The Arizona Court of Appeals (Division 1 in Maricopa County) just issued an opinion entitled Helvetica v. Pasquan, which addresses the scope of Arizona’s anti-deficiency protections in the judicial foreclosure (non-trustee’s sale) context.
The first issue the Court addressed is whether refinancing a purchase money loan forfeits a borrowers’ anti-deficiency protection, to the extent that the proceeds from the refinancing transaction were used to satisfy the underlying purchase money obligation. The Court held that refinancing alone does not destroy the purchase money status and the borrower does not lose the protections of Arizona’s remedial anti-deficiency protections.
The Court next addressed the open question of whether a loan that funds construction of a statutorily qualifying residence (as defined in A.R.S. Section 33-729(A)) is a purchase money obligation. The Court held that a construction loan qualifies as a purchase money obligation if: (1) the deed of trust securing the loan covers the land and the dwelling constructed on the land and the loan proceeds were in fact used to construct a residence that meets the size and use requirements set forth in A.R.S. Section 33-729(A).
Finally, the Court addressed an issue that has been hanging in the balance since 1997, when the same Court decided Bank One, Arizona v. Beauvais, which held that regardless of whether the subject workout note was an extension, renewal, or new obligation, it was a purchase money obligation and the borrower was protected by the anti-deficiency laws. However, Bank One did not address the propriety of segregating non-purchase money portions of the loan, as Bank One abandoned that argument in that case.
On this issue, the Court of Appeals held that loan proceeds used to construct a qualifying residence (as set forth in A.R.S. Section 33-729(A)) merit anti-deficiency protection under certain circumstances, but those sums disbursed in a loan transaction for non-purchase money purposes may be traced, segregated, and recovered in a deficiency action.
This decision now opens the door for lenders to pursue borrowers who took out money in a refinance and used it for purposes other than the purchase (or construction of a property on vacant land) of a home. While this decision is limited to judicial foreclosures, as opposed to the trustee’s sale context (which accounts for almost all foreclosure sales in Arizona), the logic would seem to apply to the trustee’s sale context, but it remains to be seen whether the courts will extend this ruling to the deed of trust statutes. Stay tuned as always.