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Arizona Supreme Court Confirms Judgment Liens Apply to Homestead Properties in Excess of Exemption

In response to a certified question from a bankruptcy court, the Arizona Supreme Court held that a recorded judgment lien attaches to homestead property where the judgment debtor has equity in excess of the $150,000 exemption under Arizona law.

In addition, given the uncertainty of the law that prompted the certified question, the Court denied the bank’s request for attorney’s fees.

A copy of the opinion in In re Todd McLauchlan is available at:  Link to Opinion.

A bank obtained a California judgment against a consumer, and the judgment was domesticated and recorded in Arizona. The consumer later filed a Chapter 7 bankruptcy petition identifying an ownership interest in a residence and claiming the statutory $150,000 homestead exemption in the residence under A.R.S. § 33-1101.

The bank filed a proof of claim, $552,497 of which was secured by the recorded judgment lien. The remaining $115,985 was unsecured. After the consumer received his discharge, he sold the residence and realized $56,852 in excess of the $150,000 homestead exemption.

The bank filed a motion seeking a determination that the consumer’s bankruptcy discharge did not affect its interest secured by its recorded judgment. The consumer objected, arguing that, under A.R.S. § 33-964(B), judgment liens do not attach to homestead property.

The bankruptcy court then certified the question to the Arizona Supreme Court. At issue was whether, under A.R.S. 33-964(B), judgment liens attach to homestead property.

A.R.S. § 33-1101 provides a $150,000 exemption from attachment, execution, and forced sale for, among other things, a “person’s interest in real property in one compact body upon which exists a dwelling house in which the person resides.” § 33-1101(A)–(A)(1) (2004).

The Arizona Supreme Court determined that the key purpose of the statute is to ensure that individuals whose property is subject to foreclosure are not rendered homeless. See, e.g., Ferguson v. Roberts, 64 Ariz. 357, 361 (1946). However, nothing in the statute suggests an aim to shield proceeds in excess of the exemption from creditors, nor to confer any financial benefits upon debtors beyond the exemption.

Additionally, the Arizona Supreme Court noted that A.R.S. § 33-1103 was amended in 2007 to read: “[t]he homestead provided for in § 33-1101, subsection A, is exempt from process and from sale under a judgment or lien, except: . . . [t]o the extent that a judgment or other lien may be satisfied from the equity of the debtor exceeding the homestead exemption.” § 33-1103(A), (A)(4) (2007).

Therefore, the Arizona Supreme Court agreed with the bank that the plain language of the statutes encompasses judgment liens that may be applied against property sale proceeds in excess of the homestead exemption.

Moreover, the Arizona Supreme Court concluded that there was no reason to treat proceeds in excess of the homestead exemption from a voluntary sale differently than proceeds from a forced sale because A.R.S. §  33-1103(A)(4) makes no such distinction, stating categorically that “a judgment or other lien may be satisfied from the equity of the debtor exceeding the homestead exemption.” § 33-1103(A)(4) (2007).

Accordingly, the Arizona Supreme Court answered the question presented by the bankruptcy court in the affirmative, and given the prior uncertainty in the law, the Court denied the bank’s request for attorney’s fees.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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