Vacant Land Loan Not Protected by Anti-Deficiency Statute
As the metropolitan Phoenix, Arizona real estate market continues to recover, we hear less and less about foreclosures, short sales and Arizona’s anti-deficiency statutes. But there are still many foreclosure cases still winding their way through the Court system. We expect that the Arizona Court of Appeals and perhaps the Arizona Supreme Court will continue to issue decisions clarifying the anti-deficiency statutes. One such case, BMO Harris v. Wildwood, was just decided on January 16, 2014. The case is significant because it clarifies what type of property qualifies for protection under the anti-deficiency statute for trustee’s sales (non-judicial foreclosures).
As you may recall from my prior article and video presentation, when the lender has foreclosed by trustee’s sale, under A.R.S. § 33-814, the lender may not sue the borrower or guarantor for a deficiency if all of the following apply:
1. The property is encumbered by a deed of trust;
2. The property is 2.5 acres or less;
3. The property is “limited to and utilized for either a single one-family or a single two-family dwelling.”
The third element was at issue in Wildwood and has been addressed in other cases.
In Wildwood, the borrowers took out a loan from the bank to purchase a vacant lot of less than 2.5 acres. Although they planned to eventually construct a home on the lot, no construction was ever started. Indeed, the Court noted that “significantly, at no time was there any construction on the Property; it remained vacant throughout the term of the Loan until the time of the trustee’s sale.” Who wins?
Well, the Superior Court judge found that the borrower and guarantors were entitled to protection. The lender was not entitled to pursue the deficiency balance against them. The trial court relied on another decision in M&I Marshall & Ilsley Bank v. Mueller. In Mueller, the borrowers took out a loan from the bank to purchase a vacant unimproved lot on which they intended to build and then occupy a residence. They began construction, but ran into problems. Construction was never finished and the Muellers nor anyone else ever actually occupied or utilized the dwelling. They then defaulted on the loan and the bank foreclosed. The bank sued to collect the deficiency (the balance remaining on the loan after crediting the value of the property at the time of the trustee’s sale). The Court of Appeals held that since the Muellers started construction and actually intended to later occupy the property as a dwelling, they were entitled to deficiency protection. The bank was not entitled to collect. You can read more about the Mueller case in my blog post.
Turning back to Wildwood, most people would expect, given the plain language of the statute, that the borrower was not entitled to deficiency protection, since the property was vacant at all times. But, the Superior Court, relying on Mueller, found that Wildwood was entitled to protection under the anti-deficiency statute. That Court found that since the borrower intended to eventually occupy a dwelling on the property, the statute applied. But the Bank appealed. The Court of Appeals held that the borrower and individual guarantor were not entitled to protection under the anti-deficiency statute. The lender was entitled to sue them for the balance on the loan after giving them credit for the value of the property at the time of the trustee’s sale. The Court of Appeals distinguished Mueller and found that, since no construction was ever started and the property remained entirely vacant at all times, the anti-deficiency statute did not apply. So, the lender was entitled to sue for the deficiency.
The Court of Appeals has purportedly attempted to avoid arbitrary distinctions and to give homeowners liberal protection under the anti-deficiency statute. In part, the Court in Mueller justified its decision by finding that a borrower that intended to eventually occupy a dwelling should be given the same protection as one who has actually occupied the residence, say for one day; otherwise, the Court felt that it would encourage borrowers to engage in manipulative activities in order to fall within the protection of the statute. In my view, the Wildwood decision will encourage such activity. Under the Court’s analysis, if Wildwood had simply “started construction,” whatever that means, it would have qualified for protection. So, perhaps it could have dug one trench or laid one segment of concrete. Would the statute have then applied? Or, perhaps it could have constructed a shack, tent or tee pee and someone camped overnight, and then maybe the Court would have deemed the statute to apply.
I expect that the Court of Appeals and, hopefully, the Arizona Supreme Court will consider these and other issues to give borrowers and lenders clear guidance on the scope of Arizona’s anti-deficiency statutes. Stay tuned for further news, and please let us know if you have any questions in the meantime. The experienced Scottsdale real estate lawyers at Berk Law Group, P.C. would be happy to answer your questions.