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M&I Bank v. Mueller - The Expansion of the Arizona Anti-Deficiency Statute

M&I Bank v. Mueller - The Expansion of the Arizona Anti-Deficiency Statute

The Arizona Court of Appeals recently expanded Arizona's anti-deficiency statute governing the pursuit of a deficiency following the foreclosure of a deed of trust in the case of M&I Marshall & Ilsley Bank v. Mueller (link provided).

Most home loans are secured by deeds of trust in Arizona. When a homeowner quits making payments, the lender may foreclose on the home through an auction via a trustee's sale. A deficiency exists if at the trustee's sale the proceeds from the auction are less than the amount owed to the lender; that amount is the deficiency.

As to deeds of trust, A.R.S. § 33-814(G), Arizona's anti-deficiency statute governing deeds of trust, prohibits the lender from pursuing a deficiency against a homeowner after a trustee's sale if the following conditions are satisfied: (1) the property is situated on 2.5 acres or less, and (2) the property is utilized as a single-family or two-family residence. As an aside, Arizona case law has narrowed this statute, at times, when applying it to Home Equity Lines of Credit or HELOCS.

The meaning of the word "utilized" in the statute has often been interpreted as pertaining to homes with completed construction that were also occupied by the owners or their tenants. M&I v. Mueller held that an unfinished home that was not fully constructed and never "utilized" may qualify for anti-deficiency protection if the borrower can provide that it intended to use the home as the borrower's actual residence once construction had been completed.

M&I v. Mueller supports the argument that a borrower who takes out a construction loan to build it's own home, and then defaults on that loan before the home's completion, without occupying the home, is afforded the protections of the Arizona anti-deficiency statute.