Arizona Court of Appeals Division One holds that payments made pursuant to a judgment should be allocated to outstanding interest first, then to any remaining principal balance.

In 1993, the Gila River flooded and breached the Gillespie Dam, causing extensive flood damage to farmers’ land.  The Flood Control District of Maricopa County had previously entered into an agreement with the owners of the dam to indemnify the dam owners in exchange for the dam owners granting an easement to the District.

The farmers sued the dam owners and the District for damages, and the District filed a complaint for declaratory relief against the dam owners, seeking a judgment declaring that the District had no obligation to indemnify the dam owners.  Eventually the superior court entered judgment awarding the dam owners $11.45 million plus $8.4 million in costs and fees.  The amended judgment ordered interest paid “at the rate provided by law from August 21, 2007.”

An earlier appeal remanded the case to the superior court to determine the appropriate amount of prejudgment interest, among other things.  After remand, the District made two partial payments toward the judgment.  Counsel for the District sent an e-mail to counsel for the farmers and the dam owners, explaining that the payments were to go toward the principal and should “cut off” any accruing interest.  The farmers and the dam owners, however, applied the payments first to outstanding interest and then to the remaining balance.  The parties also disputed the appropriate interest rate.

The superior court held that the interest rate should be 10% and that the partial payments should be applied first to interest, then to principal.

The Court affirmed the interest rate of 10%.  A 2012 amendment to A.R.S. § 44-1201(B) awards interest at the lesser of 10% or 1% plus the prime rate, but the amendment applies only to “judgments that are entered on or after the effective date of this act”—July 20, 2011.  Therefore, the 2012 amendment did not reduce the interest rate applicable to this case.

Finally, the Court affirmed the superior court’s ruling that the District’s payment applies first to accrued interest, explaining that while a debtor who makes a payment may direct how the payment is applied, this principle only relates to payments voluntarily made by the debtor; it has no application where the payment was involuntarily made.  The Court held that the District’s partial payment was “clearly involuntary,” and that absent an agreement or statute to the contrary, partial payment of a debt is made first to the unpaid interest due. 

Judge Thompson authored the opinion.  Presiding Judge Gould and Judge Portley concurred.