A Person Owning a Fractional Interest in a Vacation Home is Protected by Arizona’s Anti-deficiency Statute

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In Independent Mortgage v. Alaburda, the Arizona Court of Appeals held that Arizona’s anti-deficiency statute, A.R.S. § 33-814(G), precluded a lender from suing its borrowers for a deficiency after foreclosing on the borrowers’ fractional interest in a vacation home.  230 Ariz. 181, 281 P.3d 1049 (Ct. App. 2012).

If a lender conducts a trustee’s sale of “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,” then A.R.S. § 33-814(G) bars a lender from suing a borrower to recover any difference between the value of the property and the amount of debt owed (i.e., the “deficiency”).  This statute, generally referred to as the anti-deficiency statute, was designed “to protect consumers from financial ruin and place the risk of inadequate security on lenders rather than borrowers.”  Independent Mortgage, 230 Ariz. at 183, 281 P.3d at 1051.

In Independent Mortgage, the Alaburdas purchased a 1/10th interest in a vacation home in Sedona, AZ.  To purchase the interest, the Alaburdas obtained a loan from Independent Mortgage and secured the loan with a deed of trust against their fractional interest in the home.  The Alaburdas could vacation at the home only 28 days a year, and certain restrictions prevented them from altering the home, the furnishings, or the appliances within the home. 

In December 2008, the Alaburdas defaulted and Independent Mortgage foreclosed.  Following the foreclosure sale, Independent Mortgage filed suit against the Alaburdas claiming that the value of the 1/10th interest was less than the debt and, therefore, the Alaburdas still owed Independent Mortgage a deficiency of $57,884. 

The sole issue on appeal was whether the 1/10th interest in the vacation home constituted a “dwelling” within the meaning of A.R.S. § 33-814(G).  Independent Mortgage argued for a narrow definition of “dwelling” premised upon continuous and permanent use of the home, and argued that the fractional interest (as opposed to complete ownership of the property) excepted the Alaburdas’ interest from the anti-deficiency statute.  The Court of Appeals rejected both arguments.

First, relying upon N. Arizona Properties v. Pinetop Properties Group, 151 Ariz. 9, 725 P.2d 501 (Ct. App. 1986) and MidKansas Fed’l Savings & Loan Ass’n v. Dynamic Development Corp., 167 Ariz. 122, 804 P.2d 1310 (1991), the Court of Appeals rejected the narrow definition of “dwelling” proposed by Independent Mortgage.  Instead, the Court of Appeals concluded that a “dwelling” includes any building that is used (even occasionally) as an abode. 

Second, the Court of Appeals relied upon A.R.S. § 33-801(9) to conclude that “trust property” includes any interest in real property, including fractional interests.  Thus, the Alaburdas’ 1/10th interest in the vacation home qualified for protection under the anti-deficiency statute.

The holding seems generally consistent with prior case law and the deed of trust statute, but is significant in that it expands the term “dwelling” to include even very limited interests in a foreclosed property so long as the property is, or has been, used as a human abode.