Court Finds Residential Construction Loan Subject to Anti-Deficiency Statute
In 2005, Trevis and Lisa Mueller purchased raw land. In 2006, they borrowed $444,000 from M&I Bank to construct a single family home for their own use. In 2007, they began construction. Unfortunately, construction fell behind schedule and was mostly defective. The Muellers requested that M&I advance them loan disbursements to remedy the defects. When the Bank refused, the Muellers abandoned the property and defaulted on their loan. In 2009, M&I foreclosed upon the property at a trustee sale. M&I then filed suit against the Muellers for some $68,000, the deficiency balance on their loan.
The trial court dismissed the lawsuit on grounds that the Muellers were protected by Arizona’s anti-deficiency statute – Arizona Revised Statute § 33-814(G) even though M&I argued that the property was never “utilized” as otherwise required by the statute. (That statute provides that “If trust property of two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling is sold pursuant to the trustee’s power of sale, no action may be maintained to recover any difference between the amount obtained by sale and the amount of the indebtedness and any interest, costs and expenses.”) M&I then filed an appeal.
On appeal, the Arizona Court of Appeals held that because the Muellers purchased the property with the purpose of occupying a single family home for their own use, they were protected by the anti-deficiency statute, never mind that the residence was never constructed or actually occupied. The Court’s rationale was that such a holding was consistent with the legislative intent of the statute – to protect homeowners. The Court wanted to avoid what it called a blurry artificial line that would be created if the Court adopted a “physically inhabit” standard. For example, such a standard could result in statutory protection of a homeowner who camped out on the property or moved into the home for one day, but no protection for a homeowner who did not camp out or was just a day or so away from moving into the property.
The Court also distinguished prior Arizona case law in which a residential commercial builder who had not completed construction on the subject property was held not protected by the anti-deficiency statute. The Court distinguished that case because the Court in that case limited its holding to the facts of that case and because the debtor in that case was a residential commercial builder, not a homeowner. The Court reiterated the legislative intent of the statute is to protect homeowners, not commercial builders.
Click here for a copy of the M&I Bank v. Mueller decision.