Changes in the Anti-Deficiency Statutes and Case Law


Thomas A. Stoops
Stoops, Denious, Wilson & Murray, PLC


House Bill 2018 relating to deeds of trust and mortgages specifies changes to the anti-deficiency protections for consumers which substantially narrow those protections. As of December 31, 2014, the anti-deficiency provisions of A.R.S. §§ 33-729 (mortgages) and 33-814 (deeds of trust) applicable to single-family or two-family dwellings are modified. For mortgages or deeds of trust the anti-deficiency provisions do not apply in three circumstances: 1) where the mortgaged or trust property is 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 mortgage or deed of trust given to secure payment of a loan for construction of a dwelling on the property for sale to another; 2) trust property that contains a dwelling that was never substantially completed; and 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. The statutes go on to define a dwelling as substantially completed if either of the following occurs: 1) the final inspection is completed, if required by the governmental body that issued the building permit for the dwelling; 2) if final inspection is not required by the government body that issued the building permit; and 3) the dwelling has been completed in all material respects as prescribed in the applicable ordinances and regulations of the government body that issued the building permit for the dwelling.

The primary significance of this change with regard to mortgages and deeds of trust as far as modification of the protections for consumers is that if a consumer takes out a construction loan in the course of building a new home, and for whatever reason the structure is not completed, it is the consumer that bears the risk of loss. There are two circumstances in which this would come into play. First, where the mortgaged or trust property was either incomplete or for some reason failed to pass final inspection, and the second, where the property is completed but something delays or prevents the dwelling from being yet utilized. There are many circumstances in which this might occur in the construction of a new home. Certainly as of December 31, 2014, it makes the purchase of an existing single-family dwelling far less risky for the consumer than attempting to build a custom home or even arrange construction financing for a builder in a subdivision for a house to be built in the future.

While this statute specifically applies only to mortgages and deeds of trust originated after December 31, 2014, a recent supreme court case holds that even mortgages and deeds of trust obtained prior to the effective date of these legislative changes will be subject to at least some of the same increased risks for the consumer.
The Arizona Supreme Court in the case of BMO Harris Bank, N.A., as Successor to M&I Marshall & Ilsley Bank v. Wildwood Creek Ranch, LLC; Shaun F. Rudgear and Kristina B. Rudgear, 234 Ariz. 100, 317 P.3d 641 (App. 2014), held that the Arizona residential anti-deficiency statute A.R.S. § 33-814(G) applies to certain property utilized for a dwelling, and held that the statute does not bar deficiency judgment against the owner of vacant property. For the purposes of A.R.S. § 33-814(G) to apply, a dwelling must have been completed. The court did not address the issue of a completed dwelling which had not been “utilized.” The facts of the case were that the Rudgears, through their LLC, Wildwood Creek Ranch, borrowed $260,200.00 to fund the construction of a home on a vacant lot of 2.26 acres. The construction of the home never began and the lot remained undeveloped. BMO Harris sued for a deficiency and the Rudgears defended, citing the case of M&I Marshall & Ilsley Bank v. Mueller, 228 Ariz. 478, 268 P.3d 1135 (App. 2011), which had applied the anti-deficiency statute when the borrower intended to eventually occupy a partially constructed home on the property. The superior court agreed with the Rudgears, finding that the Rudgears intended to use the property for a single-family residence and thus qualified for the anti-deficiency protection.

The supreme court in reviewing the anti-deficiency provisions of A.R.S. § 33-814(G) stated, “By its terms, the statute applies only to property that is utilized for either a single one-family or single two-family dwelling.” The statute does not define dwelling.

In reviewing the statute, the court cited to the Mid Kansas case, noting that in the Mid Kansas case where liability was found the property was not utilized for a dwelling. In that case, the court stated, “We hold that the commercial residential properties held by the mortgagor for construction and eventual resale as dwellings are not within the definition of property ‘limited to’ and ‘utilized for’ single-family dwellings.” The court noted that 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. The supreme court also noted that the lower court’s comments in Mid Kansas regarding the role of intent were imprecise and have caused confusion, stating, “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.” The court went on to state, “Under these principles, the Rudgears are not entitled to § 33-814(G)’s anti-deficiency protection: the trust property remained undeveloped and a dwelling was never completed.” The court noted that this conclusion conflicts with the language in the Mueller case, stating, “Mueller’s emphasis on intent arguably would extend anti-deficiency protection to owners of a vacant lot so long as they intend to build and eventually live in a residence.”
Based on the statutory changes which are now augmented by this supreme court case, it is clear that the risks to consumers in taking out a loan for the purpose of constructing a new residence have increased substantially. It has always been true that a consumer who puts his money at risk for the construction of a new home is taking a substantial risk. The course of construction of homes can be subject to a variety of unexpected obstacles, including defective construction, unexpected delays, cost overruns, and even insolvency of the builder. Under the new statutes and coupled with the new case law, the consumer would be responsible to the lender for the full amount of the debt even if the consumer did not get the house he paid for. Professionals advising such consumers should make these risks clear.


Thomas Stoops is the founder and Managing Member of the firm Stoops, Denious, Wilson & Murray, P.L.C and a co-founder of the Arizona Risk Reduction Institute. Thomas is a Certified Real Estate Specialist and is a former prosecutor with the Financial Fraud Division of the Arizona Attorney General’s Office. Thomas can be reached at or at (602) 274-7700.