FYI: AZ Sup Ct Confirms Judgment Liens Apply to Homestead Properties in Excess of Exemption

In response to a certified question from a bankruptcy court, the Arizona Supreme Court held that a recorded judgment lien attaches to homestead property where the judgment debtor has equity in excess of the $150,000 exemption under Arizona law.

 

In addition, given the uncertainty of the law that prompted the certified question, the Court denied the bank's request for attorney's fees.

 

A copy of the opinion is available at:  Link to Opinion

 

A bank obtained a California judgment against a consumer, and the judgment was domesticated and recorded in Arizona. The consumer later filed a Chapter 7 bankruptcy petition identifying an ownership interest in a residence and claiming the statutory $150,000 homestead exemption in the residence under A.R.S. § 33-1101.

 

The bank filed a proof of claim, $552,497 of which was secured by the recorded judgment lien. The remaining $115,985 was unsecured. After the consumer received his discharge, he sold the residence and realized $56,852 in excess of the $150,000 homestead exemption.

 

The bank filed a motion seeking a determination that the consumer's bankruptcy discharge did not affect its interest secured by its recorded judgment. The consumer objected, arguing that, under A.R.S. § 33-964(B), judgment liens do not attach to homestead property.

 

The bankruptcy court then certified the question to the Arizona Supreme Court. At issue was whether, under A.R.S. 33-964(B), judgment liens attach to homestead property.

 

A.R.S. § 33-1101 provides a $150,000 exemption from attachment, execution, and forced sale for, among other things, a "person's interest in real property in one compact body upon which exists a dwelling house in which the person resides." § 33-1101(A)–(A)(1) (2004).

 

The Arizona Supreme Court determined that the key purpose of the statute is to ensure that individuals whose property is subject to foreclosure are not rendered homeless. See, e.g., Ferguson v. Roberts, 64 Ariz. 357, 361 (1946). However, nothing in the statute suggests an aim to shield proceeds in excess of the exemption from creditors, nor to confer any financial benefits upon debtors beyond the exemption.

 

Additionally, the Arizona Supreme Court noted that A.R.S. § 33-1103 was amended in 2007 to read: "[t]he homestead provided for in § 33-1101, subsection A, is exempt from process and from sale under a judgment or lien, except: . . . [t]o the extent that a judgment or other lien may be satisfied from the equity of the debtor exceeding the homestead exemption." § 33-1103(A), (A)(4) (2007).

 

Therefore, the Arizona Supreme Court agreed with the bank that the plain language of the statutes encompasses judgment liens that may be applied against property sale proceeds in excess of the homestead exemption.

 

Moreover, the Arizona Supreme Court concluded that there was no reason to treat proceeds in excess of the homestead exemption from a voluntary sale differently than proceeds from a forced sale because A.R.S. §  33-1103(A)(4) makes no such distinction, stating categorically that "a judgment or other lien may be satisfied from the equity of the debtor exceeding the homestead exemption." §  33-1103(A)(4) (2007).

 

Accordingly, the Arizona Supreme Court answered the question presented by the bankruptcy court in the affirmative, and given the prior uncertainty in the law, the Court denied the bank's request for attorney's fees.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 11th Cir Holds Florida's "Standard Search Logic" Exception Did Not Save Incorrect Debtor Name in UCC-1s

The U.S. Court of Appeals for the Eleventh Circuit recently held that a bank did not perfect its security interest in a business debtor's assets because the two UCC-1 Financing Statements filed with the Florida Secured Transaction Registry that failed to correctly name the debtor were "seriously misleading" under Florida Statute Section 679.5061(2), as the Registry does not implement a "standard search logic" necessary to trigger the safe harbor exception set forth in Florida Statute Section 679.5061(3).

 

In so ruling, the Eleventh Circuit applied Florida law as opined by the Florida Supreme Court in response to certified questions.

 

A copy of the opinion is available at:  Link to Opinion

 

A business and its affiliates filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code. The business and its affiliates were jointly and severally liable to a bank on two loans guaranteed by the U.S. Small Business Administration.  These loans purported to be secured by a blanket lien on all of the business' assets.

 

The bank, in an attempt to perfect its security interest in these assets, filed two UCC-1 Financing Statements with the Florida Secured Transaction Registry. These filing statements identified the business by using an abbreviation instead of the business' legal name, as listed in the articles of organization filed with the Florida Secretary of State.

 

The business filed a complaint asserting that the bank's financing statements were "seriously misleading" under Florida Statute § 679.5061(2) and therefore ineffective to perfect the bank's security interest.

 

The parties eventually cross-moved for summary judgment, and the bankruptcy judge granted summary judgment for the bank, concluding that the bank's financing statements fell under the "safe harbor" of Section 679.5061(3) because a search of the business' correct legal name on the Registry's website revealed that the financing statements were found on the page immediately following the initial page. Thus, the bankruptcy court held the bank's financing statements were not seriously misleading and were effective to perfect the bank's security interest in all of the business' assets.

 

The trial court, sitting in an appellate capacity, affirmed the bankruptcy court's order. The business then timely appealed to the Eleventh Circuit.

 

Florida Statute § 679.5061 concerns the effect of errors or omissions in financing statements. The statute provides, in relevant part:

 

(1) A financing statement substantially complying with the requirements of this part is effective, even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading.

 

(2) Except as otherwise provided in subsection (3), a financing statement that fails sufficiently to provide the name of the debtor in accordance with s. 679.5031(1) is seriously misleading.

 

(3) If a search of the records of the filing office under the debtor's correct name, using the filing office's standard search logic, if any, would disclose a financing statement that fails sufficiently to provide the name of the debtor in accordance with s. 679.5031(1), the name provided does not make the financing statement seriously misleading.

 

Additionally, Section 679.5031(1) specifies how to correctly name a debtor that is a registered organization:

 

A financing statement sufficiently provides the name of the debtor . . . only if the financing statement provides the name that is stated to be the registered organization's name on the public organic record most recently filed with or enacted by the registered organization's jurisdiction of organization that purports to state, amend, or restate the registered organization's name

 

The Eleventh Circuit explained that Section 679.5061(2) creates a zero-tolerance rule, under which a financing statement that fails to name the debtor as directed in Section 679.5031(1) is "seriously misleading."

 

Additionally, the Court noted that Section 679.5061(3) creates a "safe harbor exception" to Subsection (2)'s zero-tolerance rule, providing that a financing statement with errors or omissions in naming a debtor will still be effective to perfect a security interest so long as "a search of the records of the filing office under the debtor's correct name, using the filing office's standard search logic, if any, would disclose [the] financing statement." § 679.5061(3).

 

Because this case presented a novel issue of Florida law that divided bankruptcy courts within the Eleventh Circuit, and because the Eleventh Circuit faced substantial doubt as to how the Florida Supreme Court would resolve the split, the Eleventh Circuit certified three questions to the Florida Supreme Court.

 

The Florida Supreme Court, however, found dispositive a threshold question that was not expressly certified by the Eleventh Circuit:  Is the filing office's use of a "standard search logic" necessary to trigger the safe harbor protection of Section 679.5061(3)? After analyzing the language of Section 679.5061(3), the Florida Supreme Court concluded yes -- i.e., the Florida filing office's use of a "standard search logic" is necessary to trigger the safe harbor protection.

 

In answering its threshold question, the Florida Supreme Court adopted the definition of "standard search logic" accepted in the secured transactions industry, which requires the search to identify specific hits on the searched name, if any, and held that the search option offered by the Registry, which returned the entire index, was not a "standard search logic." As a result, the Florida Supreme Court concluded that, because the Registry lacked a "standard search logic," the search contemplated by Section 679.5061(3) was impossible, and filers with the Registry were left with the zero-tolerance rule of Section 679.5061(2).

 

Accordingly, any financing statement filed in the Registry that failed to correctly name the debtor, as required by Section 679.5031(1), was "seriously misleading" and therefore ineffective.

 

Thus, when the case returned to the Eleventh Circuit for disposition, the Eleventh Circuit held that the Florida Supreme Court's answer to the threshold question it identified resolved the appeal. The Eleventh Circuit specifically concluded that the bank did not perfect its security interest in the business' assets because the two UCC-1 Financing Statements filed with the Registry were "seriously misleading" under Section 679.5061(2), as the Registry did not implement a "standard search logic" necessary to trigger the safe harbor exception set forth in Section 679.5061(3).

 

Accordingly, the Eleventh Circuit reversed the trial court's order affirming the bankruptcy court's grant of the bank's cross-motion for summary judgment and remanded for further proceedings.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

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