Arizona Appellate Court Discusses Deficiency Protection Following Judicial Foreclosure

Helvetica Servicing, Inc. v. Pasquan, 2012 WL 925566, ___P.3d.____ (Ariz. Ct App. Mar. 20, 2012)

This new opinion concerns the deficiency protection afforded a homeowner following judicial foreclosure, ARS 33-729, and applied it to refinancing a construction loan.  Carefully note the court’s rationale regarding the legislative intent and the policies behind deficiency protection for homeowners, because this rationale also holds for the policy behind the other deficiency protection statute following the non-judicial foreclosure of a deed of trust.  But also note paragraph 37 where the court indicates that for a commingled loan, it might be appropriate to allow a lender to pursue a deficiency judgment for amounts not used as purchase money (following a judicial foreclosure).  The court invites the Legislature to amend the statutory scheme if it disagrees with “our resolution of this admittedly murky issue.”

Anti-deficiency protection reflects a legislative policy decision to place the risk of inadequate security on lenders rather than borrowers. Id. at 103, 770 P.2d at 771. It is intended to discourage purchase money lenders from over-valuing real property by requiring them to look solely to the collateral for recovery in the event of foreclosure.

. . .

A change in the lender’s identity does not, standing alone, alter the nature of the underlying purchase money debt. To hold that refinancing a purchase money obligation with a new lender and executing a new deed of trust on the same property destroys anti-deficiency protection would contravene the legislative intent to “abolish the personal liability of persons who give trust deeds encumbering properties that fit within the statutory definition.” Bank One, 188 Ariz. at 249, 934 P.2d at 813 (citing Baker, 160 Ariz. at 104, 770 P.2d at 772). Moreover, it would be anomalous to conclude that an original lender who refinances an acquisition loan at a lower interest rate cannot pursue a deficiency judgment, as Bank One instructs, but a new lender who pays off that original loan in a refinancing transaction may do so.

…Like California, see Prunty, 112 Cal.Rptr. at 375, our anti-deficiency statutes allocate the risk of inadequate security to purchase money lenders, thereby discouraging overvaluation of the collateral. Additionally, as in California, “[i]f inadequacy of the security results, not from overvaluing, but from a decline in property values during a general or local depression, [the anti-deficiency statute] prevents the aggravation of the downturn that would result if defaulting purchasers were burdened with large personal liability.” Id.

 

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