Arizona Anti-Deficiency Statute Case Law Update
In the final two months of 2011, the Arizona Supreme Court and the Arizona Court of Appeals, Division 1 issued new opinions related to foreclosures and deficiencies. These decisions deal with a couple of the arguments that have been made the past few years. The Arizona Supreme Court addressed the ability of a lender to foreclose without a recorded assignment of beneficial interest under deed of trust and the Court of Appeals dealt with whether a homeowner can be made liable for a deficiency on a construction loan. The courts taking action in these most recent cases point out the importance of the law regarding foreclosures in the current market and the need for more clarity in the law of foreclosures.
In Vasquez v. Saxon Mortgage, Inc. (CV-11-0091-CQ), the Arizona Supreme Court held that an assignment of beneficial interest under a deed of trust does not need to be recorded prior to a notice of trustee’s sale being recorded by an assignee of a promissory note secured by a deed of trust. In doing so, Arizona joins California in deciding that a recorded assignment is not necessary and that the security interest follows the note whether or not an assignment of beneficial interest is recorded. While there are good arguments to be made that requiring a lender to record an assignment would remove any doubt as to who a borrower needs to deal with and who has the right to foreclose on their loan, the Court decided otherwise. While prudent lenders will still want to record assignments to protect themselves from the prior lenders assigning the same obligation to another without notice, they do not have to have a recorded assignment to foreclose on the borrower.
The case that was decided by the Arizona Court of Appeals addresses an issue that is regularly discussed in my Foreclosures Class at Hogan School of Real Estate. In M & I Marshall & Isley Bank v. Mueller (1 CA-CV 10-0804), the Court addressed whether the anti-deficiency statute protects owner-builders from a deficiency after trustee’s sale of an uncompleted home. Prior case law suggested that an unfinished dwelling was not entitled to protection under the statute because it was unfinished and had not been lived in and therefore was not “utilized for” a single-family dwelling. In the new case decided December 27, 2011, the Court of Appeals distinguished the prior case by emphasizing that the owner in the prior case, a commercial home builder, was holding the property for sale and had no intent to ever occupy the property. By distinguishing the case to be limited in its application to commercial builders, the Court looked to the intent of the legislature in enacting the anti-deficiency statutes as elaborated on by the Supreme Court in 1989 and found that anti-deficiency statutes did apply to persons building their own home for occupancy by themselves whether the home is completed or not. Before people start walking away from their incomplete upside down construction loans, however, they should consider that this Appellate Court case is now on appeal to the Supreme Court of Arizona. As of the writing of this article, the case is pending with the Supreme Court and a decision is expected sometime in the next few months. Therefore, stay tuned as we will be following this issue closely as the case continues its journey in the system.