                                 IN THE
             ARIZONA COURT OF APPEALS
                             DIVISION ONE


           HELVETICA SERVICING, INC., Plaintiff/Appellant,

                                     v.

              MICHAEL S. PASQUAN, Defendant/Appellee.

                          No. 1 CA-CV 17-0699
                            FILED 8-15-2019


          Appeal from the Superior Court in Maricopa County
                         Nos. CV2008-050966
                              CV2009-029276
                              (Consolidated)
              The Honorable John R. Hannah, Jr., Judge

                     VACATED AND REMANDED


                               COUNSEL

Buchalter, Scottsdale
By Roger W. Hall, Jason E. Goldstein, Pro Hac Vice
Counsel for Plaintiff/Appellant

Daniel Kloberdanz, PLC, Scottsdale
By Daniel L. Kloberdanz
Counsel for Defendant/Appellee
                         HELVETICA v. PASQUAN
                           Opinion of the Court



                                   OPINION

Judge Maria Elena Cruz delivered the opinion of the Court, in which
Presiding Judge Diane M. Johnsen and Judge Randall M. Howe joined.


C R U Z, Judge:

¶1            Helvetica Servicing, Inc. (“Helvetica”) appeals the deficiency
judgment the superior court entered in its favor against Michael S. Pasquan
(“Pasquan”). Helvetica argues the court erred in deciding that most of the
debt remaining after a judicial foreclosure was a construction loan entitled
to anti-deficiency protection under Arizona Revised Statutes (“A.R.S.”)
section 33-729(A). Its appeal raises issues that demand clarification by the
legislature.

¶2            We held in Helvetica Servicing, Inc. v. Pasquan, 229 Ariz. 493,
501, ¶ 32 (App. 2012) (hereinafter Helvetica I), that the anti-deficiency
protections of A.R.S. § 33-729(A) apply to a loan “used to construct a
residence” if a dwelling meets the size and use requirements of the statute
and the deed of trust secures both the land and the dwelling. We also
recognized that “[i]n some cases, it will be a question of fact whether a
particular transaction is a construction loan or some different type of
obligation—e.g., a home improvement loan.” Id. at 499 n.6, ¶ 25. Here, the
evidence in the record shows that, aside from the $600,000 original purchase
money loan that was later refinanced as part of a loan from Helvetica,
Pasquan used the bulk of the loan proceeds for the purpose of home
improvement, not home construction. Therefore, the anti-deficiency
protections of A.R.S. § 33-729(A) do not extend to the funds Pasquan
borrowed beyond the refinancing of the original purchase money
obligation. Accordingly, we vacate the judgment and remand for further
proceedings.

                  FACTS AND PROCEDURAL HISTORY

¶3            This is the fourth appeal stemming from a 2009 judicial
foreclosure sale of Pasquan’s home. Helvetica I, 229 Ariz. at 495; Gold v.
Helvetica Servicing, Inc., 229 Ariz. 328 (App. 2012); Helvetica Servicing, Inc. v.
Giraudo, 241 Ariz. 498 (App. 2017). In May 2003, Michael and Kelly Pasquan
(the “Pasquans”) purchased a 4,000 square-foot home in Paradise Valley
(the “Property”) with a $600,000 loan from Hamilton Bank (“Hamilton


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                           Opinion of the Court

loan”) and a cash payment. Over the next several years, the Pasquans
substantially renovated the Property, expanding the home by 7,000 square
feet. In 2004-2005, the Pasquans borrowed approximately $2.1 million from
Desert Hills Bank (“Desert Hills loan”). The Pasquans used a portion of the
Desert Hills loan to refinance the Hamilton loan, then applied the
remainder of the proceeds toward the renovation/expansion project. They
also borrowed $225,000 from Pasquan’s father and put that money toward
the expansion and charged another $140,000 on credit cards for the project.

¶4            In September 2006, the Pasquans borrowed $3.4 million from
Helvetica, secured by a deed of trust on the Property. The Pasquans used
the proceeds of the Helvetica loan to pay off the Desert Hills loan, the loan
from Pasquan’s father, the credit card debt, loan fees, and interest. They
were left with $357,172.72 in cash from the loan proceeds, from which they
made interest payments to Helvetica and paid for landscaping,
maintenance, taxes, utilities, and marketing.

¶5            The Pasquans defaulted on the Helvetica loan, and Helvetica
sued to judicially foreclose. On April 9, 2009, Helvetica obtained a
judgment against the Pasquans for the amount due on the loan plus
attorneys’ fees and a foreclosure judgment on the Property. After a sheriff’s
sale, the superior court entered a deficiency judgment against the Pasquans
for $1,936,825.53.

¶6             Pasquan1 appealed, and, in Helvetica I, we vacated the
judgment and remanded for further consideration pursuant to § 33-729(A).2
In that decision, we held that a construction loan used to build a home that
secures the debt qualifies as a purchase money loan for anti-deficiency
protection under § 33-729(A) and refinancing a purchase money loan does
not destroy the original loan’s status. Helvetica I, 229 Ariz. at 499-502,
¶¶ 23, 32, 37. Further, when loan proceeds are used for “both purchase
money and non-purchase money sums, a lender may pursue a deficiency
judgment for the latter amounts” if they can be traced and segregated. Id.
at 501-02, ¶¶ 34, 37; see First Financial Bank, N.A. v. Claassen, 238 Ariz. 160,
163, ¶ 10 (App. 2015).




1     The Pasquans divorced in 2009. Kelly Pasquan is not a party to this
appeal.

2      When a deed of trust is judicially foreclosed, the provisions under
A.R.S. § 33-729(A) apply. A.R.S. § 33-814(E).


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                            Opinion of the Court

¶7             Helvetica I remanded the matter to the superior court and
directed it to address the following issues:

       1. The amount of the Hamilton Loan payoff, which is entitled
       to anti-deficiency protection.

       2. Whether the deeds of trust at issue cover the newly
       constructed residence.

       3. Whether and to what extent loan proceeds, beginning with
       the first Desert Hills loan, were disbursed for construction of
       the residence and/or payment of the remaining purchase
       price of the Property.

       4. The purposes for which the Helvetica Loan proceeds were
       disbursed.

       5. The amount of a revised default judgment against Pasquan
       that includes only non-purchase money sums.

229 Ariz. at 502, ¶ 38.

¶8            On remand, after a bench trial, the superior court ruled that:
(1) “The amount of the Hamilton Mortgage loan payoff was $600,000”; (2)
all of the Desert Hills loan was “secured by deeds of trust that covered the
real property and the buildings and improvements then existing or
subsequently erected on the property,” but the loans from Pasquan’s father
and the credit card debt were unsecured; (3) all of the money the Pasquans
borrowed from Desert Hills, all of the money they borrowed from
Pasquan’s father, and all of the credit card purchases were “used for
construction of the residence” on the Property with the exception of the
$600,000 used to pay off the Hamilton loan; (4) the Helvetica proceeds were
used to pay loan fees, loan interest, construction costs, and cash to
borrowers; and (5) Helvetica was entitled to a deficiency judgment against
Pasquan of $341,188.35.

¶9            Helvetica timely appealed and we have jurisdiction pursuant
to A.R.S. § 12-2101(A)(1).

                               DISCUSSION

I.     Standard of Review

¶10           On appeal, we view the evidence in the light most favorable
to sustaining the superior court’s judgment. Rogus v. Lords, 166 Ariz. 600,


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                          Opinion of the Court

601 (App. 1991). When an appeal presents a mixed question of law and fact,
although we defer to the superior court’s factual findings, we review de novo
its legal conclusions. In re MH 2008-001752, 222 Ariz. 567, 569 n.3, ¶ 7 (App.
2009). We are not bound by the superior court’s conclusions of law that
combine both fact and law when there is an error as to the law. Egan v.
Fridlund-Horne, 221 Ariz. 229, 232, ¶ 8 (App. 2009).

II.    The Desert Hills Loan

¶11           Helvetica does not dispute the superior court’s ruling that the
$600,000 that Pasquan used to refinance the Hamilton loan was a purchase
money obligation under § 33-729. It argues, however, that the court erred
by ruling that the loan proceeds Pasquan used to pay off the Desert Hills
debt were entitled to the same protection. Helvetica argues those amounts
financed home improvements, not home construction.

¶12            In Helvetica I, we held that a construction loan will qualify as
a purchase money obligation when the deed of trust securing the loan
covers the land and the dwelling constructed on the property, and the loan
proceeds were used to construct a dwelling that meets the size and use
requirements of § 33-729(A). 229 Ariz. at 501, ¶ 32. We noted, however,
that a construction loan used to build a residence is significantly different
for this purpose from a loan used to improve an existing home. Id. at 499
n.6, ¶ 25 (citing California’s interpretation of an analogous statute
recognizing such a distinction). Although a construction loan may fall
within the anti-deficiency statute, a home improvement loan will not. Id.
Whether a loan is a construction loan or a home improvement loan depends
on the facts. Id.

¶13           Helvetica contends that the Desert Hills loan was not a
construction loan but a home improvement loan because (1) Pasquan
described his home renovation at trial as a “remodel”; (2) the nature of the
work permits and certificate of completion are consistent with a home
improvement loan rather than a construction loan; and (3) the 7,000 square-
foot addition was not built “from scratch on a vacant lot.” Pasquan
contends, in contrast, that the Desert Hills loan helped finance some 7,000
square feet of additions to his home and was for that reason a home
construction loan, not a home improvement loan under the distinction we
drew in Helvetica I.

¶14           Neither the case law nor the statutes define a “home
construction loan” as we applied that term in Helvetica I. In the absence of




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                          Opinion of the Court

clarification by the legislature, we must use common sense to apply the rule
announced in Helvetica I to the facts before the superior court.

¶15          On that basis, we conclude that the superior court erred by
deciding that the entirety of the Desert Hills loan was a construction loan
for purposes of anti-deficiency protection under § 33-729. Based on the
evidence before the court after Helvetica I was decided, we conclude that
except for the $600,000 used to pay off the refinanced original purchase
loan, the Desert Hills loan financed home improvement, not home
construction. See Sw. Sav. & Loan Ass’n v. Ludi, 122 Ariz. 226, 228 (1979)
(“property improvement loans” not covered by the anti-deficiency statute).

¶16           In fact, Pasquan testified that he lived in the home during the
entire time of the renovation, that the project was not a complete “tear
down,” and that, for as long as he has owned the Property, it was never a
vacant lot. Pasquan also testified that he purchased the home in 2003 and
the renovation/expansion took the next four years. Pasquan first
remodeled the upper level of the home by adding a game room, two
bedrooms, a kitchen, and a bathroom. Then, he renovated the entire
downstairs as he lived and managed the renovation project from the upper
level of the home. He tracked expenditures on spreadsheets that he
updated weekly. He testified he spent nearly $275,000 on the project in
2003, nearly $310,000 in 2004, $613,000 in 2005, nearly $720,000 in 2006, and
$93,000 in 2007. He installed a pool for more than $100,000; built a detached
2,500 square-foot, eight-car garage at a cost of between $120,000 and
$125,000; spent “much more” than $1,000,000 on improvements to the
interior of the home, including adding a master bathroom, closets, a
breakfast area, and a kitchen, and installed approximately $389,000 in
interior upgrades, including appliances, theater chairs, cabinets, flooring,
fireplace, venetian plastering, and a wine cellar. He also spent $142,000 on
landscaping, including “4,000 plants and trees.”

¶17          The superior court admitted work permits issued by the
Town of Paradise Valley for the addition of the master bedroom and closets,
breakfast area, kitchen, screen walls, gates, the detached garage, and the
pool.

¶18          The renovation/expansion project Pasquan completed was
immense in scope, and doubtless added considerable value to the Property
that secured the Helvetica loan. But we cannot overlook that he did not
build a new home from scratch. The home that secured his original
$600,000 purchase money loan had two stories, three bedrooms, three
bathrooms, a living room and a dining room, a three-car garage, and a


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                         HELVETICA v. PASQUAN
                           Opinion of the Court

swimming pool.         Over a period of years, Pasquan methodically
transformed that home into a much grander dwelling. But considering all
the facts in the record, and in light of our supreme court’s holding in Ludi,
we hold that the loan he obtained to do that from Desert Hills was a home
improvement loan, not a loan for home construction.

III.   Loan Fees

¶19            Helvetica also challenges the superior court’s finding that
“points, interest, and reserves” paid in connection with the Helvetica loan
are entitled to anti-deficiency protection. We held in Claassen that interest,
late fees, and costs commonly associated with refinancing a purchase
money loan “are properly considered purchase money obligations.” 238
Ariz. at 163, ¶¶ 14-15. The superior court properly recognized that
principle in ruling that such costs are protected under § 33-729 “to the
extent that the Helvetica loan was otherwise a purchase money obligation.”
Because we have concluded that only $600,000 of the Desert Hills loan falls
within § 33-729, however, the superior court’s application of Claassen to the
Helvetica loan must be recalculated.

¶20            Helvetica argues that Helvetica I ruled that the interest on the
Helvetica loan, at $32,555 per month, was not a purchase-money obligation.
Helvetica misrepresents Helvetica I’s characterization of the loan’s $32,555
monthly interest. We did not hold that such interest payments were non-
purchase money sums; the reference Helvetica cites was in a footnote
stating the record required further development. Helvetica I, 229 Ariz. at
501 n.7, ¶ 34.

                               CONCLUSION

¶21           Only the $600,000 used to pay off the original purchase money
loan, and the associated loan fees and interest, are entitled to anti-deficiency
protection under § 33-729. See Claassen, 238 Ariz. at 163, ¶ 15; Ludi, 122 Ariz.
at 228. Accordingly, we vacate the judgment and remand for entry of a
revised judgment consistent with this decision.




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                       HELVETICA v. PASQUAN
                         Opinion of the Court

¶22          Both parties seek attorneys’ fees under A.R.S. § 12-341.01,
which authorizes a fee award to the successful party in a contested action
arising out of contract. In the exercise of our discretion, we deny both
requests.




                         AMY M. WOOD • Clerk of the Court
                         FILED:    JT


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