Being Sued by Your Lender for a Deficiency?  You May Have Defenses.

As foreclosures have flooded the Arizona housing market, we have started noticing a new trend.  Banks and lenders are now suing property owners for deficiencies.  A deficiency can occur when the home sells at the trustee's sale or foreclosure for less than what is owed on the loan.  In some cases, the deficiency could be hundreds of thousands or even millions of dollars.

The lender can only sue the homeowner if the homeowner is not protected by Arizona's anti-deficiency statutes.  In order to be protected, the property must meet all of the following criteria: 1) a single or dual family residence; 2) 2.5 acres or less; and 3) it must be utilized as a dwelling.  A.R.S. § 33-814(G).  The requirement that it be utilized as a dwelling is the most open to interpretation and is a matter of degree.  You may have a defense to a deficiency lawsuit even if the home was not your primary residence or even if it was rented to a tenant.  If you don't meet the 3-part test above, and the lender completes a trustee's sale of your home, the lender must sue for a deficiency judgment within 90 days.  If the lender fails to do so, you may have a defense to the lawsuit on that basis alone.

Sometimes a lender will decide not to pursue a foreclosure and instead choose to sue on the promissory note.  This is more common for the junior lien holders, such as a HELOC.  However, you will have a defense to this type of lawsuit if you meet the 3-part test above and the loan was for purchase money - money you used to acquire the property.  Whether a loan qualifies as a "purchase money loan" under Arizona law is a gray area.  Since there have not been a lot of cases in Arizona that have gone up to the court of appeals, we don't know the exact limits of what the courts consider a "purchase money loan". 

If the homeowner has refinanced the property, but not taken cash out during the refinance, then the homeowner should still be protected from a lawsuit by the lender.  See Bank One, Arizona, N.A. v. Beauvais, 188 Ariz. 245 (1997).  But if the homeowner took cash out during the refinance, then the homeowner may have some exposure in a lawsuit by the lender.  As the case law in Arizona continues to develop, we should get a more definitive answer to this question.

There are many potential defenses to a deficiency lawsuit or a lawsuit by the lender on a promissory note.  In fact, there may even be defenses to the actual trustee's sale itself if it was legally defective in some way.  If you have one of the defenses discussed above, you may be able to get the lender's lawsuit dismissed and the bank may be ordered to pay your costs in obtaining the dismissal.  This article provides general legal information.  The only way to know if you have a viable defense is to consult with a licensed Arizona attorney.  Andrew D. Lynch is the founder of The Lynch Law Firm, LLC, a real estate and business litigation firm in Scottsdale.  Ph: (602) 274-6369; http://www.lynchlegalfirm.com