Today's Trends in Credit Regulation

Arizona's Anti-Deficiency Statute: A Win for Creditors
By Catherine M. Brennan

In the wake of the Great Recession, Arizona has taken steps over the last few years to dial back its anti-deficiency statute. Originally enacted to protect homeowners from artificial deficiencies resulting from forced sales that may not obtain market value, and to protect homeowners from losing other assets they may own, the anti-deficiency statute had operated to protect some homeowners that seemed less worthy of such protection - namely, investors who purchased lots with the hope of someday developing them into residential units.

A recent decision by the Arizona Supreme Court makes very clear that the protection is intended to protect actual homeowners who live in a dwelling. In BMO Harris Bank N.A. v. Wildwood Creek Ranch LLC, 2015 Ariz. Lexis 26 (Ariz. January 23, 2015), Shaun and Kristina Rudgear owned a vacant lot through an LLC. The LLC obtained a $260,200 loan, guaranteed by the Rudgears, from the predecessor of BMO Harris Bank to build a home on the lot. The LLC ultimately defaulted on the loan and BMO foreclosed. After the trustee sold the property at the trustee's sale for $31,100, BMO sued the LLC for the deficiency. The Rudgears argued that they intended to use the home as their dwelling and thus the state anti-deficiency statute protected them from attempts by BMO to collect the shortfall. The trial court agreed with the Rudgears and BMO appealed.

The Arizona Supreme Court, the state's highest court, held that the anti-deficiency statute does not bar a deficiency judgment against an owner of a vacant property. The anti-deficiency statute provides that no deficiency action may be maintained to recover any difference between the amount obtained by sale and the amount owed on the mortgage if the property is 2.5 acres or less "limited to and utilized for either a single one-family or a single two-family dwelling." By its terms the statute only applies to property utilized as a dwelling. The court noted that although the statute does not define "dwelling," other case law indicates a structure is a "dwelling" if it is suitable for residential purposes and a person resides in the structure, or the structure is intended for such use. Because no dwelling was ever built on the Rudgears' lot, they could not invoke the protection of the anti-deficiency statute.

The decision comes less than a year after the Arizona legislature took steps to limit the class of people who can avail themselves of the protections of the anti-deficiency statute. Effective January 1, 2015, Arizona law allows deficiency judgments even if the security for the deed of trust is two and one-half acres or less in size and used for either a single one-family or a single two-family dwelling, where the security is:

1. Trust property owned by a person who is engaged in the business of constructing and selling dwellings that was acquired by the person in the course of that business and that is subject to a deed of trust given to secure payment of a loan for construction of a dwelling on the property for sale to another person.

2. Trust property that contains a dwelling that was never substantially completed.

3. Trust property that contains a dwelling that is intended to be utilized as a dwelling but that is never actually utilized as a dwelling.

Between the decision in BMO Harris Bank and the new statute, investors who were banking on the anti-deficiency statute's protections in case their investments tanked are no longer able to assert the vague notion of "it could have been used as a dwelling" as a reason why mortgage creditors should not get the full amount they are due under the mortgage. Given the public policy in investing actual Arizona homeowners, this is a fair result for both consumers and mortgage creditors.

Catherine M. Brennan is a partner in the Hanover, Maryland office of Hudson Cook, LLP. Cathy can be reached at 410-865-5405 or by email at

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