North Canyon v. Allen

NOTICE: NOT FOR OFFICIAL PUBLICATION.
UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

NORTH CANYON RANCH OWNERS ASSOCIATION,
Plaintiff/Appellant,

v.

PAMELA J. ALLEN, Defendant/Appellee.

No. 1 CA-CV 17-0227
FILED 8-23-2018

Appeal from the Superior Court in Maricopa County
No. CV2014-097453
The Honorable David King Udall, Judge

AFFIRMED IN PART; VACATED AND REMANDED IN PART

COUNSEL

Maxwell & Morgan, PC, Mesa
By B. Austin Baillio
Counsel for Plaintiff/Appellant

Hymson Goldstein Pantiliat & Lohr, PLLC, Phoenix
By Dennis P. Brookshire
Counsel for Defendant/Appellee
 NORTH CANYON v. ALLEN
Decision of the Court

MEMORANDUM DECISION

Judge James B. Morse Jr. delivered the decision of the Court, in which
Presiding Judge Randall M. Howe and Judge Kenton D. Jones joined.

M O R S E, Judge:

¶1 North Canyon Ranch Owners Association ("Association")
appeals the judgment entered in favor of Pamela Allen following a bench
trial on the Association's claims for judicial foreclosure and breach of
contract, and the subsequent denial of the Association's motion for new
trial. For the following reasons, we affirm the superior court's finding that
the Association may not collect its pre-bankruptcy fees and charges, vacate
the order dismissing the foreclosure action, and remand the case to the
superior court for further proceedings consistent with this decision.

FACTS AND PROCEDURAL HISTORY

¶2 Between 2010 and 2013, Allen failed to pay assessments, fines,
and fees owed to the Association by virtue of her ownership of property in
Glendale subject to the Association's codes, covenants, and restrictions
("CC&Rs"). In July 2013, the Association obtained a judgment in small-
claims court against Allen for $1,757.76 in past-due assessments and $561
in attorneys' fees and costs, plus after-accruing fees and interest. Allen did
not make any payments on the judgment or after-accruing assessments, and
her delinquency grew.

¶3 In November 2013, Allen filed for bankruptcy protection in
the U.S. Bankruptcy Court for the District Court of Arizona, naming the
Association as an unsecured creditor. The Association did not file a proof
of claim in the bankruptcy proceeding, and in February 2014, the
bankruptcy court finalized Allen's bankruptcy and discharged her debts.
Shortly before the bankruptcy was finalized, Allen requested from the
Association "a new payment schedule with new coupons so [she could] be
sure to stay on a timely payment schedule again from here on out," and she
has timely paid the semi-annual assessments due after the discharge. The
Association continued to incur attorneys' fees related to the delinquent pre-
bankruptcy debt.

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¶4 On December 24, 2014, the Association filed a complaint
seeking, first, foreclosure on a lien securing the past-due assessments, and
second, a money judgment for additional sums that had continued to
accrue against Allen's pre-bankruptcy account following the date of her
bankruptcy discharge. A trial was held in November 2016.

¶5 After taking the matter under advisement, the trial court
found the Association had failed to meet its burden of proving it was
entitled to relief, and issued an order dismissing the Association's
complaint with prejudice and granting Allen's request for attorneys' fees.
After unsuccessfully moving for a new trial, the Association timely
appealed. We have jurisdiction pursuant to Arizona Revised Statutes
("A.R.S.") sections 12-120.21(A)(1) and 12-2101(A)(1) and (5)(a).

DISCUSSION

¶6 On appeal, the Association argues that the superior court
erred when it (1) concluded the foreclosure was barred by 11 U.S.C. § 524,
(2) applied the doctrine of res judicata to the foreclosure action, and (3)
denied its motion for new trial. "Where issues involve mixed questions of
fact and law, we defer to the court's factual findings unless clearly
erroneous, but review the legal conclusions de novo." KPNX-TV Channel 12
v. Stephens, 236 Ariz. 367, 369, ¶ 7 (App. 2014). Contractual interpretation
is also a question of law, which we review de novo. Dunn v. FastMed Urgent
Care PC, 793 Ariz. Adv. Rep. 20, ¶ 10, 2018 WL 3032385 (App. June 19,
2018). While neither party requested findings of fact pursuant to Arizona
Rule of Civil Procedure 52(a), "we will not disturb sua sponte findings based
on conflicting evidence if there is reasonable evidence to support them."
Nordstrom, Inc. v. Maricopa Cty., 207 Ariz. 553, 558, ¶ 18 (App. 2004) (internal
quotation marks and citation omitted).

I. Effect of Discharge on the Association's Assessment Lien

¶7 The Association argues that the superior court erred in
finding that it was an unsecured creditor whose claim was discharged
pursuant to 11 U.S.C. § 524. For the reasons that follow, we conclude that
the superior court erred in finding that the Association's lien for
"assessments" was discharged in bankruptcy, but affirm the superior court's
finding as it applies to fees, costs, and other charges.

A. Assessment Lien

¶8 Evidence supports the superior court's finding that, before
Allen petitioned for bankruptcy, the Association had a lien upon her

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property for unpaid assessments. The CC&Rs and A.R.S. § 33-1807(A) have
similar requirements for the creation of an assessment lien. By statute, an
owners' association "has a lien on a unit for any assessment levied against
that unit from the time the assessment becomes due." A.R.S. § 33-1807(A).
Section 3.7(A) of the CC&Rs states that "[a]ny Assessment, or any
installment of an Assessment, which is delinquent shall become a
continuing lien on the Lot . . . ." Thus, both the statute and the CC&Rs
provide for the automatic establishment of an assessment lien when the
assessment becomes due, A.R.S. § 33-1807(A), or when the assessment is
delinquent, CC&Rs § 3.7(A). Any difference in timing of the establishment
of the lien is not relevant to this appeal because either requirement was met.

¶9 It is uncertain whether A.R.S. § 33-1807(A) or the CC&Rs
separately creates an independent lien or whether a single assessment lien
is created. Because at least one assessment lien was created, we do not
address this issue.

¶10 Likewise, we do not address whether the assessment lien was
perfected. Perfection pursuant to A.R.S. § 33-1807(E) requires nothing more
than recording the CC&Rs. In contrast, the CC&Rs require the Association
to send a demand letter to the owner, allow the owner an opportunity to
cure the delinquency, and then record a Notice of Claim of Lien before the
lien is perfected. CC&Rs § 3.7(C). Because perfection is not required for
the Association to foreclose upon its assessment lien, we do not resolve this
issue. In re Babaeian Transp. Co., 206 B.R. 536, 540 (Bankr. C.D. Cal. 1997)
("An unperfected security interest is binding between the parties. The lack
of perfection creates a problem only when an intervening third party
obtains a perfected security interest that trumps the unperfected interest.").

¶11 The Association's assessment lien passed through Allen's
bankruptcy unavoided. A lien, perfected or unperfected, that is not
avoided passes through bankruptcy and is enforceable against the
property. In re Cortez, 191 B.R. 174, 177-78 (B.A.P. 9th Cir. 1995). Allen
acknowledged that "there was no effort in [the bankruptcy] case to remove
the purported lien." 11 U.S.C. §§ 502(a), 506(d), and 545. Also, Allen's
inaccurate listing of the Association's lien as unsecured in her bankruptcy
petition did not transform the Association into an unsecured creditor or
avoid the lien. See Cortez, 191 B.R. at 178 ("[W]hile the appellee was listed
as an unsecured creditor and the debt was discharged, the appellee was
actually a secured creditor under [state] law by virtue of the deed of trust
lien which had not been avoided in bankruptcy. Its lien survived the
bankruptcy."). Further, the Association was not required to participate in
the bankruptcy proceeding to preserve its rights as a lienholder. See In re

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Blendheim, 803 F.3d 477, 485 (9th Cir. 2015) ("A creditor with a lien on a
debtor's property may generally ignore the bankruptcy proceedings and
decline to file a claim without imperiling his lien, secure in the in rem right
that the lien guarantees him under non-bankruptcy law: the right to
foreclosure."); Cortez, 191 B.R. at 179 (finding 11 U.S.C. § 524(a) is not
violated when a creditor enforces a lien upon real property through
foreclosure); Stewart v. Underwood, 146 Ariz. 145, 147 (App. 1985) (noting a
secured creditor may join the bankruptcy proceeding or "wait and enforce
his rights after the automatic bankruptcy stay is terminated").

¶12 Because the assessment lien survived Allen's bankruptcy, the
Association may foreclose upon the assessment lien as permitted by
Arizona law. See Butner v. United States, 440 U.S. 48, 54-55 (1979) (noting
that property rights, including security interests, are governed by state law
unless there is a conflicting federal law). "[A]ssessments may be foreclosed
in the same manner as a mortgage" if the owner is delinquent in payment
of assessments for one year. A.R.S. § 33-1807(A). Allen argues that the pre-
petition assessments cannot be delinquent because they were discharged,
and she is not delinquent on post-petition assessments. Discharge enjoins
the debtor's personal liability but does not erase the debt. Stewart, 146 Ariz.
at 148; see also Zavelo v. Reeves, 227 U.S. 625, 629 (1913) ("[T]he discharge
destroys the remedy, but not the indebtedness."); In re Mahoney, 368 B.R.
579, 584 (Bankr. W.D. Tex. 2007) ("Bankruptcy does not erase debt; the
discharge is only an injunction against attempts to collect the debt as a
personal liability of the debtor."); In re Vogt, 257 B.R. 65, 70 (Bankr. D. Colo.
2000) ("[T]he discharge does not wipe away the debt. It only serves to
eliminate the debtor's personal responsibility to pay the debt."). Thus, Allen
is no longer personally liable for the pre-petition assessments, but the debts
remain in their delinquent status and may be foreclosed pursuant to A.R.S.
§ 33-1807.

¶13 Allen argues that the superior court correctly prohibited the
collection of pre-petition debts because 11 U.S.C. § 523(a)(16) "provides that
only post-petition assessments are not discharged." This misreads the code.
Section 523 lists debts that may not be discharged, including fees and
assessments that are based upon an ownership interest in an owners'
association that come due after the commencement of the bankruptcy
action, and clarifies that it does not prevent the discharge of association fees
or assessments due before the bankruptcy was filed. 11 U.S.C. § 523(a)(16).
Because this section does not require the discharge of pre-petition fees and
assessments, it is not relevant to this appeal.

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¶14 Allen also argues that the Association waived any right it had
to foreclose because it failed to inform her, upon her request, of the
delinquent assessment balance, and it accepted her post-bankruptcy, semi-
annual assessment payments as payment in full. The evidence in the record
does not support either of these arguments. First, Allen's letter, which she
sent before her bankruptcy discharge, expressed her uncertainty as to how
her next payment should be applied and requested a "new payment
schedule" so she could "be sure to stay on a timely payment schedule again
from here on out." (Emphasis added). Allen intended this note to be a
request for information about her delinquent assessments; however, during
the hearing, she admitted that the note did not clearly convey her intent
and, instead, specifically requested information for future payments.
Second, Allen claimed that her post-petition payments "were intended to
be payment in full of the semi-annual assessment as noted on the checks,"
but the checks indicated which assessment year and installment the
payments were for and did not indicate they were intended to be payment
in full. Because her intention was not conveyed on the payments, we do
not need to consider whether a "payment in full" notation would have been
sufficient to waive collection of any outstanding assessments.

B. Fees, Costs, and Other Charges

¶15 The Association acknowledges in its supplemental brief that
it chose to present evidence in the pursuit of foreclosure pursuant to its
statutory rights and argues that it is not required to meet the CC&Rs'
assessment lien requirements. Because the Association chose not to pursue
any rights it may have had pursuant to the CC&Rs, we only address
whether the Association had a lien for fees and charges pursuant to statute.

¶16 The Association's assessment lien does not include attorneys'
fees, costs, and other charges. "Fees, charges, late charges, monetary
penalties and interest charged pursuant to § 33-1803, other than charges for
late payment of assessments are not enforceable as assessments." A.R.S. §
33-1807(A). A lien for fees and charges is created when an association
obtains a judgment and records the judgment in the office of the county
recorder. A.R.S. § 33-1807(A). In 2013, the Association obtained a judgment
for assessments, attorneys' fees, and charges (costs). However, the
Association did not present any evidence that this judgment was recorded.
The Association's unrecorded judgment was discharged. A discharge in
bankruptcy "voids any judgment at any time obtained, to the extent that
such judgment is a determination of the personal liability of the debtor with
respect to any debt discharged . . . ." 11 U.S.C. § 524(a)(1). Because the
Association had not recorded the judgment, it did not have a lien for the

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fees and charges, and the judgment was discharged pursuant to 11 U.S.C. §
524.

¶17 Likewise, any pre-petition fees and charges incurred by the
Association that were not included in the judgment were discharged. As
stated above, these fees and charges were not included in the assessment
lien. See A.R.S. § 33-1807(A) (requiring a judgment to be obtained and
recorded before fees and charges are included in the assessment lien). Thus,
they were the personal liability of Allen and discharged in her bankruptcy
pursuant to 11 U.S.C. § 524(a)(2).

¶18 Because the Association established its right to an assessment
lien and the lien survived bankruptcy, we vacate the superior court's order
dismissing the Association's complaint. We affirm the superior court's
finding to the extent that it prohibited the Association from collecting on
fees and charges that were incurred before Allen petitioned for bankruptcy
because those fees and charges were discharged pursuant to 11 U.S.C. §§
524(a)(1) and (2). However, the Association may collect upon the fees and
charges, if any, that became due after Allen filed for bankruptcy. 11 U.S.C.
§ 523(a)(16). Therefore, we remand the case to the superior court to
determine the amount of "reasonable collection fees and . . . reasonable
attorney fees and costs incurred with respect to" enforcing the assessment
lien after Allen petitioned for bankruptcy. A.R.S. § 33-1807(A).

II. Doctrine of Res Judicata

¶19 The Association argues that the superior court erred in
applying the doctrine of res judicata to its foreclosure action. It is unclear
whether the superior court's res judicata finding was limited to fees and
charges, or if it included assessments and charges for the late payment of
assessments. Because we find that fees and charges were not included
within the assessment lien and were, thus, discharged in Allen's
bankruptcy, we do not reach whether res judicata precludes the fees and
charges included within the judgment. We still must address, however,
whether res judicata prohibits the Association from pursuing foreclosure
upon the assessments and charges for the late payment of assessments.

¶20 "Whether res judicata applies in particular circumstances is a
question of law that we review de novo." Minjares v. State, 223 Ariz. 54, 58,
¶ 12 (App. 2009). "Res Judicata is a judicial doctrine grounded in public
policy considerations to insure that at some point there will be an end to
litigation." El Paso Nat. Gas Co. v. State, 123 Ariz. 219, 223 (1979). "Under
res judicata, a final judgment on the merits bars further claims by parties or

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their privies based on the same cause of action." Montana v. United States,
440 U.S. 147, 153 (1979).

¶21 As previously stated, an assessment lien may be foreclosed in
the same manner as a mortgage. A.R.S. § 33-1807(A). There are two
methods for collecting upon a mortgage: "sue and get a judgment at law
upon the personal obligation and enforce it by levy upon any property of
the debtor (in personam remedy) or . . . foreclose upon the property (in rem
remedy)." Darnell v. Denton, 137 Ariz. 204, 206 (App. 1983). The ability to
collect is limited by the election statute, which states: "If separate actions are
brought on the debt and to foreclose the mortgage given to secure it, the
plaintiff shall elect which to prosecute and the other shall be dismissed."
A.R.S. § 33-722. The statute "is limited to the circumstance where both
actions are pending simultaneously." Smith v. Mangels, 73 Ariz. 203, 207
(1952). "It has never, however, been construed so as to prevent the holder
of a mortgage from suing at law upon notes held by him and secured by
such mortgage and subsequently prosecuting an action in the same county
in equity for the purpose of enforcing the lien of the mortgage." Id.; see also
Mid Kan. Fed. Sav. & Loan Ass'n of Wichita v. Dynamic Dev. Corp., 167 Ariz.
122, 126 (1991) (reaffirming that "the election statute does not preclude a
subsequent foreclosure action after judgment on the debt, as is the case in
some other states").1

¶22 Because the Arizona Supreme Court has expressly held that a
mortgage may be enforced by a judgment and a subsequent foreclosure,
and an assessment lien may be foreclosed upon in the same manner as a
mortgage, the doctrine of res judicata does not prevent an association from
foreclosing on the assessment lien after obtaining a judgment against the
owner. Therefore, we vacate the superior court's finding that the doctrine
of res judicata barred the Association from foreclosing upon its assessment
lien.

III. Denial of Motion for New Trial

¶23 The Association also argues that the superior court erred
when it denied its motion for a new trial based upon the arguments
addressed above. We review an order denying a motion for new trial for

1 The CC&Rs would also allow the Association to pursue a judgment
"without waiving the Assessment Lien securing the delinquent
Assessments." CC&Rs § 3.7(D)(i).

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an abuse of discretion. Summers v. Gloor, 239 Ariz. 222, 225, ¶ 10 (App.
2016).

¶24 Because we find that the Association's assessment lien was
not discharged in Allen's bankruptcy and is not barred by the doctrine of
res judicata, we also find that the superior court abused its discretion when
it denied the Association's motion.

IV. Attorneys' Fees and Costs

¶25 Both parties request an award of attorneys' fees and costs
incurred on appeal pursuant to the CC&Rs and A.R.S. §§ 12-341.01 and 33-
1807(H). Allen is not the successful party on appeal and her request is
denied. As the successful party in an action arising under contract and
A.R.S. § 33-1807, we award the Association reasonable attorneys' fees and
costs incurred on appeal upon compliance with Arizona Rules of Civil
Appellate Procedure 21(b).

CONCLUSION

¶26 For the foregoing reasons, we affirm the superior court's
finding that the Association may not collect its pre-bankruptcy fees and
charges, vacate the order dismissing the foreclosure action, and remand the
case to the superior court for further proceedings consistent with this
decision.

AMY M. WOOD • Clerk of the Court
FILED: AA

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