Opinion
No. 01-00354-PHX-GBN Chapter 7
August 30, 2001
Thomas M. Shaw, Mesa, AZ, for Debtor.
Rick D. Sherman, Phoenix, AZ, for Household Finance.
Adam B. Nach, Lane Nach PC, Phoenix, AZ, for Trustee.
Barbara L. Caldwell, Hebert Schenk, Phoenix, AZ, for Maricopa County Treasurer.
MEMORANDUM OF DECISION
Debtor Dayna Haydon owned and resided in real estate located in Maricopa County, Arizona. She defaulted on the secured debt encumbering the property. The residence was sold through a nonjudicial foreclosure by CTC Real Estate Services ("CTC") on January 12, 2001. The foreclosure produced $14,110.60 in cash after payment in full to the first lienholder, Countrywide Home Loans ("Countrywide").
Second position consensual lienholder, Household Finance Corporation ("Household"), attended the foreclosure and submitted a successful cash bid of $170,000.00, topping Countrywide's credit bid of $154,313.47 for the property. After remitting the full purchase price to CTC, Household was issued a trustee's sale deed. Thereafter, Household resold the property for $209,000 and alleges that after deducting sales commissions and sale costs that it netted less than $194,000 from the resale.
Household reports it acquired and resold the property to mitigate damages and to protect its junior lien of over $84,000 from foreclosure by senior creditor Countrywide.
Debtor complains this claimed amount greatly exceeds a principal balance listed as $38,269.49 by Household in a state law complaint pending at the time of the sale. Creditor argues the complaint amount is in error. Since the proceeds at issue approximate $14,000.00, this debt amount dispute need not be resolved here. It is noted, however, that debtor herself listed the second lien in her schedules at $83,160.00.See schedule A.
After deducting foreclosure costs, CTC deposited $13,999.06 with the Maricopa County Treasurer on March 29, 2001. Debtor claims this amount by virtue of her homestead exemption of $100,000.00, asserted in her amended bankruptcy schedule C of March 19, 2001. See A.R.S. § 33-1101(A). No party objected to this exemption claim. Household argues that under Arizona law, debtor is not entitled to receive any excess proceeds until all junior liens have been paid in full. The court concludes the excess funds belong to the junior creditor.
I.
It is undisputed debtor owed the senior creditor approximately $156,000.00. It is further undisputed that Household held the second lien. Household's purchase of the property at a foreclosure sale was ratified and validated by this court on April 30, 2001, when creditor was allowed to record the trustee's deed.
See docket no. 22. This order is the result of a motion for relief from stay. See docket no. 7. Debtors opposed the motion. Oral argument was conducted on April 30, 2001. See docket nos. 14, 21 and 22.
On May 18, 2001, debtor filed a "Motion for Turnover of Property Without Hearing," seeking the excess sale proceeds from the foreclosure. Household objected, claiming a right to the proceeds. The trustee has withdrawn his earlier support for debtor's turnover request. The issue is whether a junior lienholder, who purchases Arizona real estate at a foreclosure sale commenced by a senior lienholder, may retain the surplus foreclosure proceeds.
II.
Arizona Revised Statutes section 33-812(A) provides the distribution scheme for foreclosure sale proceeds. The statute provides that the trustee shall apply the proceeds of the trustee's sale in the following order:
1. To the costs and expenses of exercising the power of sale, and the sale, including the payment of the trustee's fees and reasonable attorney's fees actually incurred.
2. To the payment of the contract or contracts secured by the trust deed.
3. To the payment of all other obligations secured by the trust deed.
4. To the junior lienholders or encumbrancers in order of their priority as they existed at the time of the sale. After payment in full to all junior lienholders and encumbrancers, payment shall be made to the trustor. (Emphasis added)
A fair reading of this statutory scheme is that excess proceeds from the foreclosure are to be paid to junior lienholders in order of their priority, as existing at the time of sale, before payment is made to the trustor.
In the present case, creditor argues that pursuant to A.R.S. section 33-812(A), the excess funds should be paid to Household, because at the time of the sale, Household was next in line to receive payment. Since the excess is clearly less than the amount of Household's lien, even in the lower amount alleged by debtor, Household argues it should be the recipient.
Debtor argues Household is prohibited from receiving payment because it would be receiving payment for a deficiency claim through a residential foreclosure. Arizona Revised Statutes section 33-814(G) prohibits deficiency claims in these circumstances, debtor alleges. However, the present dispute involves allocation of a foreclosure sale surplus, not an action for a deficiency judgment.
Ariz. Rev. Stat. Ann. section 33-814(G) provides: If trust property of two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling is sold pursuant to the trustee's power of sale, no action may be maintained to recover any difference between the amount obtained by sale and the amount of the indebtedness and any interest, costs and expenses.
Debtor also argues that because Household's lien merged into its title interest, it cannot be paid for its lien interest. She cites Oklahoma P.A.C. First Limited Partnership v. Metropolitan Mortgage Securities Co. (In re Oklahoma P.A.C. First Limited Parthership), 168 B.R. 212 (Bankr. D. Ariz. 1993) to support her argument that the lien and the ownership interest merged upon purchase. However, this case, which refused to invoke the merger doctrine, is not relevant. Id. at 224-25. The statutory scheme requires examination of the priority of junior interests that existed at the time of the sale. A.R.S. § 33-812(A)(4). Accordingly, the doctrine of merger does not apply.
Finally, debtor invokes the theory of double recovery and equity. Although there does not appear to be an Arizona case directly on point, the California case of Walter E. Heller Western, Inc. v. Bloxham, 176 Cal.App.3d 266, 221 Cal.Rptr. 425 (App. 1985), addresses these issues. Heller made a series of loans, which were consolidated into a $288,000 note secured by trust deeds. The deeds were later subordinated to a $75,000 first mortgage to Newport Equity Fund Trust. Id. at 269. Bloxham defaulted and Newport foreclosed through a nonjudicial sale. Heller's attorneys purchased the properties at a sale with Heller's funds. Id. The California court noted the properties were purchased "for a price allegedly well below its fair market value." Id. at 270. TheHeller court reached this conclusion because creditor later filed an anti-deficiency action for the entire amount of his loan, and interest. Furthermore, there was no evidence as to the property's fair market value. Id.
The Heller court determined a junior lienholder could bring a deficiency action, although it was the purchasing party at the foreclosure. Even if the sale resulted in the borrower losing redemption rights, the decision to conduct such a sale was made by the foreclosing senior lienholder, not the junior creditor. The court stated that "it would be unfair to eliminate the purchasing junior's right to a deficiency based on a choice made by the senior lienholder." 176 Cal.App.3d at 273. The court, however, limited the amount of the deficiency "to the lesser of the excess of the combined debts of the senior and junior lienholders over 1) the fair market value of the property or 2) the selling price at the foreclosure sale." Id. at 273.
Here, at the foreclosure, the senior lienholder was paid in full with an excess resulting from Household's bidding. Subsequently, Household sold the property. This court concludes that the fair market value is represented by the subsequent sale by Household, or $209,000. No evidence impeaching the subsequent sale was produced. Thus, Household purchased the property for $14,000 more than the senior lien and approximately $39,000 less than the property's subsequent sale value. Unlike the facts in Heller, the junior lienholder here did not grossly underbid the fair market value. In addition, the resale price is nominally less than the senior lien plus the junior lien (as alleged by debtor) plus the commission and closing costs or $209,269.49 ($156,000.00 plus $38,269.49 plus $15,000.00). As such, it does not appear there is evidence of an equitable or double recovery issue.
The case cited by Household supports this contention. In Pacific Loan Management Corp. v. The Superior Court of Santa Clara County, 196 Cal.App.3d 1485, 242 Cal.Rptr. 547 (App. 1987), Armstrong's real property was subject to a lien of approximately $86,000 held by Pacific, the senior lienholder, and a lien of approximately $50,000 held by the Small Business Administration ("SBA"), the junior lienholder. Id. at 1488. Pacific commenced a foreclosure SBA was the successful purchaser. Following the foreclosure, both Armstrong and SBA claimed the excess funds. The court had to determine whether the junior creditor lost its right to surplus funds of an out-of-court foreclosure sale when it purchased the property.
Pacific noted that it was not measuring the deficiency judgment amount. Accordingly, the principles of Heller did not apply. Instead, the court was dealing with the surplus generated by SBA's bid, funded by SBA's own cash. The court stated that "[f]or SBA to trace its $50,000 loan into the $31,000 surplus which it has itself generated and which it would be otherwise entitled to (had it not purchased) is neither double recovery nor unfair. . . . [T]he surplus replaces its claim to $50,000 secured by the property." 196 Cal.App.3d at 1495.
III.
Given these facts, and under the analysis in the Pacific Loan and theHeller cases, the surplus replaced Household's claim secured by property. There is no evidence Household greatly underbid the property, which would bring equitable notions into play. As such, debtor failed to show Household is not entitled to the funds. Debtor's motion is denied. The funds are to be turned over to Household.