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Are Vacant Lots Protected Under Arizona’s Anti-deficiency Statutes?

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By:  Ben Reeves

No, of course not.  Arizona’s anti-deficiency statutes only prohibit deficiency judgments after a trustee’s sale of a “dwelling”.[1]  Under no definition can a vacant lot constitute a “dwelling”.  This was the Arizona Supreme Court’s holding in BMO v. Wildwood Creek Ranch, LLC.

In BMO, Shawn and Kristina Rudgear (through their company Wildwood Creek Ranch, LLC) borrowed $260,000 to fund construction of a home on a vacant 2.26-acre lot.  This loan was secured by a deed of trust against the lot.

Construction of the home never began, the Rudgears defaulted, and BMO Harris Bank foreclosed via trustee’s sale.  At the trustee’s sale, a third-party purchased the lot for $31,100.  BMO then sued for the deficiency (i.e., the difference between the amount owed and the sale price).  The Rudgears objected, arguing that under M&I Marshall & Ilsley Bank v. Mueller,[2] their intent to eventually live on the property afforded them the anti-deficiency protection.  The trial court accepted this defense.  As we previously blogged, the Court of Appeals reversed the trial court’s ruling.  The case then went up to the Arizona Supreme Court.

Although the Supreme Court reached the same conclusion as the Court of Appeals, it vacated the Court of Appeals’ opinion to set forth its own analysis.  In doing so, the opinion makes a few interesting points.  First, the Supreme Court reaffirmed its 1991 landmark MidKansas opinion, but clarified that property utilized for a dwelling “requires that a residential structure have been completed.”  Second, the Supreme Court effectively overruled the Mueller opinion.  Third, it holds that a homeowner that “has not yet moved into [a] completed residence would be entitled to anti-deficiency protection.”

Although the third point conflicts somewhat with the statute (which requires that the property be “utilized” as a dwelling), the Supreme Court’s opinion removes much of the uncertainty that developed since the 1991 MidKansas holding.  Accordingly, it provides a much needed reset for the law on A.R.S. § 33-814(G).

[1]          Specifically, the 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.”

[2]           In Mueller, the Court of Appeals held that a half-constructed property constituted a “dwelling” because the builder intended, someday, to reside in the property.