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 protections apply.

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 residence.

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).