Confusion has plagued the courts following the M&I Marshall and Ilsley Bank v. Mueller decision over whether the anti-deficiency statutes apply to vacant land. Prior to Mueller, 228 Ariz. 478 (App. 2011), everyone understood that Arizona’s anti-deficiency statutes were limited to properties that meet the following criteria:
- single family home or duplex;
- situated on 2½ acres or less; and
- actually utilized as a dwelling.
Following Mueller, the confusion revolves around the third requirement: whether the property was “utilized as a dwelling.” Common sense says that in order for the borrower to “utilize the property as a dwelling,” the property must actually contain a dwelling. So that would seem to rule out vacant land.
But in the M&I Bank v. Mueller decision, the trial Court (the Hon. Edward Burke) and the Court of Appeals surprised everyone and ruled that property can be “utilized as a dwelling” as long as the borrower proves that he “intended” to utilize the property as a dwelling.
Thus, the Mueller decision opened the door for borrowers’ attorneys to argue that the anti-deficiency statutes apply to even vacant land as long as the borrower signs an affidavit swearing that they intended to use the property as a dwelling.
Following Mueller, the key evidence in deficiency actions has centered on the borrower’s loan application which almost always requires the borrower to swear to their intent regarding occupancy of the property.
In an apparent moment of vindication for M&I Bank (BMO Harris is M&I Bank’s Canadian predecessor in interest). In the BMO Harris v. Wildwood case, that **** in a Court of Appeals clarified and confirmed that Arizona’s anti-deficiency statutes “do not apply to vacant land.” See BMO Harris v. Wildwood, [insert citation] (January 2014).
Importantly, the court was careful to limit its ruling to the specific facts of the Wildwood case. For example, in Wildwood, the property truly was vacant. There were no improvements or any construction that took place on the property. It was “vacant” throughout the term of the loan. See Wildwood at Paragraph 10. Further, although the borrowers in Wildwood swore in affidavits that they intended to build a home on the property to utilize as their dwelling, the clever bank submitted evidence showing that the borrowers in fact “owned three separate parcels, each of which they purportedly intended to use as their “primary residence.” Id. at Paragraph 5.
Regardless, the Trial Court found that no material evidence contradicted the borrowers’ affidavits and ruled in their favor because they intended to occupy the property as their primary residence notwithstanding that the property was vacant land.
In Wildwood, the Court of Appeals overruled the Trial Court and clarified that the anti-deficiency statutes “do not apply to vacant land.” Id. at Paragraph 10.
But in limiting the Court’s ruling to the limited facts of Wildwood, the Court of Appeals clarified that it was not overruling Mueller but that instead did not apply to the facts in this case because in Mueller “construction of the dwelling had commenced.” Thus, the Wildwood Court left open the door for applying the anti-deficiency statutes to cases where some construction or improvements had commenced on the property. As discussed by Judge Kessler in the concurring opinion, what level of construction is necessary is still unknown. For example, where will the Courts draw the line between the lack of any construction and an almost completed dwelling to determine if the borrower is protected by the anti-deficiency statutes? If the lot has been excavated does the anti-deficiency statute apply? If the foundation has been laid? If the framing has been completed?