{"id":9965,"date":"2014-09-12T06:21:31","date_gmt":"2014-09-12T12:21:31","guid":{"rendered":"https:\/\/www.myconstructionexpert.com\/blog\/?p=9965"},"modified":"2014-09-15T06:22:14","modified_gmt":"2014-09-15T12:22:14","slug":"arizona-supreme-court-rules-lenders-mechanics-lien-priority-dispute","status":"publish","type":"post","link":"https:\/\/www.myconstructionexpert.com\/blog\/arizona-supreme-court-rules-lenders-mechanics-lien-priority-dispute\/","title":{"rendered":"Arizona Supreme Court Rules for Lenders in Mechanic\u2019s Lien Priority Dispute"},"content":{"rendered":"

Edward A. Salanga – Quarles & Brady LLP – September 3, 2014<\/p>\n

In\u00a0The Weitz Company LLC v. Heth, No. CV-13-0378-PR (Ariz. Sup. Ct., Aug. 26, 2014), the Arizona Supreme Court reversed the Court of Appeals, holding that lenders can once again rely upon the doctrine of equitable subrogation in mechanic\u2019s lien priority disputes with contractors.<\/p>\n

The Facts<\/strong><\/p>\n

First National Bank of Arizona provided a construction loan to Summit at Copper Square for the development of a 165-unit, mixed-use commercial and residential condominium project in downtown Phoenix, recording a deed of trust to secure Summit\u2019s payment obligations. Summit later contracted with The Weitz Company, which served as the general contractor on the project. As the project neared completion, however, Summit still owed Weitz for billed work. Nevertheless, Summit began selling individual units in the project and applied the earnings toward its loan with First National. Residential lenders provided financing for most of the unit sales.<\/p>\n

Weitz complied with the statutory requirements in Arizona to obtain a mechanic\u2019s lien on the project. After recording its lien, Weitz filed a complaint seeking to foreclose its lien and named as defendants the unit owners and the lenders who provided the funds used to finance the purchases of the units. Weitz argued that its mechanic\u2019s lien was superior to the lenders\u2019 security interests, based on Arizona\u2019s mechanic\u2019s lien statutes: A.R.S. \u00a7\u00a7 33-981,\u00a0et seq.\u00a0The lenders argued that they were equitably subrogated to the first lien position held by First National because the financing provided by the lenders was used to pay off Summit\u2019s loan with First National.<\/p>\n

It seemed the lenders were on solid legal ground, based on prior decisions of the Arizona Court of Appeals, but the Court of Appeals in\u00a0Weitz\u00a0ended up rejecting its earlier rulings and sided with Weitz, holding that the doctrine of equitable subrogation was not available in mechanics lien priority disputes.<\/p>\n

The Arizona Supreme Court reversed, however, siding with the lenders and holding that the doctrine of equitable subrogation was available in mechanics lien priority disputes.<\/p>\n

The Decision<\/strong><\/p>\n

The Supreme Court first noted that the Court of Appeals decision represented a departure from previous case law allowing subsequent lienholders to have priority over mechanic’s liens through equitable subrogation. Relying on the\u00a0Restatement (Third) of Property: Mortgages\u00a0\u00a7 7.6(a), the Supreme Court characterized equitable subrogation differently than the Court of Appeals did. Rather than describing equitable subrogation as a means of jumping ahead of an intervening lien, the Supreme Court described equitable subrogation as allowing a party to replace a priority lienholder through substitution or assignment.<\/p>\n

In addition, the Supreme Court noted that nothing in A.R.S. \u00a7 33-992(A) \u2014 which grants priority to a mechanic\u2019s lien over subsequently recorded liens \u2014 \u201csuggests that the legislature intended to preclude equitable subrogation in the mechanics\u2019 lien context.\u201d In any event, the Supreme Court explained that mechanic\u2019s lienholders suffer no prejudice when equitable subrogation comes into play, because \u201c[w]hen a lien that is superior to a mechanic\u2019s lien is assigned to another through equitable subrogation, the mechanic\u2019s lien remains in the same position it occupied before subrogation.\u201d The court also based its holding on A.R.S. \u00a7 33-723, which allows junior lienholders to assume a superior lien position by discharging the superior lien in a foreclosure action, regardless of any intervening mechanic\u2019s liens.<\/p>\n

Weitz alternatively argued that the owners and lenders could not be equitably subrogated to First National\u2019s position because they did not fully pay off Summit\u2019s obligation to First National. The Supreme Court initially noted that partial equitable subrogation is not permitted because it \u201csplits\u201d the obligation between the original and subsequent obligor. However, the Supreme Court sided with the lenders, holding that \u201cwhen a single mortgage burdens multiple parcels, a third party may be entitled to equitable subrogation when that party has paid a pro rata amount of the obligation and obtained a full release of the parcel at issue from the mortgage.\u201d<\/p>\n

What This Means for Lenders and Contractors<\/strong><\/p>\n

The Supreme Court\u2019s reversal of the Court of Appeals decision returns Arizona law to its\u00a0status quo\u00a0prior to the Court of Appeals decision, where equitable subrogation could be relied upon in mechanic\u2019s lien priority disputes to allow subsequent lienholders to take a superior position over mechanic\u2019s liens. This final pronouncement from the Arizona Supreme Court likely settles the issue in Arizona for good. While lenders (and their title companies) should continue to be extra diligent in confirming whether any liens encumber the property being purchased by their borrowers, they can again rely on the doctrine of equitable subrogation in any mechanic\u2019s lien priority dispute. Contractors, on the other hand, have to be aware of this important limitation on their mechanic\u2019s lien rights.<\/p>\n

via Arizona Supreme Court rules for lenders in mechanic\u2019s lien priority dispute – Lexology<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

Edward A. Salanga – Quarles & Brady LLP – September 3, 2014 In\u00a0The Weitz Company LLC v. Heth, No. CV-13-0378-PR (Ariz. Sup. Ct., Aug. 26, 2014), the Arizona Supreme Court reversed the Court of Appeals, holding that lenders can once again rely upon the doctrine of equitable subrogation in mechanic\u2019s lien priority disputes with contractors.… Continue reading Arizona Supreme Court Rules for Lenders in Mechanic\u2019s Lien Priority Dispute<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","enabled":false},"version":2}},"categories":[8],"tags":[8],"class_list":["post-9965","post","type-post","status-publish","format-standard","hentry","category-mechanics-lien-rights","tag-mechanics-lien-rights","entry"],"jetpack_publicize_connections":[],"yoast_head":"\nArizona Supreme Court Rules for Lenders in Mechanic\u2019s Lien Priority Dispute - Advise & Consult, Inc.<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.myconstructionexpert.com\/blog\/arizona-supreme-court-rules-lenders-mechanics-lien-priority-dispute\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Arizona Supreme Court Rules for Lenders in Mechanic\u2019s Lien Priority Dispute - Advise & Consult, Inc.\" \/>\n<meta property=\"og:description\" content=\"Edward A. Salanga – Quarles & Brady LLP – September 3, 2014 In\u00a0The Weitz Company LLC v. Heth, No. CV-13-0378-PR (Ariz. Sup. 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