M&I v. Mueller- The Court of Appeals Confirms the Legislatures Intent to Protect Consumers

A lender's ability to maintain a "deficiency" action in Arizona may be more limited than previously thought. Very generally, the ability to maintain a deficiency action is governed by several Arizona statutes and the case law interpreting those statutes. One such statute is A.R.S. § 33-814(G), which prohibits a deficiency action following a trustee's sale if the following elements are satisfied: (1) the property is situated on 2.5 acres or less; and (2) the property is “limited to and utilized for" a single-family or duplex residential dwelling. See A.R.S. § 33-814(G).

Many attorneys have long believed that the "utilized for" element of A.R.S. § 33-814(G) was satisfied only when the single-family or duplex residential dwelling involved in the trustee's sale was completed and utilized in some fashion. In fact, in order to satisfy this element when a residential dwelling was not quite ready to be utilized (like in the case of ongoing construction of the dwelling), many attorneys actually advised their borrower-clients to throw in a sleeping bag, stay overnight, and take pictures. Due to a recent interpretation by the Court of Appeals of Arizona, this practice may no longer be necessary.

In M&I Marshall & Isley Bank v. Mueller, ___ P.3d ___, WL 6778743 (App. 2011), the Court of Appeals of Arizona held that an unfinished property may qualify for anti-deficiency protection, provided that the borrower intended to utilize it as a residential dwelling once completed. In other words, as long as a borrower can prove that it intended to utilize an unfinished property as a single family or duplex residential dwelling, the lender may be prohibited from pursuing a deficiency following a trustee's sale. This recent decision by the Court of Appeals of Arizona appears to have been driven largely by the legislative intent behind the Arizona anti-deficiency statutes, which was to protect homeowners from deficiency judgments.

The impact of the Mueller decision may be somewhat limited, as the number of deficiency suits following the trustee's sales of unfinished dwellings represent a rather small subset of all deficiency suits. However, given the strong consumer-protection based rationale for the ruling, further expansion of Arizona anti-deficiency protection may be imminent.

*****The content of this discussion is NOT intended to address every possible scenario and should not be used as a substitute for legal advice.*****