Pac. W. Bank v. Castleton

Citations: 434 P.3d 1187; 246 Ariz. 108Docket: No. 1 CA-CV 17-0667

Court: Court of Appeals of Arizona; December 27, 2018; Arizona; State Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Pacific Western Bank (PWB) and Coastline Re Holdings Corp. appeal a superior court's preliminary injunction that prevents the sale of a home owned by the Castleton Revocable Trust. The court ruled that a judgment creditor cannot attach a judgment lien to homestead property, instead permitting execution through a forced sale under Arizona Revised Statutes (A.R.S.) 33-1105. 

In 2002, Berislav and Djurdjica Sepic purchased a home in Mesa, using it as their primary residence. They secured a loan of $937,500 with a deed of trust on the home, later assigned to Chase Bank. After defaulting on a separate loan for an apartment complex, PWB obtained a $5.2 million default judgment against the Sepics in 2011. 

Following the foreclosure of their apartment complex and subsequent default on the home loan, the Sepics executed a short sale, transferring the home to the Fairbrook Revocable Family Trust and then to the Castleton Trust for $535,000 in 2013, while the judgment was still unpaid. More than three years later, PWB sought to enforce the judgment by claiming it remained a lien on the home. 

The Castleton Trust countered by seeking to block the sale, leading the superior court to issue a preliminary injunction after an evidentiary hearing. PWB's appeal examines the relationship between Arizona's judgment lien and homestead statutes, particularly whether the Sepics' homestead exemption protected the home from the judgment lien and if they abandoned that exemption before the transfer of title.

The court noted that under A.R.S. 33-961(A), a recorded judgment becomes a lien on the debtor's real property unless it is exempt from execution, including homestead property, as stated in A.R.S. 33-964(A). The homestead statutes allow individuals to claim an exemption of up to $150,000 in equity in their personal residence, which is protected from attachment and forced sale. The court's analysis will focus on whether the homestead exemption applied in this case and if it was abandoned prior to the title transfer.

A.R.S. 33-964 establishes that a recorded judgment does not become a lien on homestead property, allowing individuals to hold such property free from judgment liens. A judgment lien can attach to real property, but homestead exemptions protect the property from such liens. The case law reinforces that no lien attaches to real property claimed as a homestead. To access any excess equity in a homestead, a judgment creditor must utilize A.R.S. 33-1105, which permits a forced sale if the sale price exceeds the homestead exemption plus any consensual liens. A.R.S. 33-1103(A)(4) allows creditors to reach excess equity but only through the forced sale procedure in A.R.S. 33-1105. Despite amendments to the statutes, the fundamental principle remains that a judgment creditor can only satisfy a judgment from homestead property by following the prescribed sale process. In this case, PWB's judgment lien did not attach to the home, but the creditor could have pursued a judicial sale under A.R.S. 33-1105. However, PWB reportedly did not do so, likely because the home's value was insufficient to cover the senior lien and homestead exemption, as it sold for only $535,000, while the combined total required for a sale to be viable was over $1 million.

PWB contended that a judgment lien attached to the Sepics' home and argued that it "runs with the land," thus permitting a forced sale by the Castleton Trust. However, it was established that under A.R.S. 33-964, a judgment lien does not attach to homestead property, and since the lien never attached to the home, PWB's argument was unconvincing. PWB further argued that the Sepics abandoned their homestead protection by transferring the home to the Fairbrook Trust. However, antecedent case law indicated that a judgment lien does not revive upon the sale of previously homesteaded property. Additionally, PWB claimed abandonment occurred when the Sepics vacated the home shortly before its sale, but A.R.S. 33-1104(A)(3) allows homeowners to be absent for up to two years without losing their homestead exemption, meaning the Sepics did not abandon the homestead. Consequently, the judgment never attached as a lien, allowing the Sepics to convey the home free of the judgment.

The Castleton Trust sought attorneys' fees on appeal based on A.R.S. 12-1103(B), claiming to have met the necessary requirements, although it had not yet formally prevailed on its quiet title counterclaim. The request for fees was denied without prejudice, allowing for future claims if the superior court grants fees. The court affirmed the injunction against a Sheriff's sale of the home and ruled that the Castleton Trust was entitled to its costs on appeal, contingent on compliance with ARCAP 21. The Sepics had transferred their beneficial interest in the Fairbrook Trust during the short sale process, and all claims against the Sepics and April Van Dyke, as trustee, were resolved through stipulated judgments.

The amendment to A.R.S. 33-1105 eliminated the requirement for an appraisal in forced sales by judgment creditors, but the core content of the statute remained unchanged, as affirmed by In re Rand, which noted that the amendment did not alter the analysis in Evans. A.R.S. 33-964(A) establishes judgment liens without permitting exceptions for homestead properties. The Rand court's view is supported by a minority of jurisdictions that allow judgment liens to attach to homestead property but deem them dormant as long as the property retains its homestead status. However, the majority opinion dictates that a judgment does not constitute a lien on homestead properties, rendering any attempts at enforcement void. Arizona adheres to this majority view, as demonstrated in cases such as Security Trust Savings Bank and Union Oil, which state that judgment liens cannot be valid against homestead property and that no liens can attach to real property designated as a homestead. Furthermore, a judgment lien is not applicable to the excess value of the homestead.