Helvetica Servicing v. Pasquan - Recent Case Law Affecting Arizona’s Anti-Deficiency Statutes - One Step Forward, One Step Back
In its recent decision in Helvetica Servicing v. Pasquan, the Arizona Court of Appeals sought to address two questions that have lingered since the Court's decision in Bank One v. Beauvais. First, the Court looked at whether construction loans used to build a residence are purchase money obligations entitled to anti-deficiency protection under A.R.S. §33-729(A). The Court answered this question in the affirmative. Specially, the Court held a construction loan qualifies as a purchase money obligation if: (1) the deed of trust securing the loan covers the land and the dwelling; and (2) the loan proceeds were used to construct a single family residence or duplex on 2.5 acres or less which is to be utilized as a residence. During the real estate boom, there were lenders freely providing construction financing. However, when the market crashed, many of the lenders ceased making draws on the construction loans, which precluded the borrowers from completing the residence. There was concern that the anti-deficiency statutes would not apply given that the properties had never been utilized as a residence. It is clear from the Helvetica decision that this is not the case.
Next the Court determined whether a non-purchase money loan funds included in a purchase money transaction may be traced and segregated, according anti-deficiency protection to only the purchase money amounts. The Court ultimately held that "to the extent a judicially foreclosed mortgage includes both purchase money and non-purchase money sums, a lender may pursue a deficiency judgment for the latter amounts." In the end the Court invited the Arizona legislative to amend the existing statutes if this was not consistent with the legislature's intent. The second part of the Court's holding is important to those who utilized a home equity line of credit to in part pay off and existing second mortgage, and the remainder to pay off auto loans, credit cards, medical bills or other payments that are clearly not purchase money in nature. It is also relevant to those who utilized the funds received from a cash out refinance for similar purposes.
If you have any questions or concerns as to how this will affect your mortgage, please don't hesitate to contact us to schedule an appointment.