A couple defaulted on a loan to purchase commercial real property, and a bank obtained a default judgment against them. After that, the couple defaulted on a separate loan used to purchase their primary residence, and the lender on that loan approved a short sale of their home. The short sale resulted in a trust purchasing the house for less than the outstanding value of the loan. The bank’s judgment on the non-resident loan was never paid. Three years later, the bank sued the trust, seeking declaratory relief and to quiet title, claiming the judgment was an enforceable lien against the home. The bank obtained a writ of general execution as well, and the county sheriff noticed a sale of the home. The trust moved to enjoin the sale. Following an evidentiary hearing, the superior court entered a preliminary injunction enjoining the sale of the home. The bank appealed.
The Court of Appeals affirmed. Arizona law automatically makes a recorded judgment a lien on all real property owned by the debtor, unless the property is exempt from execution. One exception to this rule is the homestead exemption. A homestead exemption protects equity of up to $150,000 in a personal residence. If a homestead exemption exists, the property is held free and clear of judgment liens, even if there is excess equity in the homestead beyond $150,000. If a judgment creditor believes excess equity exists in a homestead, they may instead protect themselves by forcing an execution sale under A.R.S. § 33-1105, but only if it can sell the homestead for more than the combined sum of the debtor’s homestead exemption and any senior consensual liens. Here, the evidence suggested the bank chose to forgo this protection because the home could not be sold for more than the combined total of the senior lien and the debtor’s homestead exemption. As the homestead exemption applied, there was no judgment lien on the residence.
Judge Cruz delivered the unanimous opinion of the court; Presiding Judge Campbell and Judge Johnsen joined.
Posted by: Emma J. Cone-Roddy