What Happens to Excess Proceeds After a Foreclosure Sale in Arizona?

In Arizona, there are two primary ways to secure payment for a lien on real property: a trustee’s sale and a judicial foreclosure. The two procedures have some technical differences but the same end result: the property that is the security for the lien is sold to generate proceeds to pay the lien. There is no theoretical limit on the amount of liens with which one can encumber a piece of real estate, but the first lien created is senior to the second lien created. The second lien is senior to the third lien created but junior to the first lien, and so on down the line.

What happens, then, when a junior lienholder wants to foreclose on its lien? This occurs frequently with homeowners associations that want to foreclose their lien for HOA dues or other assessments, and those HOA liens are typically junior to the lien for the property owner’s mortgage loan.

So, for example, say that Celeste has a home with a mortgage balance of $200,000 owed to Union Bank. Celeste also has failed to pay her HOA dues for some time, and she now owes her HOA $5,000. The HOA forecloses its junior lien and holds a judicial foreclosure sale where Omar buys Celeste’s property for $40,000. The HOA gets paid its $5,000, but what happens to the other $35,000? What about the $200,000 that is owed to Union Bank? Did Omar get a great deal and purchase a home worth at least $200,000 for only $40,000?

No, Omar is not that lucky (and, if Omar is bidding on property at a judicial foreclosure sale, he should already know this. If he does not, he should think about different investment opportunities). The senior lienholder, Union Bank, has an intact lien on Omar’s property; the judicial foreclosure sale did not affect Union Bank’s lien. Omar has to make the mortgage payments to Union now, or he will face foreclosure from Union Bank.

But what about the $35,000? Does Union Bank get to take that money, too? That is the question the Arizona Court of Appeals, Division Two, answered in August of this year in Tortosa Homeowners Association v. Garcia (2 CA-CV 2021-0114). The court said no, Union Bank does not get that money. There is a statute that directs how the excess proceeds are to be paid, A.R.S. Section 33-727(B), and the senior lienholder argued in Tortosa that the statute directed payment to “other liens” in order of seniority, not just “junior liens.” The Court of Appeals went through numerous other authorities to show that interpretation is contrary to established law regarding the disposition of excess proceeds and reasoned, correctly, that the recourse of the senior lienholder is the intact senior lien that remains on the foreclosed property, not the excess proceeds. The excess proceeds flow down to the junior lienholders and then, finally, to the owner of the property.

So, in our example above, Celeste actually would receive the $35,000 in excess proceeds, given that there are no other junior liens in my example.

The senior lienholder in Tortosa deserves credit for making a unique argument, but ultimately the right decision seems to have attained. A senior lienholder is protected in a foreclosure sale and gets to keep its lien. That should be recourse enough.

Arizona Court of Appeals Issues Federal Land Patent Easement Decision

In Underwood v. Wilczynski, Division Two of the Arizona Court of Appeals issued an opinion clarifying certain rules applicable to easements granted pursuant to a federal land patent under the Small Tracts Act; 43 U.S.C. §§ 682a through 682e (repealed 1976). This case arose in Pinal County, so Division Two, located in Tucson, decided the appeal.

The case involved a dispute between three residential landowners: a trust, Underwood, and Wilczynski. Wilczynski owned landlocked property that required access through either the trust property or Underwood’s property. The Wilczynskis argued their property had legal access pursuant to 33-foot easements granted in federal land patents (FLPs) that ran along the boundaries of the trust and Underwood properties.

The Court of Appeals upheld the basis of the trial court’s ruling, which was summary judgment in favor of the Wilczynskis granting them access through the Underwood property (the trust did not dispute that Wilczynski could have access through the trust property). In upholding the ruling (and also vacating some portions of the actual judgment, which the Court of Appeals found had some technical errors), the Court of Appeals clarified some unique aspects of FLP easements:

1. FLP easements may only be used for access if necessary - if other physical and legal access to a parcel exists, the FLP easements are not necessary and therefore may not be used for convenience.

2. FLP easements, when necessary, may not necessarily be used to the full extent of their grant like other easements. In Underwood, the Court of Appeals found it was incorrect to say the Wilczynskis could use the entire 33-foot easement to enter the Wilczynski property when 33 feet was not necessary to construct an adequate access road. That is unlike other express easements that may be used as a matter of right up to the full extent of the express grant.

3. If a parcel needs to use an FLP easement out of necessity and has multiple FLP easement options to use for access (here, the Wilczynskis could have placed a road entirely on the trust property, entirely on the Underwood property, or half on both properties (this last option is the one the Wilczynskis chose)), the parcel needing access may choose where to place its access, and the burdened property owners (the trust and Underwood) cannot ask the court to force the parcel needing access to choose differently based on some external criteria.

Unique rules apply to FLP easements that make the legal rights and obligations of those easements slightly different than express easements in Arizona. The Court of Appeals does not issue a large number of opinions dealing with easements, and it was interesting to see how it dealt with these unique issues.

Arizona Flooding Damage Statutory Claims Not Guaranteed a Jury Trial

I have represented many clients who have either pursued their neighbors for property damages resulting from flooding or had to defend themselves against claims they flooded someone else’s property. As natives to the state know, flooding is no small concern in Southern Arizona despite the desert climate.

"A river runs through it (Tucson, Arizona)" by Distraction Limited is licensed under CC BY 2.0

One important tool to litigate flooding claims is A.R.S. § 48-3613. That statute requires any person who “engage[s] in any development which will divert, retard or obstruct the flow of waters in any watercourse” to procure a floodplain use permit allowing the development.

If a person engages in prohibited development without a permit, a court must require that person either to remove the development or to secure a permit. The court may award any person whom the unpermitted development harms his or her damages, attorney’s fees, and costs.

But who decides whether or not a person has engaged in conduct the statute prohibits - a judge or jury?

In Williams v. King, 460 P. 3d 303 (Ariz. App. 2020), the Arizona Court of Appeals held a judge, not a jury, should decide all matters relating to statutory flooding claims based on A.R.S. § 48-3613 because no statute or constitutional provision explicitly provides a right to jury trial for such a claim.

In practice, that holding means most flooding damage lawsuits will have two finders-of-fact: a jury will decide common-law tort claims like negligence or trespass, but a judge will decide the statutory claim under A.R.S. § 48-3613. Both parties should be aware of this bifurcated decision making from the outset and strategize accordingly.

Arizona Court of Appeals Clarifies Attorney Fee-Shifting Statute

In February of 2020, the Arizona Court of Appeals (Division One) issued an interesting opinion regarding the attorney fee-shifting statute, A.R.S. § 12-341.01. In Fields v. Elected Officials Retirement Plan, 459 P. 3d 503 (Ariz. App. 2020), the Court of Appeals held that a fee agreement between a client and lawyer that provided the lawyer would be paid only the full amount of any fee award if a court awarded statutory recovery of attorney’s fees but also required the client to petition the court for such an award was a genuine financial obligation of the client to the lawyer.

"Losing Hand" by Damian Gadal is licensed under CC BY 2.0

The State of Arizona, an additional defendant in the case, had argued in the trial court and to the Court of Appeals that the fee agreement did not really obligate the client to pay anything since there existed a significant possibility the trial court would not award recovery of attorney’s fees and, therefore, an award of fees under A.R.S. § 12-341.01 was unavailable.

The Court of Appeals held the fee agreement at issue was a contractual obligation that bound the client to do two things: 1. Seek an award, and 2. Pay any award over to the lawyer. The conditional nature of the obligation to pay did not eliminate the client’s obligation.

This is important to the work I do because I often have real estate clients who are seeking a remedy against a government entity against whom an award of attorney’s fees may be available under A.R.S. § 12-348. I have structured fee agreements like this before, though perhaps not quite this elegantly. Fields v. EORP provides an important blueprint for lawyers and clients to structure their fee agreement before the lawyer begins representation. The decision ensures lawyers can undertake cases that might be in the public interest but not easily paid for by the client at an hourly rate or using a traditional contingency fee recovery from an award of money damages.

If you have a zoning or eminent domain case that might involve litigation against a government entity, I am able to help. Fields v. EORP provides another tool to enable me to take such cases.

Reboot, COVID-19 Update, and Birds

When starting this website and attached blog, I sampled many offerings from firms across Tucson and Southern Arizona. Many, I noticed, began with regular posts and features but then quickly went defunct. “Not I,” I thought - I will continue posting on my blog come snow, rain, heat, or gloom of night.

Hubris. What happened?

When I began my own law firm, as is customary, I had a lot of time to write on this blog and not so many clients. Now, the reverse is true. Handling cases and most of the back-office work single-handedly quickly consumed any extra time I had for creative internet musings.

But now, a fresh start. Not because I have fewer clients, but rather because I believe it important that my clients know I am keeping abreast of real estate matters in Southern Arizona. I will be more regularly posting quick summaries of cases decided by the Arizona Court of Appeals and the Arizona Supreme Court.

Now is also an important time to advise any potential new clients that I am taking every precaution to protect my health and the health of my clients. I am wearing a mask when outside my private office space in my building, including during all meetings. The people working in my building - receptionists, secretaries - are doing the same. All surfaces are cleaned regularly. The court systems in town are taking extensive precautions and conducting most business virtually; my in-person visits to court are rare.

Finally, one of the only bright spots of this pandemic: with people self-quarantining, wildlife is proliferating in developed spaces, including my backyard. This summer has been especially fruitful for birdwatching on the many days I have worked from home.

Western Screech Owl

Harris's Hawk

Roadrunner

Cardinal

Fifth Anniversary for Sammartino Law Group

Sammartino Law Group has been proudly serving clients throughout Southern Arizona for five years. In that time, I have consistently maintained a well-balanced roster of clients who need high-quality, effective, and affordable legal help with all manner of real estate issues.

I remain one of the few State Bar of Arizona certified real estate law specialists in Tucson. For any legal issue with your property - access, eminent domain, easements, property damage - call me for a free consultation.

Arizona Daily Star Interviews Carl Sammartino Regarding Eminent Domain Success for Property Owners

The Arizona Daily Star interviewed me recently regarding my successful representation of multiple property owners whose property the City of Tucson condemned using eminent domain for the Downtown Links project:

“‘Whenever there is a large dispute, or a large number of disputes ... it indicates that there was some major disagreement between the government agency and the private property owner regarding the value of the property taken,’ said Carl Sammartino, an attorney who represented several of the affected owners.

Though they were on opposite sides of those disputes, Rossi and Sammartino agreed on the principal cause for the disagreements: The boom in downtown development, which led many owners to believe that their properties were worth more than the city was offering. A quick review of the offer and ultimate settlement figures shows that owners ended up with about 60 percent more than what was originally on the table, according to court documents.”

— Woodhouse, Murphy. (2017, September 18). Road Runner: Decades in the making, downtown bypass in sight. Arizona Daily Star, pp. A2, A5.

Please refer to my page of reviews on AVVO to see how my clients felt about the results I obtained for them as their eminent domain lawyer. You can also find the original Arizona Daily Star article here on the Star's website or permanently cached here. 

RTA Update 2017

In Southern Arizona, The Regional Transportation Authority (RTA) is a major source of condemnation cases - cases in which government entities use the power of eminent domain to take private property needed for public-works projects. The RTA plan is a 20-year plan, approved by voters in 2006, that mandates improvements to many roadways in Tucson. 

The RTA had its 10-year anniversary last year, in 2016, marking the halfway point of the RTA plan. What can citizens expect from the next ten years? This map shows which projects remain to be completed:

As you can see, Broadway Boulevard, Silverbell Road, Valencia Road, 22nd Street, Grant Road, 1st Avenue, and Tangerine Road are still slated for major improvements. 

Many property owners who have asked me to represent them when their property has been taken through eminent domain express surprise at how quickly the process moves once the government decides their property is needed for a project. Property owners along these roadways should be prepared for the major disruption that can occur during an eminent domain taking. Having an experienced eminent domain lawyer can help to answer many of the questions that are sure to arise during the process.

City of Tucson - 43rd Best-Run City in the Nation?

Wallethub has published a study identifying the best-run cities in America, and the City of Tucson ranks 43rd by one of their metrics. That ranking includes a combined measure of "overall city services" and "total budget per capita." Tucson is ranked 99th out of 150 cites in the former and 29th out of 150 cities in the latter, which creates the composite score of 43rd best-run city out of 150 largish cities studied. 

It should be noted, however, that Tucson falls almost into the bottom third (99th our of 150) of ranked cities using Wallethub's detailed breakdown by city, which accounts for financial stability (88th), education (114th), health (82nd), safety (109th), the economy (117th), and infrastructure and pollution (47th).

Looking at Tucson's performance in the subcategories, it seems like this city is doing well at spending a large amount of money per capita, improving infrastructure, and addressing pollution. Tucson is not doing as well at being financially stable, providing health care, safety, and education, or addressing the overall economy. 

This is an interesting study that provides a detailed look at the City of Tucson's overall performance relative to other cities in the United States. It definitely highlights areas the city could improve with more focus and leadership.  

Carl Sammartino - Certified Specialist in Real Estate Law

This May, the Board of Legal Specialization of the State Bar of Arizona certified me as a specialist in real estate law. Certification requires admission to practice for at least seven years, substantial legal practice in the area of real estate for a period of five years, the Board's recommendation after application and references, and passing an examination, which I took and passed in April. I am proud to have met these rigorous standards. 

Certified.

The State Bar of Arizona currently lists 72 board-certified-real-estate-law specialists in the State of Arizona, and only 15 of those have primary offices in Pima County. If you are looking for help resolving a real estate related legal issue, I highly recommend you seek the advice of one of those specialists. The specialist certification is the only designation the State Bar of Arizona grants to certify a particular lawyer practices mainly within one area of the law.