Tortosa Homeowners Association v. Davis Garcia

IN THE
ARIZONA COURT OF APPEALS
DIVISION TWO
TORTOSA HOMEOWNERS ASSOCIATION, AN ARIZONA NON-PROFIT
CORPORATION,
Plaintiff,
v.
DAVIS GARCIA, A MARRIED MAN AS HIS SOLE AND SEPARATE PROPERTY,
REPUTED OWNER,
Defendant,
MARICOPOLY, LLC,
Intervenor/Appellant/Cross-Appellee
and
DURABLE INVESTMENTS, LLC,
Assignee/Appellee/Cross-Appellant.
No. 2 CA-CV 2021-0114
Filed August 1, 2022
Appeal from the Superior Court in Pinal County
No. S1100CV201800379
The Honorable Jason R. Holmberg, Judge
AFFIRMED
COUNSEL
Law Offices of Kyle A. Kinney LLC, Scottsdale
By Kyle A. Kinney
Counsel for Intervenor/Appellant/Cross-Appellee
Legal AZ, Tempe
By Travis R. Campbell and Morgan Seegmiller
Counsel for Assignee/Appellee/Cross-Appellant
TORTOSA HOMEOWNERS ASS’N v. GARCIA
Opinion of the Court
Mark Brnovich, Arizona Attorney General
By Valerie Marciano and Lena Kalkbrenner, Phoenix
Counsel for Amicus Curiae Arizona Department of Housing, Administrator of
Arizona Home Foreclosure Prevention Funding Corporation
OPINION
Judge Espinosa authored the opinion of the Court, in which Presiding Judge
Eckerstrom and Chief Judge Vásquez concurred.
E S P I N O S A, Judge:
¶1 Maricopoly LLC appeals from the trial court’s order denying
its request for disbursement of excess proceeds resulting from its purchase
of property at a foreclosure sale. Durable Investments LLC cross-appeals
the court’s determination that A.R.S. § 33-727(B) mandates payment of such
proceeds to all lienholders before payment to the debtor. For the reasons
that follow, we conclude § 33-727(B) does not entitle a senior lienholder to
the excess proceeds that the junior lien’s foreclosure generates but
nevertheless affirm the court’s order.
Factual and Procedural Background
¶2 This appeal concerns real property in Pinal County
previously owned by Davis Garcia, subject to a first position deed of trust
held by U.S. Bank. In early 2018, Tortosa Homeowners Association sought
to enforce its lien against Garcia’s property through judicial foreclosure due
to unpaid fees and assessments. The trial court entered a default judgment
for Tortosa and ordered a foreclosure sale. In July 2019, Maricopoly
purchased the property at a subsequent sheriff’s sale, and after the
judgment was satisfied, the remaining $72,749.35 were deposited with the
court.
¶3 In 2020, both Durable—Garcia’s assignee—and Maricopoly
filed competing motions requesting payment of the excess proceeds from
the foreclosure sale. Maricopoly asserted it was entitled to the remaining
funds as assignee of U.S. Bank.1 In a preliminary ruling on Durable’s
1In
June 2020, Maricopoly paid to U.S. Bank the full amount Garcia
owed on the first deed of trust, and the lien on the property was released.
In March 2021, Maricopoly offered a stipulated judgment between
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TORTOSA HOMEOWNERS ASS’N v. GARCIA
Opinion of the Court
request for a hearing, the trial court determined that § 33-727(B) “prohibits
disbursement of any balance to the Judgment Debtor (or Assignee), unless
there are no other liens, not just junior lienholders.” After subsequent
briefing and argument, the court granted Durable’s request for the proceeds
and denied Maricopoly’s on the ground that it had “failed to provide any
proof of assignment from U.S. Bank.” The court thereafter entered a final
order from which Maricopoly appealed, and Durable cross-appealed. We
have jurisdiction pursuant to A.R.S. §§ 12-120.21(A)(1) and 12-2101(A)(1).
Discussion
¶4 The issues raised in this appeal turn on the interpretation of
§ 33-727(B), which governs the distribution of excess proceeds following a
foreclosure sale. It directs that “[i]f there are other liens on the property
sold, or other payments secured by the same mortgage, they shall be paid
in their order . . . and if there are no other liens the balance shall be paid to
the mortgagor.” § 33-727(B). Our review of the trial court’s interpretation
of the statute is de novo. Bank of Am., N.A. v. Felco Bus. Servs., Inc. 401(K)
Profit Sharing Plan, 243 Ariz. 150, ¶ 11 (App. 2017).
¶5 Maricopoly contends that excess proceeds generated by the
foreclosure sale must be paid to it as assignee of the senior lienholder U.S.
Bank. It maintains that under the doctrine of equitable subrogation,2 excess
proceeds from the foreclosure sale of a junior lien flow up to the senior
lienholder despite the senior lien not being extinguished by the foreclosure
because § 33-727(B) states “other liens” shall be paid in their order, without
other qualification. Durable and amicus curiae—the Arizona Department
of Housing—argue Maricopoly’s interpretation of § 33-727(B) is contrary to
the overarching statutory scheme, the Restatement of Property, and settled
Arizona law. We agree.
¶6 Our legislature’s wording in § 33-727(B) may give some
purchase to Maricopoly’s interpretation because it “does not limit excess
Maricopoly and U.S. Bank assigning “any claim to excess proceeds . . . that
U.S. Bank may have had” to Maricopoly, nunc pro tunc to June 19, 2020.
2“Equitable subrogation is ‘the substitution of another person in the
place of a creditor, so that the person in whose favor it is exercised succeeds
to the rights of the creditor in relation to the debt.’” Sourcecorp, Inc. v.
Norcutt, 229 Ariz. 270, ¶ 5 (2012) (quoting Mosher v. Conway, 45 Ariz. 463,
468 (1935)).
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TORTOSA HOMEOWNERS ASS’N v. GARCIA
Opinion of the Court
proceeds distribution to junior lienholders” and instead appears to apply
to all other liens. But when read in conjunction with related statutes, it is
clear that in a foreclosure by a junior lienholder, a senior lienholder’s rights
are not impacted by the sale. See A.R.S. § 12-1562(A) (In an execution of
judgment sale, “[a]ny excess in the proceeds over the judgment and costs
shall be returned to the judgment debtor unless otherwise directed by an
order of the court.”); A.R.S. § 33-455 (a conveyance made by virtue of a
decree or judgment passes “absolute title to the property to the purchaser
thereof, but the conveyance shall not affect the right, title or interest of any
person other than the parties to the conveyance, decree or judgment, and
those claiming under them”).3
¶7 The Restatement (Third) of Property (Mortgages) (1997),
which Arizona courts follow absent contrary authority, In re Krohn, 203
Ariz. 205, ¶ 18 (2002), provides added support for our interpretation of § 33-
727(B). Section 7.4 states that surplus proceeds are “applied to liens and
other interests terminated by the foreclosure in order of their priority and the
remaining balance, if any, is distributed to the holder of the equity of
redemption.”4 (Emphasis added.) And Comment c explicitly rejects
Maricopoly’s argument:
Senior lienors have no lien claim to a surplus
produced by the foreclosure of a junior
3Analogs to § 33-727(B) in the trustee sale statutes also support our
interpretation. Section 33-812, A.R.S., provides that proceeds of a trustee
sale are applied first to payment for costs and expenses of exercising the
sale, then to the payment of the contract secured by the trust deed, next to
the payment of “all other obligations provided in or secured by the trust
deed and actually paid by the beneficiary before the trustee’s sale,” then to
homeowners’ associations with subordinate liens, and finally to “the junior
lienholders or encumbrancers in order of their priority as they existed at the
time of the sale.” Any excess proceeds after these payments “shall be made
to the trustor.” § 33-812(A)(5). Under A.R.S. § 33-811(E), a conveyance via
trustee sale is made “clear of all liens, claims or interests that have a priority
subordinate to the deed of trust and shall be subject to all liens, claims or
interests that have a priority senior to the deed of trust.” Maricopoly has
provided no rationale for why a senior lienholder should have a right to
surplus funds resulting from a judicial execution sale but not from a trustee
sale.
4“The holder of the equity of redemption” is defined as the
mortgagor. See Equity of Redemption, Black’s Law Dictionary (11th ed. 2019).
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TORTOSA HOMEOWNERS ASS’N v. GARCIA
Opinion of the Court
mortgage. Unlike their junior lien counterparts,
their liens are unaffected by foreclosure and
remain on the foreclosed real estate. They
remain free to foreclose on the real estate, and
thus there is no justification for transferring any
part of their liens to the junior foreclosure
surplus.
¶8 This rationale is also echoed in Arizona case law. See Midyett
v. Rennat Props., Inc., 171 Ariz. 492, 494-95 (App. 1992) (trial court “could
not have ordered that the surplus be applied to the prior lien” because the
surplus must “be paid to the judgment debtor on whose behalf the property
was sold to satisfy the judgment or his creditors with liens subsequent to
the judgment” (citation omitted)). And in Mid Kansas Federal Savings and
Loan Ass’n of Wichita v. Dynamic Development Corp., our supreme court
recognized that “the purchaser at a foreclosure sale of a junior lien takes
subject to all senior liens.” 167 Ariz. 122, 130 (1991). In fact, “the purchaser
is presumed to have deducted the amount of the senior liens from the
amount he bids for the land.” Id.; see also Hanley v. Pearson, 204 Ariz.
147, ¶ 13 (App. 2003) (at trustee sale, “[t]he purchaser is expected and
presumed to take into account existing senior liens in calculating an
appropriate bid for the property”); Fay v. Harris, 64 Ariz. 10, 12 (1945) (“The
purchaser [at an execution sale] is not entitled to an offset because of a lien
on the property purchased.”).
¶9 And while not controlling, we nevertheless find apposite the
reasoning in United States v. Sage, 566 F.2d 1114 (9th Cir. 1977). In that case,
the purchaser at a bankruptcy sale paid off a senior lien on the foreclosed
property and claimed to have received an equitable assignment of the
senior mortgage as a result of the payoff, with priority for payment of
excess proceeds ahead of the former owner. 566 F.2d at 1114. The Ninth
Circuit Court of Appeals rejected this argument, explaining, “Foreclosure
affects the rights of all mortgagees junior to the foreclosing mortgagee and
requires them to look to the proceeds for satisfaction, but it has no effect
whatsoever upon the interest of senior mortgagees . . . .” Id. at 1114-15.
Such a result
embodies the ancient rule that “upon sale under
a junior mortgage, the surplus belongs to the
mortgagor, and is not applied to the satisfaction
of the prior mortgage; for the equity of
redemption which was sold belongs to the
mortgagor, and the presumption of the law is,
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TORTOSA HOMEOWNERS ASS’N v. GARCIA
Opinion of the Court
that the purchaser of it only pays for its worth
in excess of the prior mortgage debt.”
Id. at 1115 (quoting L. Jones, Law of Mortgages § 2186 (1928)).
¶10 Finally, because Maricopoly relies on an unpublished
memorandum decision issued by this court in Matt Steinmetz, PLLC v.
Everyone Wins, LLC and contends the trial court should have applied it, we
briefly address that case. There, we affirmed the trial court’s decision to
allow a senior lienholder to intervene and recover excess proceeds in a
judicial sale following a junior homeowner association lien foreclosure.
Matt Steinmetz, PLLC v. Everyone Wins, LLC, No. 1 CA-CV 17-0549, ¶¶ 1-4
(Ariz. App. June 19, 2018) (mem. decision). But our analysis focused
narrowly on various anti-deficiency statutes we found inapplicable.
Id. ¶¶ 8-11. The parties did not cite the Restatement § 7.4, nor did we
discuss the incongruity between our result in that case with the results
under the trustee sales statutes, instead rejecting such arguments as
“inapplicable.” Id. ¶ 10. In any event, that decision is not controlling nor
particularly persuasive here in light of our analysis set forth above. See
Ariz. R. Sup. Ct. 111(c)(1)(C) (“Memorandum decisions of Arizona state
courts are not precedential and such a decision may be cited only . . . for
persuasive value . . . .”).
Conclusion
¶11 In sum, under § 33-727(B), liens and other interests
terminated by a foreclosure attach to the surplus in order of the priority
they enjoyed prior to the foreclosure. Lienholders with higher priority to
the foreclosing lienholder who remain unaffected by the foreclosure have
no right to the excess proceeds. Accordingly, as relevant here, the
successful bidder at a foreclosure sale who takes the property subject to a
senior lien has no right to the excess proceeds that the junior lien’s
foreclosure generates. We thus reject the trial court’s contrary
interpretation; nevertheless, the court correctly awarded Durable the excess
proceeds from the sale, and we therefore affirm its order. See Starr v. Ariz.
Bd. of Fingerprinting, 252 Ariz. 42, ¶ 8 (App. 2021) (“We are not bound by
the superior court’s legal conclusions and may affirm the court if it reached
the correct result even if it did so for different reasons.”). In light of our
resolution of this issue as a matter of law, we need not address Maricopoly’s
equitable subrogation arguments. See McDermott v. McDermott, 129 Ariz.
76, 77 (App. 1981) (“Whenever the rights of parties are clearly defined and
established by statutory provisions, equity follows the law.”). Regardless
of whether Maricopoly had an assignment from U.S. Bank, the senior
lienholder here is not entitled to the excess proceeds.
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TORTOSA HOMEOWNERS ASS’N v. GARCIA
Opinion of the Court
Disposition
¶12 The trial court’s order granting Durable’s request for payment
of the excess proceeds resulting from the foreclosure sale is affirmed.5
5Maricopoly requests an award for attorney fees it incurred to
oppose the amicus brief pursuant to Arizona Rules of Civil Appellate
Procedure 21 and 25. Maricopoly has failed to state the authority for such
an award under Rule 21, and we do not find the amicus brief was frivolous
or “filed solely for the purpose of delay.” Accordingly, Maricopoly’s
request is denied.
7