In January, we won a huge court victory for one of our clients who was facing down a greater than $250,000 deficiency judgment arising in wake of foreclosure of their vacant residential lot. The court ruled they owed nothing!
Just before the recession hit, our clients had purchased a large and beautiful lot in Paradise Valley, intending to build a new residence upon it for the family to live in. It was not an investment property, and the clients had acquired a lot purchase loan from a large local bank. When the great recession hit, the clients were no longer able to afford the acquisition of a construction loan. In addition, the value of the lot had dropped precipitously. If that were not enough, the clients also suffered a spate of unemployment. The net result was that the clients could no longer afford the lot, which the bank promptly foreclosed.
Following the bank’s foreclosure of our clients’ lot, the bank declared there to be a large deficiency remaining after the trustee’s auction of the lot. In fact, the bank declared there to be a deficiency in excess of $250,000, which if upheld, would have forced our clients into bankruptcy where they would have lost their entire life’s savings. Luckily, our clients did not just capitulate to the bank’s demands, nor did they just run off to a bankruptcy lawyer to file bankruptcy. Instead, the clients hired McCarthy Law to try to negotiate with the bank and to defend against the bank’s deficiency lawsuit. Although our clients were willing to make a generous offer to the bank, which we did in fact convey, the bank wanted essentially 100% of the deficiency amount that it alleged existed. So, with no then-present ability to settle the case, we commenced defense.
The primary crux of our defense was to apply a very recent decision from the Arizona Court of Appeals, a case called M and I Marshall & Isley Bank vs. Mueller. Under the Mueller case, the Court of Appeals clarified the definition of property that would qualify for protection of Arizona’s anti-deficiency statute. Essentially, the anti-deficiency statute says that when residential property is foreclosed, the foreclosure is the bank’s sole remedy, and even if the bank is not made financially whole in the foreclosure, the bank could never go back to its customer for additional financial recompense. Put another way, the trustee’s sale on residential property is the bank’s remedy, and the bank is entitled to nothing further.
Until Mueller, it was generally assumed that the anti-deficiency statute applied only to actually-occupied residential property. However, Mueller clarified that occupancy was not the standard that courts would use in determining whether or not the anti-deficiency statute applied. Rather, what Mueller decided was that the parties’ intention vis-a-vis the property governed. If the parties intended to use the property as residential property, that was all that mattered; occupancy was not the hallmark. Putting this in context, the property owner in Mueller had begun construction of a residence. However due to a variety of circumstances, the Muellers were never able to complete construction on their residence, hence they never took up occupancy within it. The bank foreclosed and pursued a deficiency judgment, arguing that the anti-deficiency statute required actual occupancy. The Muellers won at the Superior Court, and the bank appealed. In the middle of 2012, the Court of Appeals rendered its decision disagreeing with the bank and affirming the Superior Court’s initial decision applying the anti-deficiency statute to unoccupied residential property.
So, armed with Mueller and substantially similar facts, our firm filed a motion for summary judgment. Our clients’ opponents also filed for summary judgment, arguing that our situation was different from Mueller in that our clients hadn’t even begun construction on the lot, whereas the lot owners in Mueller had nearly completed their home. Following extensive and well-written pleadings by both sides, the court took our clients case under advisement. In the interim (and simply by lucky coincidence), the Mueller case had actually gone up for further appeal to the Arizona Supreme Court. However, at the end of 2012, the Arizona Supreme Court rejected the opportunity to review the Court of Appeals decision, thereby cementing Mueller as good and reliable law in Arizona. So, armed with substantially similar facts, and the Mueller standard that the parties’ intention governs the anti-deficiency statute, we received a ruling from the Arizona Superior Court in late January 2013, wherein the court ruled in our clients’ favor. We had therefore saved our clients from a potential horrendous judgment and from the need to file bankruptcy.
Reflecting on this victory, we are still mystified that the bank rejected our clients’ cash offers to settle. In the end, our client ended up owing nothing! Tears expressed the words that couldn’t be found. A family saved from certain financial ruin had a happy ending to a horrible chapter now closed in their lives.
So, if there is a moral to this story (possibly two morals), it would be that banks don’t always act in their own best interests, and people faced with litigation and debt should never be too quick just to throw in the towel. Help and hope are available.
Kevin Fallon McCarthy
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