Arizona Anti-Deficiency Protection Is Not Available
for Vacant Land
In reaffirming protection for borrowers whose homes
are under construction, the Court of Appeals also reins in the recent trend
toward expanding Arizona's anti-deficiency laws.
Although we hope that Arizona is (mostly) out of the
woods in terms of the housing value meltdown, cases involving the
anti-deficiency rules for residential loans continue to wind their way through
the courts. In recent years, the courts have extended protection to borrowers
under various scenarios, solidifying the prohibition against deficiency
judgments in most residential loan transactions. For example, in 2011 the court
held that, when construction for a home is underway, the anti-deficiency
The recent case of
BMO Harris v.
Wildwood Creek Ranch, LLC appears to limit that trend. The Arizona Court
of Appeals decided that anti-deficiency protections do not apply where no
construction had commenced on the property in question, even though the borrower
had taken the position that the intention was to use the property as a primary
To reach that conclusion, the court first discussed the
language of the statute, which provides that the protections apply only if three
criteria are met. Only one of those criteria was at issue in the case: whether
the property was "utilized" for a "dwelling." The court found that, because the
property in question was unimproved vacant land, it was not utilized as a
dwelling. The court therefore held that the borrower's intent to construct a
home was irrelevant, even though the lender had not contested the borrower's
affidavit submitted to the trial court setting forth that intention.
One interesting aspect of the case is that Judge Kessler
wrote a separate concurring opinion, which noted that the borrower not only
owned three lots, but also took the position that all three lots were intended
for a personal residence. Further, the loan applications implied that the loan
was for a business purpose, not to construct a home. Under these facts, is it
possible that the Court of Appeals was not persuaded that it was really the
intent of the borrower to construct a personal residence on the lot in question?
Regardless of the answer, Judge Kessler's concurring
opinion addressed the fact that, after this decision, there is no clear line to
guide the lower courts about precisely when a property will qualify for the
anti-deficiency protections. That line appears to be somewhere between
acquisition of the property and the first shovel going into the ground, and
Judge Kessler suggests that courts look to the "totality of the circumstances"
rather than an arbitrary level of construction to determine where the line
should be drawn in any given case. For the moment, how to discern the position
of the line remains unanswered.
At the time this article was written, there was no indication as to whether the borrower
would appeal this decision to the Arizona Supreme Court.
Steve Benson is a Certified Specialist in Real Estate Law
(Arizona Board of Legal Specialization).