s anti-deficiency statute, even though the statute was originally enacted to protect only homeowners.  In sum, for loans secured by residences that are originated after December 31, 2014, commercial homebuilders will no longer be able to avoid liability based on Arizona’s anti-deficiency statute, A.R.S. § 33-814(G).

A.R.S. § 33-814(G) provides that after a trustee’s sale, a lender cannot sue to recover the difference between the value of a “dwelling” and the amount owed on the loan (i.e., the “deficiency”).  The statute applies only if the “dwelling” is (1) two and one-half acres or less, (2) limited to and utilized for a dwelling, (3) and is a single one-family or single two-family residence.  Case law interprets a “dwelling” as “a shelter (as a house or building) in which people live.”  N. Arizona Properties v. Pinetop Properties Group, 151 Ariz. 9, 725 P.2d 501 (Ct. App. 1986).

In 1991, Arizona’s Supreme Court held that even though the purpose behind the anti-deficiency statutes “was to protect ‘homeowners’ from deficiency judgments,” and not commercial developers, the statute allowed homebuilders to claim anti-deficiency protection so long as the “property” satisfied the criteria of a protected “dwelling.”  Mid Kansas Federal Sav. & Loan Assoc. of Wichita v. Dynamic Dev. Corp., 167 Ariz. 122, 804 P.2d 1310 (1991).  At the time, commentators believed this was a hollow extension of the statute, because it was thought that “it will be a rare case indeed where a developer still owns a home that is actually utilized as a residence.”  See Arizona’s Deficiency Law:  When is a Deficiency Judgment Available and How is One Obtained, 28 Ariz. Att’y 23 (April 1992).

During the recent economic downturn, homebuilders found themselves in precisely the “rare case” described in MidKansas.  Developers owned “dwellings” that were worth far less than the debt they owed.  After the lender foreclosed, the MidKansas decision allowed the developers to take advantage of Arizona’s anti-deficiency statute much to the chagrin of commercial lenders.

HB 2018 closes the MidKansas loophole and specifically excludes from protection “[r]eal property owned by a person engaged in the business of constructing and selling dwellings that was acquired by the person in the course of that business and that is subject to a mortgage given to secure payment of a loan for construction of a dwelling on the property for same to another person.”  The bill also excludes from protection any dwelling that was never substantially completed, or that was never actually used as a dwelling.  These changes effectively overturn M&I Marshall & Isley Bank v. Mueller, which granted anti-deficiency protection to homeowners even though they never used the property as a dwelling.

The enactment of HB 2018 will undoubtedly allow real estate lenders to feel more secure when loaning to homebuilders, and removes much of the uncertainty that beleaguered this sector of Arizona’s economy during the recent recession.