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

• Decision Date: 10 January 1991
• Docket Number: No. CV-89-0447-PR,CV-89-0447-PR
• Citation: 167 Ariz. 122,804 P.2d 1310
• 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.
• Court: Arizona Supreme Court

Page 1310

804 P.2d 1310

167 Ariz. 122

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.

No. CV-89-0447-PR.

Supreme Court of Arizona, In Banc.

Jan. 10, 1991.

[167 Ariz. 124] Apker, Apker, Haggard & Kurtz by David B. Apker, Phoenix, for plaintiff-appellee.

Law Offices of Mitchell C. Laird, P.C. by Mitchell C. Laird, Jerry Steele, Phoenix, for defendant-appellant.

Gust, Rosenfeld & Henderson by Brent F. Moody, Margaret L. Steiner, Robert L. Stewart, Jr., Phoenix, for amici curiae, Arizona Bankers' Ass'n, Valley Nat. Bank, First Interstate Bank, Sec. Pacific Bank.

Feller & Cohen by Roger L. Cohen, Kathi M. Sandweiss, Phoenix, for amicus curiae Southwest Sav. & Loan Ass'n.

OPINION

FELDMAN, Vice Chief Justice.

A construction lender held notes secured by first and second deeds of trust on a residential developer's property. The lender acquired title to the property at a trustee's sale on the second trust deed and thereafter brought an action against the developer for the balance due on the first notes. The court of appeals held that the lender was precluded from doing so under A.R.S. § 33-814(G) ¹ and the rationale of our decision in Baker v. Gardner, 160 Ariz. 98, 770 P.2d 766 (1989).

We must determine whether the anti-deficiency statutes apply to a residential developer and whether a lender may recover the balance owing on the first notes after it has acquired title to the property at the foreclosure sale of its second deed of trust. Rule 23, Ariz.R.Civ.App.P., 17B A.R.S. We have jurisdiction under Ariz. Const. art. 6, § 5(3) and A.R.S. § 12-120.24.

FACTS AND PROCEDURAL HISTORY

A. Factual Background

Dynamic Development Corporation (Dynamic) is a developer that builds and sells residential and commercial property. In May 1985, Dynamic secured financing from Mid Kansas Federal Savings and Loan Association (Mid Kansas) for the construction of ten "spec" homes on lots Dynamic owned in a Prescott subdivision. The total loan, amounting to $803,250, was disbursed in the form of ten separate loans, each evidenced by a separate note and secured by a separate deed of trust on a single unimproved lot. Unable to complete construction with the amounts financed under the first notes, Dynamic obtained an additional $150,000 loan from Mid Kansas in January of 1986. This loan was evidenced by a single promissory note and a blanket deed of trust on the seven lots remaining unsold.

The first and second notes came due in the summer of 1986. Two more lots were sold and released from the liens. In the fall of 1986, Mid Kansas notified Dynamic that the five remaining properties would be sold at a trustee's sale if the total debt on the first and second notes was not paid. Dynamic was unable to pay the total balance due, but did sell one more lot prior to the trustee's sale and applied the proceeds to the second note.

Mid Kansas noticed a trustee's sale on the four remaining properties, each of which was by then improved by a substantially finished residence. At the time of the trustee's sale, Dynamic owed Mid Kansas approximately $102,000 on the second note and $425,000 on the four first notes. Originally, the sales on the first deeds were scheduled for the day after the sale on the second deed. On January 20, 1987, the second-position blanket deed of trust was foreclosed by the sale of the four parcels. Mid Kansas purchased the property with a credit bid of the balance owed on the second note. The four first-position sales were postponed and ultimately never held. Having thus acquired title to the property, Mid Kansas now seeks to waive the security of the first liens and sue for the balance due on the first notes.

B. Procedural Background

Mid Kansas's amended complaint stated causes of action for recovery of the balance due under each of the four promissory notes. Mid Kansas moved for partial summary judgment on the four debt claims. The trial court granted the motion and entered judgment for Mid Kansas pursuant to Rule 54(b), Ariz.R.Civ.P., 16 A.R.S.

The court found that Dynamic was in default on the four construction notes in the principal amount of $425,250 plus interest at thirteen percent. The court rejected Dynamic's claim that Mid Kansas had "artificially created a deficiency and now seeks a deficiency judgment against the maker of the notes." The court determined that

under the holding of Southwest Savings and Loan v. Ludi, 122 Ariz. 226 [594 P.2d 92 (1979) ], 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 [same] subject properties.

On appeal, Dynamic argued that Mid Kansas was prohibited from recovering on the promissory notes by the Arizona anti-deficiency statute, A.R.S. § 33-814(G). After the release of our opinion in Baker, Dynamic filed a supplemental brief asserting that Ludi could no longer be read to permit a residential mortgage holder to waive its security and sue on the note. See Southwest Sav. & Loan Ass'n v. Ludi, 122 Ariz. 226, 594 P.2d 92 (1979). Dynamic argued that Baker prohibited any attempt to waive the security and sue on the note as a disguised action for deficiency. Therefore, Mid Kansas could not both foreclose the second deed by power of sale and elect to sue Dynamic on the first notes covering the same property.

The court of appeals reversed and remanded the case for entry of judgment for Dynamic. Mid Kansas Fed. Sav. & Loan Ass'n v. Dynamic Dev. Corp., 163 Ariz. 233, 787 P.2d 132 (Ct.App.1989). The court held that under Baker, Mid Kansas's attempt to waive the security and sue on the debt was an action for a deficiency, barred after a trustee's sale under § 33-814(G). Judge Brooks concurred in the result, but argued that the case should have been decided according to the principles of merger and extinguishment, rather than under the anti-deficiency statute, because he was "not persuaded that a residential developer may claim the statutory protection against deficiency judgments afforded to homeowners under Baker v. Gardner." Id. at 239, 787 P.2d at 138 (Brooks, J., concurring).

Mid Kansas petitioned for review in this court, presenting the following issues for our consideration:

1. Whether commercial developers of residential property who borrow for business purposes are entitled to the benefit of Arizona's consumer anti-deficiency statutes, A.R.S. §§ 33-729(A) and 33-814(G).

2. Whether Arizona's anti-deficiency statutes apply when the encumbered properties are not actually used as residences.

3. Whether a lender's election to waive its security and sue upon a construction loan note secured by a deed of trust constitutes an action for a deficiency prohibited by Arizona's anti-deficiency statutes, A.R.S. §§ 33-729(A) and 33-814(G).

DISCUSSION

A. The Applicability of the Anti-Deficiency Statutes

Arizona has two anti-deficiency statutes. A.R.S. § 33-729(A) applies to purchase money mortgages and purchase money deeds of trust foreclosed judicially pursuant to the authority of A.R.S. § 33-807(A). A.R.S. § 33-814(G) applies to deeds of trust that are foreclosed by trustee's sale, regardless of whether they represent purchase money obligations. Both sections prohibit a deficiency judgment after sale of a parcel of "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." A.R.S. §§ 33-729(A), 33-814(G).

Arizona also has an election of remedies statute within the general law applicable to mortgages. Under A.R.S. § 33-722, a mortgagee can foreclose and seek a deficiency judgment or can sue on the note and then execute on the resultant judgment but cannot bring both actions simultaneously. See Washburn, The Judicial and Legislative Response to Price Inadequacy in Mortgage Foreclosure Sales, 53 S.CAL.L.REV. 843, 928 (1980). The election statute is intended to protect the debtor from multiple suits and at the same time grant the creditor the benefit of the security.

The election statute alters the traditional common law rule that a holder of a note secured by a mortgage has the right to sue on the note alone, to foreclose on the property, or to pursue both remedies at once (although there may be only one recovery on the debt). See Paramount Ins., Inc. v. Rayson & Smitley, 86 Nev. 644, 472 P.2d 530, 533 (1970). ² However, the reach of the statute, as applied to most mortgages, is quite limited. In Smith v. Mangels, 73 Ariz. 203, 207, 240 P.2d 168, 170 (1952), this court held the election statute does not preclude a subsequent foreclosure action after judgment on the debt, as is the case in some other states. See, e.g., Neb.Rev.Stat. §§ 25-2140 and 25-2143 (1989); N.Y.Real Prop.Acts.Law § 1301 (McKinney 1979); S.D.Codified Laws Ann. §§ 21-47-5 and 21-47-6 (1987).

In Baker, we held the election statute was limited by the subsequently enacted purchase money mortgage anti-deficiency statute, A.R.S. § 33-729(A), which barred the lender from waiving the security and suing on the debt. 160 Ariz. at 104, 770 P.2d at 772. In so holding, we joined the courts of California and North Carolina in finding that such an election is inconsistent with the anti-deficiency statutes, which limit the lender to recovery from the land itself. Id.

Baker held that the lender should not be allowed to circumvent the anti-deficiency statute by electing to sue the debtor on the note, thereby realizing any difference between the value of the real property and the amount owed on the debt. As our supplemental opinion pointed out, Baker's holding applies whenever the anti-deficiency statutes apply and therefore is not always limited to the purchase money situation. 160 Ariz. at 106-07, 770 P.2d at 774-75. Assuming that the deed of...