Changes to Arizona's Anti-Deficiency Statutes

Arizona recently enacted changes to its anti-deficiency statutes. Arizona has two anti-deficiency statutes. A.R.S. §§ 33-729(A) and 33-814(G) generally prohibit a lender from pursuing a borrower following a foreclosure in a deficiency action. The anti-deficiency protections apply when the property is (1) two and one-half acres or less and (2) “limited to and utilized for either a single one-family or single two-family dwelling.” In addition, the statutes impose a ninety-day statute of limitations, requiring the lender to quickly decide whether to pursue the borrower who is not subject to the anti-deficiency protections for any deficiency.

The Arizona Legislature’s changes to the statutes appear to arise out of confusion in the appellate courts as to whether the anti-deficiency statutes protected borrowers who intended to live in homes under construction but were foreclosed before completion. In M&I Marshall & Ilsley Bank v. Mueller, 228 Ariz. 478, 268 P.3d 1135 (Ct. App. 2011), for example, the Court of Appeals held that the anti-deficiency statutes protected borrowers whose intent was to utilize a home under construction as a single-family residence were protected from deficiency action after foreclosure even though the home was not fully constructed. The Court of Appeals in Mueller noted the harshness of a bright-line test, where “a person who lived in a new home for a day would be entitled to anti-deficiency protection, whereas someone who had not yet moved into a newly constructed home would not be entitled to such protection.” Id. at 480, 268 P.3d at 1137.

The appellate courts continued to struggle with the absence of a bright-line rule. In BMO Harris Bank v. Wildwood Creek Ranch, the Court of Appeals refused to apply the anti-deficiency statutes to “unimproved, vacant land.” 234 Ariz. 100, 317 P.3d 641 (Ct. App. 2014). The Court of Appeals concluded that the anti-deficiency statutes did not extend to vacant land. The Arizona Supreme Court stepped into the debate, overruling Mueller and holding that there must be a “completed structure on the property suitable for dwelling purposes.” BMO Harris Bank, N.A. v. Wildwood Creek Ranch, LLC, 236 Ariz. 363, 340 P.3d 1071 (2015). The Supreme Court, however, struck a balance, holding that the borrower did not have to actually occupy the completed structure in order to fall within the protections of the anti-deficiency statutes. “Thus, a property contains a “dwelling” for purposes of the anti-deficiency statute when a borrower has purchased but not yet occupied a home, given that the structure is suitable and intended for human abode.” Id. at 367, 340 P.3d at 1075.

Against this judicial backdrop, the Legislature revised the statute to statute to reflect that, for loans originating after December 31, 2014, the anti-deficiency statutes do not apply to real property that (1) is owned by a developer, (2) contains a dwelling that “was never substantially completed,” and (3) contains a completed dwelling that was “never actually utilized as a dwelling.” The statutes define “substantial completion” as the applicable governmental entity’s “final inspection” or in compliance with all building codes. Thus, the new statutes appear to limit the application of the anti-deficiency statutes to completed residences where it was actually utilized as a dwelling. What constitutes “actually utilized as a dwelling,” however, remains to be clarified.

The statute does not apply to loans originating before December 31, 2014, so the Supreme Court’s decision in BMO Harris Bank still determines the applicability of the anti-deficiency statutes for such loans.