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Anti-Deficiency Protection For Vacant Lots? Not What The Arizona Supreme Court Intended

Kent E. Cammack and Christopher M. McNichol

On January 23, 2015, the Arizona Supreme Court held that Arizona's anti-deficiency statute protects only a completed residence. In so doing, it clarified a prior appellate court decision extending the statute's protections to borrowers who intend to turn vacant land into a future residence, but do not build. BMO Harris Bank, N.A. v. Wildwood Creek Ranch, ___ Ariz.___, ___ P.3d ___ (2015 WL 292458, January 23, 2015). The decision provides much needed guidance for a statute with varying interpretations that have confounded both borrowers and lenders for more than two decades.

In 1991, the Arizona Supreme Court decided Mid Kansas Savings & Loan Association of Wichita v. Dynamic Development Corp., 167 Ariz. 122, 804 P.2d 1316 (1991). Interpreting A.R.S. § 33-814(G), the court observed that the statute's anti-deficiency protections applied to real property that is 2-1/2 acres or less and that is "utilized for either a single one-family or a single two-family dwelling," regardless of the borrower's identity. But the court held that "commercial residential properties held by the mortgagor for construction and eventual resale as dwellings are not with the definition of properties 'limited to' and 'utilized for' single-family dwellings." Id. at 129, 804 P.2d at 1317 (emphasis in original).

The Mid Kansas court's statement that "property is not utilized as a dwelling when it is unfinished, has never been lived in, and is being held for sale to its first occupant by an owner who has no intent to ever occupy the property" proved to be problematic after the decision was released. Many observers concluded that the last phrase, concerning intent to occupy, was added for emphasis, but not intended to add a new "intent" element to the statutory protections. The difficulty in using that phrase manifested itself in 2011, when the Arizona Court of Appeals found that the borrowers were not liable for a deficiency following a trustee's sale of a vacant building lot because the borrowers intended to build a home and occupy it as their primary residence at some point in the future. M & I Marshall & Ilsley Bank v. Mueller, 228 Ariz. 478, 268 P.3d 1135 (App. 2011).

In an obvious nod to the Mueller decision, the Wildwood court acknowledged that its "comments in Mid Kansas regarding the role of intent were somewhat imprecise and have caused some confusion." Id. at___. The court explained: "Although the intended use of a completed building is relevant in determining if it is a dwelling, an intent to eventually construct a building does not determine whether property is being 'utilized for' a dwelling."

Pointing out that A.R.S. § 33-814(G) speaks of property use in the present tense ("is limited to and utilized for a ... dwelling"), the court held that "a residential structure may qualify for a 'dwelling' before it is occupied, ... but trust property is not being 'utilized for' a dwelling until a residential structure is completed." Id. The court overruled Mueller insofar as it conflicts with its opinion.1

The bottom line is that while the borrower's intent may be relevant to determining whether a completed residential structure is a dwelling – intent to move in should be enough without actually living there – the anti-deficiency protections of the statute do not apply unless there is "a completed structure on the property that is suitable for dwelling purposes."


1 A recent amendment to A.R.S. §33-814(G) provided some much-needed statutory clarification. The anti-deficiency protections do not apply to residential property that (1) was developed for commercial resale to a third party, (2) was never substantially completed, or (3) was never used as a dwelling. The amendment applies only to deeds of trust originated after December 31, 2014. The Wildwood decision clarifies the law governing deeds of trust in existence as of that date.

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