Stinson Leonard Street Attorneys Earn Supreme Court Victory for BMO Harris Bank

Press Release

Stinson Leonard Street attorneys Jeffrey Goulder, James Holland, Jr. and Stefan Palys recently won a decision at the Arizona Supreme Court on behalf of long-time clients BMO Harris Bank that altered the way in which Arizona’s post-foreclosure anti-deficiency statute is applied.

The Supreme Court found that the statute does not bar a deficiency judgment against the owner of residential real property unless the house on the property has been completed. The case is BMO Harris Bank, N.A. v. Wildwood Creek Ranch, LLC.

Wildwood is important both to owner-occupied home loans and also to residential spec construction loans. Previously, a home owner or spec builder was protected from a deficiency judgment as soon as construction began on a house. Based on the Wildwood opinion, however, the borrower is exposed to a deficiency claim until the house is complete.

The owners of Wildwood Creek Ranch, LLC, borrowed money to finance construction of a spec home on a vacant lot. The loan was secured by a deed of trust. But the home was never built, and the property remained undeveloped. Wildwood later defaulted on its loan, and BMO foreclosed on the property.

BMO subsequently sued Wildwood and the guarantors for the deficiency. Relying on M&I Marshall & Ilsley Bank v. Mueller, the trial court granted summary judgment in favor of the defendants. The court found that the owners intended to use the property for a single-family residence and therefore qualified for anti-deficiency protection, even though construction of a house had not yet commenced.

In the Wildwood decision, the Supreme Court over-ruled Mueller, and concluded the anti-deficiency statute does not bar a deficiency judgment until the house is complete regardless of the intent of the borrower.

According to Goulder, “The Mueller decision greatly increased the risk of loss for lenders because a borrower was protected from a deficiency from the moment construction commenced. Consequently, Mueller encouraged speculation on land values and allowed a borrower to walk away from a loan without risk of a deficiency if the market deteriorated. Wildwood changes the analysis and leaves the risk of a market downturn on the borrower at least until the house is complete.”

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