In a new decision issued on December 27, 2011, the Arizona Court of Appeals held that Arizona's anti-deficiency statute applies to debtors who purchase vacant land with the intent to reside on the property upon completion of construction of a home even if they do not complete construction or actually occupy the property.

In M&I Marshall & Ilsley Bank v. Mueller, 1 CA-CV 10-0804, the debtors purchased a vacant lot on which they intended to construct a single-family home. The debtors borrowed approximately $440,000 from M&I Bank to finance the construction. Many months into the construction the debtors experienced construction delays. The debtors defaulted on the note and M&I conducted a non-judicial foreclosure on the property. After foreclosure, M&I sued the debtors for the resulting deficiency. The trial court held that the debtors were entitled to protection under Arizona's anti-deficiency statute.

This seemingly is a change in Arizona law. The Arizona Court of Appeals distinguished its ruling from the twenty year old Arizona Supreme Court holding in Mid Kansas Federal Savings & Loan Association of Wichita v. Dynamic Development Corp., 167 Ariz. 122, 129, 804 P.2d 1310, 1317 (1991). In the Mid-Kansas case, a commercial builder sought protection under the anti-deficiency statute after defaulting on a loan on partially constructed homes. The Arizona Supreme Court held that the anti-deficiency statute did not protect the debtor in Mid Kansas. The court specifically stated that debtors are not entitled to the protections of the anti-deficiency statute where property cannot be utilized as a dwelling, is unfinished, has never been lived in, and the owner has no intent to ever occupy the property...

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