AZ Appeals Court: Intent To Occupy Home As Residence Where Homeowner Never Actually Moves In Enough To Qualify For Protection Against Deficiency Jdgmt

The Arizona Republic reports:

• A would-be homeowner has the same right to walk away from a mortgage as someone who already is living in the house, the Arizona Court of Appeals has ruled.



• The judges acknowledged that laws which bar lenders from pursuing borrowers for the difference between what the property is worth and the amount owed is reserved under state law for owner-occupied premises. And in this case the borrowers never actually moved in.



• But Judge Patrick Irvine, writing for the unanimous court, said it is clear that Trevis and Lisa Mueller did intend to move in.



• It was only when construction problems developed, Irvine said, that the couple decided to walk away from the home and the mortgage. That , Irvine said, gives them the protections of the law.



• Court records show the Muellers purchased a vacant plot in 2005. The following year they borrowed $444,000 from M & I Marshall & Ilsley Bank to build a single-family home on the property for their own use. Several months later, the Muellers said the contractor was behind schedule and that much of the construction was defective.



• The Muellers notified the bank they would need advances on the loan disbursements to fix the defects. When the bank did not agree, the couple abandoned the property and defaulted on the mortgage. After foreclosing on the property, the bank sought to recover $68,197, the difference between the amount the couple still owed and the appraised value of the home before the foreclosure sale. When a trial judge threw out the bank's lawsuit, its lawyers appealed.



• Arizona law precludes lenders from going after a deficiency if the property is 2½ acres or less and is limited to and utilized for either one-family or single two-family dwelling. Based on that, the bank said the protection does not apply to the Muellers because a home was never built on the property and, therefore, it was never used as a single-family home.



• To back that argument, the bank's attorneys pointed to a 1991 state Supreme Court ruling which said the anti-deficiency protection does not apply to companies building homes. Irvine said that case is different because that borrower was a corporation that never intended to occupy the property.



• "The Muellers intended to live in the single-family home upon its completion," the judge said. "The primary purpose of Arizona's anti-deficiency statutes is to protect 'homeowners' from deficiency judgments -- not to afford protection to commercial homebuilders."



• To require actual occupancy to get the legal protections would create other problems, Irvine said. "An individual facing the possibility of foreclosure may camp out in the unfinished home, claiming to be 'utilizing' the dwelling," the judge wrote. "Additionally, a person who lives in a new home for a day would be entitled to the anti-deficiency protection, whereas someone who had not yet moved into a newly constructed home would not."

Source: Court: Statute also protects would-be owner (Appellate ruling says actual occupancy of home is not necessary).

For the court ruling, see M & I Bank v. Mueller, 1 CA-CV 10-0804 (Ariz. App. Div. 1, Dept. A, December 27, 2011).