Stripping Liens in Bankruptcy: Can my debtor do this?The Arizona Supreme Court issued an opinion relating to the anti-deficiency statute, A.R.S. § 33-814(G). This was the second opinion in less than 30 days dealing with certain aspects of the anti-deficiency statute. The significance of this case is that it overruled a related case interpreting the anti-deficiency statute, and it further clarified the law.

The court accepted review of the case because cases involving the anti-deficiency statutes are creating reoccurring issues with statewide importance. The Supreme Court issued the opinion to give guidance to the trial courts on how to rule on these issues.
Wildwood Creek Ranch, LLC (“Borrower”) borrowed $260,200 from a lender (“Lender”) to construct a home on a vacant 2.26 acre lot. The loan was guaranteed by the Mr. and Mrs. Rudgear (the “Rudgears” or “Guarantors”). The loan was secured by a deed of trust. The Rudgears intended to build a home, but construction never started and the lot was undeveloped. The Borrower defaulted and the property was sold at a trustee’s sale for $31,100. The Lender then sued the borrowers for a deficiency.

The trial court judge granted summary judgment in favor of the Borrower/Guarantors because the Rudgears argued they “intended” to build and use their home, once it was completed, as their primary residence. Thus, the trial court granted the Rudgears anti-deficiency protection. The trial court relied on a M & I Marshall Ilsley Bank v. Mueller, 228 Ariz. 478, 268 P.3d 1135 (App 2011) a case that applied the anti-deficiency statute when the borrower “intended” to eventually occupy a partially constructed home.

The Lender appealed and the Court of Appeals reversed the trial court. The Court of Appeals held the anti-deficiency statute did not apply because the lot was vacant and never utilized for a dwelling. The Court of Appeals came to the correct conclusion, nonetheless, the Supreme Court took review of the case to clarify the statutory language “utilized for either a single one-family or single two-family dwelling”. The two key terms in this sentence the Supreme Court wanted to clarify are ‘utilized’ and ‘dwelling’.

The statute in question is A.R.S. 33-814(G) , which provides:

      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.

The court noted that the statute does not define a dwelling. It looked to prior decisions to get to the working definition of a dwelling. ‘We observed that the “principal element” in the varied definitions of “dwelling” is “the purpose or use of a building for human abode, meaning that the structure is wholly or partially occupied by persons lodging therein at night or intended for such use.”’ Wildwood, at ¶ 12. The structure must also be suitable for residential use. Id.

The Supreme Count went on to discuss the word ‘utilize’. In getting to a working definition of utilize, the court had to deal with the Mueller decision that emphasized the reliance on the borrower’s intent. With the Wildwood decision, the Supreme Court closed the door on the ‘intent’ theme that was created in Mueller. Rather the court looked at whether the residential structure was in a completed condition:

      To clarify, we reaffirm the distinction noted in Mid Kansas between property that is intended for eventual use as a dwelling and property utilized for a dwelling. The latter requires that a residential structure have been completed. Vacant property is not being utilized for a dwelling even if the borrower intends someday to construct and occupy a home there.

Wildwood, at ¶ 17.

The crux of the holding is that there must be a completed structure on the property suitable for dwelling purposes. Even if a homeowner has not moved into the completed residence they would still qualify for anti-deficiency protection under the court’s interpretation of the statute. “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.” Wildwood, at ¶ 18. To qualify for anti-deficiency protection ‘ . . . there must be a completed structure on the property suitable for dwelling purposes. And . . . even the homeowner who has not yet moved into the completed residence would be entitled to anti-deficiency protection . . .” Wildwood, at ¶ 17.

The Supreme Court in Wildwood is giving guidance to the lower courts by telling them to eliminate the borrower’s intentions from the equation. The message is clear, look to the ‘trust property’ and determine if a ‘dwelling’ has been constructed that is completed and suitable for dwelling purposes. If these conditions are met, even if the homeowner has not moved in, the anti-deficiency protections are going to be afforded the homeowner.

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