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M&I Bank v. Mueller - 12/27/2011

Arizona Court of Appeals Division One Holds That A.R.S. § 33-814(G) Provides Anti-Deficiency Protection to Property Owners Whose Home is Under Construction at the Time of the Foreclosure and Trustee Sale So Long As the Owners Intended to Occupy the Home Upon Its Completion.


In 2005, the Muellers purchased a plot of vacant land and borrowed $444,000 from M&I Bank to construct a single-family home on the property for their own use.  To secure the loan, the Muellers executed a deed of trust with M&I.  Construction on the home began in March 2007, but several months later the Muellers discovered that the contractor was behind schedule and much of the construction was defective.  The Muellers asked M&I to advance loan disbursements to remedy the defects, but M&I did not disburse additional funds.  The Muellers abandoned the property and defaulted on the loan.

M&I foreclosed on the property in a trustee’s sale and then filed an action against the Muellers seeking to recover a deficiency judgment of $68,196.91, the difference between the amount the Muellers owed and the appraised value of the house.  The trial court dismissed M&I’s claim and found, as a matter of law, that the Muellers were entitled to anti-deficiency protection under A.R.S. § 33-814(G).  M&I appealed.

A.R.S.  § 33-814(G) states:

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.

M&I argued that because construction on the home was never finished, the property was never “utilized” as a single-family home.  In support, M&I relied upon Mid Kansas Federal Savings & Loan v. Dynamic Development Corporation, 167 Ariz. 122, 129, 804 P.2d 1310, 1317 (1991).  In Mid Kansas, the Supreme Court stated:

[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.  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. 

The Court of Appeals distinguished Mid Kansas because in that matter, the borrower was a corporation that never intended to occupy the property whereas the Muellers intended to live in the home upon its completion.  The court held that the basis for the Mid Kansas decision was not that the homes in that case were unfinished, but rather that the homebuilder would never have utilized the properties as single-family homes.  In addition, the court noted that this understanding of Mid Kansas comports with the primary purpose of Arizona’s anti-deficiency statute – to protect homeowners, not commercial builders.  The court affirmed the trial court’s finding that the Muellers were protected by A.R.S. § 33-814(G) from a deficiency judgment.     

Judge Irvine authored the opinion; Judges Timmer and Barker concurred.

Posted by: Christina Rubalcava

Posted On: 1/4/2012