Mid Kansas Federal Sav. and Loan Ass'n of Wichita v. Dynamic Development Corp.

• Decision Date: 02 November 1989
• Docket Number: CA-CV
• Citation: Mid Kansas Federal Sav. and Loan Ass'n of Wichita v. Dynamic Development Corp., 787 P.2d 132, 163 Ariz. 233 (Ariz. App. 1989)
• Parties: MID KANSAS FEDERAL SAVINGS AND LOAN ASSOCIATION OF WICHITA, a corporation organized and existing under the laws of the United States of America, Plaintiff-Appellee, v. DYNAMIC DEVELOPMENT CORPORATION, an Arizona corporation, Defendant-Appellant. 188-310.
• Court: Arizona Court of Appeals

Page 132

787 P.2d 132

163 Ariz. 233

MID KANSAS FEDERAL SAVINGS AND LOAN ASSOCIATION OF WICHITA, a corporation organized and existing under the laws of the United States of America, Plaintiff-Appellee, v. DYNAMIC DEVELOPMENT CORPORATION, an Arizona corporation, Defendant-Appellant.

1 CA-CV 88-310.

Court of Appeals of Arizona Division 1, Department C.

Nov. 2, 1989.

Petition for Review Granted Feb. 26, 1990.

Apker, Apker & Kurtz, P.C. by David B. Apker, Phoenix, for plaintiff-appellee.

Laird & Schneck, P.C. by Mitchell C. Laird, Douglas H. Cook and Jerry Steele, Phoenix, for defendant-appellant.

OPINION

EUBANK, Presiding Judge.

We consider whether Arizona's anti-deficiency statute for deeds of trust, A.R.S. § 33-814(E) (now § 33-814(F) (Supp.1988)), protects a residential housing developer from a deficiency judgment on the construction loans that it received from the lender. The trial court granted the lender, Mid Kansas, summary judgment against the borrower, Dynamic. We reverse, holding that Mid Kansas could not sue Dynamic because of the anti-deficiency statute, A.R.S. § 33-814(E).

Following the briefing of this appeal and prior to oral argument, our supreme court's opinion in Baker v. Gardner, 160 Ariz. 98, 770 P.2d 766 (1988) was filed. At oral argument, we requested supplemental briefs on Baker. Counsel have filed supplemental briefs, which we have considered.

FACTS

Dynamic Development Corporation (Dynamic) owned ten lots in the Kingswood subdivision of Prescott, Arizona. In May 1985 Mid Kansas Federal Savings and Loan Association of Wichita (Mid Kansas) lent Dynamic a total of $803,250 for the purpose of constructing ten houses on the lots. In exchange Dynamic executed ten separate construction notes, each secured by a first deed of trust on each one of the ten lots. In January 1986 Mid Kansas lent Dynamic an additional $150,000 to complete the construction of seven houses that had not already been sold. In exchange, Dynamic executed one construction note secured by a second blanket deed of trust on all remaining seven lots. Thereafter, Dynamic defaulted on the loans for five houses that had not yet been sold.

Mid Kansas noticed a trustee's sale under the second blanket deed of trust on the five houses. During the pendency of the trustee's sale, one of the five houses was sold. At the trustee's sale, Mid Kansas bought the four remaining houses for $101,986.67, which was the balance due on the underlying construction note.

Thereafter, Mid Kansas filed suit against Dynamic and its owners, Darrell and Paula Smith. In the claims that are the subject of this appeal, Mid Kansas sought to recover $425,250 plus interest due on the four construction notes, electing not to foreclose on its first-position deeds of trust. Mid Kansas also filed claims of constructive trust, unjust enrichment, conversion, breach of contract, and punitive damages, based on Mid Kansas' allegation that Dynamic had removed fixtures from the houses purchased with construction funds.

The trial court granted Mid Kansas' motion for partial summary judgment on the four construction notes and entered judgment for Mid Kansas, pursuant to Rule 54(b), Arizona Rules of Civil Procedure, stating:

The Court has considered these theories and finds they should not preclude summary judgment on the claims of Plaintiff on the four notes and that there are no material issues of fact precluding summary judgment and that under the holding of Southwest Savings and Loan v. Ludi, 122 Ariz. 226 [594 P.2d 92], Plaintiff can maintain an action on these notes notwithstanding there was a Trustee's Sale instituted by Plaintiff on a separate deed of trust involving the subject properties.

In reversing the trial court, we must address the two primary arguments made on appeal by Mid Kansas, the appellee:

(1) A.R.S. § 33-814(E) did not apply because Mid Kansas was not suing to recover a deficiency; and

(2) A.R.S. § 33-814(E) did not apply because Dynamic was a developer, not a homeowner.

However, first we review Arizona's two anti-deficiency statutes.

ARIZONA'S ANTI-DEFICIENCY STATUTES

In this opinion, we interpret the anti-deficiency statute governing deeds of trust, A.R.S. § 33-814(E), (now A.R.S. § 33-814(F)). This statute provides that if certain residential trust property is sold pursuant to a trustee's power of sale, then no action may be maintained to recover a deficiency:

If trust property of two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling is sold pursuant to the trustee's power of sale, no action may be maintained to recover any difference between the amount obtained by sale and the amount of the indebtedness and any interest, costs and expenses.

Arizona's other anti-deficiency statute, A.R.S. § 33-729(A), provides that if a purchase money mortgage on certain residential property is foreclosed, no action may be maintained to recover the deficiency:

[I]f a mortgage is given to secure the payment of the balance of the purchase price, or to secure a loan to pay all or part of the purchase price, of a parcel of real property of two and one-half acres or less which is limited to and utilized for either a single one-family or single two-family dwelling, the lien of judgment in an action to foreclose such mortgage shall not extend to any other property of the judgment debtor, nor may general execution be issued against the judgment debtor to enforce such judgment, and if the proceeds of the mortgaged real property sold under special execution are insufficient to satisfy the judgment, the judgment may not otherwise be satisfied out of other property of the judgment debtor, notwithstanding any agreement to the contrary.

In interpreting A.R.S. § 33-814(E), we refer to cases interpreting both statutes. We assume that the legislature had the same intent in enacting both of these statutes, since they both apply to similar residential property and were enacted at the same time. See Baker v. Gardner, 160 Ariz. at 101, 770 P.2d at 769.

(1) MID KANSAS WAS SUING ON A DEFICIENCY, WITHIN THE MEANING OF A.R.S. § 33-814(E)

Mid Kansas' first argument on appeal is that it was not suing to recover a deficiency, within the meaning of A.R.S. § 33-814(E), because there were multiple deeds of trust. Mid Kansas argues in particular that it could foreclose under the second blanket deed of trust and still elect to sue on the first construction notes.

This argument was rejected by the supreme court in Baker. The facts are that the Bakers sold their house to the Gardners. The Gardners gave a commercial lender a promissory note secured by a first deed of trust to finance most of the purchase price. Then they gave the Bakers a note secured by a second deed of trust to finance the balance of the purchase price. The Gardners defaulted on both notes. After the commercial lender noticed a trustee's sale, the Bakers elected to waive their second deed of trust and to sue on the unpaid balance of their note under A.R.S. § 33-722:

If separate actions are brought on the debt and to foreclose the mortgage given to secure it, the plaintiff shall elect which to prosecute and the other shall be dismissed.

The Arizona Supreme Court held that the Bakers could not sue on the note because the trust property was described in A.R.S. § 33-814(E). The court noted that the legislative history of A.R.S. § 33-729(A), the anti-deficiency statute for purchase money mortgages, demonstrated that "the purpose of this bill is to protect the homeowners from deficiency judgments." (Quoting Minutes of Meeting, Arizona House of Representatives' Committee on Ways and Means, March 31, 1971 at p. 2.) The court found that the purpose of Arizona's anti-deficiency statutes was similar to the purpose of California's anti-deficiency statute, Cal.Civ.Proc.Code § 580b (West 1976), and quoted the California Supreme Court's statement that the purpose of California's anti-deficiency statute was to discourage the sale of overvalued land by placing the risk of inadequate security on the lender. (Quoting Spangler v. Memel, 7 Cal.3d 603, 612, 498 P.2d 1055, 1060, 102 Cal.Rptr. 807, 812 (1972)). The supreme court in Baker also quoted the North Carolina Supreme Court's statement that its anti-deficiency statute should be construed more broadly, not just literally, in order to prevent a lender from electing to waive the security. (Quoting Ross Realty v. First Citizens Bank & Trust, 296 N.C. 366, 250 S.E.2d 271 (1979)). The court in Baker concluded that "the legislature's objective in enacting § 33-814(E) was to abolish the personal liability of those who give trust deeds encumbering properties of two and one-half acres or less and used for single-family or two-family dwellings." 160 Ariz. at 104, 770 P.2d at 772.

Mid Kansas relies on Southwest Sav. and Loan v. Ludi, 122 Ariz. 226, 594 P.2d 92 (1979). In Ludi the lender foreclosed on its first mortgage, waived the second mortgage, and sued on the second promissory note. 122 Ariz. at 227, 594 P.2d at 93. The supreme court held that the borrower was not protected against a deficiency judgment by A.R.S. § 33-729(A) because the second mortgage was not for a purchase money mortgage but a property improvement loan. Id. at 228, 594 P.2d at 94. The court reasoned in part that since the lender had a cause of action against [the borrower] for both mortgages and notes, it could have foreclosed the first mortgage and still have sued at law on the second note without violating [A.R.S. § 33-729(A) ], as the second action would not be a deficiency judgment based on the first mortgage but a wholly independent action on the second note alone. 122 Ariz. at 228, 594 P.2d at 94.

Nothing in Baker suggests a retreat from the supreme court's position in Ludi. In fact, the Baker majority cited Ludi, stating a "creditor/beneficiary can still elect to sue on the note in all cases except those involving the particular...