PNC Bank v. Cabinetry by Karman, Inc. – 7/24/2012

August 2, 2012

Arizona Court of Appeals Division One Holds That, Under A.R.S. § 33-812(J), a Court May Not Distribute Excess Proceeds from a Trustee’s Sale Before the Expiration of 180 Days After a Complaint Is Filed, If the Court Has Information Before It Indicating That a Party May Have a Claim Superior to the Applicant’s Claim, Even If No Party Files a Response to the Application.

A trustee’s sale of property in Phoenix yielded $29,786.94 in excess funds.  Pursuant to A.R.S. § 33-812(C) and (D), on October 6, 2010, the trustee filed a civil action to distribute the funds.  The trustee’s complaint listed four claimants with liens and encumbrances, with the following order of priority:  PNC Bank, City of Phoenix, Cabinetry by Karman, Inc., and City of Tempe.  On October 21, Karman filed an application for the release of funds.  Karman sent the application all parties with interests, including PNC.  After no party responded to Karman’s application within the 45 days prescribed by § 33-812(I), Karman requested, and the superior court entered, an order awarding the funds to Karman.  Karman received the funds on February 15, 2011.

On February 22, 2011, PNC filed a motion to set aside the judgment pursuant to Rule 60 and its own application for the excess proceeds.  The superior court denied both motions.

The Court of Appeals reversed.  A.R.S. § 33-812(I) allows a party to respond to an application for excess proceeds within 45 days.  But § 33-812(J) requires an applicant to “acknowledge the existence of any apparent lien, encumbrance or interest that could have priority over the applicant . . . .”  Karman did not acknowledge PNC’s lien in its application even though the trustee had listed PNC’s interest as having priority over Karman’s.  In addition, § 33-812(J) also requires the court to make a determination whether any party has a superior right to the proceeds over the applicant.  The court did not refer to the trustee’s complaint when making its determination, which would have aided it in determining whether superior rights existed.

A.R.S. § 33-812(J) also provides that, if the court finds that a party other than the applicant or respondent has a superior interest in the proceeds, it may not release the proceeds before the expiration of 180 days after the complaint was filed.  The superior court had before it information indicating that parties had rights superior to Karman’s and thus should not have released the funds before expiration of the 180-day period.

Judge Thompson authored the opinion; Judges Brown and Downie concurred.