Arizona Court of Appeals Division two holds that A.R.S. § 33-727(B) does not entitle lienholders with higher priority than the foreclosing lienholder to the excess proceeds generated by the junior lienholder’s foreclosure sale.

A lienholder sought to enforce its lien upon real property through judicial foreclosure following the debtor’s failure to meet its financial obligations to the lienholder. The trial court entered default judgment for the lienholder and ordered a foreclosure sale. The foreclosure sale generated excess proceeds.  In competing motions, the debtor’s assignee and a senior lienholder’s assignee both claimed entitlement to the excess proceeds. The trial court granted the debtor-assignee’s motion and denied the senior-lienholder-assignee’s motion.

The Court of Appeals affirmed, holding that A.R.S. § 33-727(B) does not entitle a senior lienholder to the excess proceeds from a junior lienholder’s foreclosure. Rather, § 7.4 of the Restatement (Third) of Property (Mortgages) (1997), which the Court followed in the absence of contrary authority, applies surplus proceeds to liens and other interests terminated by the foreclosure.  And, comment c to § 7.4 specifically states that, because senior liens are unaffected by junior lien foreclosures, senior lienors are not entitled to proceeds from junior lien foreclosures. Instead, senior lienors can initiate their own proceedings. The Court’s explained that its reading of § 33-727(B) in conjunction with § 12-1562(A) and § 33-455 echoed this conclusion, as did Arizona and Ninth Circuit authority.

Judge Espinosa authored the opinion to which Presiding Judge Eckerstrom and Chief Judge Vásquez concurred.

Posted by: BriAnne Illich Meeds