On March 20th the Arizona Court of Appeals filed an opinion and what sure appeared like an appeal of its own in the case of HELVETICA SERVICING, INC. vs. PASQUAN, Division One, Department C (2012 WL 925566, March 20, 2012). The Court of Appeals ruled that sometimes a lender can have a deficiency judgment following a judicial foreclosure, if and to the extent it can be proven that some of the funds advanced that were not repaid went to items that were not to retire proceeds of purchase money lending by a previous lender. Pasquan’s borrowing history was complicated but ultimately the couple’s borrowing was used in part to pay taxes, utilities, new home improvements and landscaping, among other things.
The Court of Appeals asked the fundamental question whether in a refinancing the non-purchase money portion of a loan can be segregated so as to permit the foreclosing lender to seek recovery of these amounts if there is a deficiency following the auction of the property. The Court explained that there are policy reasons to disallow deficiency actions against lenders, in general. Those reasons include discouraging lender over-valuation of property, preventing financial ruin and “protecting refinancing transactions.” (Would that we could advance the policy to discourage over-valuations of potential borrowers’ capacity to repay – but I digress.)
The Court of Appeals ultimately held that for the policy reasons cited above, the risk of inadequate security should fall on purchase money lenders, and that purchase money loans will include any loan, even a construction loan, in which a residence falls within the statutory boundaries of A.R.S. Sec. 33-729(A) and the deed of trust securing the loan covers the land and the dwelling unit on it. However, the Court held that in a judicial foreclosure, the portion of the loan proceeds not used in construction or refinancing of the original purchase money loan may be segregated and therefore the lender may “pursue a deficiency judgment for the latter amounts.”
Well, I’m having trouble getting my head around that decision. There’s only one total sum due under a note, and although its use may be allocated to different functions, there’s only one monthly (usually) payment made. So, if there’s a borrower default, which dollars didn’t get repaid – the purchase money dollars or the “non purchase money sums?” Does one set of dollars get paid first? Or do you just do a division problem and say, “well, since a quarter of your loan didn’t go to purchase money purposes, and then you defaulted when you still owed half the total loan amount, then the lender can pursue you for one-eighth of the amount that is not recovered via the sheriff’s sale?”
That makes my head hurt, so I’m guessing it was no accident that this is the last sentence of the opinion: “If the legislature disagrees with our resolution of this admittedly murky issue, we presume it will amend the existing statutory scheme to make clear its intentions.” So, if A.R.S. Sec. 33-729 didn’t make clear that the lender takes nothing by way of deficiency, to the Court’s plea for clarity, I add “amen.”