A Non-Purchase Money Second Deed of Trust is Not Protected by Arizona’s Anti-deficiency Statute

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Arizona anti-deficiency laws do not prohibit a non-purchase money lender from suing on its note after foreclosure by a senior lender.  In Wells Fargo Bank, N.A. v. Brewer, No. 1CA-CV 12-0383 (Ariz. Ct. App. May 21, 2013 unpublished), the Arizona Court of Appeals held that Arizona’s anti-deficiency statute, A.R.S. § 33-814, did not prevent Wells Fargo from suing on its note after a senior lender foreclosed on the borrowers’ multi-million dollar home.

In 2007, Wells Fargo agreed to lend the Brewers up to $1,000,000 and secured the loan with a second position deed of trust recorded against the Brewers’ home.  Before Wells Fargo obtained its lien, however, a senior lien from a different lender had been recorded against the same property.  Wells Fargo’s loan documents did not restrict the Brewers from using the funds in any particular manner.  In fact, the record revealed that the home was complete and that it neither required repairs nor maintenance at the time Wells Fargo made its loan.

Between 2007 and 2010, the value of the home plummeted and the Brewers defaulted on their loans to both lenders.  The senior lender foreclosed and recovered the property.  The next month, Wells Fargo sued the Brewers to recover under its note. 

The Brewers argued that Wells Fargo’s lawsuit had no basis because Helvitica Servicing, Inc. v. Pasquan and Bank One, Arizona v. Beauvais extended the protections of A.R.S. § 33-814 to second position loans like Wells Fargo’s loan.  Generally, A.R.S. § 33-814 prevents lenders secured by loans against an individual’s residence from suing to recover anything beyond the value of the borrower’s home.  The Court of Appeals distinguished both cases and rejected the Brewers’ arguments.

In Helvitica, the Court of Appeals held that A.R.S. § 33-814 barred a construction lender from suing to recover a deficiency because the borrower intended to ultimately reside in the home that was constructed using the loan.  The Brewers argued that the principles of Helvitica applied because they used some of the proceeds of the Wells Fargo loan for landscaping.  The Court of Appeals disagreed, finding that: (i) there is a significant difference between new construction financing versus remodeling, and (ii) nothing in the record established that the Brewers used the loan for any construction.

Further, in Bank One, the Court of Appeals held that a loan that refinanced a purchase money loan retained the same character of the original purchase money loan such that a replacement lender is barred from suing for a deficiency if the original lender would have been barred.  Like Helvitica, the Court of Appeals determined that Bank One did not apply to the present action, distinguishing that there was no evidence in the record showing that Wells Fargo’s loan refinanced any loan. 

Thus, the Court of Appeals affirmed the entry of judgment in favor of Wells Fargo, noting that notwithstanding A.R.S. § 33-814, “a lender who holds a deed of trust as security for a loan may sue on the note as long as the proceeds of the loan were not used as purchase money.” 

The Court of Appeals recent holding in Brewer is significant given the courts’ recent expansion of A.R.S. § 33-814 to houses and properties that are on the fringe of the statutory definition of a protected “dwelling.”  The Brewer case cuts against this recent trend, and confirms that a non-purchase money lender can sue on a note even if the note is secured by a lien against an individual’s personal residence.