Arizona Appellate Court Upholds HOA’s Redemption Rights in Judicial Foreclosure
On March 17, 2016, in the case of The Bank of New York Mellon Trust Company, National Association v. Arizona HOA Acceptance LLC, the Arizona Court of Appeals ruled that Arizona’s redemption laws granted the holder of an HOA assessment lien the right to redeem residential real property following a judicial foreclosure sale of that property. In that case the borrower bought a property with funds from The Bank of New York Mellon Trust Company, National Association (the “Bank”) secured by a recorded Deed of Trust. The property also was subject to the existing recorded Declaration of Covenants, Conditions and Restrictions (“CC&Rs”) of the Vista View Homeowners’ Association (“HOA”). The CC&Rs required the owner to pay assessments and stated that such assessments were a continuing lien on the property as authorized by A.R.S. §33-1807. The borrower defaulted on the Bank loan and the assessments. The bank then sued the borrower for breach of contract and to foreclose. During the course of the lawsuit, the HOA stipulated that any lien it had on the property was junior to the Bank’s deed of trust lien. The Bank obtained a $199,642.52 default judgment against the borrower. In addition, the court declared the Bank’s lien valid and superior to all other liens and authorized the Bank to purchase the property by credit bid at a Sheriff’s sale. Thereafter, the Bank purchased the property for a credit bid of $22,000.
About a month later, Arizona HOA Acceptance, LLC (Arizona HOA”), as assignee of the HOA’s rights to enforce a $2,000 assessment lien, recorded a “Notice of Intent to Redeem” in connection with the property. The Bank filed a motion to prevent the redemption claiming that A.R.S. §12-1281(2) limited redemption rights to those creditors “having a lien by judgment or mortgage on the property sold…subsequent to that on which the property was sold.” Arizona HOA argued that another provision controlled, A.R.S. §12-1283(B), which grants any creditor having a lien on the property sold “subsequent to the lien so foreclosed” the right to redeem the property. The Arizona Appellate court agreed with Arizona HOA and ruled that A.R.S. §12-1283(B) does in fact govern redemption following a judicial foreclosure and confirmed Arizona HOA’s right, as a creditor having a lien, to redeem the property.
So what does Bank of New York v. Arizona HOA mean in practice?
First, in a judicial foreclosure all creditors with subsequent liens now have redemption rights.
Second, lenders should determine the amounts owed to each subsequent lien creditor and consider increasing their credit bid to an amount higher than subsequent creditors would be willing to bid.
Third, HOAs should ensure that their CC&Rs declare assessments to be a continuing lien on the property.