Arizona Supreme Court Holds That A.R.S. § 33-814(G) Only Applies When A Dwelling Has Been Completed

In a ruling filed on January 23, 2015, the Arizona Supreme Court reversed a judgment of the Superior Court and overruled the Arizona Court of Appeals' decision in M & I Marshall & Ilsley Bank v. Mueller, 228 Ariz. 478, 268 P.3d 1135 (Ct. App. 2011), which had applied the anti-deficiency protections of Arizona Revised Statute Section 33-814(G) where a borrower intended to eventually occupy a partially constructed home on the property. The decision in Mueller had appeared to dramatically expand the scope of anti-deficiency judgment protections in Arizona, but the Supreme Court has now ended any such expansion.

The Supreme Court's decision in the case of BMO Harris Bank, N.A. v. Wildwood Creek Ranch, LLC, et al.was rendered based on the Court's determination that "the applicability of § 33-814(G)'s anti-deficiency provision is a recurring issue of statewide importance." This has indeed been the experience of many Arizona real estate lawyers, who for the past decade have grappled with innumerable cases involving the applicability of § 33-814(G) and the related anti-deficiency statute found at A.R.S. § 33-729(A).

The ruling in the Wildwood Creek Ranch case analyzed the Arizona legislatures adoption of the deed of trust framework in 1971, as an alternative to the expensive and time-consuming process of completely a judicial foreclosure. The Court considered the intent of the anti-deficiency laws, which were designed to prevent artificial deficiencies and to protect borrowers from losing assets besides their homes in the event of a foreclosure.

In order to implement these protections, the legislature had limited the protections to property "utilized for either a single one-family or a single two-family dwelling." A.R.S. § 33-814(G). The Mueller court had expanded the interpretation of the statute to include instances where a borrower intended to utilize the property as a dwelling. The Wildwood Creek Ranch court was unwilling to endorse the emphasis on intent, and determined that the protection only applies where a residential structure is completed and the property is actually utilized as a dwelling.