Everyone Wins When a Foreclosure Sale Generates Excess Proceeds

Introduction

When a foreclosure sale generates more money than needed to pay off the lien, the excess proceeds usually go first to creditors in the order of their priority, and second to the owner after creditors are paid in full. So, in truth, not everyone wins when a foreclosure sale brings in too much money.  Amusingly, in Steinmetz v. Everyone Wins, the court awarded excess sale proceeds to….you guessed it…Everyone Wins, despite the owner’s argument that Arizona’s anti-deficiency statutes barred it from recovering anything.

In addition to supplying a clever title for this post, Steinmetz v. Everyone Wins provides an important analysis of how Arizona’s anti-deficiency statutes, homeowner’s assessment lien statutes, and foreclosure statutes apply when determining who “wins” when it comes to excess sale proceeds.

The Facts

Matt Steinmetz, PLLC (“Steinmetz”) bought a house in Phoenix. To finance the purchase, it borrowed money from a bank, and secured the obligation with a first position deed of trust against the property (the “DOT”).  The bank later sold the loan and DOT to Everyone Wins, LLC (“Everyone Wins”).

Two years after the purchase, the homeowners’ association sued Steinmetz for unpaid assessments (the “HOA Lawsuit”). The HOA Lawsuit resulted in a judgment against Steinmetz that directed the Sheriff’s office to sell the home under special execution (i.e., a “Sheriff’s Sale”).  Because the HOA judgment came after the DOT, it was junior in priority.

Jarvis Holdings, LLC (“Jarvis”) bought the home at the Sheriff’s Sale subject to the senior DOT. See Mid-Kansas Fed’l Sav. & Loan v. Dynamic Dev. Corp., 167 Ariz. 122, 130, 804 P.2d 1310, 1318 (1991).  The Sheriff took the sale proceeds, paid off the HOA, and deposited the rest of the cash—$31,444.99 in this case (the “Excess Proceeds”)—with the Maricopa County Clerk.  Jarvis, Steinmetz, and Everyone Wins each submitted a claim for the funds.

The trial court dismissed Jarvis’ claim, with prejudice, and then awarded Everyone Wins the entirety of the Excess Proceeds pursuant to A.R.S. § 33-727. This statute generally provides that proceeds from a mortgage foreclosure sale go first to creditors according to their priority, and only to the owner after creditors are paid in full.  Steinmetz appealed.

Legal Analysis

On appeal, Steinmetz argued that Arizona’s mortgage and trustee’s sale anti-deficiency statutes prevented Everyone Wins from recovering the Excess Proceeds. These statutes generally provide that a creditor secured by a lien against a residence of 2.5 acres or less cannot recover anything from the borrower beyond recovery of the residence itself. See A.R.S. §§ 33-729(A) and 33-814(G).  Alternatively, Steinmetz argued that since the foreclosure was a Sheriff’s Sale instead of a mortgage foreclosure action, A.R.S. § 33-727 did not apply.  The Court of Appeals disagreed with Steinmetz’s interpretation of these three statutes.

First, A.R.S. § 33-729(A) only prevents a creditor from pursuing the borrower “if the proceeds of the mortgaged real property sold under special execution are insufficient to satisfy the judgment….” In this case, the proceeds of the Sheriff’s Sale were sufficient to pay off the HOA’s judgment and, in any event, Everyone Wins’ lien was not foreclosed.  Thus, the statute did not prevent Everyone Wins from recovering the Excess Proceeds.

Second, the Court of Appeals determined that under its plain language, A.R.S. § 33-814(G) only applies when a property “is sold pursuant to the trustee’s power of sale….” Since the sale was a Sheriff’s Sale instead of a trustee’s sale, this statute did not apply.

Third, although the HOA Lawsuit involved an assessment lien under A.R.S. § 33-1801 et seq. instead of a mortgage under A.R.S. § 33-701 et seq., the Court of Appeals held that A.R.S. § 33-727 still applied.  The HOA statutes provide that an assessment lien “may be foreclosed in the same manner as a mortgage on real estate….” See A.R.S. § 33-1807(A).  Thus, the trial court correctly applied the mortgage statutes to award Everyone Wins the Excess Proceeds.

Conclusion

Put simply, when the foreclosure of a junior lien generates excess sale proceeds, Everyone Wins.