Arizona’s Anti-Deficiency Laws
In 1971, the Arizona Legislature enacted two
anti-deficiency statutes excluding the right of certain beneficiaries under Deeds of Trust and certain "purchase
money" mortgagees from seeking a deficiency judgment on certain
types of residential loans. If the property and loans fit within the definition of these statutes, the debtor is
protected from the lender seeking a deficiency judgment against them.
The landmark
decision in this area of law is Baker v. Gardner, decided in 1988. In that case, the Arizona Supreme Court
considered whether a lender could sue the debtor on the promissory note instead
of conducting a Trustee's sale. The lender
was looking to avoid being subject to the anti-deficiency law. In that case, the court concluded that, when
a deed of trust is involved, and A.R.S. section 33-814(G) applies, the
anti-deficiency provision prevents a creditor from waiving the security and
bringing an action on the note.
The Arizona court
noted that the mortgage Anti-Deficiency Statute, A.R.S. section 33-729(A), only
applies to purchase-money mortgages, but the deed of trust Anti-Deficiency
Statute, A.R.S. section 33-814(G), is not limited to purchase-money collateral. Therefore, a lender who forecloses by
Trustee's sale cannot pursue a deficiency judgment. The result of Baker is that a lender
who takes a mortgage or deed of trust to secure all or part of the purchase
price of the home may only foreclose and cannot seek a deficiency afterwards.
However, as I
will discuss below, for qualified residential properties, the only time a
lender can sue directly on the note instead of foreclosing, is if the loan is
not "purchase money." This
includes situations such as a home equity loan.
In the case of non-purchase money loans, the lender may consider the
option of suing on the note.
In Arizona, protection for residential borrowers
is set forth primarily in Arizona
Revised Statutes § 33-729(A),
which provides in part:
"if a mortgage is given to secure the
payment of the balance of the purchase price, or to secure a loan to pay all or
part of the purchase price, of a parcel of real property of two and one-half
acres or less which is limited to and utilized for either a single one-family
or single two-family dwelling, the line of judgment in an action to foreclose
such mortgage shall not extend to any other property of the judgment debtor,
nor may general execution be issued against the
judgment debtor to enforce such judgment."
Qualifying
Arizona Properties:
To obtain anti-deficiency protection in
Arizona three basic elements must be met; 1) the property must be two and
one-half acres or less, 2) limited to a single one-family or a single
two-family dwelling. The Arizona Supreme Court has interpreted this language to
require that the dwelling be built and at least occasionally occupied. Mid Kan. Fed. Sav & Loan Ass’n, 167
Ariz. at 129, 804 P.2d at 1317. The property will qualify under the statute for
anti-deficiency protection whether occasionally occupied by the owners or third
party renters. Northern Arizona
Properties v. Pinetop Properties Group, 151 Ariz. 9, 725 P.2d 501. 3)
Additionally, the mortgage must be “given to secure the payment of the balance
of the purchase price”. This is commonly
known as a “purchase money mortgage”. Therefore,
the statute does not protect borrowers who have obtained “non-purchase money
mortgages” such as home equity lines of credit.
Element
One and an Arizona Property:
The
first element of anti-deficiency protection requires that the property be two
and one-half acres or less. Does your home sit on two and one-half acres or less?
Element
Two and an Arizona Property:
The second element of anti-deficiency protection is
really made up of two subsets. First, the property must be either a single
one-family or a single two-family dwelling. Secondly, the Property must
actually be occupied and though there have been many proposed changes to the
occupancy requirement, the law has stayed the same—the property does not need
to be occupied by the owners to receive the anti-deficiency protection.
SB 1271 – Proposed Changes to
the Occupancy Requirement
In early 2009 the Arizona
Bankers Association successfully argued that drastic changes to the anti-deficiency
statutes were necessary because abuses in the current law were costing Arizona banks
millions of dollars. There was significant sympathy for the Arizona community
banks in making the changes provided by this legislation. Arizona state legislators
found it very easy to hold property investors
liable for their debts while arguing that homeowners would still retain their
deficiency protection if they lived in the home for six consecutive months. The
legislation sailed out of the Senate by a unanimous vote but just barely received
enough votes to pass the Arizona House of Representatives. Governor Jan Brewer
then signed SB 1271 on the last day to sign or veto the legislation.
SB 1271 would have
amended A.R.S. § 33-814 (G) requiring that the property owner must have
“utilized” the property for six consecutive months and a certificate of
occupancy must have been issued. After September 30, 2009, properties sold at
trustee’s sale would not qualify for the anti-deficiency exemption unless the property
owner lived in the single one-family or single two-family dwelling for at least
six consecutive months.
HB 2008 the repeal of SB 1271
Due
to the unprecedented amount of negative feedback, towards SB 1271, another
bill, HB 2008 was proposed to immediately repeal the law. The original sponsor
of SB 1271, Senator Steve Pierce, asked the legislature and the Governor for an
immediate repeal of the law which was slated to go into effect at the end of
September 2009. HB 2008 was then passed by both the Arizona State Senate and
House of Representatives and signed by Governor Jan Brewer; repealing SB 1271
and its change to the anti-deficiency statutes. With this fix, Arizona will
continue to operate as a deed of trust state with the protections that have
been in existence since 1971.
Element
Three and an Arizona Property:
The third element of anti-deficiency
protection requires that the Property’s mortgage(s) were
used to purchase the property (“purchase money mortgages”).
Am I Protected by Arizona's Anti-Deficiency Statute?
Understanding Arizona's Anti-Deficiency laws and whether they protect you from lawsuits and crushing tax debt can be very complex. Contact the Dunaway Law Group at 480-415-0982 to speak with a skilled Arizona attorney about how we can help you.
