Watson Communication Systems Incorporated v. Adamson et al

Filing 17

ORDER that Defendants' 13 Motion to Dismiss for Failure to State a Claim is denied. Signed by Judge G Murray Snow on 01/19/12.(ESL)

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WO

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Plaintiff,
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vs.
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Thomas D. Adamson and Kathleen J.)
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Adamson,
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Defendants.
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Watson Communication Systems, Inc.,

No. CV-11-1114-PHX-GMS
ORDER

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Pending before the Court is Defendants’ Motion to Dismiss for Failure to State a
Claim (Doc. 13). For the reasons stated below, the motion is denied.
BACKGROUND

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In November of 2005, Defendants borrowed $1,400,000 from non-party Bank of

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America to develop a single-family residence on property they owned at 11637 East Cochise

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Drive, Scottsdale, Arizona (“the Property”). The Property is located in Lot C-7 of a

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development named Mirage Crossing. Defendants additionally owned Lot C-8 and Lot C-9

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in Mirage Crossing. In February of 2007, Defendants borrowed $1,500,000 from Plaintiffs

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in order to continue to build a house on Lot C-7. They executed a promissory note to

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Plaintiff and secured it with two deeds of trust encumbering the undeveloped lots at C-8 and

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C-9. In December of 2007, Plaintiff released the deed of trust on Lot C-9 and substituted Lot

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C-7 as collateral. In July of 2008, Plaintiff and Defendants executed a deed of trust for Lot

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C-7, in which Plaintiff’s interest was junior to Bank of America’s.

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Defendants went into default on their loan from Plaintiff in late 2008. In June of 2009,

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they conveyed Lot C-8 in partial fulfilment of their obligation in lieu of foreclosure, and

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Plaintiff credited Defendants’ debt by $578,289.60. At some point, they also went into

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default on their loan from Bank of America, which foreclosed on Lot C-7 in August of 2010,

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leaving Plaintiff unsecured for the remaining debt on the note. Plaintiff now sues for the

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remaining value of the debt, and Defendants claim that Arizona’s anti-deficiency statutes bar

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recovery.

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DISCUSSION
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Legal Standard

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To survive dismissal for failure to state a claim pursuant to Federal Rule of Civil

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Procedure 12(b)(6), a complaint must contain factual allegations sufficient to “raise a right

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to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).

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The task in a motion to dismiss “is to evaluate whether the claims alleged can be [plausibly]

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asserted as a matter of law.” See Adams v. Johnson, 355 F.3d 1179, 1183 (9th Cir. 2004); see

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also Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009). When analyzing a Rule 12(b)(6)

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motion, all plausible “allegations of material fact are taken as true and construed in the light

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most favorable to the non-moving party.” Smith v. Jackson, 84 F.3d 1213, 1217 (9th Cir.

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1996).

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presumption of truthfulness, and “conclusory allegations of law and unwarranted inferences

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are not sufficient to defeat a motion to dismiss.” Pareto v. FDIC, 139 F.3d 696, 699 (9th Cir.

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1998). Alternatively, dismissal may be appropriate when the plaintiff has included sufficient

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allegations disclosing some absolute defense or bar to recovery. See Weisbuch v. County of

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L.A., 119 F.3d 778, 783, n.1 (9th Cir. 1997) (“If the pleadings establish facts compelling a

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decision one way, that is as good as if depositions and other . . . evidence on summary

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judgment establishes the identical facts.”).

However, legal conclusions couched as factual allegations are not given a

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Analysis

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In Arizona, two statutes protect borrowers from lenders seeking to collect debt that

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remains outstanding after foreclosure. When a loan is secured by a purchase-money

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mortgage, the homeowner is protected from those seeking deficiencies by Ariz. Rev. Stat.

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(“A.R.S.”) § 33-729 (2007). When land is secured by a deed of trust, whether or not the loan

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was used to purchase the property, the homeowner is protected from those seeking deficiency

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judgments by A.R.S. § 33-814 (2007). If the beneficiary of a deed of trust so chooses, it may

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“elect to waive the security and sue directly on the promissory note.” Wells Fargo Credit

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Corp. v. Tolliver, 183 Ariz. 343, 345, 902 P.2d 1101, 1103 (App. Div. 1995). Should the

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beneficiary of a deed of trust choose to waive its security and sue directly on the note, “the

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provisions of [A.R.S. § 33-729] apply.” A.R.S. § 33-814. Those provisions limit the scope

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of anti-deficiency protection to loans used to “secure the payment of the balance of the

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purchase price.”. A.R.S. § 33-729(A). Therefore, when a creditor forgoes its security and

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sues on the note, the protection afforded to non-purchase money borrowers secured by a deed

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of trust vanishes. As the Arizona Supreme Court has noted, “[t]he conflict” between the deed

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of trust statute and the mortgage statute “is more apparent than real” because the protection

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offered to non-purchase-money obligations under the deed of trust statute is not available

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when a creditor sues on the note. Baker v. Gardner, 160 Ariz. 98, 106, 770 P.2d 766, 774

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(1988).

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When a single property is encumbered by two deeds of trust, and “the lenders under

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the first and second deeds of trust [are] entirely separate entities,” suits based on the second

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note are “wholly separate actions unaffected by the first lender’s proceedings.” Resolution

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Trust Corp. v. Segel, 173 Ariz. 42, 46, 839 P.2d 462, 466 (App. 1992) (internal quotations

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omitted). Thus, a junior beneficiary holding a deed of trust securing a non-purchase money

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mortgage is not prohibited from suing directly on the note by any anti-deficiency statute,

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even if the senior beneficiary has already foreclosed. Id.; see also Southwest Sav. and Loan

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Ass’n v. Ludi, 122 Ariz. 226, 594 P.2d 92 (1979) (action on a junior non-purchase mortgage

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after judicial foreclosure “is an action on an independent promissory note”).Just as when
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there is only one beneficiary, when the holder of a deed of trust sues directly on the note, the

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anti-deficiency statute only protects borrowers when the loan at issue represents “purchase

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money collateral encumbering the residential property.” Baker, 160 Ariz. at 106. Limiting

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the coverage of the anti-deficiency statutes to purchase money obligations when a creditor

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foregoes its security and sues on the note comports with the Arizona Supreme Court’s

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interpretation of the legislative purpose of the anti-deficiency statutes: a “desire to protect

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certain homeowners from the financial disaster of losing their homes to foreclosure plus all

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their other nonexempt property on execution of a judgment for the balance of the purchase

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price.” Baker, 160 Ariz. at 101.

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Therefore, “a decisive question in determining the rights of a creditor when a deed of

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trust is involved is whether the collateral secures a purchase-money or non-purchase-money

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obligation.” Bank One, Arizona, N.A. v. Beauvais, 188 Ariz. 245, 249, 934 P.2d 809, 813

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(App. 1997). Plaintiffs here state that they are suing on the note, and that the anti-deficiency

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statutes therefore offer no protection because the loan was not a purchase-money loan under

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Arizona state law. (Doc. 14 at 4). After claiming in their initial motion that the anti-

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deficiency statutes would offer protection even if the house in question were not their place

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of residence (Doc. 13 at 6), in their reply Defendants claim that the loan was in fact a

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purchase-money mortgage because the loan “was used to pay for, and build, Defendants’

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primary residence.” (Doc. 15 at 3). Since this argument was raised for the first time in a reply

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brief, it need not be considered. See Eberle v. City of Anaheim, 901 F.2d 814, 818 (9th Cir.

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1990). In any event, whether or not Defendants lived in the house, or used the loan to

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construct it, are factual arguments not appropriate for a motion to dismiss. According to the

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complaint, Defendants are real estate developers, and the language of the various loan

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agreements contemplated Defendants’ sale of the property. (Doc. 1 ¶¶2–4, 14–16). Taking

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the allegations of the complaint as true, it is plausible that the loan did not meet the standards

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set forth to qualify as a purchase money obligation under A.R.S. § 33-729(A). In fact, the

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loan may not even satisfy the more generous standards that protect loans secured by deeds

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of trust, even those that are not purchase money mortgages, set out under A.R.S. § 33-814.
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See Mid Kansas Federal Sav. and Loan Ass’n of Wichita v. Dynamic Dev. Corp., 167 Ariz.

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122, 129, 804 P.2d 1310, 1317 (1991) (“[R]esidential properties held by the mortgagor for

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construction and eventual resale as dwellings are not within the definition of properties

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‘limited to’ and ‘utilized for’ single-family dwellings”) (emphasis in original). It would

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therefore be inappropriate to dismiss the case at this juncture.

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CONCLUSION

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Whether or not Defendants are to be afforded the protections of the anti-deficiency

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statutes depends upon whether their loan qualifies as a purchase-money obligation under

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Arizona law. Taking the facts as alleged in the complaint as true, it was not a purchase-

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money obligation and they are afforded no such protection. Their motion to dismiss will

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therefore be denied.

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IT IS THEREFORE ORDERED that Defendants’ Motion to Dismiss for Failure
to State a Claim (Doc. 13) is denied.
DATED this 19th day of January, 2012.

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