Pub. 4 2014 Issue 4

19 FALL 2014 O N AUGUST 26, 2014, THE ARIZONA SUPREME COURT MADE IT CLEAR—ONCE AGAIN— THAT LENDERS AND TITLE companies may rely on the doctrine of equitable subrogation in the context of mechanic’s lien priority disputes. That decision, The Weitz Company, L.L.C. v. Heth, rejected the argument that Ari- zona’s mechanic’s lien statutes precludes assignment by equitable subrogation of a deed of trust that attached after construction began on the project. T HE FACTS UNDERLYING WEITZ In the Weitz case, First National Bank of Arizona loaned approximately $62 million to Summit at Copper Square for the construction of a commercial and residential condominium project in downtown Phoenix. The bank recorded a deed of trust to secure the loan. Summit contracted with Weitz to be the project’s general contractor, and Weitz satisfied the statutory require- ments to obtain a mechanic’s lien on the project. When Summit stopped paying Weitz as the project neared completion, Weitz filed suit and sought to fore- close on its lien. Individuals who had purchased some of the condominium units, and their lenders, argued that because their funds had been used to pay off part of Summit’s loan with First National Bank of Arizona, they were equitably subrogated to First National’s first lien position. Decades of Arizona court decisions seemed to support the application of equitable subrogation in this context. Weitz, however, argued that Arizona’s mechanic’s lien statute did not allow the doctrine of equitable subrogation to el- evate claims in priority over mechanic’s liens. The Arizona Court of Appeals, relying primarily on a recent deci- sion out of Nevada, rejected the prior Arizona decisions and accepted Weitz’s argument. T HE SUPREME COURT’S DECISION The Court of Appeals’ decision in Weitz survived for only a few months. The purchasers and their lenders sought review by the Arizona Supreme Court, and it overturned the Court of Appeals decision. The Supreme Court rejected the Court of Appeals’ position that equitable subrogation unfairly allowed a later claim to leap-frog ahead of a mechanics’ lien. Instead, equitable subrogation prevents the mechanics’ lien claimant from getting a windfall by moving into first position when a subsequent lender satisfies a lien in first position. The Supreme Court also held that, contrary to Weitz’s contention, nothing in Arizona’s mechanic’s lien statutes “suggests that the legislature intended to preclude equitable subrogation in the mechanic’s lien context.” Moreover, the Supreme Court recognized that the purpose of the mechanic’s lien statutes is to protect the rights of laborers and materialmen who enhance the value of property, and “[e]quitable subrogation does not prejudice those rights” because “[w]hen a lien that is superior to a mechanics’ lien is assigned to another through equitable subrogation, the mechanics’ lien remains in the same po- sition it occupied before subrogation.” C ONCLUSION The use of equitable subrogation in the context of mechanics’ liens is back on track in Arizona. Barring the unlikely event of a statutory change by the Ari- zona legislature, the Supreme Court’s decision in Weitz is likely to be final word on this issue. w Mr. Egbert is the Chairman of the Appellate Prac- tice Group at Jennings, Strouss & Salmon, a law firm which represents both title insurers and lenders. Mr. Egbert wrote the Arizona Bankers Association’s amicus brief filed with the Arizona Supreme Court in the Weitz case. Arizona Supreme Court Restores Equitable Subrogation as Important Safeguard for Lenders By JOHN J. EGBERT