Watch for Excess Proceeds Following a Trustee Sale
Arizona land owners are seeing a change in the real estate landscape. While Arizona law has not changed, marketplace improvement has triggered the application of an existing law that affects both the property owner and those holding liens against the property.
Arizona law governs how and when excess proceeds are paid following a trustee sale. Excess proceeds in the trustee sale setting are generated when the purchaser pays more for the property than the amount owed to the lender who initiated the sale. The excess proceeds must be disbursed in accordance with the law.
How Funds from a Trustee Sale are Disbursed
Following a trustee's sale, A.R.S. §33-812(A) controls how proceeds are disbursed and specifies the priorities given to individuals entitled to the proceeds. The trustee applies the proceeds to the costs and expenses of the sale, and then pays the loan amount to the lender. Condominium or association liens, if any, are paid if additional funds remain and then the remaining balance is paid to junior lien holders. Finally, if any extra funds are left, they are paid to the property borrower/owner. To avoid making mistakes, the trustee may choose to deposit the sale proceeds with the county treasurer and commence a civil suit rather than decide who to pay first.
Trustee's and Civil Suits
There is a procedure the trustee is required to follow in a civil suit. The trustee must describe the property liens and encumbrances and specify the priority of potential claimants to the sale proceeds. A copy of the complaint is mailed to any individual who has an interest in the property during the trustee sale. Any person claiming a legal interest may submit an application requesting the release of the proceeds from the civil action. A copy of the application is mailed to all interested parties.
Parties receiving the application or those claiming a right to the proceeds, must respond within 45 days. The applicant - or any recipient of the mailing - must acknowledge the existence of any lien, encumbrance or interest that could have priority over the applicant. The court uses the information supplied by the applicant, any recipient of the mailing, and the trustee to determine who has a superior right to the proceeds.
If the court determines that a person has a superior right to receive the proceeds, the court cannot issue an order disbursing the funds to the applicant within the first 180 days from the file date of the civil action. If a priority lien holder does not file a response with the court within the 180-day period, then the court is permitted to release the proceeds to the applicant. The applicant has an opportunity to contest the validity of a prior lien by requesting a hearing to determine the validity or enforceability of any prior lien. Thus, junior lien holders and owners should monitor the bidding and price paid at the trustee sale. Under certain circumstances, excess proceeds may pay off more than the first lien against the property.
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