Arizona Anti-Deficiency Laws: a Guide to Navigating Uncertainty

May 14, 2008 Real Estate Law

Given the two statutes and the various considerations that must be taken into account, no strategy works every time

The distressed residential real estate market has prompted some lenders to ask us about possible foreclosure strategies in the context of Arizona’s anti-deficiency statutes. Many of these questions have not been easy to answer, due to the language of the statutes, the amount of discretion left to the courts, and the scarcity of applicable case law attributable to our recent history of favorable market conditions. What follows is a brief discussion of Arizona’s anti-deficiency statutes and how they affect a lienholder’s foreclosure decisions.

In Arizona, protection for residential borrowers is set forth in two anti-deficiency statues: A.R.S. §§ 33-729(A) and 33-814(G).

While by its plain language, § 33-729(A) applies only to purchase money mortgages, Arizona courts have construed it to apply also to purchase money deeds of trust that are foreclosed judicially. Mid Kansas Federal Savings & Loan Association v. Dynamic Development Corp., 167 Ariz. 122, 126, 804 P.2d 1310, 1314 (1991). The statute defines a purchase money mortgage (or deed of trust) as one “given to secure the payment of the balance of the purchase price, or to secure a loan to pay all or part of the purchase price.” Thus, the statute would not protect borrowers who have assumed the mortgage on the property, mortgaged one home to purchase another, or obtained home equity lines of credit.

In turn, § 33-814(G) applies to deeds of trust foreclosed by trustee’s sale, whether or not they are purchase money deeds of trust. The statutory scheme, however, does not provide for non-purchase money mortgages.


Regardless of which statute is applicable, the threshold for obtaining anti-deficiency protection is the same: the property securing the loan must be “two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling.” A.R.S. §§ 33-729(A) and 33-814(G). The Arizona Supreme Court interpreted this language to require that the dwelling be built and at least occasionally occupied. Mid Kan. Fed. Sav. & Loan Ass’n, 167 Ariz. at 129, 804 P.2d at 1317. However, whether the property is occasionally occupied by the owners or rented to third parties, it will qualify under the statute for anti-deficiency protection. Northern Arizona Properties v. Pinetop Properties Group, 151 Ariz. 9, 725 P.2d 501 (App. 1986). In addition, for purchase money mortgages (or deeds of trust judicially foreclosed), anti-deficiency protection will not be provided to the extent of any diminution in value of the property due to voluntary waste committed by the debtor. A.R.S. § 33-729(B).


If the secured property does not qualify under the anti-deficiency statutes, the lender may obtain a deficiency judgment against the debtor and/or guarantors. For judicial foreclosure of purchase money instruments, obtaining a deficiency judgment is part of the foreclosure proceedings. A.R.S. § 33-729. To obtain a deficiency judgment after a trustee’s sale, an action must be brought within 90 days after the sale; otherwise, any right to a deficiency is lost. A.R.S. § 33-814(D). The deficiency judgment is the amount due the lender, which includes interest from the date of the sale and any costs for bringing the action, less the fair market value of the property as of the date of the sale or the sales price, whichever is higher. Id. The debtor must file a written application for a special hearing as to the determination of the fair market value of the property within 30 days of the sale of the property; otherwise, the trustee or sheriff sale’s price will stand. § 12-1566(C).


When the decision to foreclose on a borrower’s property seems imminent, the first question to ask is whether the anti-deficiency statute applies. If it does not, further discussion is unnecessary. As discussed above, for anti-deficiency protection, the property must be:

  • two and one-half acres or less;
  • a completed, single, one or two family dwelling; and
  • at least occasionally occupied by the owner or another party.

Thus, for many lenders with liens on raw land or partially developed properties, the anti-deficiency issue is not a concern.

Whether the anti-deficiency statute applies will influence the lender’s strategy regarding the method of foreclosure. This assumes, of course, that the lien came into existence via a deed of trust; obviously, there are no choices when it comes to mortgages, which is one reason we recommend that lenders use a deed of trust.


A judicial foreclosure has a few very important benefits. First, the anti-deficiency statute for judicial foreclosures does not apply to non-purchase money instruments. Thus, if the lender has a non-purchase money deed of trust for which the anti-deficiency protection may apply, the lender can avoid it, and pursue a deficiency, by judicially foreclosing. Also, even if it is a purchase money deed of trust, a judicial foreclosure is advisable if the loan guarantors are solvent. Perhaps due to a legislative drafting error, the mortgage anti-deficiency statute protects only the “judgment debtor”, i.e. the borrower. In contrast, the deed of trust anti-deficiency statute states that, if it applies, “no action may be brought,” which means no action may be brought against the debtor or guarantor. Finally, there is no 90-day limitation and, thus, no concern for the lender of losing a deficiency judgment through an oversight. Of course, it is important to include a claim for deficiency in the complaint when a foreclosure suit is filed.

The downsides of a judicial foreclosure include length of time, the statutory right of redemption, and the election of remedies statute.


The benefits of a trustee’s sale include simplicity, efficiency, reduced costs, and no statutory right of redemption. While there is no election of remedies statute for trustee’s sales, the Arizona Supreme Court has held that when the anti-deficiency statute applies, whether it involves a mortgage or deed of trust, the creditor may not waive the security and simply sue on the note. Baker v. Gardner, 160 Ariz. 98, 105, 770 P.2d 766, 773 (1980). However, if the property does not qualify for statutory protection, the lender can sue on the note and then conduct a trustee’s sale, or vice versa, or simultaneously sue on the note and pursue a trustee’s sale. In contrast, with a judicial foreclosure, if the lender sues on the note, the security is waived.

For a trustee’s sale or judicial foreclosure, the statute provides that a lender may sue on a guaranty separately as a contract; however, if the suit is for a deficiency after a sale the statute’s fair market value limitations apply. A.R.S. § 12-1566(E); In re Five Flags Hotel Corporation, 179 B.R. 169, 174 (Bankr. D. Ariz. 1995) (holding that the guarantor is not entitled to a reduction in the judgment for the fair market value of the collateral property where the lender did not hold a trustee’s sale and is suing directly on the guaranty).


It is now the day of sale. The next most asked question, and perhaps the most difficult, is: What amount should the lender credit bid? This is not a simple question as there are many, sometimes conflicting, considerations. If the lender bids too high, it may eliminate the deficiency. In contrast, if it bids too low, the court may become skeptical and refuse to award a deficiency, finding that the sale proceeds satisfy the outstanding debt.

The standard answer is to bid the fair market value of the property. However, in the current volatile market determining fair market value can be very difficult. The statute, A.R.S. § 12-1566(C), defines “fair market value” as:

“… the most probable price, as of the date of the execution sale, in cash, or in terms equivalent to cash, or in other precisely revealed terms, after deduction of prior liens and encumbrances with interest to the date of sale, for which the real property or interest therein would sell after reasonable exposure in the market under conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably and for self-interest, and assuming that neither is under duress.”

Unfortunately for lenders, there is little case law explaining or applying this standard. Recently, the U.S. Bankruptcy Court for the District of Arizona refused to award a deficiency judgment to a lender that, over the course of 32 months, submitted five appraisals of the property with widely varying values. Minute Entry, In re MCW Brickyard Commercial, LLC (Bankr. D. Ariz. Aug. 18, 2004). In light of that decision, we have recommended, when practiced, that lenders use only one appraiser and if necessary have the appraiser update his report (since the fair market value is to be measured as of the date of the sale), or solicit a broker’s opinion first for a more informal valuation of the property. We also recommend that, before obtaining an appraisal, the lender give the appraiser the statutory definition of fair market value for inclusion in his report. The Arizona Supreme Court has also held that a trustee’s sale may be set aside if it is “grossly inadequate,” which the Court interpreted as less than or equal to 20% of market value. In re Krohn, 203 Ariz. 205, 214, 52 P.3d 774, 783 (2002).


Given the two anti-deficiency foreclosure statutes and the various considerations that need to be taken into account, no single approach or strategy works every time. As always, it is best to make a judgment based upon all the facts. Even then, in this area of law, be prepared to make difficult decisions based upon less than perfect information.