                                  IN THE


    SUPREME COURT OF THE STATE OF ARIZONA

                       H ELVETICA SERVICING, INC.,
                            Plaintiff/Appellant,

                                    v.

                          MICHAEL S. PASQUAN,
                           Defendant/Appellee.

                           No. CV-19-0242-PR
                          Filed August 25, 2020


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

              Opinion of the Court of Appeals, Division One
                        248 Ariz. 219 (App. 2019)
                               VACATED

COUNSEL:

Buzzi Shindler, Buchalter, Scottsdale; and Jason E. Goldstein, Buchalter,
San Francisco, Attorneys for Helvetica Servicing, Inc.

Daniel L. Kloberdanz, William Kozub, Kozub Kloberdanz, Scottsdale,
Attorneys for Michael S. Pasquan
               HELVETICA SERVICING INC. v. PASQUAN
                        Opinion of the Court

CHIEF JUSTICE ROBERT BRUTINEL authored the opinion of the Court, in
which JUSTICES BOLICK, GOULD, LOPEZ, BEENE, MONTGOMERY and
CHIEF JUDGE VÁSQUEZ * joined.


CHIEF JUSTICE BRUTINEL, opinion of the Court:

¶1            Residential purchase money loans are entitled to statutory
anti-deficiency protection; that is, the lender cannot seek a money judgment
against the borrower. Such protection extends to “construction loans” but
not to “home improvement loans.” Whether a loan is a construction loan
or a home improvement loan is a question of fact that the trial court must
resolve. To resolve that question of fact, we hold that a trial court should
consider the totality of the circumstances surrounding the loan and we
identify some of the factors that the court should evaluate in making that
decision.
                           I. BACKGROUND

¶2             This is the fifth appeal in this case. Helvetica Servicing, Inc. v.
Pasquan, 229 Ariz. 493 (App. 2012) [hereinafter Helvetica I]; Gold v. Helvetica
Servicing, Inc., 229 Ariz. 328 (App. 2012); Helvetica Servicing, Inc. v. Giraudo,
241 Ariz. 498 (App. 2017); Helvetica Servicing, Inc. v. Pasquan, 248 Ariz. 219
(App. 2019) [hereinafter Helvetica IV]. In 2003, Michael and Kelly Pasquan
began renovating their 4,000 square-foot home in Paradise Valley (the
“Property”), which they purchased with a $600,000 loan from Hamilton
Bank (the “Hamilton loan”) and a cash payment. Over the next several
years, the Pasquans expanded the Property by an additional 7,000 square
feet.

¶3           In 2004 and 2005, the Pasquans borrowed approximately $2.1
million from Desert Hills Bank (the “Desert Hills loan”). The Pasquans
used a portion of the Desert Hills loan to pay off the Hamilton loan, and
used the remainder to renovate/expand the Property.

¶4           In 2006, the Pasquans borrowed $3.4 million from Helvetica
(the “Helvetica loan”). The Property secured the deed of trust. The
Pasquans used the proceeds of the Helvetica loan to pay off the Desert Hills
loan.

∗
 Vice Chief Justice Ann A. Scott Timmer has recused herself from this case.
Pursuant to article 6, section 3, of the Arizona Constitution, the Honorable
Garye L. Vásquez, Chief Judge of the Arizona Court of Appeals, Division
Two, was designated to sit in this matter.
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               HELVETICA SERVICING INC. v. PASQUAN
                        Opinion of the Court

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

¶6             Pasquan 1 appealed, arguing the Helvetica loan was entitled
to anti-deficiency protection. See Helvetica I, 229 Ariz. at 497 ¶ 12; see Baker
v. Gardner, 160 Ariz. 98, 107 (1988) (“By choosing judicial foreclosure, the
creditor can obtain a deficiency judgment in all cases except those dealing
with purchase money collateral on the residential property described in
[A.R.S.] § 33-729(A).”). A deficiency judgment “is nothing more than the
difference between the security and the debt.” Valley Nat. Bank of Ariz. v.
Kohlhase, 182 Ariz. 436, 440 (App. 1995) (quoting Baker, 160 Ariz. at 104 n.7).

¶7            Helvetica I held a construction loan used to build a home that
secures the debt qualifies as a purchase money loan 2 entitled to anti-
deficiency protection under § 33-729(A). 229 Ariz. at 501 ¶ 32. Helvetica I
directed the trial court to address on remand whether the Desert Hills loan
was a construction loan or a home improvement loan. Id. at 499 ¶ 25 n.6.

¶8             On remand, after a bench trial, the trial court found the Desert
Hills loan was “used for construction of the residence” on the Property with
the exception of the $600,000 used to pay off the Hamilton loan. However,
the trial court did not make a factual finding as to whether the Desert Hills
loan was a construction loan or a home improvement loan. Helvetica IV, 248
Ariz. at 221 ¶ 8. The trial court declined to decide this issue because it
interpreted Helvetica I as foreclosing the argument that the Desert Hills loan
was at least in part a home improvement loan.

¶9          Helvetica appealed. Helvetica IV found the Desert Hills loan
was a home improvement loan, not a construction loan, primarily because
Pasquan “did not build a new home from scratch.” Id. at 222 ¶ 18.




1      The Pasquans divorced in 2009. Kelly Pasquan is not a party to this
appeal.
2      “[A] purchase money mortgage is one that encumbers the property
being sold.” Cely v. DeConcini, McDonald, Brammer, Yetwin & Lacy, P.C., 166
Ariz. 500, 505 (App. 1990).
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              HELVETICA SERVICING INC. v. PASQUAN
                       Opinion of the Court

                           II. DISCUSSION

¶10           We granted review to provide guidance concerning the
application of Arizona’s anti-deficiency laws to home construction and
home improvements loans, an issue of statewide importance. When an
appeal presents a mixed question of law and fact, we defer to the trial
court’s factual findings but review de novo all legal conclusions. State v.
Gonzalez-Gutierrez, 187 Ariz. 116, 118 (1996).

¶11           In Arizona, protection for residential borrowers is set forth in
two anti-deficiency statutes: A.R.S. §§ 33-729(A) and -814(G). Residential
borrowers are generally not subject to a deficiency judgment on a loan for
the purchase of a home if the loan is secured by the home. The anti-
deficiency statutes apply when the collateral is: (1) a property of two-and-
a-half acres or less and (2) “limited to and utilized for either a single one-
family or a single two-family dwelling.” §§ 33-729(A), -814(G). Because
Helvetica judicially foreclosed its lien, § 33-729(A) is the anti-deficiency
statute applicable in this case. Section 33-729(A) provides:

       [I]f a mortgage is given to secure the payment of the balance
       of the purchase price, or to secure a loan to pay all or part of
       the purchase price, of a parcel of real 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, the lien of
       judgment in an action to foreclose such mortgage shall not
       extend to any other property of the judgment debtor, nor may
       general execution be issued against the judgment debtor to
       enforce such judgment, and if the proceeds of the mortgaged
       real property sold under special execution are insufficient to
       satisfy the judgment, the judgment may not otherwise be
       satisfied out of other property of the judgment debtor,
       notwithstanding any agreement to the contrary.

¶12            Anti-deficiency protection, pursuant to § 33-729(A), includes
loans for the construction of new homes. Helvetica I, 229 Ariz. at 501 ¶¶ 31–
32; see Prunty v. Bank of Am., 112 Cal. Rptr. 370, 378 (Cal. App. 1974)
(applying anti-deficiency protection, under a similarly worded statute, to a
construction loan used to finance construction of a residence on a lot
already owned by the borrower). “[A] construction loan qualifies as a
purchase money obligation if: (1) the deed of trust securing the loan covers
the land and the dwelling constructed thereon; and (2) the loan proceeds
were in fact used to construct a residence that meets the size and use


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              HELVETICA SERVICING INC. v. PASQUAN
                       Opinion of the Court

requirements set forth in A.R.S. § 33-729(A).” Helvetica I, 229 Ariz. at 501
¶ 32. Neither party challenges that holding.

¶13           Home improvement loans are not entitled to anti-deficiency
protection. Sw. Sav. & Loan Ass’n v. Ludi, 122 Ariz. 226, 228 (1979). Ludi
involved a home improvement loan assumed by a subsequent purchaser.
Id. at 227. Ludi states, without analysis, that the loan at issue is a home
improvement loan, “clearly not covered by” § 33-729(A). Id. at 228. Ludi
provides no guidance as to what makes a loan a construction loan as
opposed to a home improvement loan. Rather, Ludi stands solely for the
proposition that a home improvement loan, unrelated to the construction
of a residence, is a non-purchase money obligation not entitled to anti-
deficiency protection under § 33-729(A). Id.

¶14            The issue in this case, left unresolved by Helvetica I, is what
distinguishes a construction loan from a home improvement loan.
Although Helvetica I suggested a substantial portion of the Desert Hills loan
was a construction loan, it reserved that question and remanded the matter
to the trial court for a factual determination. 229 Ariz. at 499 ¶ 25 n.6.
However, the trial court instead simply characterized the Desert Hills loan
as a construction loan based on its reading of Helvetica I.

¶15          On appeal, Helvetica IV found the Desert Hills loan was a
home improvement loan, not a construction loan, primarily because the
Pasquans did not build a new home from scratch. Helvetica IV, 248 Ariz. at
222–23 ¶ 18. We disagree with this analysis.

¶16            The “built from scratch” standard applied in Helvetica IV does
not further the legislative objectives of Arizona’s anti-deficiency statutes
because such a rule fails to protect a borrower who obtains what would
otherwise be a construction loan, but which does not fit within the narrow
definition of a home built from scratch. In 1971, when the Arizona
legislature first enacted the anti-deficiency statutes, its objective was to
protect homeowners against deficiency judgments arising from the
purchase of a home. Baker, 160 Ariz. at 101. The legislature wanted to
“protect[] consumers from financial ruin” and eliminate “hardships
resulting to consumers who, when purchasing a home, fail to realize the
extent to which they are subjecting assets besides the home to legal
process.” Id. (citation omitted). Anti-deficiency protection reflects a
legislative policy decision to place the risk of inadequate security on lenders
rather than borrowers. Id. at 103. The anti-deficiency statute discourages
purchase money lenders from over-valuing real property by requiring them


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              HELVETICA SERVICING INC. v. PASQUAN
                       Opinion of the Court

to look solely to the collateral for recovery in the event of foreclosure. Id.
These objectives are why anti-deficiency protection extends only to loan
disbursements related to the acquisition or construction of a statutorily-
qualifying residence. Helvetica I, 229 Ariz. at 502 ¶ 37.

¶17            But there is a substantial grey area between a loan used to
finance a newly constructed, built from scratch home and a loan used to
remodel the kitchen. Here, we attempt to clarify circumstances under
which a loan is a “home improvement loan” as in Ludi, as opposed to a
“construction loan” under Helvetica I. Although construction may involve
building an entirely new structure, construction also includes building or
rebuilding qualified properties—even if the project did not begin “from
scratch” with an empty lot. Differentiating between a construction loan and
a home improvement loan is a fact intensive inquiry based on the specifics
of the project and property at issue.

¶18           Therefore, a construction loan includes building or rebuilding
a residence, where the existing structure is largely demolished. Conversely,
a home improvement loan includes elective enhancement, such as the
expansion of an existing structure, but not reconstruction of a damaged
structure. However, a single definition cannot capture these concepts.

¶19           Because determining whether a loan is a home improvement
loan or a construction loan depends on a number of criteria, courts should
consider the totality of the circumstances surrounding the loan. We identify
five non-exclusive factors indicating whether a loan is a construction loan
for purposes of anti-deficiency protection under § 33-729(A): (1) whether
there was a complete or substantially complete demolition of an existing
structure and a new building constructed in its place; (2) the intent of the
parties when executing the loan documents; (3) whether the structure was
inhabitable or inhabited during construction; (4) whether the structure was
largely preserved and improved or substantially expanded; and
(5) whether the project is characterized as “home improvement” or
“construction” in the loan documents and in the permits or other official
documents. See Allstate Sav. & Loan Ass’n. v. Murphy, 159 Cal. Rptr. 663, 664
(Cal. App. 1979) (finding a loan to finance the construction of a swimming
pool, seventeen months after the defendants bought the home and moved
in, was not entitled to anti-deficiency protection); Prunty, 112 Cal. Rptr. at
372 (looking to the parties’ intent when executing the relevant loan
documents).




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              HELVETICA SERVICING INC. v. PASQUAN
                       Opinion of the Court

¶20            Applying those factors here, several facts suggest that the
Desert Hills loan is a construction loan: Over the course of several years the
Pasquans demolished most, but not all, of the residence. In stages, the
Pasquans replaced the existing building with a larger single-family
residence and related improvements. Additionally, the Desert Hills loan
was titled a construction loan. Both the Pasquan-Desert Hills Bank deeds
of trust that were refinanced by Helvetica are titled “Construction Deed of
Trust” and contain language indicating the deeds of trust are intended by
the parties to secure a construction loan.

¶21           Conversely, when the Pasquans purchased the property,
there was an existing single-family residence on the property. And at all
times during the construction there was an inhabitable structure on the
property and, at all relevant times, someone did reside on the property.
These facts suggest the loan was made for home improvements.

¶22            The record before us presents a close call as to whether the
Desert Hills loan is a construction loan or a home improvement loan. But,
because the trial court did not make an independent factual determination,
we remand for the appropriate factual findings. After considering the
factors set forth herein along with any other relevant facts, the trial court
must decide whether the loan was made for construction or home
improvement. If the court determines it is a construction loan, the borrower
is entitled to anti-deficiency protection.

                          III. CONCLUSION

¶23            We vacate the court of appeals’ opinion and remand to the
trial court. On remand, the trial court should consider the totality of
circumstances surrounding the project and the loan, including the factors
set forth herein, make a factual determination as to whether the loan was
for construction or home improvement, and enter judgment in accordance
with its findings.




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