Helvetica V: The Anti-Deficiency Statute Strikes Back
By Anne Munsil Courchaine September 14, 2020 Real Estate
"Good things come to those who wait." At least that is what litigant Michael Pasquan hopes in the thirteen-year-old litigation following the Supreme Court's recent decision in Helvetica Servicing, Inc. v. Michael S. Paquan . This is the fifth appellate decision stemming from a single foreclosure action dating back to the 2007 housing crash. Now the thirteen-year-old case is going back to the trial court for factual findings. Pasquan, the borrower, received a $3.4 million loan to finance vast improvements to his Paradise Valley home. He eventually defaulted on the loan, and ever since the lender Helvetica has been trying to secure a deficiency judgment against him personally for the significant balance still owed after the foreclosure sale.
The legal issues, and there have been many, revolve around what type of loan qualifies for anti-deficiency protection. Arizona's anti-deficiency statutes in A.R.S. §§ 33-729(A); 33-814(G) protect residential borrowers from being subject to a deficiency judgment in the event that they default on the loan, as long as the loan is secured by a residential property of "(1) a property of two-and-a-half acres or less and (2) "limited to and utilized for either a single one-family or a single two-family dwelling." The Helvetica line of cases has gone a long way in fleshing out what loans can qualify. In the first Court of Appeals decision, which the Arizona Supreme Court confirmed in Helvetica V, loans used to construct a residence by an individual ("construction loans") were brought under the umbrella of anti-deficiency protection. But what pushed this case to the Arizona Supreme Court was a need to explain the difference between a construction loan and a home improvement loan. That is where the Court of Appeals in Helvetica IV erred.
The Court of Appeals declared that a construction loan only qualified for anti-deficiency protection if the house was "built from scratch." That relied on an old Arizona Supreme Court case, Sw. Sav. & Loan Ass'n v. Ludi, which mentioned only that home improvement loans did not qualify for the protection, but never described what a home improvement loan was. Sw. Sav. & Loan Ass'n v. Ludi, 122 Ariz. 226, 228, 594 P.2d 92, 94 (1979). What the Court of Appeals overlooked was that the determination of an individual loan's character is a factual determination for a trial court. The legal principle was already sufficiently established: construction loans gain protection, home improvement loans do not. There was no need to create a new standard that changed the essential character of a construction loan. Additionally, the "built from scratch" standard used by the Court of Appeals in Helvetica IV would have cut off a significant number of homeowners who would have otherwise qualified for anti-deficiency protection, based on the statute's intent, which "reflects a legislative policy decision to place the risk of inadequate security on lenders rather than borrowers."
But without a bright-line rule, the Arizona Supreme Court needed to provide guidance on what parties and judges should look to when characterizing a loan. As the Court noted, "there is a substantial grey area between a loan used to finance a newly constructed, built from scratch home and a loan used to remodel the kitchen." Enter the totality of circumstances test. The Arizona Supreme Court laid out five non-exclusive factors to differentiate a construction loan from a home improvement loan: "(1) whether there was a complete or substantially complete demolition of an existing structure and a new building constructed in its place; (2) the intent of the parties when executing the loan documents; (3) whether the structure was inhabitable or inhabited during construction; (4) whether the structure was largely preserved and improved or substantially expanded; and (5) whether the project is characterized as "home improvement" or "construction" in the loan documents and in the permits or other official documents."
Ultimately, the Court remanded the case to the trial court to rule on these factors. The takeaway for lenders and borrowers, is that the character of the loan matters. Both parties should be as clear as possible throughout the lending and construction process to define whether the loan is being used for a complete remodel, which would be protected under the anti-deficiency statute, and a simply home improvement loan, which is not protected in the event of default.
If you are a lender or a borrower facing issues involving judicial or non-judicial foreclosure, deficiency judgments, home improvement or construction loans, the Attorneys at Provident Law® are here to help. We are experienced in all aspects of financing and real estate transactions, from purchase contracts, mortgages, deeds of trust, to non-judicial and judicial foreclosures. Contact Ms. Courchaine today at a.courchaine@providentlawyers.com.
Anne Courchaine is an Associate Attorney with Provident Law®, where she practices real estate, commercial litigation, and family law. She can be reached at a.courchaine@providentlawyers.com or 480-388-3343.