Recorded judgments in Arizona do not encumber homestead property, but watch out for a Lis Pendens

By Scott A. Malm

Many lawyers representing creditors record their money judgments and let escrow companies collect the judgment amount for them when the debtor sells real property.

But after a recent published opinion in Arizona applying its homestead protection laws, that practice may soon come to an end if the real property is protected by the homestead statutes.

In Pac. W. Bank v. Castleton, No. 1 CA-CV 17-0667, 2018 WL 6815531 (Ariz. Ct. App. Dec. 27, 2018), the Arizona Court of Appeals considered the effect of a $5.2 million recorded judgment on a subsequent conveyance of a personal residence by the judgment debtor to a third-party buyer.

After the close of escrow, the judgment creditor sought to collect its judgment against the buyer by filing a judicial foreclosure complaint.

Such action triggered coverage under a title insurance policy (not an Alliant National policy!) because the judgment was not listed in Schedule B.

The Arizona Court of Appeals had to decide the purely legal question: Is a recorded judgment a lien that encumbers homestead property? If so, the insured would lose its property.

Almost 100 years ago, the Arizona Supreme Court followed the majority view in the United States that a judgment lien does not attach to homestead protected property.

But some lawyers for creditors argued that an amendment to Arizona’s judgment lien and homestead statutes enacted in 2007 changed that precedent – A.R.S. Section 33-1103(A)(4) – provides that homestead property is not exempt if there is sufficient equity in the property to satisfy a judgment or other lien.

The Pacific Western case confirms the idea that homestead statutes and judgment lien statutes follow the concept of “homestead” as being the actual property.

As a result, the insured buyer is protected from a recorded judgment if the homestead exemption applies because the judgment lien will not attach to homestead protected property.

However, homestead statutes may not fully insulate a sale by a judgment creditor because many states, including Arizona, allow a creditor to proceed with a statutorily described process to reach any equity in excess of the homestead protection amount.

The judgment lien may not attach to a property protected by this homestead exemption, but a court may order a sheriff’s sale for the creditor to recover any equity that exists in excess of the homestead amount.

If such an action is filed and a lis pendens is recorded before the close of escrow of a sale of the property by the judgment debtor, then the subsequent sheriff’s sale could extinguish the insured buyer’s title.

Therefore, best practice is to dispose of any pending judgment liens prior to closing a proposed transaction.

If you encounter an outstanding judgment lien prior to closing, please contact underwriting counsel with any questions regarding attachment or homestead exemptions.

About the Author:

Scott Malm is a managing member of Gust Rosenfeld, PLC, one of the oldest law firms in Arizona, and represents many title and escrow companies, including Alliant National Title. He successfully argued the Pacific Western case and may be reached at samalm@gustlaw.com or 602-257-7481.

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