IN THE COURT OF APPEALS STATE OF ARI

ZONA DIVI SION

TWO

LAMB EX CAVATION , INC., an Arizona corporation, Plaintif f/Appellee,

v. CHASE MANHATTAN MORT GAGE CORPORATI ON, Defend ant/Appe llant, and INTEG RA W INDOW & DOO R, INC.; ATKO BU ILDING MAT ERIALS, INC.; and U.S. CO MPON ENTS L .L.C., Defendants/Cross-Claimants/Appellees. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) 2 CA-CV 2002-0139

DEPARTMENT B O P I N I O N

APPEAL FROM THE SUPERIOR COURT OF PIMA COUNTY

Cause No. C-20010928 Honorable Jane L. Eikleber ry, Judge REVERSED AND REMANDED2

Durazz o & Eckl e, P.C. By Patric E. Durazzo

Snell & Wilme

r, L.L.P. By Marc G. Simon and Wade R. Swanson

Slut es, Sa kris on & Hill, P. C. By James M. Sakrison

Norman R. Fre eman II, P. C.

Ander son,Brody

, Levins on, We ise

r & Hor witz , P.A. By Jeffrey H . Levinso n & Jane ssa E. K oenig Tucson Attorneys for

Plaintif f/Appellee

Tucson Attorneys for

Defendant/Appellant Chase Manhattan Mortgage

Corporation TucsonAttorneys for Defendant/CrossClaimant/Appellee Integra Window & Door, Inc.

TucsonAttorney for Defendant/CrossClaimant/Appellee U.S. Com ponents L.L.C

.

PhoenixAttorneys for Defendant/CrossClaimant/Appellee ATKO Building Materials, Inc.

E S P I N O S A, Acting Presiding Judge. ¶1 In this mechanics’ lien foreclosure ac tion, appell

ant Chase Manhattan Mortgage Corporation

(Chase) a ppeals from the trial court’s g rant o f summary judgment in f avor of appelleeLamb Excavation, Inc. (Lamb). Chase contends thecourt erred in declining to apply the doctrine of equi

table subr

ogat ion in its f

avor, which would have placed Chase i n the primary lien pos i tion occupied by the construct

ion lender aft

er Chase provided permanent1 The construction loan and th e permane nt financing dif fered in their t

erms: t he CFB loan, by its te

mporary nature , had a one-year term, while the

Chase loan was for thirty year s; the CFB interest rat

e was 8.25% a nd the Ch ase financin g, an adju stable rate note, carried an 11.275% interest

rate; and the CFB loan was for the amount of $240,000, whil e the Chase n ote listed $248,000 as

the principal

balance. 3 financing for the subject project and satisfied the construction loan. We agree and reverse the grant of summary judgment

in favor of Lamb and remand t he case to the

trial cour

t for furt her proceedings consis

tent with thi s decision. Facts and Procedural Background ¶2 The essential facts are undisputed. I n February 2000 Edwin and Catheri ne Torrejonobtained a construction loan from Commercial Federal Bank (CFB) to build a house

on a parce l of prop erty they ha d purch ased. T he loan was se cured b y a d eed of trust. The Torrejons employed several subco ntr

act ors d uri ng const ruct ion, incl udin g Lamb , ATKO BuildingMaterials (ATKO), U.S. Co mponents, and Integra Window & D oor (Integra). Those four subcontractors

subsequently s erved on CFB and the Torrejons prel iminary t wenty-day notices of mechanics’ and mat erialmen’s l

iens pursuant t

o A.R.S. § 33-992. 0 1. In November 2000, the Torrejons obt ained permanent fi

nancing from Chase t

o satis fy the CFB construction loan, executing a promissory

note and deed

of trust to the property,

which Chase recorded on December 15, 2000. 1 Shortly there after, Lamb, ATKO, Integra, and U.S. Compo nents (collectively refer red to as mechan ics’ lienholde rs), who h ad not bee n fully paid for their w ork, all r ecorde d mech anics’ lie ns agai nst the p roperty.2 In addition to t h e lien-foreclosure clai m, Lamb’s complaint a nd the subsequent amended complaint

contained three additional counts for breach of contract, unjust enrichment and equita ble lien, and quantum meruit. 4 ¶3 In February 2001, Lamb filed an acti on to foreclose i

ts lien, nami

ng as defendan ts the Torrejons, CFB, Chase, and the three other mechanics’ lienholders. 2 The three

an swered and filed cross-claims asserting lien priority positions identical to L amb’s. In November 2001 C hase mov ed for summ ary judgme nt, arguing its lien should be subrogated to the extent of t

he CFB lien. Lamb filed a count ermotion for summary judgment, whic h the other three mechanics’ lienholders j oined, co ntending th at Chase w as not entitled to equitable subrogation

because th

e CFB lien had been exti nguished and thus the

re was no agreement or intent to subrogate. Lamb al so argued that subr ogation “would work a

substantial

injustice” on the lienholders. The tr ial c ourt denied Chase’s mot ion and granted the l

ienholders’ mot

ion instead. ¶4 In granting Lamb’s mot ion for summary

judgment, the tr

ial court r

ejected Chase’s argument that i t was entitl

ed to equi table subrog ation, find ing th at Chase was “a sophisticat

ed lender” an d had “c onstr uctive notice of the potential for the filing of a mechanic’s liens [sic] against the pr operty when

it made the loa

n.” Citing Mosher v. Conway , 45 Ariz. 463, 46 P .2d 110 (1935 ), the trial court also found that the decisio n to apply eq uitable subrogation

depends on the parti

cular circums

tances of each ca se and that applyi ng the doctrinehere would produce an “inequit able resul

t” and be contrary to public policy. In5

addition, the court rea soned tha t subrogatio n did not ap ply because the terms of the CFB and Chase loans were “not ident ical.” This appe al followed. Standard of Review ¶5 A trial court properly grants summary judgmen t if the moving party is entit led to j udgmen t as a matter of la w. Ariz. R. Civ. P . 56(c)(1), 1 6 A.R. S., Pt. 2; Orme School v. Reeves , 166 Ariz. 301, 802 P.2d 1000 (1990). Becaus e determining whethe r Chase was entitled to equitable s ubrogation involv es a questio n of l aw, we r evie w de novo the issue of whetherthat reli

ef is appropriate. See Johnson v. Hispanic Broadcast ers of Tucson, Inc. , 196 Ariz. 597, 2 P.3d 687 (App. 2000) (entry of summary judgment r eviewed de novo ); see also Andrews v. Blake , 205 Ariz. 236, 69 P.3d 7 (2003) (a vailability and p ropriety of equ itable relief re viewed de novo ). Equitable Subrogation ¶6 The doctrine of equitable subr

ogation permit

s the substi

tution of one l

ienholder into the lien-priority posi tion of a prior lienholder. Subrogation is “an equitable remedy designed to avo id a person ’s receiving an unearne d windfall at the expen se of another.” Restatement

(Third) of Proper

ty (Mortgages)

(hereinaft

er “Restatem ent”) § 7.6 cmt. a. In general, previously r

ecorded liens have pr

iority over subsequent mechani cs’ lien s record ed after labor has begun or materials have been furnished. The mechanics’ liens then have priority over later-recorded encu mbrances. See A.R.S. § 33-992; E. Sav. Bank v. Pappas , 829 A.2d 953 (D.C. 2003) ; see genera lly Restatement § 7.6. But applicati on of the doctri

ne of equitable subrogation al lows a subsequent

lender who sup plies funds used to pay off a p rimary6

and superior encumbranc e to be substit uted into the pr

iority position of t

he primary lienholder, despite the recordin g of an intervening lien. See Mo sher; Peter man-D onnelly Eng’rs & Co ntractors Corp. v. First Nat’l Bank of Ariz. , 2 Ariz. App. 3 21, 408 P.2d 841 (1965); see also Mort v. United St

ates , 86 F.3d 890 (9th Cir. 1996). ¶7 On appeal, Chase co ntends it w as entitled to eq uitable subrogation based on t he two -part test enunciat

ed in Peterma n-Donn elly , which considers (1) whether an express o r implied ag reement to subrogate existed and (2) wheth er any preju dice to the lien claimants resulted. Conve rsely, Lamb u rges us to up hold the trial co urt’s ruling, as serting the trial co urt, in denying subrogation, properly considered factors such as Chase ’s actual or c onstructive notice of the interve ning liens, its sta tus as a soph isti cated len der, and public policy issues. Thus, the parties

disagree o n th e approp riate legal stand ard for asses sing whe ther equitab le

su brogation

sh ould apply. In or

der to clarify the Arizona s tandard, we firs

t review the approaches taken by other jurisdictions. Majority Approach ¶8 The four primary elements of equitable subrogatio n are as follow s: (1) the party claiming subrogation

has paid the debt;

(2) the party

was not a volunteer;(3) the party was not primarily liable for the d ebt; and (4) n o injustice w ill be done to the oth er party by allowing subrogation. See Kuznik v. Bees Ferry Assocs. , 538 S.E .2d 15 (S .C. Ct. A pp. 2000 ); accord St. Paul Fire & Mari

ne Ins. Co. v. Murray

Guard, Inc. , 37 S.W.3 d 180 (A rk. 2001) ; County

v. Jensen , 83 P.3d 405 (Utah Ct. Ap p. 2003); cf. Mos her . A majo rity of jurisdictions apply the doctrine of e quitable subrogation when the subs equent mortgagee had no act ual knowledge3 Indeed, a n “increasing trend” is to allow subrogati on notwithstandi ng actual knowledge of intervening l

iens, if t he parties had i

ntended that subr

ogation occur. Osterman , 714 N.E.2d at 739. 7 of an existing l

ien, reasoning t

hat the subsequent

mor tgage e, having paid the pr eexisting obligation,

reasonably had expectedto step int o the shoes of the

previous creditor. Houston

v . Bank of Am. Fed. Sav. Bank , 78 P.3d 71 (Nev. 2003) (characterizin g, though declining to adopt, majority appr

oach viewing equitabl

e subrogation as def

eated onl y by actual , but not constructi

ve, knowledge of existing lien ; adopting in stead more liberal appro ach); Osterman

v. Baber , 714 N.E.2d 735 (Ind. Ct. App. 19 99) (same); see, e.g., Han v. United States , 944 F.2d 526 (9th Cir. 19 91); Smith v. State Sav. & Loan Ass’n , 223 Cal. Rptr. 298 (Cal. Ct. App. 1985). 3 Minority Approach ¶9 A minority of states,

however, consider, i

n addition t

o the primary eleme nts considered

by the majorit

y, such things as whether t he subsequent mortgage e had constructi ve notice of int

ervening liens , the lender’ s sophistic ation, and the lender’s negligencein faili

ng to discover an existing encu mbrance. See, e.g. , Bankers Trust C o. v . United States , 25 P.3d 877 (Kan. Ct. App. 2001) (denying equi table subrogat

ion to negligent sophisticated lender); Carl H. Peterson Co. v. Zero Estates , 261 N.W.2d 346 (Minn. 1977) (equitable subrogation deniedbecause o f sophistication of party seekin g subroga tion); se e also La ndmark Bank v. Ciaravin o , 752 S.W .2d 923 (M o. Ct. Ap p. 1988) ( equitable su brogation a llowed on ly in extreme cases bordering on

fraud); Richards v. Sec. Pac. Nat’ l Bank , 849 P.2 d 606 (U tah Ct.8

App. 1993) (construct

ive n otice of

mechanics’ lien defeats claim of e quitable subrogation); Kim v. Lee , 31 P.3d 665 (Wash. 2001 ) (constructive notice bars equitable su brogation). Restatement Approach ¶10 The Re sta tement sets fo rth an even more liberal ru le concern ing equitab le subrogation

than tha t of the majority of jurisdict ions. Section 7.6 of the Restatement states: (a) One w ho fully performs an obligation of an other, secured by a mortgage, becomes by subrogation the

owner of

the obligation and the mortgage to t he extent neces sary to prevent unjust enri chment. Even though the performance w ould otherw is e dischargethe obligati

on and the mortgage,they are pres erved and the mortgage ret

ains its pr

iority in the hands of t

he subrogee. (b) [S]ubrogati

on is appropriate to prevent u njust enrich ment if the person seeking s

ubrogation perfor

ms the obligat

ion:

. . . . (4) upon a request . . . t o do so, if the

person perfor

ming was promised repayment a nd reason ably expecte d to rece ive a security interest in the real est ate with the pri

ority of t

he mortgage being discharged, and if subro gation will n ot materially prejudice the hol

ders of inter

vening interes

ts in the re al estate. Thus, under the Restateme nt, a s ubsequent mortgagee’ s negligence in f ailing to di scover an existing lien does not preclude application of the doctrine so long as the int ervening lienholders are not prejudic ed. And, notice is not a considerati

on. Rather, the quest

ion i s whethera subsequent mortgage e reasonably expected a security interest w ith the same p riority

as that of the mortgage being discharged. See Restatement § 7.6( b) (4) and cmt. e; see also Houston

.9

¶11 The rationale behi nd t he Restatement’s

approach is that

the interveni

ng lienholder

suffers no prej udice because its lien maintains the same position it occupied before the subsequent

lender sati sfied the pre- existing obl igation. Rest

atement § 7.6 cmt. a. (“The hold ers of intervening interests can hardly complain about this result, for t hey are no worse off than before the s enior obligat ion was discharged. If the re were no subrogation, suc h junior interests would be promoted in priority, giving them an unwarranted an d unjust windfall.”); see also Pappas (focus of Restatement is on whether intervening lienholders prejudiced). Arizona Approach ¶12 As this court st ated in Herberman v. Bergstrom , 168 Ariz. 587, 590, 816 P.2d 244, 247 (App . 1991 ), “[f]o r equitab le subro gation to apply, there must be an agr eement, either express or implied, tha t the subseq uent lender w ill be substitut ed for the holder

of the prior encumbrance.” See also P eterman -Donne lly . In addition, the subsequent mortgagee must not be a volunteer. Id. Becau se subr ogation is a crea ture of e quity, “i ts applicat ion may be defeated by intervenin g rights wh ich wou ld be prejudiced by t he substitut

ion.” Id. at 326, 408 P.2d a t 846. As an equitable construct, “[i ]t rests upon the principl

e that substa

ntial just ice should be attai

ned, regardless

of form.” Mosher , 45 Ariz. at 468, 46 P.2d at 115. ¶13 Arizona’s approach to equita ble subrogati

on ap pears c onsistent wit h the Restateme nt: the doctrine will apply w hen there is a n express o r implied agre ement to subrogate, which is concordant with a party’s havi

ng a reasonable expect

ation of recei

ving a security interest

, and when an intervening lien claimant suffers no prejudice

. See PetermanDonnelly; see also Wetheri ll v. Basham , 197 Ariz. 198, ¶ 13, 3 P.3d 1118, 1123 (A pp. 2000),10

quoting Ramirez v. Health Partners of So. Ariz. , 193 Ariz. 325, ¶ 26, 972 P.2d 658 , 665 (App. 1998) (A rizona cou rts usually follow Restateme nt absent c ontrolli ng authority

, provided its application “is logi

cal, furthe

rs the inte

rests of just

ice, is consist

ent with Arizona

law and policy, and has been g enerally acknowledg ed elsewhere.”). ¶14 Although expressly declining to set forth a general rule for the future applicability of equitable s ubrogation, our s

upreme court in Mosher nonetheless stated, “when one, being himself a creditor, pays another credi tor, whose claim is prefera ble to his, it is held that the person so payi

ng is subrogated

to the right

s of the other credi

tor.” 45 Ariz. at

469, 46 P.2d at 116. Th e court dete rmin ed that whether the doctri

ne applies “depends upon t he particular

facts and cir

cumstances of each cas e as it ari ses,” id . at 46 8, 46 P.2d at115, but equitable subrogation will not be applied

when the subsequent creditor is a mere volunteer . Id. ¶15 Peterma n-Donn elly , this court’s most recent interpretation of Mosher , includes the following obse

rvation: Although the Mosher case i nd icates that an a d hoc app roach is required, the following

stateme nt . . . ap proxim ates a ge nerality: “[A] third person , having a greed to ad vance mo ney to dischargean enc umbra nce on proper ty o f a nother, where he [or she] is not a volunt

eer, and where payment is made u nder an agreement that he [ or she] will be s ubstituted in place of the holder of the encumbranc e, is entitled to subrogation, whether s uch agreement is express or whether such agreem ent i s implied .” Pete rman-D onnelly , 2 Ariz. App . at 325, 408 P. 2d at

845 ( cit ing wh at i s now 83 C.J.S

. Subrogation § 50, p. 583-4). Although t he parties di spute theimport of this language, which4 Interestin gly, the trial court in it

s decision ci

ted Mosher for the pr

oposition th at the applicability of equitable s ubrogation depends

upon the particul

arfacts and cir

cumstances of each individual case, bu t made no mention o f Peterma n-Donn elly

.

5 We note that, i

mmediately a

fter refusing to promulgat e a general rule , the Moshe r court remarked that “t

he modern tendency is

to extend [equit

able subrogati

on’s] use rathe

r than t o restrict

it” and that

“it now has a very l

iberal appli

cation, it s principle

be ing modified t

o meet the circumstances of ca ses as they arise.” 45 Ariz. at 468 , 46 P.2d at 115. 11 Lamb characterize s as mere dic ta, we find itpersuasive when viewed in combi nation with the remainder

of the court’s analy

sis. Moreover, we do not f ind the two cases i

ncompatible. 4 In considering

whether to apply s

ubrogation, the

court in Peterman-Donnelly focused p rimarily

on the parties’ expr

ess or implied understanding and intent to s

ubrogate and on whether any intervening

rights would be prej udi ced by subrogation. N either Mosher nor PetermanDonne lly requires that

subrogation be denied where a sub sequent creditor has a ctual or constructi

ve notice of intervening liens; nor do es either cont ain any language s

uggesting subrogation

is inappropri

ate when a sophisticated lender is involved . Furthermore, Mosher ’s dictate,were we to appl y it, t hat cou rts must consi

der the facts

and circumstances

of each individual

case, 5 seems mere ly to state the obv ious, that, in evaluating an equi table subrogat

ion claim,a court mus t nec essarily consider the fa

ctual and procedura

l framework in which t

he

case developed. Lamb’s prot estations not

withstanding, not

hing in Pete

rma n-Donn elly contradicts

the general la

nguage in Mosher

. ¶16 Having identif ied the appropriate parameters for applyi ng equitable su brogation , we now ex amine whether the t rial court failed to pr

operly apply

it here. We find t

hat it did. First, as Chase maintains and Lamb does not dispute, there exi sted a t least an i mplied12

agreement to subrogate, reflected in the for m of the loan documents and escrow closing instructions. For exam ple, th e clo sing instr uctions provide

that “[the] t

itle ins urance policy

. . . must show [Chase’s] mor tgage to be a valid fir

st lien agai

nst the property.” I

n addition, one of the conditions

in the closi

ng instructi

ons specifical

ly stat ed that the

loan was to “payoff t

he following: c omm fed -$231100.” It is clear and undisputed that Chase was not acting as a

vo l unteer in paying off

the CFB loan, and nothing in t he record suggests

its motivat

ion was anything oth er than com mercial. ¶17 Second, we agree with Chas e that the t rial court

erred in findi

ng that the mechanics’ lienholders w o uld be prej udiced by su brogation. In so finding , the court sim ply stated, without elaborat ion, that equi

table subrogat

ion would “defeat the r ight s of other creditors who w ould be prejud iced by its application” and that apply ing the doctri

ne would be “inequitable.” ¶18 We fail to comprehen d the nature of the perce ived preju dice or ineq uity, as it appears the lienholders would re main in the same position the

y occupied before

subrogation if that doctri

ne were applied. To the cont rary, without

subrogation , the lien

holders w ould receive a windf

a ll if elevated to a higher priority status. See Restatement § 7.6 cmt. a. The record establishes t

h at when the lienhol

ders agreed to per

form work on the propert y they understood

that CFB, not they,

had a superior posi

tion. They ther

efore accepted t

he risk that the Torrejons would not pay t hem and wou ld not pay th e first l ienholder, t

hereby defeat

ing their liens. See E. Boston Sav. Bank v. Ogan , 701 N.E.2d 331 (Mass. 1998). Further more, although t he lienholders e mphasize C hase’s allege d negligen ce, they offer n o concrete13

example of how subrogation would prejudi ce their int

erests other

than character

izing themselvesas “truly innocent intervening l

ienholders” who, if

subrogation is

denied, “will be paid for the wo rk th ey have alr eady performed and nothing else.” Lamb’s contentions rest solely on theoretical

policy argument

s and fail t

o demonstrate how

applying the

criteria stated in Mosher and Peterma n-Donn elly suppor ts the tria l court’s gran t of summary j udgmen t in its favor. ¶19 In denying equitable subrog ation, t he trial court ci ted the di

fferenc e in ter

ms between the CFB and Chase loans as an “important” factor in i

ts decision,

suggesting that

, from the court’s perspective,

the lien claimants would have been pre judiced by the i

mplementation of the Chase loan terms, w hich differed from the terms of the o ri ginal C FB financing. Howeve r, it is well settled in A rizona that, w hen equita ble subr ogation is ap plied, its application is limit

ed to the extent of the prior lien only. See Mosher ; Restateme nt § 7.6 cm t.

e. Peterma n-Donn elly does n ot sugg est otherwise. The Mosher court recog nized the limits of subrogation, st

ating, “the doct

rine . . . cannot

give any great

errights to the subrogee than a re held by the person t

o whose rights he is

subrogated.” According t o the Resta

teme nt, “[t]he payor is subrogate d only to the ex tent that t he funds disbursed are ac tually applied toward payment of the prior

lien. There is

no right of subr

ogation with res

pectto any excess funds.” Restatement

§ 7.6 cmt. e. The Restat ement also recogni

zes that when a lender

, such as Chase, demands a higher inte rest rate than that under t he prior loan,the interveni ng lienholders

may be jeopardized. In this si tuation, “[s] ubrogation should be granted only t

o the extent of the debt balance that would have exist ed if the int

erest rate

had been unchanged.” Id . While14

emphasizing

that the te

rms of thetwo loans differ ed, Lamb has failed to expl ain precisel

y how itis prejudiced by that diffe rence. Ind eed, Chase readily concedes that “it

s lien can only

be subrogated

to the extent of the [CF B lien].” Thus, if Chase is onl y subrogated t

o the extent of the original l

oan, the lien claima nts can hard ly claim they will be prejudiced. We see no reas on to deny equitable subroga tion on this basis. ¶20 Finally, we briefly addr ess the tri

al court’s s

tatement tha

t “Cha se had constructi

ve notice of the potential for the filing of a mechanic ’s lien[] again st the prope rty when it made the loan.” (Emphasis added.) Si gnificantl

y, when Chase recorded it s deed, no mechanics’ liens had

y et been recorded. Thus, in addition t

o imposing an improper constructi

ve-notice requirement, t

he trial cour

t also impli

edly charged Chase wit

h notice of mechanics’ liens not t

hen in existence,

based purely on

the future possibility of such liens. Cf. Richards (commencemen t of visible work impart s constructive notice of lien). Regardless, the court’s findin g is irrel evant, given our det ermination t

hat construct

ive notice i s not an element of equitable s

ubrogation

under A rizona law . This con clusion is also consistent w ith those of the majority of jurisdict ions that have addresse d the iss ue. See, e.g., Han; Smith; Osterman; Dodge City of Spartanbur g, Inc. v. Jones , 454 S.E.2d 9 18 (S.C. Ct. A pp. 1995). Disposition ¶21 We rev erse the grant of summa ry judgment in favor of Lamb and remand the case to the trial

court for fur

ther proceedings

consistent wit

h this opi

nion. Bo th parties

have requested att

orney fees

on appeal, and Chase also has requested at torney fees

incurred at t

he trial level. In view of Cha

se’ s fa ilu re t o provide any subs tant ive b asi s for

an awa rd of fees , we15

decline to grant its requests. See In re Wilcox Revocable Trust , 192 Ariz. 337, 965 P.2d 71 (App. 1998 ). ¶22 Reversed and remanded for further pro ceedings.

PHILIP G. ESPINOSA, Acting P res iding Judg e CONCURRING:

PETER J. ECKER STROM, Judge

JOSEPH W. HO WARD, Judge