On December 5, an Arizona Superior Court for Maricopa County issued an Order to Show Cause to the state of Arizona and scheduled an expedited evidentiary hearing in a suit challenging the newly passed Arizona Protection from Predatory Debt Collection Act (the Act), also known as Proposition 209. Arizona voters passed the Act in the November midterm elections and it became effective on December 5, the same day the suit and show cause order were filed. The Act has been touted as a way to protect Arizonans with medical debt from bankruptcy and set new exemption limits on property subject to debt collection and decreased the portion of a judgment debtor’s income that is subject to garnishment. The plaintiffs, led by the Arizona Creditors Bar Association Inc., contend the Act should be declared void due to the vagueness of the savings clause. The evidentiary hearing is set for December 16, 2022.

The Act amends various Arizona statutes to: (1) lower the interest rate cap on medical debt from 10% to 3%; (2) increase the amount of equity in a person’s home (up to $400,000) that is protected from certain creditors, including tax liens from state and local governments; (3) increase the dollar value of personal property and assets exempt from the claims of creditors from $6,000 to $15,000; and (4) decrease the portion of a judgment debtor’s weekly disposable earnings that can be withheld pursuant to a wage garnishment to the lesser of 10% of disposable earnings or 60 times the highest applicable federal, state, or local minimum wage. The Act includes a savings clause that states the entire law, “applies prospectively only.” The Act then states the entire law does not apply to three different types of situations, the third being “rights and duties that matured” before the effective date.

In the complaint, the plaintiffs contend that because garnishment actions are considered independent from the underlying contract action it is unclear when in this process the right to garnishment would “mature” under the Act. They provide the example of a claim with a contract date of January 1, 2020, a judgment date of December 1, 2022, a garnishment application filing of December 2, 2022, a writ of garnishment on December 5, 2022, and service of the writ on December 6, 2022. If the claim matures when a judgment was entered the Act would not apply, if the claim matures when the garnishment application was filed the Act would not apply, but if the claim matures when the writ is issued or served the Act may apply. The plaintiffs claim the Act provides no clear guidance.

For relief, the plaintiffs request that the Act be declared void for vagueness under the First and Fourteenth Amendments of the U.S. Constitution and Article 2, Section 4 of the Arizona Constitution. Alternatively, the plaintiffs request that the court declare that the Act’s provisions: (1) do not apply to debt arising out of contracts or agreements entered into before the effective date; (2) do not apply to post-judgment enforcement actions occurring after the effective date where the underlying contracts were entered into before the effective date, regardless of when the underlying judgment was entered; and (3) do not apply to non-contract judgments where the underlying cause of action accrued before the effective date; but (4) do apply to both debt arising out of contracts entered into and non-contract judgments entered after the effective date.

Troutman Pepper will continue to monitor developments in this litigation.