Cely v. Deconcini, McDonald, Brammer, Yetwin & Lacy, P.C.

Citations: 803 P.2d 911; 166 Ariz. 500; 66 Ariz. Adv. Rep. 62; 1990 Ariz. App. LEXIS 260Docket: 2 CA-CV 88-0389

Court: Court of Appeals of Arizona; August 7, 1990; Arizona; State Appellate Court

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In the case of Cely v. DeConcini, the Arizona Court of Appeals addressed the appeal by William P. Cely and Merlann E. Cely against multiple defendants, including Douglas H. Clark and Lawyer's Title of Arizona, following a summary judgment favoring the defendants. The court referenced a precedent from Baker v. Gardner, establishing that a mortgage securing the purchase of a second home does not qualify as a purchase money security interest under Arizona's anti-deficiency statutes.

The facts indicate that the Celys sold their Tucson home, which had two existing security interests, one being a purchase money deed of trust not involved in this suit. The second mortgage, initially granted to Terry Gropp to facilitate the Celys' purchase of Gropp's home in Oregon, was later assigned to the Bank of Newport. When selling to Clark, the Celys aimed for novation on the first deed of trust, seeking complete liability release, and intended for Clark to assume the second mortgage. However, the record does not clarify whether they also sought novation for the Gropp mortgage.

Clark acknowledged in a deposit receipt that he would assume existing mortgages. However, complications arose regarding the assumption of the first note, as Home Federal indicated that Clark might incur a higher interest rate if the Celys were released from liability. Ultimately, the sale closed under the direction of Janet Heist, with escrow statements indicating that both mortgages were 'assumed,' but the deed explicitly stated the conveyance was 'subject to' the existing mortgages.

Defendant Yetwin represented the Celys during their sale to Clark, knowing they wanted him to assume two notes and ensuring compliance with their intent by reviewing closing documents. After the sale, Clark paid the Bank of Newport directly but later defaulted. Yetwin advised the Celys to inform the bank to collect from Clark and warned against voluntarily paying the bank to preserve their claim against him. Yetwin noted that, due to the absence of a signed novation agreement, the Celys remained secondarily liable under the deed of trust and mortgage. The Bank of Newport subsequently sued the Celys, securing a judgment for the unpaid balance and related costs. In response, the Celys sued Clark for breach of contract and fraud, as well as Yetwin and his firm for negligence in failing to ensure the assumption of the mortgage. Clark contended he only purchased the property "subject to" the mortgage, denying responsibility for the note. The trial court granted Clark summary judgment, ruling that the assumption's status was irrelevant and that Arizona's anti-deficiency statute barred personal judgment against him. Following this, the other defendants' motions for summary judgment were granted based on the same reasoning. The Celys appealed. The appellate court reversed the trial court's decision, ruling that the mortgage given to Gropp was not a purchase money mortgage, that it retained this character upon the Celys' sale to Clark, and that the anti-deficiency statute was inapplicable.

Arizona's mortgage anti-deficiency statute, A.R.S. 33-729(A), prohibits creditors from foreclosing on purchase money mortgages and subsequently pursuing debtors for any deficiency. The Arizona Supreme Court, in Baker v. Gardner, reinforced that creditors cannot waive the mortgage and sue for personal liability on the note. The defendants assert that the second mortgage in question qualifies as a purchase money interest, arguing that it was initially a purchase money mortgage when the Celys gave it to Gropp for the Tucson home, and that its character persisted when Clark assumed the note. Alternatively, they claim that the mortgage would have become a purchase money mortgage upon Clark's assumption to secure his purchase of the Tucson home.

However, the court finds that Gropp's mortgage was not originally a purchase money mortgage. Citing the similarities between Arizona's and California's anti-deficiency laws, the court notes that in a standard purchase money transaction, a seller retains an interest in the property sold. Gropp did not retain such an interest in the Oregon home, as he instead received an interest in the Tucson home, which is unrelated to the sale. The defendants argue that California cases referenced in Baker are not relevant due to differing statutory purposes; however, the court disagrees, stating that the Arizona statute mirrors the intent of the California statute. The California Supreme Court has indicated that its anti-deficiency statute applies primarily to standard purchase money transactions and serves to stabilize land sales by preventing burdensome personal liability on purchasers amid declining property values. In a cited California case, the court determined that a second trust deed was not a purchase money interest, allowing the plaintiff to pursue personal liability on the associated notes.

The court determined that applying section 580b would result in buyers acquiring the hotel for less than the agreed price, and the theory that "the vendor knows the value of his security and assumes the risk of its inadequacy" does not apply, as the seller had no greater knowledge of the property value than the buyers. The purposes of Arizona's anti-deficiency statute are similar to those of California's and do not apply to the transaction between Gropp and the Celys. The Celys, when mortgaging their Tucson home, had a better understanding of its value than Gropp did regarding the Oregon home, which was not mortgaged. The Tucson home acted as nonpurchase money collateral, similar to personal items, and thus the anti-deficiency statutes do not apply. Furthermore, North Carolina's anti-deficiency statute supports this conclusion, requiring a purchase money interest to be part of the same transaction as the land purchase. The Uniform Commercial Code also defines a purchase money security interest narrowly, indicating a security interest must encumber the property being sold. The court concluded that the mortgage given to Gropp was not a purchase money interest. 

Additionally, the argument that the mortgage on the Tucson home became a purchase money mortgage upon Clark's assumption was dismissed, referencing Southwest Sav. Loan Ass'n v. Ludi. In that case, the court found that assumptions of mortgages did not convert non-purchase money loans into purchase money interests. The defendants' claim suggesting that Baker v. Gardner overruled Ludi was rejected, as the court reaffirmed Ludi’s interpretation of the anti-deficiency statutes, allowing creditors to pursue personal liability when the statutes do not apply.

Defendants argue that the case of Ludi is distinguishable because the second mortgage in Ludi secured a home improvement loan, not a purchase money transaction, while in this case, the second mortgage was for purchasing a different home. However, this distinction is irrelevant. The reliance on Ludi is not to argue the Gropp note's status as a purchase money interest but to assert that Clark cannot have an interest superior to that of the Celys. The Gropp mortgage was not a purchase money interest when granted, nor did it become one upon Clark's assumption. Thus, the trial court erred in concluding that Clark was shielded from personal liability under the mortgage anti-deficiency statute, leading to an erroneous summary judgment in favor of Clark and other defendants.

Other issues presented by the parties remain unresolved as they require factual determinations not addressed by the trial court. The court reverses the trial court's ruling on the Gropp mortgage's status and the anti-deficiency statute's applicability, while leaving the remaining issues for the trial court to address upon remand. The second mortgage on the Tucson home is deemed not a purchase money interest, meaning A.R.S. 33-729 does not bar the Celys from suing Clark on the Gropp note. Furthermore, the other defendants retain the responsibility to address any failure related to the assumption of the mortgage. The judgment in favor of the defendants is reversed and the case is remanded for further proceedings.

A.R.S. 33-729(A) establishes that if a mortgage secures the payment of the purchase price for a parcel of real property of 2.5 acres or less, intended for single-family or two-family dwellings, the judgment lien in a foreclosure action does not extend to the debtor’s other properties. Additionally, general execution cannot be issued against the debtor, and if the proceeds from the mortgaged property are insufficient to satisfy the judgment, the judgment cannot be collected from other properties, regardless of any contrary agreement. 

California’s Cal. Civ. Proc. Code § 580b prohibits deficiency judgments after the sale of real property due to a purchaser's failure to complete a sale contract, specifically for mortgages securing the balance of the purchase price. 

North Carolina’s N.C. Gen. Stat. § 45-21.38 similarly abolishes deficiency judgments when a mortgage represents part of the purchase price in real property sales. Under this statute, mortgagees or trustees cannot seek deficiency judgments related to mortgages or deeds of trust securing the sale price of real estate, provided the evidence of indebtedness clearly indicates it is for the purchase money.