Mechanic’s Liens Take Priority Over ‘Equitable Subrogation,’ ASA Tells Arizona Supreme Court

June 4, 2014

Using the doctrine of “equitable subrogation” to establish lender priority over mechanic’s liens would “completely defeat” the legislative intent behind mechanic’s liens statutes and “improperly shift the known and assumed risks” from construction project owners and lenders to contractors and subcontractors, the American Subcontractors Association (ASA) and ASA of Arizona told the Supreme Court of Arizona.

In the associations’ amicus brief in The Weitz Company, LLC, Plaintiff-Appellee, v. Nicholas Heth, et al., Defendants-Appellants, ASA and ASA of Arizona urged the state Supreme Court to affirm a court of appeals decision, saying, “The mechanic’s lien statutes are one part of the intricate statutory framework adopted by the legislature to protect subcontractors and ensure that laborers and materialmen are paid for their work All 50 states have some form of mechanic’s lien statutes. The language and details of the statutes vary widely, as does the jurisprudence. However, the basic premise of all is that those whose labor or materials go into improving real estate should be permitted, in fairness, to satisfy their unpaid bills out of that real estate.”

“Those involved in construction depend on their mechanic’s lien rights as security for payment for the work they perform,” said Matthew B. Meaker, attorney, Sacks Tierney P.A., Scottsdale, Ariz. Sacks Tierney prepared the ASA brief in this case. “Affirming the Court of Appeals decision regarding equitable subrogation results in a bright line rule that all stakeholders can rely upon.”

In the underlying case, the construction project owner, Summit at Copper Square, LLC, obtained construction loans to build a high-rise condominium on an empty lot in Phoenix. The owner hired the Weitz Company as the general contractor. Weitz and its subcontractors spent 30 months and $59 million building the 23-story tower containing 165 units of mixed-use commercial and residential condominiums. Either before construction was finished, or shortly after, the developer sold 91 of the condominiums, and the proceeds were used to pay down the construction loan, solely for the benefit of the developer and lender. Most of the condominium purchases were financed by purchase money loans, but 15 buyers paid cash. The borrower and construction lender received nearly $40 million from these 91 sales, without paying Weitz the full amount owed on the construction contract despite their earlier agreement to pay Weitz the balance due as the condominiums were sold. Weitz was not paid the final $3.8 million owed on the project.

“Equitable subrogation” is a doctrine, based on principles of fairness, where the one who pays the obligation of another is treated as the beneficial owner of the original obligation. In this case, the lenders argued that by financing the purchase of certain individual units, they were paying off the outstanding obligations of the construction loan and, thus, had the right to the priority of the bank, which had — by recording its deed of trust in a timely manner — priority over the mechanic’s lien claimants.

ASA and ASA of Arizona wrote in their brief that the appeals court correctly held that the state’s mechanic’s lien statutes’ “plain and express language precludes application of the equitable subrogation doctrine.” “Equitable subrogation is designed to prevent injustice, and will not be applied when there is no injustice to prevent,” ASA and ASA of Arizona wrote, The Appellants’ demands would effectively rewrite the statutory mechanic’s lien provisions and. in the process. create a great injustice not only to Weitz and its unpaid subcontractors, but to all subsequent subcontractors on future projects who would lose the certainty of the plain statutory language, and have their statutory remedies imperiled and rendered ineffective under the guise of an ‘equitable’ doctrine.

Source: American Subcontractors Association

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