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In re McLauchlan - 1/27/2022

Arizona Supreme Court holds that a recorded judgment lien attaches to homestead property if the debtor has equity in excess of the amount exempt under Arizona law.


In 2019, a man filed for Chapter 7 Bankruptcy and claimed the statutory $150,000 homestead exemption in a residence that was secured by a lien.  A bank filed a proof of claim, based in part on a judgment it had obtained against the man in 2015.  After the bankruptcy was discharged, the man sold the residence and netted a profit greater than $150,000 after satisfying the consensual lien and costs of the sale.  The bank then filed a motion in federal bankruptcy court seeking a determination that the discharge did not affect its interest in the residence.  The man objected, arguing that A.R.S. § 33-964(B) prevents judgment liens from attaching to homestead property.  The bankruptcy court certified the question to the Arizona Supreme Court.

The Supreme Court held that if a judgment debtor has equity in excess of the statutory exemption limit, a recorded judgment lien does attach to the homestead property.  The Court began by explaining that the purpose of the homestead exemption statute, A.R.S. § 33-1101 (2004), is to protect individuals whose property is subject to foreclosure from becoming homeless.  It does not confer any other financial benefits on debtors, nor does it shield proceeds in excess of the exemption from creditors.  Nevertheless, prior to 2007, A.R.S. § 33-964(B) prevented all judgment liens from attaching to homestead property.  In 2007, that statute was amended to prevent attachment of judgment liens to homestead property “[e]xcept as provided for in § 33-1103.”  Section 33-1103 in turn provides that the homestead is exempt except “to the extent that a judgment or other lien may be satisfied from the equity of the debtor exceeding the homestead exemption.”

The Supreme Court held that the new prefatory language in § 33-964(B) now permits any type of judgment lien to be applied to proceeds in excess of the homestead exemption, because any other reading would effectively increase the amount of the homestead exemption to include surplus revenues from a voluntary sale, which would be inconsistent with the statutory scheme.  The Court thus declined to follow In re Rand, 400 F.R. 749, 754 (Bankr. D. Ariz. 2008), which had construed the new language to apply only to spousal and child support liens.  The Court also clarified that a judgment lien may attach regardless of whether the proceeds result from a forced or voluntary sale, expressly disapproving of Pacific Western Bank v. Castleton, 246 Ariz. 108, 110–11 (App. 2018), to the extent that it held that such liens could only attach to proceeds from a forced sale.

Because of the uncertainty of the law that prompted the certified question, the Court declined to award attorney fees.

Justice Bolick authored the unanimous opinion.

Posted by: Heather Robles

Posted On: 2/7/2022