If You Purchase a House at an HOA Lien Foreclosure, Are You Entitled to Excess Sale Proceeds?

That pesky excess sale proceeds statute, A.R.S. § 33-727, is making waves again. We previously blogged about this statute here. In the prior post, we explained that excess sale proceeds (i.e., a foreclosure sale price greater than the lien being foreclosed) must be used to pay other lien creditors, in full, before the owner receives anything. Recently, the Arizona Court of Appeals held that creditors also take excess sale proceeds before the person who purchased the property at foreclosure. The case, Vista Santa Fe Homeowners Association v. Millan, No. 1 CA-CV 18-0609 (Ct. App. Oct. 15, 2019), is discussed below.

The Facts

In Vista Santa Fe, an individual bought a home secured by a first and second deed and trust. The homeowner defaulted on assessments owed to the Vista Santa Fe Homeowners Association (the “HOA”), and the HOA commenced an action to foreclose the resulting assessment lien. At the time, the HOA was owed approximately $14,000.

Patterson Commercial Land Acquisition & Development, LLC (“Patterson”) purchased the property at the HOA’s sheriff’s sale for $42,000. After satisfying the HOA’s lien, the sheriff deposited the excess sale proceeds, in the amount of approximately $28,000, with the clerk of the court.

Both Patterson and the second deed of trust holder, Bank of New York Mellon (“Bank”), submitted claims for the excess sale proceeds.[1] The trial court awarded the money to the Bank, and Patterson appealed.

Legal Analysis

On appeal, Patterson argued—incorrectly—that he inherited the HOA’s position when he purchased the property at the sheriff’s sale. Based on this flawed premise, Patterson reasoned that because A.R.S. § 33-1807(B) provides that HOA assessment liens have priority over all liens except a first deed of trust, he—as the successor to the HOA—should take priority over the Bank and its second deed of trust.

But Patterson’s argument ignored the fact that the foreclosure sale extinguished the HOA’s lien. Indeed, the sale proceeds paid off the HOA in full. Thus, the HOA had no more lien interest following the foreclosure sale. Instead, as the Restatement (Third) of Property (Mortgages) § 7.4 (1997) provides, the Bank’s second deed of trust attached to the sale proceeds in the same order of priority that it had prior to the sheriff’s sale. In essence, the HOA got paid first, and the Bank got paid second. Accordingly, the Court of Appeals affirmed the judgment awarding the excess sale proceeds to the Bank.

Conclusion

Matters involving excess sale proceeds can be a little bit tricky and counterintuitive at times. Indeed, Patterson’s argument sounds plausible. Nevertheless, the Court of Appeals’ deep dive into the excess sale proceeds statute and general lien law ultimately led it to reach the right conclusion.

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[1]           The first deed of trust holder initiated a trustee’s sale of the same property and sold it to a third-party in satisfaction of its claim.