Generally, Arizona’s anti-deficiency statutes protect the owner of a home from a deficiency judgment after foreclosure if the home meets the following three requirements:

1.  Single family residence or duplex residence;
2.  Located on two and-a-half acres or less; and
3.  Utilized as a dwelling.

Requirements number one and number two are self-explanatory. Therefore, the significant Arizona appellate court decisions on the anti-deficiency statutes relate to the interpretation of requirement number three: “utilized as a dwelling.”

In the first appellate decision to address utilization since 1991, the Arizona Court of Appeals recently ruled that a borrower who obtains a construction loan but fails to “utilize” the home due to unfinished construction is still protected by the anti-deficiency statutes. See M&I Marshall & Isley Bank v. Mueller, 1 CA-CV 10-0804 (12/27/11).

In an earlier 1991 Arizona Supreme Court decision a developer defaulted on a construction loan for “spec” homes that were not yet fully constructed. When the developer sought the protection of the anti-deficiency statutes after foreclosure, the lender argued that the developer should not receive protection because the developer did not and could not “utilize” or occupy the unfinished spec homes as dwellings. The Arizona Supreme Court agreed, and ruled that a spec home cannot be occupied as a dwelling when it is unfinished, has never been lived in, and is being held for sale by an owner who has no intent to ever occupy the home. See Mid Kansas decision, 167 Arizona 122.

In this new 2011 Mueller case, a couple obtained a construction loan from a lender to construct a home for their own use. After the couple was unable to obtain advances on the loan from the lender to address construction problems, the couple abandoned construction of the home and defaulted on the loan. The lender then foreclosed on the unfinished home and sued the couple for a deficiency judgment.

The Court of Appeals ruled that the lender was not entitled to a deficiency judgment against the couple even though the home was never completed or occupied. The Court of Appeals held that, unlike the developer in the Mid Kansas decision, the couple was not a spec home builder that never intended to occupy the home. Rather, the couple intended to live in the home upon completion, and the primary purpose of the anti-deficiency statutes is to protect “homeowners” from deficiency judgments. This decision may be appealed by the lender to the Arizona Supreme Court.