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.

July 2014 Updates

The Arizona Court of Appeals, Division One, issued two opinions recently regarding land-use issues:

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Hopefully you do not own a lot in a subdivision that looks like this.

Mandamus not available to force county to call subdivision improvement construction performance bonds: In Ponderosa, et al. v. Coconino, et al., the court stated that the decision to "call," or enforce, a performance bond ensuring construction of subdivision improvements when a developer defaults on its obligation to construct those improvements is discretionary. An action in mandamus - or, an order from a court ordering an entity to do that which it is required to do - is not available to force a county to call the bond. Where does that leave property owners who purchased lots in a subdivision with the expectation the improvements would be built? The court left open whether a county could be liable in damages for the failure to call the bond. I would suggest exploring breach of fiduciary duty as a viable claim for such damages, especially if the county did call the bond but, for whatever reason, the improvements were still never constructed.

Res Judicata does not bar ADEQ's claim for UST remediation costs and penalties when UST owner misrepresented ownership of UST in previous proceedings: This decision in State v. Arnett is not earth-shattering in its conclusion: during the bankruptcy of an entity the Arizona Department of Environmental Quality (ADEQ) thought owned an underground storage tank (UST), the true owner of the UST, a party to that proceeding, did not disclose his ownership. The bankruptcy proceeding therefore did not bar ADEQ from later pursuing its remedies against the true owner of the UST because the law generally does not allow a person to benefit from his or her own fraud.

Benson Mobile Home Community Prevails Against the City of Benson in Arizona Supreme Court on Zoning Issue

Good legal disputes are sometimes more entertaining than bad soap operas. Villains and heroes antagonize each other over ages, and, at the end, nobody is really sure what started the dispute in the first place. All involved are left yearning for a portal back to sunnier days when rancor was not so entrenched, so foreordained - but rather peaceably negotiable.

Such is the saga of Stagecoach Trails MHC, L.L.C. v. City of Benson. The Arizona Supreme Court's decision represents the climax of the story. The dispute started as follows.

 Some time prior to 2010, a property owner adjacent to Stagecoach Trails, a 55+ manufactured home community (MHC) in Benson, Arizona, complained about the size of a particular manufactured home (MH) within Stagecoach Trails. The ire of the great beast thus was provoked. When Stagecoach Trails, in 2010, applied for a permit to install a new MH on Lot 27 (not the original lot that prompted the neighbor's complaint), the City denied the permit because the City had decided all new MH installations should conform to the zoning code.

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The Stagecoach Trails Manufactured Home Community in Benson, Arizona. The location of Lot 27, the lot in dispute in the legal battle, is not shown.

The City's interpretation offended the owner of Stagecoach Trails, who claimed the property had been used as a MHC since the 60s. Goodwill, if it ever existed between the City and the owner at all, surely was further strained when the Benson mayor attempted to work things out mano-a-mano only to have that conversation reportedly tape recorded for future use. 

The City thus denied Stagecoach Trails's application for a permit, and Stagecoach Trails brought suit after appealing the permit denial to the City's Board of Adjustment. The critical issue was whether the property as a whole was a nonconforming use immune from the City's application of the zoning code or whether, as the City contended, each MH lot was an individual nonconforming use. If the City's interpretation was correct, each lot would lose its nonconforming status when a manufactured home was removed from a lot. If Stagecoach Trails's interpretation was correct, as long as the entire property remained in use as a MHC, individual MH units could be switched in and out without affecting the nonconforming status of the overall property.

Why was the Arizona Supreme Court needed to weigh in on such a simple issue? It wasn't. By the time the case got to the Supreme Court, the kerfuffle over the nonconforming status of the property was a secondary issue because the Court of Appeals had determined Stagecoach Trails had not made the prerequisite exhaustion of its administrative remedies.

Before a court has jurisdiction over a permit dispute, the permit applicant must "exhaust" his or her "administrative remedies" - in essence, the applicant must follow the appeal process of the body from whom he or she is requesting a permit. The idea is that governing bodies must be allowed the opportunity to correct their mistakes before valuable judicial resources are spent resolving the issue. In practice, these Board of Adjustment appeals are Grand-Guignol masquerades.  

During the time the matter was in Cochise County Superior Court, the City of Benson's zoning administrator had been busy. Once the City learned the superior court judge was not likely to see things the City's way (which, in the mind of the City Attorney, could only be the result of rank bias against the City), the zoning administrator issued multiple follow-up letters to Stagecoach Trails crafting various new reasons why Stagecoach Trails would never, ever receive a zoning permit. See video, at right. 

Stagecoach Trails's lawyers dutifully amended and refiled their court documents in response to each letter, but the Court of Appeals found that the new explanations from the zoning administrator required new appeals to the City of Benson Board of Adjustment in order for Stagecoach Trails to satisfy the "administrative exhaustion" requirement.

Enter the Supreme Court, which astutely holds that a governmental body does not have the power to create a never-ending process of review by continuing to modify its objections to a permit application. This levels the playing field somewhat for property owners because the opinion empowers common sense over bureaucratic nonsense. As long as a property owner makes a valid claim in the first instance that addresses every angle a city or county conjures up or could conjure up to deny a permit, the property owner need not mount futile attempts to reassert his or her claim successively each time the city or county evokes a new barrier.

The denouement is nearly as entertaining. After receiving the case back from the Supreme Court, the Court of Appeals, no doubt feeling upbraided, sent the matter back to the trial court for further findings rather than disposing of the case.

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The City of Benson could possibly appeal again whatever final ruling the trial court makes, but: 1. The trial court already ruled in favor of Stagecoach Trails once, and 2. The city attorney responsible for the City of Benson's legal strategy has been relieved of his post.

Unfortunately for Stagecoach Trails, the Supreme Court agreed with the Court of Appeals that the City of Benson was not required to pay Stagecoach Trails's attorneys' fees, rumored to be close to $300,000. Congratulations to Mr. John Hinderaker, Ms. Kimberly Demarchi, and Mr. Jeffrey Sklar of Lewis and Roca LLP (now Lewis Roca ‎Rothgerber LLP), who represented Stagecoach Trails. Here's hoping you get paid for your good work.