Deficiency Judgments
This page will discuss DEFICIENCY JUDGMENTS as they relate to the foreclosure process. The following information is general in nature, and should not be construed as legal advice or a substitute for legal advice. Although we have tried to be as accurate as possible, the following information may be inaccurate, missing some information, or outdated – as law can frequently change or become modified. If you have questions about your case, please contact a foreclosure defense lawyer in your area.
General Information on Deficiency Judgments in Arizona on Construction Loans:
Arizona Anti-deficieny statutes (can the lender come after you if you walk away from your construction loan)? General Foreclosure Legal Information
Steven C. Vondran, Esq. is practicing real estate law, loan modifications and foreclosure prevention law and can be reached at steve@vondranlaw.com or (877) 276-5084 He is licensed to practice law in Arizona and California. Please note that the emails sent to my office or posted on my Blog are not confidential and create no attorney-client relationship. Therefore, please do not send personal or confidential information.
I have been getting many calls from Phoenix, Arizona homeowners lately (and Scottsdale, Arizona and other cities in the Greater Phoenix area) regarding whether or not they can simply walk away from their homes and allow the house to go into foreclosure, without the lender being able to come back after them (and their assets) for a deficiency judgment. The following is general legal information and some of the case law in Arizona that discusses deficiency judgment in the foreclosure context.
I. Anti-Deficiency Protection in Arizona
In Arizona, borrowers are protected by Arizona’s anti-deficiency statutes which are found at A.R.S. § 33-729 (A) and A.R.S. § 33-814 (D) – the Deed of Trust anti-deficiency statute. A.R.S. § 33-729 (A) by its plain terms, applies only to mortgages (not to deeds of trust), however, case law in Arizona has applied this statute to deeds of trust therby protecting purchase money deeds of trust from deficiency judgment.
A.R.S. § 33-729 (A) states in pertinent part:
if a mortgage (and implicitly, a deed of trsut) 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 lien 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, and if the proceeds of the mortgaged real property sold under special execution are insufficient to satisfy the judgment, the judgment may not otherwise be satisfied out of other property of the judgment debtor, notwithstanding any agreement to the contrary.
In sum, the bare minimum requirements for a homeowner to be protected by the anti-deficency judgment statute of A.R.S. § 33-729(A) are: 1) the property must be two and one half acres or less (this covers most properties in an around the Phoenix area); 2) limited to and utilized for a (must be used at least occasionally); 3) completed, single one or two family dwelling (must be a dwelling, as opposed to commercial property). The purpose of these statutes is to protect certain homeowners from the financial disaster of losing their homes to foreclosure plus all their other property for the remaining unpaid balance. Baker v. Gardner, 160 Ariz. 98, 101, 770 P.2d 766, 769 (1988). Anti-deficiency statutes put the burden on the lender or seller to fairly value the property when extending the loan, recognizing that consumers often are not equipped to make such estimations. Mid Kansas Federal Savings & Loan Ass’n v. Dynamic Development Corp., 167 Ariz. 122, 127, 803 P.2d 1310, 1316 (1991).
Note: Investment properties can also be protected by the ARIZONA ANTI-DEFICIENCY STATUTES. In Northern Arizona Properties v. Pinetop Properties Group, 151 Ariz. 9, the Court held that investment properties could be protected from deficiency judgments as long as the property is lived in at least occassionally. See also the Mid Kansas case 167 Ariz. 129.
II. What is a Purchase Money Mortgage?
Where a homeowner has a purchase money first and/or second mortgage, the foreclosing lender may only pursue the foreclosure and cannot collect any deficiency judgment following the foreclosure sale. So, the million dollar question is whether or not a mortgage loan constitutes “purchase money” or not.
A number of additional cases have refined certain points concerning what qualifies as a purchase money mortgage. For purposes of the anti-deficiency provisions of the statutes, a “purchase money mortgage” is one that encumbers the property being sold in the specific loan transaction, not another piece of property which is somehow involved in the sale. Cely v. DeConcini, McDonald, Brammer, Yetwin & Lacy, P.C., 166 Ariz. 500, 803 P.2d 911 (App. 1990). The Cely court held that “when one home is mortgaged to secure the purchase of a second home, the mortgage is not a purchase money security interest and the mortgage anti-deficiency statute does not apply.” Cely, 166 Ariz. at 501, 803 P.2d at 912. The Uniform Commercial Code defines a purchase money security interest in personal property and fixtures in similarly restrictive terms. Id. A.R.S. § 47-9107 (1) provides that a security interest is a “purchase money security interest” to the extent that it is “[t]aken or retained by the seller of the collateral to secure all or part of its price.” A.R.S. § 47-9107 (1) (1988).
However, a purchase money loan, when extended, renewed, refinanced, or “worked out,” (ex. the subject of a loan modification) retains its purchase money status, and the borrower retains the attendant protections offered by the Arizona anti-deficiency statutes. See Bank One v. Beauvais, 188 Ariz. 245, 934 P.2d 809, 239 Ariz. Adv. Rep. 13 (App. 1997). In Beauvais, the borrower obtained a loan modification. The lender argued the modification was akin to a refinance of the loan, and thus, there was no anti-deficiency statute that would protect the borrower from amounts due following a foreclosure. The borrower argued the loan workout was not a refinance, and that the Arizona anti-deficeincy statute protected the borrower from a deficiency statute. The Court held that anti-deficieny protection applied to the loan workout, but the Court’s holding indicated that even “refinances” were covered. However, it is not clear that a refinance is actually covered under the AZ anti-deficency statute and noone should rely on this finding given other Arizona cases that discuss what constitutes “purchase money.”
Thus, the initial classification is important to determine whether a loan is a purchase money loan and thus, whether it will be covered under the anti-deficiency statutes in Arizona.
III. Influence from Other States on Arizona’s Anti-Deficiency Statutes
Cases from California and North Carolina provide clear insight to the objective of Arizona’s statute. Baker, 160 Ariz. at 103, 770 P.2d at 771. Specifically, the Arizona Supreme Court has relied on the similarity between Arizona’s anti-deficiency statutes and those in California to interpret our statutes. Cely, 166 Ariz. at 504, 803 P.2d at 915 citing Baker, 160 Ariz. at 102, 770 P.2d at 770. California case law indicates that in the standard purchase money transaction, the seller retains an interest in the land sold to secure payment of part of the purchase price. Id. citing Roseleaf Corp. v. Chierighino, 59 Cal. 2d 35, 41, 378 P.2d 97, 100 (1963).
Arizona and California’s anti-deficiency statutes also mirror North Carolina’s statute. A purchase money interest only exists in North Carolina if it is “made as a part of the same transaction in which the debtor purchases land, embraces the land so purchased, and secures all or part of its purchase price.” Id. at 505, 803 P.2d at 916, citing Dobias v. White, 239 N.C. 409, 412, 80 S.E.2d 23, 26 (1954).
So, in other words, where the Arizona cases do not shed light on the issue of “purchase money” the Arizona courts are not afraid to look to California or Arizona case law.
IV. Are Construction Loans Purchase Money Loans?
A home improvement loan is “clearly not a purchase money transaction.” Southwest Savings Case – Id. at 506, 803 P.2d at 917. The question raised by this case is whether or not a construction loan would be deemed an “improvement loan.” In another Arizona case, a developer sought protection under the A.R.S. § 33-729 (A) anti-deficiency statutes claiming he had a construction loan that was intended to build houses that the developer intended to live in. The Court distinguished between when a property has never been used as a dwelling, and is not yet susceptible of being used as a dwelling. The court noted that “there is a difference between property intended for eventual use as a dwelling and property utilized as a dwelling.” Mid Kansas Federal Savings & Loan Ass’n, 167 Ariz. at 129, 803 P.2d at 1317. In that case, the court concluded “that commercial residential properties held by the mortgagor for construction and eventual resale as dwellings are not within the definition of properties ‘limited to’ and ‘utilized for’ single-family dwellings.” Id. The court further clarified that “property is not utilized as a dwelling when it is unfinished, has never been lived in, and is being held for sale to its first occupant by an owner who has no intent to ever occupy the property.” Id.
In another UNREPORTED CASE, (American General v. Dinwiddie, 2008 WL 4182862), the Court held that there is simply no authority that a construction loan is a purchase money loan entitled to Arizona antideficiency statute protection. The court in Dinwiddie cited the Southwest case mentioned above (home improvement loans are not treated as purchase money loan for deficiency judgment purposes.
V. California’s View on Construction Loans
As noted above, courts in Arizona have relied on interpretations of California Code of Civil Procedure § 580(b) (California’s equivalent of Arizona’s anti-deficiency statute) to define the scope of Arizona’s statute. Section 580(b) provides, inter alia: “No deficiency judgment shall lie in any event under a deed of trust, or mortgage…on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of such dwelling occupied, entirely or in part, by the purchaser.”
Whether a loan transaction falls within the protection of section 580(b), turns on “the character of the transaction…determined at the time the trust deed is executed. Its nature is then fixed for all time….” Paramount Savings & Loan Ass’n v. Barber, 263 Cal. App. 2d 166, 169, 69 Cal. Rptr. 390, 392 (Ct. App. 1968). In order to determine the character of a construction loan, courts focus on the intent of the parties entering into the transaction. See Prunty v. Bank of America, 37 Cal. App. 3d 430, 443, 112 Cal. Rptr. 370, 379 (Ct. App. 1974).
A loan will be covered by the code’s deficiency provision, if the parties to the construction loan intended that the deed of trust, securing the loan’s payment, cover real property. Id. (holding that a construction loan was covered by the code’s deficiency provision where “it [was] undisputed that any personal property acquired by plaintiffs under the contract for the construction of their residence had become real property upon the completion of the contracted work). In other words, where both parties intend that the loan’s proceeds will be used to build a dwelling, the loan will take on the character of a purchase money loan.
However, the statute also requires that the parties intend the loan to finance construction of a dwelling that the borrower intends to occupy entirely on in part. Cal. Code of Civ. Proc. § 580(b). For example, in Paramount Savings & Loan, the court found that the dwelling financed by the construction loan was never occupied, and the borrower never intended to occupy the residence. Paramount Savings & Loan, 263 Cal. App. 2d at 169-70, 69 Cal Rptr. at 392-93. Thus, the court held that section 580(b) did not apply.
Although courts are willing to impute the parties’ intent to the character of the loan, it is not willing to extend section 580(b)’s protections to loans used to repair or improve real property (similar to Arizona). Thus, in Allstate Savings & Loan Ass’n v. Murphy, the lender lent defendant money to finance the construction of a swimming pool some 17 months after the borrower had bought the residence and moved in. Allstate Savings & Loan Ass’n, 98 Cal. App. 3d 761, 763, 159 Cal. Rptr. 663, 664 (Ct. App. 1979). Since construction loans do not fall under § 580(b)’s anti-deficiency provision unless used by the borrower to finance his personal residence, the court held that construction loans for improvements or repairs (such as a swimming pool) are not within the description of the loans protected by § 580(b). Id. at 763-64, 159 Cal. Rptr. at 664-65.
VI. Recent Case Outcomes – Construction Loans under Arizona Anti-Deficiency Statutes (The Case of the Dinwiddies)
Although not binding legal precedent, American General v. Dinwiddie, 2008 WL 4182862 provides insight to any all possible litigation outcomes in Arizona courts. In this case, the Dinwiddies obtained a six-month construction loan from Aztec (Aztec) Funding to construct their residence. Several months later, the Dinwiddies obtained a long-term loan from Downey Savings and Loan (Downey) secured by a deed of trust on the property which they used to pay off the Aztec loan. One month later, the Dinwiddies obtained a loan from American General for $19,728.71, secured by a second deed of trust on the property. The Dinwiddies had previously taken out a loan from American General for the purchase of consumer goods, and that loan was then consolidated with the second loan. The money was used to pay off the earlier loan, pay off several credit cards, and buy insurance. A balance of $9,408.00 was paid in cash to the Dinwiddies. The Dinwiddies then defaulted on the Downey loan which forced American General to sue on the promissory note. American General then filed suit against the Dinwiddies for an outstanding debt of $25,507.10.
The plain language of the statue indicates that, to be a purchase money security interest, the loan would have to have been used to pay all or part of the purchase price of the property. The court cited North Carolina’s view that a purchase money interest exists only if it is “made as part of the same transaction in which the debtor purchases land, embraces the land so purchased, and secures all or part of its purchase price.” Cely, 166 Ariz. at 505, 803 P.2d at 916 quoting Dobias v. White, 80 S.E.2d 23, 26 (1954). “Purchase money” has been defined as the “actual money paid in cash or check initially for the property while the balance may be secured by a mortgage and note calling for periodic payments.” Black’s Law Dictionary 1235 (6th ed.1990). “Purchase money mortgage” has been defined as a “mortgage or security device taken back to secure the performance of an obligation incurred in the purchase of the property.” Id.
In the Dinwiddies’ case, the court noted that the record did not contain any evidence suggesting that any part of the Dinwiddies’ loan was used to purchase the property at issue. The Dinwiddies argued that the loan was for the purpose of finishing construction of the residence, but asserted that the loan qualified as a purchase money transaction because the loan was necessary to complete the construction as part of the process of purchasing the property and building their home. In support, they cited Bank One, Arizona, N.A. v. Beauvais, 188 Ariz. 245, 934 P.2d 809 (App.1997).
The court distinguished the Beauvais case. The American General loan at issue was not a consolidation, extension, or renewal of an earlier purchase money loan; it was independent of the Aztec Funding and Downey loans. The earlier loan from American General was used to pay for consumer goods.
The Dinwiddies claimed that the loan was used to pay for construction. However, the court stated that they have previously noted that loans for property improvement are not purchase money loans. Southwest Savings and Loan Association v. Ludi, 122 Ariz. 226, 228, 594 P.2d 92, 94 (1979).
The court stated that “even if funds used to construct a residence could qualify as a purchase money obligation, the evidence submitted by the Dinwiddies to show that the funds were used for that purpose was insufficient to withstand summary judgment.” The court stated that “Mr. Dinwiddie does not actually state that he paid the funds to the contractor nor does he identify the contractor or any other creditor to whom he asserts the funds were given. He offers no receipts or statements in support of his claim, and the record contains no indication that any evidence is available to demonstrate that the funds were in fact used to complete construction of the residence.”
In sum, even if this construction loan could have been construed as a purchase money transaction within the protection of A.R.S. § 33-729 (A) the Dinwiddies did not present evidence sufficient to withstand summary judgment. Thus, the court held that the loan was not a purchase money obligation under A.R.S. § 33-729 (A).
VII. Conclusion
The intent of the legislature in enacting A.R.S. § 33-729 (A) was to put the burden on the lender or seller to fairly value the property when extending the loan, recognizing that consumers often are not equipped to make such estimations. Whether or not a construction loan will qualify for anti-deficiency judgement protection in Arizona is a question of fact that should be thoroughly reviewed by an Arizona real estate attorney before making the determination that the lender cannot come after you for a deficiency judgement following a foreclosure sale that does not fully recoup the lender’s investment under the loan. Before you walk away from your house, contact an attorney to discuss your factual situation.
