Arizona Anti-Deficiency Statutes and Cases as of August 2015


A.R.S. § 33-729(A):  “Except as provided in subsections B and C of this section, 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 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.”

A.R.S. § 33-814(G):  “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.”

A.R.S. § 33-814(H): “For deeds of trust that are originated after December 31, 2014, subsection G of this section does not apply to trust property as follows:

  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.”

               *          Catchpole v. Narramore, 102 Ariz. 248, 428 P.2d 105 (1967).  In this case the court was construing an anti-deficiency statute of California.  The court stated that such statute was substantive, not merely procedural, so it applied in the Arizona case subsequently brought following a trustee sale in California of California real property.   The subject indebtedness had been secured by a second position deed of trust, which was foreclosed by the prior lienholder.  Narramore then sued Catchpole in Arizona on the indebtedness previously secured by that California real property.  The Arizona Supreme Court determined that under California law, there was no recourse against the debtor other than the collateral.  “In California the right to a deficiency judgment has been taken from the creditor if the debt arises out of a purchase money note secured by a mortgage or deed of trust.”  Id. at 250, 428 P.2d at 107.  Because it held California law applied, the Arizona action was dismissed.  (This ruling was mentioned when the supreme court later decided Baker.)

               *           Southwest Savings & Loan Ass’n v. Ludi, 122 Ariz. 226, 594 P.2d 92 (1979).  Southwest Savings loaned money for a buyer of certain real property, secured by a mortgage on that property.  That buyer/borrower sold the land to another buyer who assumed the obligations of the purchase money note and mortgage and also borrowed additional money from Southwest Savings (for property improvements) evidenced by a second promissory note and second mortgage on the same property.  That latter buyer then sold the property to Ludi who assumed the debtor obligations under both sets of notes and mortgages.  After a default on the first loan, Southwest filed a mortgage foreclosure suit.  While that was pending, Ludi defaulted on the second loan and Southwest filed a separate lawsuit, waiving the security and suing on the indebtedness alone.  The first suit ended in an unappealed summary judgment for Southwest.  The second suit concluded with summary judgment for Ludi, the trial court holding that Southwest had elected its remedy by the foreclosure and was barred from suing on the second promissory note.  The supreme court reversed and remanded with directions to enter judgment for Southwest Savings.  While the first loan was covered by the anti-deficiency provision of A.R.S. § 33-729 (because it was a purchase money loan), the second loan was not (it was for improvements).  The court stated that the lender had a separate cause of action with respect to each note.  Thus, while it had foreclosed on the first mortgage and could not seek any deficiency on that loan, it still could waive the security and sue on the second loan without violating the statute because that was a wholly independent action and a suit on that indebtedness did not constitute a deficiency action for an inadequate recovery from the foreclosure on the first loan.

               *          Northern Arizona Properties v. Pinetop Properties Group, 151 Ariz. 9, 725 P.2d 501 (Ct. App. 1986).  Northern sold to Pinetop one condominium unit of a four-condo building.  The sale included a promissory note secured by a deed of trust on the condo.  Partners in the Pinetop Properties Group sometimes occupied the condo and sometimes it was rented to third parties.  It was an investment property.  Eventually, Pinetop defaulted and Northern elected to foreclose the deed of trust as a mortgage.  There was no resistance to the judicial foreclosure, but the parties disagreed on whether a deficiency was available pursuant to A.R.S. § 33-729(A).  The trial court ruled in favor of Pinetop that no deficiency was available and Northern appealed.

The statute (emphasis added) as in effect stated:

Except as provided in subsection B, 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 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.

Northern argued that the statute should exclude a property held for investment, rather than owned as a permanent residence.  (No one argued whether a 4-condo property was disqualified, which was considered in the PNL Credit case.)  The appellate court construed “dwelling” in favor of Pinetop.  The court stated that the property qualified as a “dwelling” if people lived in it, regardless of whether it was the owner or whether the property was used for rental purposes.

The A.R.S. § 33-729(A) exemption “which is limited to and utilized for either a single one-family or single two-family dwelling” does not require that the dwelling constitute someone’s permanent residence or normal place of abode.  Further, it does not preclude investment use such as occurred in this case.  The statute simply does not address the contentions relied on by Northern.  While we agree with Northern, that the legislature perhaps meant only to exclude deficiency judgments in foreclosure actions against a single family homeowner and not against an investment homeowner, the statute just does not say that.  If Northern is correct in its surmise, only the legislature can correct the language of A.R.S. § 33-729(A) to preclude investment homeowners.

Id. at 12, 725 P.2d at 504 (emphasis added).  (The literal reading, “hands off” stance of the court of appeals here – that only the legislature can impose an intent by correcting the wording actually used – may be contrasted with M&I Bank v. Mueller where intended, future utilization was held sufficient, despite the literal non-compliance at the time of foreclosure.)

               *          Hanson v. Spear, 153 Ariz. 84, 734 P.2d 1040 (Ct. App. 1987).  Appellant Spear bought property from appellee Hanson, giving a note and deed of trust, but the deed of trust was on different property than that sold.   Spear defaulted.  Hanson conducted a trustee’s sale and a trustee’s deed was delivered to Hanson’s attorney (apparently not recorded).  Unknown to Hanson, there were three more lienholders senior to his deed of trust and he lost the property a few months later when one of those foreclosed.  Hanson then sued Spear on the promissory note, and Spear unsuccessfully defended based upon A.R.S. 33-814 (E) (which is now re-numbered as subsection (G)). The court of appeals agreed with Spear and reversed.  “The sale of the property was complete and appellee, having elected her remedy, is prohibited from maintaining any action against appellant.”  Id. at 85, 734 P.2d at 1041.

               *           Southwest Sav. & Loan Ass’n v. Mason, 155 Ariz. 443, 747 P.2d 604 (Ct. App. 1987), vacated, 156 Ariz. 210, 751 P.2d 526 (1988).  Southwest Savings made a loan that was secured by a mortgage on a single family residence of less than 2.5 acres.  A subsequent purchaser of the home assumed the obligation on that loan, which eventually was in default.  Southwest Savings sued for a mortgage foreclosure, including a count upon the promissory note, as well.  The trial court granted summary judgment that the count to foreclose precluded the separate count upon the note.  With a dissent, the court of appeals interpreted A.R.S. § 33-722 and § 33-729 together to permit the lender to elect either remedy and reversed with directions to enter summary judgment on the note in favor of Southwest Savings.  The dissent resolved the apparent differences in the statutes by characterizing A.R.S. § 33-722 as a general statute with respect to mortgages and A.R.S. § 33-729 as a specific statute with respect to mortgages of a particular type (i.e. single family dwelling), so that the specific statute provided the exclusive remedy whenever it applied.  The supreme court vacated the court of appeals opinion, noting that the matter had been settled while on review.  (In Baker, the supreme court stated that the dissent in Southwest was correct.)

               *           Baker v. Gardner, 160 Ariz. 98, 770 P.2d 766 (1988).  Baker sold a home to Gardner.  ICA made a loan to Gardner for most of the purchase money, receiving a deed of trust on the home as security.  Baker also took a carryback promissory note for a portion of the purchase price, also secured by a deed of trust on the home.  Gardner defaulted.  ICA scheduled a trustee’s sale pursuant to its first position deed of trust.  Prior to that sale, Baker sued Gardner upon the carryback note, without exercising any rights under the second position deed of trust.  The superior court granted summary judgment for Gardner that A.R.S. § 33-814(E) [now re-numbered as A.R.S. § 33-814(G)] precluded suit on the note.  The court of appeals (in an unpublished decision) reversed applying its same reasoning from Southwest that A.R.S. § 33-722 allowed a creditor an election to waive the security and sue on only the debt (with the dissenter from Southwest again dissenting for his same reason).  The supreme court vacated the court of appeals decision, affirmed the trial court, and stated its agreement with the dissenting judge on the court of appeals.  Id. at 100-01, 770 P.2d at 768-69.  Reviewing the legislative history of the mortgage and deed of trust statutes (mostly as set forth in Boyd & Ballentine, Arizona’s Consumer Legislation: Winning the Battle but . . . , 14 Ariz. L. Rev. 627 (1972)), the court noted a legislative objective of protecting homeowners from deficiency judgments.

[W]e read both anti-deficiency statutes – §§ 33-729(A) and 33-814(A) – as evincing the legislature’s desire to protect certain homeowners from the financial disaster of losing their homes to foreclosure plus all their other nonexempt property on execution of a judgment for the balance of the purchase price.

Id. at 101, 770 P.2 at 769.  The court of appeals decision conflicted with that legislative objective.

               We conclude that the legislature’s objective in enacting § 33-814(E) was to abolish the personal liability of those who give trust deeds encumbering properties of two and one-half acres or less and used for single-family or two-family dwellings.  We can further that objective only by construing the statute to forbid the circumvention the Bakers attempted here.  The holder of the note and security device may not, by waiving the security and bringing an action on the note, hold the maker liable for the entire unpaid balance.  Thus, with regard to the limited class of mortgages and deeds of trust described in §§ 33-729(A) and 33-814(E), the effect of the anti-deficiency statutes is to change the Arizona rule we described in Catchpole to the law of California as we described it in the same case.

In reaching this conclusion, we do no violence to the text of the statutes.  Nor do we leave A.R.S. § 33-722 a meaningless shell.  The creditor/beneficiary can still elect to sue on the note in all cases except those involving the particular mortgages and deeds of trust described in the anti-deficiency statutes.  See Southwest Savings & Loan Association v. Ludi, 122 Ariz. 226, 228, 594 P.2d 92, 94 (1979).

Id. at 104, 770 P.2d at 772.  Upon reconsideration, the supreme court added a Supplemental Opinion, acknowledging that the holder of a deed of trust could elect to foreclose on it as a mortgage and thus obtain a deficiency, except when dealing with purchase money collateral of the type described in the statute.

Where the creditor chooses non-judicial foreclosure, he cannot obtain a deficiency judgment if the collateral is within the class protected by the deed of trust anti-deficiency statute.  Where, however, the creditor chooses judicial foreclosure, he can obtain a deficiency judgment in all cases except those involving purchase money loans on the type of real property that the mortgage foreclosure statute describes.  Therefore, where the creditor can obtain a deficiency judgment he can also elect to waive the security under A.R.S. § 33-722 and sue on the note.  By choosing judicial foreclosure, the creditor can obtain a deficiency judgment in all cases except those dealing with purchase money collateral on the residential property described in § 33-729(A).  He may, therefore, proceed under § 33-722 in all cases that do not fall within § 33-729(A).

Id. at 107, 770 P.2d at 775.

               *           Mid Kansas Fed. Sav. & Loan Ass’n v. Dynamic Dev. Co., 167 Ariz. 122, 804 P.2d 1310 (1991).  Mid Kansas made 10 loans to Dynamic, a developer, for construction of 10 homes.  Each loan was evidenced by a promissory note and secured by a deed of trust on the subject real property.  To complete construction on 7 of the lots (3 having been completed and sold), Dynamic obtained a second loan from Mid Kansas, evidenced by a single note and a single deed of trust encumbering those remaining 7 lots.  By the time of its default, Dynamic had sold 2 more homes, which were released, and there remained 5 lots, 1 more of which was sold before a scheduled trustee’s sale, at which the remaining 4 lots were sold to Mid Kansas for its credit bid pursuant to a sale under the second position deed of trust that had encumbered all of those lots.  Mid Kansas then sought to waive its security on the 4 first position deeds of trust and instead sue for the indebtedness on each of the 4 associated promissory notes.  Dynamic argued that the lender was prohibited from waiving the security and suing on the notes as a disguised action for deficiency.  The superior court disagreed and ruled for Mid Kansas.  The court of appeals reversed and the supreme court accepted review.  The court further explained its opinion in Baker.

               Baker held that the lender should not be allowed to circumvent the anti-deficiency statute by electing to sue the debtor on the note, thereby realizing any difference between the value of the real property and the amount owed on the debt.  As our supplemental opinion pointed out, Baker’s holding applies whenever the anti-deficiency statutes apply and therefore is not always limited to the purchase money situation.  160 Ariz. at 106-07, 770 P.2d at 774-75.  Assuming that the deed of trust falls within one of the anti-deficiency statutes, an action for a deficiency is prohibited after a trustee’s sale on any deed of trust and after judicial foreclosure on purchase money deeds of trust.  See A.R.S. §§ 33-814(G) and 33-729(A).  If a lender holds a non-purchase money deed of trust, he may recover a deficiency if he does so through an action for judicial foreclosure because A.R.S. § 33-729(A) applies only to purchase money liens.  In this latter case, of course, the debtor receives the protections of judicial foreclosure, including a statutory redemption right.

Read together, therefore, the statutes enact the following scheme:  when the holder of a non-purchase money deed of trust of the type described in A.R.S. § 33-814(G) forecloses by non-judicial sale, the statute protects the borrower from a deficiency judgment.  The lender therefore may not waive the security and sue on the note.  Baker, 160 Ariz. at 106, 770 P.2d at 774.   The holder may, however, seek to foreclose the deed of trust as if it were a mortgage, as allowed by § 33-814(E); if he does so, the debtor is allowed redemption rights under §§ 33-726 and 12-1281 through 12-1289 and is thus protected from low credit bids, but the holder may recover a deficiency judgment–the difference between the balance of the debt and the sale price–unless the note is a purchase money obligation.  In the latter case, the borrower is protected by the mortgage anti-deficiency statute, A.R.S. § 33-729(A), which applies only to purchase money obligations.  Baker, 160 Ariz. at 106, 770 P.2d at 774.

Id. at 126-27, 804 P.2d at 1314-15 (emphasis added). Notwithstanding the legislative history teaching that the origin of the anti-deficiency statutes were to protect consumers, rather than developers, the court noted that the statutory language did not exclude residential developers.  The court also noted that the language was focused on the type of property (“(1) two and one-half acres or less, (2) limited to and utilized for a dwelling that is (3) single one-family or single two-family in nature”), rather than the type of borrower.  Id. at 128, 804 P.2d at 1316.  The supreme court next looked at the “utilized for” language in the statute and acknowledged the court of appeals ruling in Northern Arizona v. Pinetop Properties applying the protection of the statute to an investment property.

               In contrast to the Northern Arizona Properties case, the property in question here had never been used as a dwelling, and was in fact not yet susceptible of being used as a dwelling.  There is a difference between property intended for eventual use as a dwelling and property utilized as a dwelling.  We hold 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.  The 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 propertyCf. Northern Arizona Properties (mortgagors intended to occupy property occasionally and rent it out).

Therefore, we hold that by its terms, the anti-deficiency statute does not apply to Dynamic in this case and A.R.S. § 33-814(G) does not preclude Mid Kansas from waiving its security and bringing a debt action on the notes.

Id. at 129, 804 P.2d at 1317 (emphasis added).  The opinion continues with an analysis of the doctrine of merger and extinguishment and concludes with a remand to permit Mid Kansas to sue on the individual promissory notes, but the opinion also required valuation of the properties at the time of the foreclosure sale to determine how much of the Mid Kansas debt was extinguished by its acquisition of title to the security. Id. at 132, 804 P.2d at 1320.

               *           Tanque Verde Anesthesiologists, L.T.D. Profit Sharing Plan v.  Proffer Group, Inc., 172 Ariz. 311, 836 P.2d 1021 (Ct. App. 1992).  InterWest Bank loaned money to Proffer which used the loans to buy distressed real property, either directly or by purchasing security instruments and foreclosing.  Proffer also used the loan money to rehabilitate the properties and re-sell them.  Tanque Verde guaranteed the InterWest loans and also made direct loans to Proffer for the same purposes. With respect to one residence, after Proffer was unable to sell it and to repay InterWest, Tanque Verde paid approximately $33,000 to acquire the InterWest deed of trust on that property, and Tanque Verde loaned additional sums for repairs, obtaining another note and deed of trust. After Proffer stopped making payments, it contracted to sell the residence and requested that Tanque Verde release both of its deeds of trust to permit the sale.  Tanque Verde agreed to the releases in exchange for a payment from escrow of somewhat less than $37,000.  The release and reconveyance specifically stated that it did not constitute satisfaction of the indebtedness.  Id. at 313, 836 P.2d at 1023.  Tanque Verde then sued for almost $2,000 still owed on the first loan (acquired from InterWest) and another approximately $6,000 owed on the second loan.  On cross-motions, the superior court ruled for Proffer that the suit was for a deficiency precluded by statute.  The court of appeals affirmed.  Although not stating that it was treating the transaction as a substitute trustee’s sale, that is essentially what the court did.

               Although no trustee’s sale occurred in this case, we agree with Proffer that, based on the holdings of Baker, supra, and Mid Kansas, supra, and absent evidence of an agreement to the contrary, when Tanque Verde signed the deed of release and reconveyance, it thereby waived its right to seek a deficiency judgment.

Id. at 314, 836 P.2d at 1024. (This is a Division Two opinion and has been since described differently by the two divisions:  First Credit v. Courtney (involved a “constructive trustee’s sale,” per Division Two) and Parkway v. Zivkovic (post-default waiver of anti-deficiency protection permitted, per Division One).)

               *           R.T.C. v. Segel, 173 Ariz. 42, 839 P.2d 462 (Ct. App. 1992).  Southwest Savings (predecessor in interest to the RTC) made four non-purchase money loans to Segel, each secured by a second-position deed of trust. Southwest Savings did not hold the first position security.  Segel defaulted.  The first position lenders scheduled trustee sales.  Southwest Savings sued on the four promissory notes for approximately $63,000.  On cross-motions for summary judgment, the superior court ruled for Segel, based on the anti-deficiency statute of A.R.S. § 33-814(G) which does not differentiate between purchase money and non-purchase money loans and is focused only on the type of property.  The court of appeals reversed.

               In the instant case, because the lenders under the first and second deeds of trusts were entirely different entities, Southwest’s actions on the second notes would constitute “wholly separate actions” unaffected by the first lender’s proceedings even more clearly than the lender’s action on the second note in Ludi.   Southwest’s right to elect remedies under A.R.S. section 33-722 was not affected by the actions of another lender who was unrelated to Southwest, and the trustee’s sales noticed by the senior lender did not constitute a choice by Southwest to exercise its non-judicial foreclosure rights.

Id. at 46, 839 P.2d at 466. The court of appeals directed entry of summary judgment for Southwest Savings (RTC).

               *           PNL Credit L.P. v. Southwest Pacific Investments, Inc., 179 Ariz. 259, 877 P.2d 832 (Ct. App. 1994).  PNL’s predecessor (Comcal) made a loan to SJM for which 6 promissory notes were executed, all secured by a single deed of trust encumbering 6 individual condominium units.  SW Pacific later assumed the obligations of SJM.  The obligations (for a limited amount) were guaranteed by Orians and Ricketts.  SW Pacific defaulted and a trustee’s sale was scheduled.  Prior to the sale, 2 of the 6 condos were sold and released.  At the time of the sale, the indebtedness was approximately $472,000 and PNL purchased the remaining 4 condo units for a credit bid of $355,000.  PNL then sued for the deficiency.  The trial court applied the anti-deficiency statute and granted summary judgment for SW Pacific, Orians, and Ricketts.  The appellate court focused on the “limited to” language in the statute and reversed.

As PNL correctly argues, the anti-deficiency statute requires the trust property to not only be utilized as a dwelling, but also be limited to a single one-family or a single two-family dwelling.  The trust property here consisted of four single-family condominium units.  Interpreting the statute to protect trust property consisting of multiple single-family dwellings would violate the language of the statute.

The Orians further argue that PNL is attempting to exclude commercial developers from the protection of the anti-deficiency statute.  The supreme court in Mid Kansas held that the anti-deficiency statute’s protection extends to commercial owners of qualifying residential property.  167 Ariz. at 128, 804 P.2d at 1316.   PNL’s argument correctly focuses on the type of property protected, not the type of borrower protected.  The trust property here simply does not qualify as protected property.

We acknowledge that our interpretation of the anti-deficiency statute will leave those commercial developers who secure loans through blanket deeds of trust unprotected, while protecting those developers who obtain separate deeds of trust for each one or two-family dwelling.  We believe that the clear language of the statute leads to such a result.

Id. at 265, 877 P.2d at 838.  Thus, the anti-deficiency statute did not apply.

               *           Nydam v. Crawford, 181 Ariz. 101, 887 P.2d 631 (Ct. App. 1994).  Nydam bought a residence (with a carryback note and deed of trust to the prior owner) then later sold it to Crawford (who assumed the obligations of that carryback note and deed of trust) who paid in part with a second position note and deed of trust securing Nydam in the property.    Crawford defaulted.  The holder of the first position note and deed of trust re-acquired the property at the subsequent trustee’s sale.  Nydam then sued Crawford upon the second position promissory note.  The trial court granted Crawford summary judgment and Nydam appealed.  The court of appeals affirmed.  The court stated that the statute is not worded to require that “the person seeking the deficiency also [be who] conducted the trustee’s sale.”  Id. at 102, 887 P.2d at 632.  Provided that qualifying property is at issue (i.e., single one- or two- family dwelling on 2.5 acres or less), then the statute precludes a deficiency if the “trust property . . . is sold pursuant to the trustee’s power of sale,” regardless of who caused it to be sold and regardless of whether it was sold pursuant to a deed of trust securing the party seeking the deficiency or some other creditor.  Id. (So while in Ludi the remedy elected by Southwest on its first-position purchase money loan did not affect Southwest’s ability to elect a different remedy on the separate, second position improvement loan, and in Segel the trustee sale remedy selected by the unrelated-party first position lienholder did not limit the remedy available to Southwest upon its second position, non-purchase money loans, in Nydam the fact that there was a first position lienholder trustee’s sale with respect to the property did preclude any recourse by the second position lienholder.)

               *           Long v. Corbet, 181 Ariz. 153, 888 P.2d 1340 (Ct. App. 1994).  Long loaned over $50,000 to Dominican Farming, secured by a subordinate position deed of trust on a single family residence owned by Martinez, and guaranteed by Corbet and others.  Dominican defaulted.  Long sued.  While the suit was pending, a prior lienholder concluded a trustee’s sale as to the Martinez residence.  The trustee’s sale produced approximately $30,000 in funds more than needed to satisfy the prior loan.  Long petitioned the court for, and received, those excess funds.  Corbet filed a motion for summary judgment taking the position that by accepting those excess proceeds from the trustee’s sale, Long had effectively elected payment pursuant to the non-judicial foreclosure and was barred from any deficiency.  The trial court instead granted judgment in favor of Long.  The court of appeals affirmed, distinguishing Segel (but not addressing Tanque Verde which arguably involved a “constructive trustee’s sale”).

               Once the creditor senior to Long sold the deed of trust property at a trustee’s sale, Long’s deed of trust was extinguished, although the debt secured by the deed of trust given to Long was not.  See Mid Kansas, 167 Ariz. at 130, 804 P.2d at 1318.   Under Segel, the senior creditor’s election of non-judicial foreclosure did not define Long’s remedies; Long had chosen to foreclose judicially, and he was still entitled to sue on the guaranty given by Corbet.

Id. at 157, 888 P.2d at 1344.

               We do not find that Long’s receipt of excess funds from the trustee’s sale can be characterized as an election by Long to collect his debt by non-judicial foreclosure.  In the complaint against Corbet and others, Long elected to proceed by judicial foreclosure so that he could also recover any deficiency from the guarantors.  Because of an intervening trustee’s sale over which Long had no control, Long lost the opportunity to proceed with the judicial foreclosure.  Although Long did receive the excess proceeds from the trustee’s sale, his receipt of what remained from someone else’s trustee sale cannot reasonably be said to have been an election of remedies by him.

Id. at 157-58, 888 P.2d at 1344-45.

               Although Segel did not reach the question of whether someone in Long’s position would be bound by another creditor’s trustee’s sale, taking the Segel reasoning another step, we conclude that as to Long, there was no trustee’s sale.  There was no sale pursuant to Long’s trust deed, nor did Long receive the proceeds directly from the sale.  The excess funds were deposited with the clerk of the superior court, and Long had to prove to the court that he was entitled to the money as repayment on the loan.

Id. at 158, 888 P.2d at 1345.  A.R.S. § 33-814 was held not to apply to the case.

               *           Wells Fargo Credit Corp. v. Tolliver, 183 Ariz. 343, 903 P.2d 1101 (Ct. App. 1995).  Tolliver executed a note in favor of Wells Fargo secured by a second position deed of trust on an apartment complex.  Lomas held the first position deed of trust.  Lomas concluded a trustee’s sale on the property, eliminating the Wells Fargo lien.

               Like the creditor in Segel, Wells Fargo was a junior lienholder who did not commence trustee’s sale proceedings, and the encumbered property was neither a single one-family nor a single two-family dwelling.  Therefore, the trustee’s sale noticed by the senior lienholder did not constitute an election by Wells Fargo to exercise its non-judicial foreclosure rights.  Wells Fargo is thus not limited to a deficiency action, and may sue the Tollivers on the note.  The action on the note is not a deficiency action and thus is not subject to the 90-day limitation.

Id. at 348-49, 903 P.2d at 1106-07.

               *           Bank One, Arizona, N.A. v. Beauvais, 188 Ariz. 245, 934 P.2d 809 (Ct. App. 1997).  In 1988, Beauvais obtained a $75,000 loan to buy stock shares and pledged the shares as security.  In 1989, Beauvais obtained a $240,000 loan.  They executed a promissory note for $315,000 representing “payment” of the 1988 loan plus the new 1989 loan, the proceeds of which were for the purchase of a residence.  The consolidated note was secured by a second position deed of trust on that residence and the previously acquired stock shares.  Beauvais was unable to pay off the 1989 loan in 1992, at which time there remained a balance of $190,000.  A new “workout note” was executed at that time for $190,000, as to which some bank records referred to it as an extension or a renewal of the 1989 loan, but bank records also treated the workout note as paying the balance of the $315,000 note.  After some payments, Beauvais defaulted on the workout note.  Bank One sued, alleging that about $144,000 was owed on the note, but seeking only $75,000 which it characterized as the non-purchase money portion.  “The trial court found that the workout loan was an extension of the 1989 consolidated loan and thus that it was a purchase-money, non-recourse note and that the Bank had no cognizable action under A.R.S. section 33-814(E).”  Id. at 247, 934 P.2d at 811.  The court of appeals stated: “The legal question we consider is whether, under the facts of this case, the workout note was a non-purchase-money note under which the Bank could waive the security, sue on the note, obtain a judgment and then attempt to satisfy the judgment from assets of the Beauvais other than the property which is subject to the deed of trust.”  Id. at 248, 934 P.2d at 812. “As can be seen from Baker and Segel, a decisive question in determining the rights of a creditor when a deed of trust is involved is whether the collateral secures a purchase-money or non-purchase-money obligation.  Therefore, in this case, the characterization of the workout note as purchase-money or non-purchase-money is the key to determining whether the Bank may maintain its action on the note.”  Id. at 249, 934 P.2d at 813.

               Here, the majority of the original loan was used as part of the purchase price for residential property of less than two and one-half acres used for a single-family dwelling.  A deed of trust on the property secured the loan.  Although a portion of the 1989 consolidated loan was non-purchase-money, the Bank no longer argues that the loan can be bifurcated; thus, we consider the entire loan to be a purchase-money obligation.  The workout note was for the balance remaining at that time on the purchase-money note; no additional funds were added to the loan.  The note continued to be secured by the deed of trust on the property.  Accordingly, we conclude that the workout note retained its character as a purchase-money note.

Id. at 250, 934 P.2d at 814.

               In summary, we hold that regardless of whether the workout note was an extension, renewal, or refinancing of the 1989 consolidated loan, it retained its character as a purchase-money note.  . . .   Accordingly, the Bank is prohibited from waiving the security under the deed of trust and suing on the note.  We affirm the trial court’s dismissal of the Bank’s complaint.

Id. at 251, 934 P.2d at 815.

               *           M & I Marshall & Ilsley Bank v. Mueller, 228 Ariz. 478, 268 P.3d 1135 (Ct. App. 2011).  Mueller purchased vacant land in 2005.  In 2006, Mueller borrowed $440,000 from M&I Bank to construct a single family residence.  That loan was secured by a deed of trust on the vacant land.  There were problems with construction and Mueller abandoned the project, defaulting on the loan.  In 2009, M&I Bank concluded a trustee’s sale of the land, then filed a deficiency action against Mueller for about $68,000.  M&I Bank appealed from dismissal of its claim.  The bank’s position was that, because construction of the home was never completed, it was never “utilized” for a single family residence and so was not entitled to the protection of A.R.S. § 33-814(G).  Id. at 479, ¶ 7, 228 P.3d at 1136.  The court of appeals, also acknowledging that Northern Arizona v. Pinetop Properties had applied the statute to an investment property, quoted from Mid Kansas as follows:

[C]ommercial 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.  [Emphasis in original.]   The 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. at 480, ¶ 8, 228 P.3d at 1137 (citation omitted).  The court of appeals then construed the anti-deficiency statute to apply because Mueller intended to utilize the property as a home, if construction had been completed.

               This case is distinguishable from Mid Kansas.   Unlike the situation in Mid Kansas, where the borrower was a corporation that never intended to occupy the property, the Muellers intended to live in the single-family home upon its completion.  The primary purpose of the Arizona anti-deficiency statutes is to protect “homeowners” from deficiency judgments – not to afford protection to commercial homebuilders.  Baker v. Gardner, 160 Ariz. 98, 101, 770 P.2d 766, 769 (1989).  The supreme court in Mid Kansas held that “the identity of the mortgagor as either a homeowner or developer is irrelevant” for purposes of applying the anti-deficiency statute, but we conclude it is relevant to determine whether the property will be “utilized” for a single-family homeId. at 128, 804 P.2d at 1316.

Id. at 480, ¶ 9, 228 P.3d at 1137 (footnote omitted) (emphasis added).  (If identifying the mortgagor is relevant to determining whether property is “utilized” in a manner the statute was meant to protect, then property owned as an investment arguably should not qualify.  Arguably, an investor is no more utilizing the property as a dwelling than the original builder did before sale.  Also, (1) Mueller arguably is inconsistent with Mid Kansas where the supreme court stated that “the identity of the mortgagor as either a homeowner or developer is irrelevant” with respect to the statute, 167 Ariz. at 128, 804 P.2d at 1316, and (2) the Mueller court did not address that  in Mid Kansas the supreme court seemed to reject “intention” as insufficient:  “There is a difference between property intended for eventual use as a dwelling and property utilized as a dwelling.” 167 Ariz. at 129, 804 P.2d at 1317.)

               *           Helvetica Servicing, Inc. v. Pasquan, 229 Ariz. 493, 277 P.3d 198 (Ct. App. 2012).  Pasquan obtained a purchase money loan of $600,000 from Hamilton for a Paradise Valley residence.  Later, Pasquan got a $1.6 million loan from Desert Hills which paid off the Hamilton loan and funded partial demolition and reconstruction for a remodeled home.  The Desert Hills loan was secured by a deed of trust on the property.  Another $100,000 from Desert Hills was added to the latter obligation and deed of trust, followed by an additional loan of $400,000 that was separately documented with a second position deed of trust on the same residence.  Pasquan said all of that money was used for construction of the home.  About two year later, Pasquan next obtained a $3.4 million loan from Helvetica (which paid off Desert Hills) secured by another deed of trust on the same residence. After Pasquan defaulted, Helvetica brought a judicial foreclosure and obtained title to the property for a $400,000 credit bid at the resulting sheriff’s sale.  Within that judicial foreclosure, Helvetica then sought a judgment for the deficiency and such a judgment was entered for almost $2 million.  Pasquan appealed.  Applying Bank One v. Beauvais, the court of appeals stated “that refinancing does not destroy the purchase money status.” 229 Ariz. 498, ¶ 20, 277 P.3d at 203.  The court also held that loans to fund construction should also qualify as purchase money obligations “if:  (1) the deed of trust securing the loan covers the land and the dwelling constructed thereon;  and (2) the loan proceeds were in fact used to construct a residence that meets the size and use requirements set forth in A.R.S. § 33-729(A).”  Id. at 501, ¶ 32, 277 P.3d at 206.  Acknowledging that the statutory language and available case law provided little guidance, the court further decided that “non-purchase money loan funds included in a purchase money transaction” that can be “traced and segregated,” may be “included in a deficiency judgment.”  Id. at ¶¶ 33, 35. So, a lender may obtain a deficiency judgment after a judicial foreclosure for the portion of a loan that constituted non-purchase money proceeds.

               *           Independent Mortg. Co. v. Alaburda, 230 Ariz. 181, 281 P.3d 1049 (Ct. App. 2012).  Alaburda purchased a 1/10th interest in a single family condominium in Sedona (which they were entitled to use only up to 28 days per year).  Alaburda obtained a purchase money loan from Independent Mortgage, evidenced by a promissory note and secured by a deed of trust on the fractional interest.  The property was subject to CC&Rs restricting its use to “vacation accommodation.”  Two years later, Alaburda defaulted, Independent Mortgage purchased their fractional interest at its trustee’s sale, and then sued Alaburda for a deficiency of approximately $58,000.  The trial court granted summary judgment to Alaburda that the anti-deficiency statute applied.  Independent Mortgage argued that a 1/10th interest in a vacation accommodation did not qualify for the protection of A.R.S. § 33-814(G).  The appellate court characterized Independent’s definition of “dwelling” as too narrow, citing the opinions in Northern Arizona v. Pinetop Properties and Mid Kansas v. Dynamic.  The court of appeals affirmed, holding that the statute did not require that the dwelling constitute one’s permanent place of abode nor did it require one to own the entire interest in it.  Id. at 184, ¶¶ 9-12, 281 P.3d at 1052.

               *           National Bank v. Schwartz, 230 Ariz. 310, 283 P.3d 41 (Ct. App. 2012).  National Bank loaned Schwartz approximately $1.4 million secured by a deed of trust upon their home.  (The court of appeals noted that the anti-deficiency statute was not being asserted, but it could not tell from the record whether that was because of the size of the property, the purpose of the loan, or some other reason.  Id. at 311, n.2, 283 P.3d at 42, n.2.)  There was a default, a trustee’s sale, and the bank then sued for a deficiency of approximately $764,000.  Schwartz sought to use an arbitration provision in the promissory note to dismiss the deficiency action and require that claim to be arbitrated.  Holding that any deficiency arose from the indebtedness evidenced by the note, rather than arising from the foreclosure, the appellate court agreed that the arbitration provision of the note applied. Id. at 313, ¶ 10, 283 P.3d at 44.

               *           RES-AZ SDL, LLC v. Lenzmeier, 2012 WL 5333675 (Ariz. Ct. App., filed Oct. 30, 2012).  This decision is not published.  Lenzmeier obtained a construction-to-permanent loan from Choice Bank for $2.475 million.  The loan was to build a custom home, apparently secured by the lot upon which it was to be built.  Silver State took over Choice Bank and FDIC later became receiver and refused to honor the remainder of the construction loan.  Lenzmeier  had then borrowed $1.4 million.  Pursuant to a loan modification with FDIC, the loan was decreased to approximately $1.9 million.  In addition to that additional loan money of about $500,000 after the modification, Lenzmeier also funded construction with about $262,000 of their own money.  The residence remained unfinished when Lenzmeier defaulted.  As assignee of FDIC, RES-AZ concluded a trustee’s sale on the residential property and then sought a deficiency of about $1.3 million.  The superior court granted summary judgment to Lenzmeier that they were entitled to protection of A.R.S. § 33-814(G).  RES-AZ appealed, arguing that under Mid Kansas the unfinished property did not qualify for anti-deficiency protection.  Lenzmeier argued that their case was similar to M&I Bank v. Mueller.  The court of appeals affirmed, agreeing with Lenzmeier “that the present case is distinguishable from Mid Kansas and similar to Mueller because the property in this case was unfinished residential property intended for private residential use and was not being held out for resale.”  Id. at *3, ¶ 16.

               *           Barnett v. BMO Harris Bank, 2012 WL 6645657 (Ariz. Ct. App., filed Dec. 20, 2012).  This decision is not published.  Barnett obtained a $1.5 million loan from M&I Bank to demolish an existing home and build a new one on his lot in Paradise Valley.  A deed of trust used that property as security for the loan.  There were construction problems, Barnett did not work out what he wanted with the bank and defaulted, and M&I Bank foreclosed by trustee’s sale.  M&I Bank sued for a deficiency.  The bank was successful in the trial court, defeating Barnett’s motion based on the anti-deficiency statute, and obtaining summary judgment against Barnett for the deficiency.

               Relying on the holding in Mid Kansas Federal Savings and Loan Association of Wichita v. Dynamic Development Corp. that a “property is not utilized as a dwelling when it is unfinished [and] has never been lived in,” 167 Ariz. 122, 129, 804 P.2d 1310, 1317 (1991), the trial court found that Barnett was not entitled to anti-deficiency protection because “there was no dwelling that was both finished and/or being lived in by anyone existing on the trust property at any time after the [loan agreement] was executed.” The court also noted that Barnett’s “inten[tion] to build a new home on the property that would be utilized as a dwelling in the future” was insufficient to determine that the property was being “utilized” under the statute.

Id. at *2, ¶ 9.  That trial court ruling pre-dated the opinion in M & I Marshall v. Mueller.  Because the record showed Barnett had stated his intention to occupy the home upon completion, the court of appeals reversed the summary judgment for the bank.  There were other claims to resolve (fraud), so the matter was remanded to resolve those.

               *           Parkway Bank & Trust Co. v. Zivkovic, 232 Ariz. 286, 304 P.3d 1109 (Ct. App. 2013).  In 2006, Parkway loaned approximately $895,000 to Equinox, evidenced by a promissory note, and secured by a deed of trust upon real property owned by the President of Equinox.  The deed of trust expressly waived the rights of any anti-deficiency law.  In 2009, the loan was renegotiated.  A new note for the same amount was provided wherein Zivkovic (the President of Equinox) was the maker/borrower; Equinox executed a guaranty of that obligation; the existing deed of trust was identified as security (modified to removed the name of Zivkovic’s wife).  Zivkovic defaulted; the property was sold by credit bid to Parkway at trustee’s sale; Parkway sued for a deficiency of approximately $278,000.  Under Illinois law (which the documents designated as applicable), the amount of the trustee’s sale controlled the amount of the deficiency.  If Arizona law applied, then Zivkovic was entitled to a fair market value determination.  The appellate court addressed whether a prospective waiver of the statutory anti-deficiency protection was permissible under Arizona law.  (The court, acknowledging Tanque Verde, suggested that a post-default waiver, such as might occur as part of a settlement, was not necessarily barred by public policy.  Id. at 290, ¶ 15 & n.2, 304 P.3d at 1113, n.2.).  Among other things, the appellate court stated that the purpose of Arizona’s anti-deficiency statutes is not merely to protect individual borrowers of residential properties, but also to “‘allocate the risk of inadequate security’ to lenders, ‘thereby discouraging overvaluation of the collateral.’”  Id. at 290, ¶ 16, 304 P.3d at 1113 (citation omitted).  The court also stated that “[i]f inadequacy of security results, not from overvaluing, but from a decline in property values during a general or local depression, [the anti-deficiency statutes] prevent the aggravation of the downturn that would result if defaulting purchasers were burdened with large personal liability.”  Id.  The court held that “a prospective waiver of the anti-deficiency protections” was impermissible as against the policy choice made by the legislature.  Id. ¶ 17.  The matter was remanded to conclude a conflict of laws analysis as to whether Illinois law would be applied.

               *           First Credit Union v. Courtney, 233 Ariz. 105, 309 P.3d 929 (Ct.App. 2013).  In 2006, Orange Grove borrowed $3.56 million for construction purposes from First Credit, evidenced by a promissory note, and secured by a deed of trust on a residential subdivision property.  Courtney also signed a commercial guaranty for personal liability on that indebtedness.  In 2009, the loan was modified, the principal reduced, and the term for payment extended.  Additional security was provided, being a single family residence on less than 2.5 acres, which was subject to then-existing liens of about $52,000.  Orange Grove defaulted.  In 2011, First Credit conducted a trustee’s sale of that residential subdivision property, which it obtained for a credit bid of $2.4 million.  Shortly thereafter, First Credit elected to waive its security on the single family residence and sue Courtney on the deficiency.  First Credit obtained summary judgment as to Courtney’s liability and a trial was held on fair market value, resulting in a judgment of over $1.4 million for damages, interest, and attorneys’ fees.  On appeal, the court stated that the terms of the loan documents allowed First Credit to sue on the indebtedness without exhausting the collateral, and that such an agreement was permissible pursuant to A.R.S. § 33-814(C).  With respect to A.R.S. § 33-814(G), the court agreed with First Credit that the statute was not invoked by the trustee sale of the residential subdivision (Appian Estates).  “Except in cases involving purchase money loans for collateral covered by § 33-814, when the creditor has not conducted a trustee’s sale of the property, the creditor remains free to waive the security, sue directly on the note, and obtain a deficiency judgment.”  Id. at 109, ¶ 17, 309 P.3d at 933.  The trustee sale of Appian Estates was a sale of commercial property, so it did not invoke the statute.  The deed of trust on the other, residential property was not part of a purchase money transaction, and it had not been sold pursuant to any trustee sale, so again the anti-deficiency statute was not invoked.  The court of appeals held that A.R.S. § 33-814(G) did not apply and First Credit was free to sue Courtney directly on the promissory note.  (The court also distinguished Tanque Verde as involving a “constructive trustee sale,” but inapplicable to aid Courtney because it was the commercial property and not the residential property that had been sold at a trustee sale.  Id.  at 110, ¶ 21, 309 P.3d at 934.)

               *           BMO Harris Bank N.A. v. Wildwood Creek Ranch, LLC, 234 Ariz. 100, 317 P.3d 641 (Ct. App. 2014), vacated, No. CV 14-0101 PR (Ariz. Sup. Ct., filed Jan. 23, 2105).  In 2006, Wildwood obtained a loan from M&I Bank (succeeded by BMO Harris) for $296,000.  It was personally guaranteed by Rudgear.  The loan was secured by a first position deed of trust on unimproved land.  In 2009, the loan was renewed and extended to 2011, when it went into default.  BMO Harris foreclosed on the vacant land and then sued Rudgear for a deficiency.  Relying on M&I Bank v. Mueller, the trial court granted summary judgment for Rudgear who had supplied an affidavit that the vacant property had been intended to be improved and used as a single family residence. BMO Harris appealed. The court of appeals stated that for a party to qualify for the protection of A.R.S. § 33-814(G), the party had to prove all of the following:

 (1) the property was encumbered by a deed of trust;  (2) the property consists of two and one-half acres or less;  (3) the property is limited to and utilized for a single one-family dwelling or a single two-family dwelling;  and (4) the property was sold at a trustee’s sale.

Id. at 102, ¶ 8, 317 P.3d at 643. In this case, the land was vacant throughout the duration of the subject loan and resulting trustee’s sale.  The court of appeals acknowledged Mueller, but did not explain how it was distinguished.  The court merely held it was “clear that unimproved, vacant land cannot be properly characterized as a ‘dwelling’.”  Id. ¶ 10.  A.R.S. § 33-814(G) was held not to apply “because the Property consisted of vacant land and was not utilized as a dwelling.”  Id. at 103, ¶ 12, 317 P.3d at 644.  On remand, the trial court was directed to enter partial summary judgment for BMO Harris. In a specially concurring opinion, one judge (acknowledging more the clarity needed in distinguishing from Mueller), opined as to what the court should do where there is a debatable issue as to partial construction. The Arizona Supreme Court accepted the petition for review and is to hear argument in December 2014.

               *          BMO Harris Bank N.A. v. Wildwood Creek Ranch, LLC, 236 Ariz. 363, 340 P.3d 1071  (2015).  The supreme court reached the same result, overruling Mueller to the extent it applied the anti-deficiency protections based on intent, before there was a complete structure.  The statute affords protection with respect to collateral property that is both (1) a dwelling and (2) utilized for a single one-family or single two-family home.  ¶¶12-13.  “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.”  ¶15.  Intent to eventually use a property for a dwelling is not equivalent to actually utilizing it as a dwelling.  “Vacant property is not being utilized for a dwelling even if the borrower intends someday to construct and occupy a home there.”  ¶17.  “For purposes of § 33-814(G), a residential structure may qualify as a ‘dwelling’ before it is occupied, see supra ¶ 15, but trust property is not being ‘utilized for’ a dwelling until a residential structure is completed.”  ¶18.  Since no dwelling had ever been constructed on their property, the Rudgears were not entitled to any statutory protection and the trial court was directed to enter partial summary judgment in favor of BMO Harris.

               *         Arizona Bank & Trust  v. James R. Barrons, et al.  237 Ariz. 401, 351 P.3d 1099 (2015) (review pending).  

The court of appeals approved lenders imposing on guarantors a waiver of the protections of Ariz. Rev. Stat. § 33-814(G) which otherwise would preclude an action for a deficiency following foreclosure by trustee’s sale pursuant to a qualifying residential deed of trust.  TDJ purchased for development several vacant lots with financing from Arizona Bank.  The loan (and a subsequent construction loan) was secured by a blanket deed of trust on the lots and unconditional guaranties by several persons and entities.  The guaranties expressly waived any protections under the anti-deficiency statutes.  Following defaults on the loans, Arizona Bank foreclosed via trustee’s sales, obtaining title to the properties with its credit bid of less than the full amount owed, and leaving a deficiency of several hundred thousand dollars.

The bank sued on the guaranties for the deficiency.  On cross-motions for summary judgment, the trial court denied summary judgment to the guarantors, who argued that Ariz. Rev. Stat. § 33-814(G) applied to guarantors, as well as borrowers, could not be waived, and thus barred the deficiency claim because the secured property was the type of residential property protected by the statute.  Instead, the trial court agreed with the bank that the statutory protection could be waived by guarantors, was knowingly and voluntarily waived in the subject guaranties, and that the bank was entitled to summary judgment for the deficiency (based on fair market value).  The guarantors appealed.

The court of appeals acknowledged the decisions in BMO Harris Bank, N.A. v. Wildwood Creek Ranch, LLC, 236 Ariz. 363, 340 P.3d 10171 (2015), CSA 13-101 Loop, LLC v. Loop 101, LLC, 236 Ariz. 410, 341 P.3d 452 (2014), and Parkway Bank & Trust Co. v. Zivkovic, 232 Ariz. 286, 304 P.3d 1109 (Ct. App. 2013).  The court distinguished the fair market value protection of Ariz. Rev. Stat. § 33-814(A) which specifically references guarantors, as well as borrowers.  There is no specific reference to guarantors in Ariz. Rev. Stat. § 33-814(G).  Holding that guarantors were not intended  by the legislature to be protected by the statute, the court stated that precluding guarantors “from waiving anti-deficiency protections would be inconsistent with the basic purpose of a guaranty,” because a guarantor could never be liable with respect to property qualifying for protection under Ariz. Rev. Stat. § 33-814(G). ¶15. Instead, the court held that freedom of contract permitted guarantors to waive the statutory protection, that the guaranties at issue demonstrated expressly bargained-for waiver, and summary judgment was properly granted for the bank.

*         First Financial v. Claassen, 1 CA-CV 14-0123, filed 8/13/2015.  The court of appeals held that interest, late fees, other charges related to purchase money part of construction loan also protected by anti-deficiency statute.

Claassen owned property in Paradise Valley subject to a purchase money loan encumbrance.  He obtained a new loan from the predecessor of First Financial (Irwin Union Bank) that was not to exceed $5.5 million, of which $1.7 million paid off the purchase money loan, and the balance was for construction of a single family residence.  Loan draws aggregated approximately $3 million, however, construction was not completed and Claassen eventually received notice of default for non-payment.

First Financial initiated a judicial foreclosure in December 2010.  Claassen counterclaimed and the matter was set for trial in July 2013.  Apparently Claassen ceased participating for a while, which is not explained in the opinion.  A bench trial occurred without Claassen’s participation, resulting in dismissal of Claassen’s counterclaims and a judgment for First Financial for foreclosure, treating the fair market value as $710,000, awarding in excess of $1 million as a deficiency, and an additional amount in excess of 250,000 for attorneys’ fees and costs.

Claassen subsequently filed a motion for new trial arguing that the damages were not recoverable under the anti-deficiency statute.  The motion was denied, the trial court noting as to part of the arguments that they raised evidentiary or legal issues which were waived by failing to participate in the trial.  Claassen appealed on two issues (¶7):

  1. Whether the trial court erred in ruling that accrued interest, late fees, and the construction deposit paid to the homeowner’s association were non-purchase money sums as a matter of law; and

  2. Whether the trial court erred in finding Claassen waived any argument regarding the deficiency because he did not raise it prior to the motion for new trial.

Since the appeal was from denial of the motion for new trial, the standard of review was to determine whether the trial court had abused its discretion in denying the motion (rather than direct review of the trial and the sufficiency of the evidence considered in that proceeding).  The court of appeals identified as an issue, determining what portion of the loan proceeds should be designated purchase money and what parts not, and whether the deficiency judgment in favor of First Financial was limited to traceable, segregated non-purchase money funds.

The appellate court disagreed with First Financial (and the trial court) as to what was properly considered separate from the purchase money obligation.  “In Helvetica, we did not reach the question whether interest payments on a refinanced loan would be a purchase money item.  We do reach that question now and conclude that interest, late fees, and the mandatory construction deposit are properly considered purchase money obligations.” ¶15 (footnote omitted).  The appellate court also held that Claassen did not waive the anti-deficiency protection for purchase money obligations by failing to participate in the trial.

Our legislature has expressly prohibited borrowers from agreeing to waive the protections of the anti-deficiency statutes in foreclosures on certain residential dwellings. In judicial foreclosures such as the one here, A.R.S. § 33–729(A) expressly prohibits such waivers by stating that if the proceeds of the execution sale “are insufficient to satisfy” the debt, it “may not otherwise be satisfied out of other property of the judgment debtor, notwithstanding any agreement to the contrary.” (Emphasis added.) In foreclosures under a deed of trust, such waivers are similarly prohibited. See A.R.S. § 33–814(G) (2014) (“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”).

¶19.

We thus hold that the statutory scheme does not permit the anti-deficiency protection of A.R.S. § 33–729(A) to be waived. The trial court erred in finding that Claassen waived those protections, and therefore erred in applying the law as set out above interpreting what constitutes “purchase money” funds as a matter of law. We reverse that determination as to accrued interest on the principal ($706,270.78), late fees ($158,132.46), and the $50,000 construction deposit. We, likewise, vacate the trial court’s award of attorneys’ fees and costs in the amount of $255,753.72 for reconsideration in light of our opinion.

¶22 (footnote omitted). The matter was remanded for a judgment consistent with the foregoing.

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