Are Banks Ready to Gamble on Arizona Investor Deficiencies?

This is attorney Chris Van Mullem’s second blog article on ForeclosureIndustry.com. If you have questions for Chris, please send us an e-mail through the site and we’ll connect you.

Can you be sued for deficiencies if you are an investor who “lived” in your foreclosed “residence”?

Until September 30, 2009, a borrower whose real property was lost in a foreclosure following a trustee’s sale was protected from a deficiency if the real estate did not exceed 2.5 acres, and the land was limited utilized as a single one-family or single two-family dwelling. See §A.R.S. 33-729(A) and A.R.S. §33-814 (G).

The new law becomes effective September 30, 2009, and states,

“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 by the trustor under the deed of trust for at least six consecutive months and for which a certificate of occupancy has been issued is sold pursuant to the trustees power of sale, no action may be maintained…The Trustor is responsible for demonstrating that the trust property was used by the Trustor as a one family or single two-family dwelling. §A.R.S. 33-814 (G) (emphasis added).

Thus, the new law places the burden of proof upon the Trustor (or borrower) to prove they qualify for deficiency protection. Because you now have to prove residential use, banks seem ready to place their bets on litigation.

Banks can and are ready to litigate en masse and let the cards fall where they will. Banks are likely to sue investors because: a) investors likely have assets which can be attached, b) investors are not likely to liquidate using Chapter 7 bankruptcy, and c) the new residency “utilization” requirement gives “teeth” for banks to make you defend or default.

I am not trying got get you down here. My purpose is to help you understand why banks are pursuing deficiencies lately. To use another gambling analogy, it’s sort of like the bank is calling your hand to see if there’s a bluff. Not only can a deficiency lawsuit make you prove residency, but it also will happen while the bank is simultaneously pursuing the judgment.

If you are prepared to fight, consult your lawyer for strategic planning. The good news is that the law is untested thus far. Soon we will start seeing cases and rulings which should help clarify this deficiency legal mess. Regardless, for now, you may be forced to play your hand and defend yourself.

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