Supreme Court of Arizona update on anti-deficiency laws
Today, August 28, 2012, the Supreme Court of Arizona published its Minutes in which it denied the Petition for Review filed by M & I Marshall/Ilsley Bank asking them to reverse the decision of the Arizona Court of Appeals, Division I in M&I Marshall & Ilsley Bank v. Mueller, 228 Ariz. 478, 268 P.3d 1135 (App. 2011). In the Court of Appeals decision, the Court found that a person building a house for their own residence was protected from a deficiency being sought by their lender after default even though the house was never completed and, therefore, not subject to occupancy. The case distinguished the prior Mid-Kansas Decision (Mid Kansas Federal Savings and Loan Association of Wichita v. Dynamic Development Corporation, 167 Ariz. 122, 804 P.2d 1310 (1991), which held that a deficiency could be sought when default and non-judicial foreclosure occurred prior to a certificate of occupancy being issued since the property was not capable of being occupied and limited its application to developers not building homes for their own occupancy.
In the Mueller case, the Court of Appeals drew the distinction between the owner/builder and commercial developer by emphasizing that “[t]he primary purpose of the Arizona anti-deficiency statutes is to protect ‘homeowners’ from deficiency judgments — not to afford protection to commercial home-builders.” The decision of the Supreme Court in case CV-12-0019-PR to deny review of the Mueller case gives the Court of Appeals decision the value as precedent that can now be used without restriction in Arizona. Unless reconsideration of their denial occurs, lenders will likely be much more careful in making construction loans since they will not have the protection of being able to seek a deficiency when a person building a home that they intend to occupy fails to complete the home and defaults on the loan borrowed to build it.