Judgment Liens and Homestead Properties

By February 11, 2019 Articles

COURT RULES THAT JUDGMENTS DO NOT ATTACH AS LIENS TO HOMESTEAD PROPERTIES

Most civil cases never reach the trial stage.  Instead, they are settled before trial.  However, in those smaller percentage of cases that proceed all the way to trial, the Court will award to the prevailing party a judgment.  These judgments are typically recorded with the local county recorder’s office so that the judgment can attach as a “judgment-lien” on any non-exempt property owned by the debtor.

Arizona provides various exemptions (i.e. protections) to judgment-debtors, including a homestead exemption of $150,000.00 on the judgment-debtor’s primary residence.  Until now, most real estate professionals understood that notwithstanding the homestead exemption, any judgment still attached as a lien to the non-exempt portion of the homestead property – that is, the judgment attached as a lien against equity in the homestead property above $150,000.00. The Court of Appeals, however, recently issued a ruling that turns the conventional wisdom on its head.

In Pacific Western Bank v. Mark Wallace Castleton, 2018 WL 6815531 (App. 2018), the homeowners purchased their home borrowing nearly a million dollars, and secured the loan by a deed of trust.  Separately, the homeowners borrowed money to buy an apartment complex.  They subsequently defaulted on the apartment loan and a judgment was entered against them for over five million dollars.  The judgment was recorded with the county recorder’s office.

More financial troubles ensued, and the homeowners defaulted on their mortgage payments for their home. That resulted in a short sale conveying the homestead property to a third party without satisfaction of the judgment.

Approximately three years later, the judgment-creditor filed suit against the new owner to foreclose on its judgment lien.  The Court then order the house be sold at Sheriff’s Sale.  The new owner then petitioned the court for an injunction to stop the sale which was granted.  The judgment-creditor then appealed the injunction.

On appeal, the Court considered whether the judgement-creditor’s judgment-lien attached to the homestead and thus gave them rights to force the sale of the property.  This latter issue required the Court to consider the interplay of various statutes that the judgment creditor argued created an exception allowing a judgment-lien to attach to the homestead property.

The Court of Appeals (Division One) relied upon a 2008 decision which opined that the exemption granted for the homestead property was essentially conceived as being for the totality of the homestead property, not just for the equity in that property.  With that predicate, the Court of Appeals then concluded that the judgment-lien never attached to any portion of the homestead property because of express statements in A.R.S. §§ 33-964(B) and 33-1101(A)

The judgment-creditor, however, is not left without a remedy: judgment-creditors can still satisfy a judgment by bringing a forced sale through A.R.S. § 33-1105.  Under this statute, a creditor can force the sale of a homestead property but only if the creditor pays the owner the amount of the homestead exemption ($150,000.00) plus the amount of any senior consensual liens.

In the Pacific Western Bank case, the judgment-creditor could NOT utilize A.R.S. § 33-1105 because the prior-existing consensual lien was for $937,500.00, meaning that the homestead property would need to sell for $1,087,500 to also account for the $150,000.00 homestead exemption.  The short-sale agreement by the judgment-debtor was for only half that amount even though done several years after the judgment was obtained against the judgement-debtors.

Importantly, the judgment-creditor also argued that the judgment-lien “ran with the land” and that the judgment-debtors abandoned their homestead when they sold the homestead property.  The Court of Appeals rejected the first of these two arguments outright because of its earlier holding that the judgment lien never attached to the land.  The second argument was dealt with in more length, but ultimately rejected because the sale of the property did not allow the judgment-lien to be resurrected by the sale and because the judgment-lien could never attach in the first place.

Takeaways:

  1. The whole homestead property of a judgment-debtor is protected from attachment of a judgment-lien regardless of how much equity there is above the homestead exemption.
  1. Lenders considering a refinance of the homestead property to the judgment-debtor could view this somewhat differently. The cautious lender may still require the judgment to be paid.  Less risk-averse lenders (i.e. hard-money lenders) may loan money without requiring the judgment-debtor to pay the judgment off because the refinance will be in a secured position versus the judgment being in an unsecured position.
  1. The sole remedy for a judgment-creditor seeking equity in a homestead property is to foreclosure judicially per A.R.S. 33-1105. In this case, the judgment-creditor should carefully consider that sufficient equity exists to pay the homestead exemption, plus any prior-existing consensual liens.

If you or someone you know has questions regarding mortgages, creditors’ rights and collection actions, or any real estate matter, call our office today to schedule a consultation with Bryan Eastin.

Bryan L. Eastin is an Attorney with Provident Law® practicing in the areas of trust and estate administration and litigation, guardianships and conservatorships, and real estate.  Bryan’s practice includes representation of private fiduciaries appointed by the court to serve as guardians, conservators, personal representatives and/or as trustees.  Bryan is admitted to practice in Arizona’s state and federal courts, and he is currently a member of the Arizona State Bar Association and Maricopa County Bar Association.  He can be reached via email at Bryan@ProvidentLawyers.com