July 20, 2009

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New Anti-Deficiency Law in Arizona

Arizona Senate Bill 1271

On July 10, 2009, Governor Jan Brewer signed a new anti-deficiency law that will apply to lenders' deficiency actions brought after completion of a trustee's sale under a deed of trust. The new law will become effective September 30, 2009.

Currently, a lender cannot recover a deficiency following a trustee's sale if the trust property consists of two and one-half acres or less and is limited to and utilized for either a single one-family or single two-family dwelling. This law has been interpreted to extend protection to investors and developers who own such property, even if the property is not used as anyone's permanent residence.

The new anti-deficiency law will limit a borrower/guarantor's ability to seek the protection of the anti-deficiency statute by inserting two additional conditions: 1) a certificate of occupancy must have been issued for the property, and 2) the trustors themselves must have utilized the property as a one or two family home for at least six consecutive months. Importantly for lenders, it is the trustor who must prove that both of these new conditions have been met.

It appears that the new law will allow lenders to pursue a deficiency after completion of trustee's sales of investment properties, rental homes, and spec homes that were never occupied by the trustor. Lenders will also be able to seek a deficiency after trustee's sales of partially completed homes that have not yet been issued a certificate of occupancy.

The new anti-deficiency law does not contain language that limits its application to deficiency actions brought under loans entered into, or trustee's sale started, after September 30, 2009. It is therefore possible that the new requirements will apply to all deficiency actions arising from trustee's sales completed after September 30, 2009, regardless of when the loan transaction or trustee's sale was initiated. There are several additional uncertainties that arise from the enactment of the new law. For questions regarding the impact and application of the new anti-deficiency legislation, please contact a member of our Bankruptcy, Creditors' Rights, and Real Estate Lending group.

John J. Fries
jfries@rcalaw.com | 602) 440-4819

Alexandra E. Hicks

David J. Itzkowitz

Scott Jenkins, Jr.

James D. O'Neil
joneil@rcalaw.com | (602) 440-4805

Andrea M. Palmer

Michael P. Ripp
mripp@rcalaw.com | (602) 440-4823

Melissa Schmucker

Allison Nicole Weyer

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