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Arizona Court Expands Timeshare Owners' Rights

On July 17, 2012, the Arizona Court of Appeals took a significant step toward granting timeshare owners more of the legal protections previously only afforded owners of traditional homes. In the case of Independent Mortgage v. Alaburda and Warner (1 CA-CV 11-0301) it ruled that a 1/10 fractional interest in Sedona, Arizona’s Villas at Seven Canyons gave its owners the same rights if they are involved in a default on a mortgage as those already belonging to ordinary homeowners.

The defendants in this case, a married couple named Dennis Alaburda and Amy Warner, bought the interest in a single-family residential condominium in 2006. Their use of the unit was limited to 28 days a year and they were not permitted to alter the villa or its décor in any way.

When they purchased the unit they obtained financing through Independent Mortgage. In connection with that financing, the couple signed a promissory note for $321,750, secured by a deed of trust on that one-tenth interest.

Things were fine until 2008 when the couple defaulted on the note and the mortgage company foreclosed. Upon obtaining its judgment of foreclosure, the mortgage company held a trustee's sale, purchased the property for $285,000 and then sued the couple for a $57,884 deficiency judgment.

However, as residential property owners, individuals cannot be sued for deficiencies in Arizona; state law includes what is known as an "anti-deficiency statute.” It provides certain borrowers protection from such deficiency judgments. In a nutshell, if the loan is on a single one- or two-family dwelling on 2 1/2 acres or less, a lender who forecloses cannot then sue the borrowers for the difference between the sale price of the property and what was owed on the note.

The mortgage company argued that the couple was not protected by this statute because their 1/10 interest in the condo was not a “dwelling” within the meaning of the statute. The mortgage company further argued that the couple did not have continuous and total use of the condo.
The court disagreed, however, stating that the definition of “trust property” in the statute includes any interest in real property. The statute in question clearly refers to “any legal, equitable, leasehold or other interest in real property which is capable of being transferred, whether or not it is subject to any prior mortgages, trust deeds, contracts for conveyance of real property or other liens or encumbrances.” [9A.R.S. § 33-801(9) (2007)].

The court went on to state that nothing in § 33-814(G) limits its protection to only those that own all of the trust property described in the deed of trust. Any other conclusion would cast into doubt the protection of condominium owners who buy interests in common condominium areas. Accordingly, the court held that the couple in question were entitled to the protection of § 33-814(G).

What this decision means – in Arizona, and many believe in the rest of the country as well – is that owners of fractional ownership property are entitled to the same legal protection as residential homeowners in the case of a mortgage default. This important decision represents significant progress in the expansion of legal protections for fractional interest owners.

Next: Scotland: The Front Lines of the Battle over Timeshare Taxes

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