Court Opinion

ID: 2790222
Source: CourtListenerOpinion
Date Created: 2015-03-31 15:01:59.905615+00
Date Added: 2024-06-11T11:28:53.548711
License: Public Domain

NOTICE: NOT FOR PUBLICATION.
     UNDER ARIZ. R. SUP. CT. 111(c), THIS DECISION DOES NOT CREATE LEGAL PRECEDENT
                     AND MAY NOT BE CITED EXCEPT AS AUTHORIZED.

                                      IN THE
              ARIZONA COURT OF APPEALS
                                  DIVISION ONE

 HACI MECHANICAL CONTRACTORS, INC., an Arizona corporation,
                 Cross-Claimant/Appellant,

                                          v.

BMO HARRIS BANK (fka M&I Marshall & Ilsley Bank) and LEXINGTON
            AVENUE, LLP, Cross-Defendants/Appellees.

                              No. 1 CA-CV 13-0147
                                FILED 3-31-2015

           Appeal from the Superior Court in Maricopa County
                          No. CV2009-018671
                 The Honorable John A. Buttrick, Judge

                       VACATED AND REMANDED

                                    COUNSEL

Jennings Haug & Cunningham, LLP, Phoenix
By Chad L. Schexnayder, James L. Csontos and Russell R. Yurk
Counsel for Cross-Claimant/Appellant

Gust Rosenfeld, PLC, Phoenix
By Timothy W. Barton
Counsel for Cross-Defendant/Appellee BMO Harris Bank, NA

Jennings, Strouss & Salmon, PLC, Phoenix
By John J. Egbert
Counsel for Cross-Defendant/Appellee Lexington Avenue, LLP
                           HACI v. BMO, et al
                           Decision of the Court

                      MEMORANDUM DECISION

Presiding Judge Patricia A. Orozco delivered the decision of the Court, in
which Judge Lawrence F. Winthrop and Judge Kenton D. Jones joined.

O R O Z C O, Judge:

¶1            This case returns to us on remand from the Arizona Supreme
Court. In HACI Mechanical Contractors, Inc. v. BMO Harris Bank, 1 CA-CV
13-0147, 2014 WL 1266386 (Ariz. App. Jul. 21, 2014) (mem. decision), we
reversed and remanded summary judgment in favor of BMO Harris Bank
(BMO) because we concluded equitable subrogation of BMO’s deed of trust
over HACI Mechanical Contractor’s, Inc.’s (HACI) mechanics’ lien was
precluded by Arizona Revised Statutes (A.R.S.) section 33-992.A (West
2015)1 and in accordance with the Court of Appeals opinion in Weitz Co.,
L.L.C. v. Heth, 233 Ariz. 442, (App. 2013). The Arizona Supreme Court
vacated that Court of Appeals opinion in Weitz Co. L.L.C. v. Heth, 235 Ariz.
405, (2014) and subsequently ordered us to reconsider our decision in this
case. Accordingly, because we conclude BMO was only entitled to
subrogation for the amount that discharged earlier deeds of trust, we vacate
summary judgment in BMO’s favor and remand for the trial court to enter
judgment consistent with this decision.

                FACTS AND PROCEDURAL HISTORY

¶2            This case arises out of the Century Plaza construction project
(the Project) converting an office building into residential condominium
units. The owner, Windsor Century Plaza (Owner), hired Summit Builders
(Summit) as the general contractor. Summit then entered into a subcontract
agreement with HACI to perform work on the Project. Construction began
on or about March 2, 2006. On June 21, 2006, HACI served a preliminary
twenty-day notice and Claim of Mechanics’ and Materialmen’s lien notice
on Owner and BMO.

¶3           Owner sought a construction loan from BMO. At that time,
the property was encumbered by two deeds of trust totaling $6,750,000 (The
Sir Mortgage loans) that were recorded in 2004. As a closing condition,

1     We cite the current version of applicable statutes when no revisions
material to this decision have since occurred.

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                            HACI v. BMO, et al
                            Decision of the Court

BMO required Owner to pay off the Sir Mortgage loans. BMO provided
construction loans in the amount of $39,852,000 in August 2006. At closing,
Owner paid $6,814,483.23 to satisfy the Sir Mortgage loans and obtain a
release from those deeds of trust. At that point, all superior liens were
released. BMO then secured its loans by a first position deed of trust
recorded on August 16, 2006, fifty-six days after HACI’s preliminary
twenty day lien notice was served.

¶4            Owner defaulted on its loan agreement twice in 2008 causing
BMO to declare Owner in default. On February 20, 2009, HACI recorded
its notice and claim of mechanics’ lien. As of that recording date, fifteen
units had been sold and the proceeds were used to satisfy a portion of the
BMO loan. BMO subsequently held a trustee’s sale pursuant to its deed of
trust in October of 2009. BMO was the successful credit bidder at $11.1
million, and consequently received a Trustee’s Deed concerning the
remaining condominiums. Shortly after the trustee’s sale, BMO conveyed
the remaining units to Lexington through a Special Warranty Deed.2

¶5             Heritage Interiors commenced a suit against Owner for
breach of contract. In their suit, Heritage named Owner, Summit, HACI,
and several other individuals and companies as parties asserting an interest
in the property. Thereafter, HACI answered and asserted cross-claims and
counterclaims against the other defendants to foreclose its mechanics’ lien.
HACI also asserted breach of contract claims against Summit and
Lexington. Appellees moved for summary judgment upon HACI’s claims
arguing that lien priority was “clearly established” under the doctrine of
equitable subrogation. The trial court agreed and granted summary
judgment. HACI timely appealed, and we have jurisdiction pursuant to
Article 6, Section 9 of the Arizona Constitution and A.R.S. §§ 12-120.21.A.1
and -2101.A.1 (West 2015).

                               DISCUSSION

¶6             Summary judgment is appropriate when no genuine issue of
material fact exists and the moving party is entitled to judgment as a matter
of law. Johnson v. Earnhardt’s Gilbert Dodge, Inc., 212 Ariz. 381, 385, ¶ 15
(2006). We review de novo the trial court’s grant of summary judgment.
Eller Media Co. v. City of Tucson, 198 Ariz. 127, 130, ¶ 4 (App. 2000). We view

2     BMO no longer has a legal interest in the property; however, it
continues to defend this action pursuant to its agreement to indemnify
Lexington.

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                            HACI v. BMO, et al
                            Decision of the Court

the evidence in the light most favorable to the nonmoving party. Tilley v.
Delci, 220 Ariz. 233, 236, ¶ 7 (App. 2009).

I.     The Trial Court’s Application of Equitable Subrogation

¶7             Equitable subrogation is “the substitution of another person
in place of a creditor, so that the person in whose favor it is exercised
succeeds to the rights of the creditor in relation to the debt.” Sourcecorp, Inc.
v. Norcutt, 229 Ariz. 270, 272, ¶ 5 (2012) (quoting Mosher v. Conway, 45 Ariz.
463, 468 (1935)). It is an equitable remedy designed to prevent a person
from “receiving an unearned windfall at the expense of another.” Id.
(quoting Restatement (Third) of Property § 7.6 cmt. A (1997) (Restatement)).
On appeal, HACI contends the preference granted to mechanics’ liens in
A.R.S. § 33-992 leaves no room for equitable remedies, and the trial court
erred in applying the doctrine.

¶8            Mechanics’ liens protect the rights of those who furnish labor
and materials to improve another’s property, and they are generally
preferred over other liens. Collins v. Stockwell, 137 Ariz. 416, 418 (1983); see
also Wylie v. Douglas Lumber Co., 39 Ariz. 511, 515 (1932) (“We are . . .
convinced that our Legislature intended that laborers and materialmen,
who contribute of their labor and means to enhance the value of the
property of another, should be jealously protected.”). As a result, A.R.S. §
33-992.A provides that mechanics’ liens “are preferred to all liens,
mortgages or other encumbrances” attaching subsequent to the time labor
was commenced or materials provided, subject to a narrow exception not
applicable here. Nevertheless, our supreme court has held that A.R.S. § 33-
992.A does not preclude equitable subrogation of a superior lien to a
mechanics’ lien because: (1) a superior lien attaches when recorded, (2)
section 33-992.A only implicates liens arising after a mechanics’ lien
attaches, and (3) equitable subrogation over mechanics’ liens is consistent
with other provisions establishing a superior lien position for junior
lienholders over a mechanics’ lien when a junior lienholder discharges a
superior lien. Weitz Co. L.L.C., 235 Ariz. at 410, ¶¶ 15-18.

¶9             With our supreme court having decided that equitable
subrogation is not precluded by A.R.S. § 33-992.A, we now turn to whether
the trial court correctly applied the doctrine in this case. Our supreme court
has adopted the Restatement’s approach as the test in Arizona for applying
equitable subrogation. Sourcecorp, 229 Ariz. at 273, ¶¶ 8-12; see also Lamb
Excavation, Inc. v. Chase Manhattan Mortg. Corp., 208 Ariz. 478, 480-81, ¶¶ 6,
10-11 (App. 2004). As stated in Sourcecorp, the Restatement provides:

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                           HACI v. BMO, et al
                           Decision of the Court

       [A] person who “fully performs an obligation of another,
       secured by a mortgage, becomes by subrogation the owner of
       the obligation and the mortgage to the extent necessary to
       prevent unjust enrichment.” Such equitable relief may be
       appropriate, for example, if the person seeking subrogation
       “expected to receive a security interest in the real estate with
       the priority of the mortgage being discharged.”
229 Ariz. at 273, ¶ 10 (quoting Restatement § 7.6).

¶10           HACI argues that even if subrogation was proper, BMO was
only entitled to the amount secured by the first priority deeds of trust on
the Sir Mortgage Loans. BMO counters that this argument is contrary to
Sourcecorp’s reliance on a comment to the Restatement, which observes that
“[o]rdinarily one who is entitled to subrogation is permitted to enforce both
the mortgage and the secured obligation.” Sourcecorp, 229 Ariz. at 276, ¶ 28
(quoting Restatement § 7.6 cmt. a).

¶11          We reject BMO’s assertion that Sourcecorp’s citation to the
Restatement comment precludes HACI’s argument. Read in context, the
Sourcecorp court quoted the comment as a general point of reference just
before noting that the facts in Sourcecorp required a slightly different
analysis. Additionally, further inquiry into the Restatement’s comments
reveals that HACI’s argument actually tracks more closely to the
Restatement’s explanation of equitable subrogation’s effect.

¶12           Comment E of Restatement § 7.6 notes in relevant part:

       Subrogation will be recognized only if it will not materially
       prejudice the holders of intervening interests. The most
       obvious illustration is that of a payor who lends the
       mortgagor more money than is necessary to discharge the
       preexisting mortgage. The payor is subrogated only to the
       extent that the funds disbursed are actually applied toward
       payment of the prior lien. There is no right of subrogation
       with respect to any excess funds.

This portion of comment E is directly applicable to this case. Additionally,
comment E observes that applying subrogation in this way is analogous to
the Restatement doctrine of Replacement, in which a lender who makes a
new loan to the same borrower “may be given the priority of the original
mortgage.” This court has previously applied this doctrine and noted that
the replacement mortgage receives priority only “up to the amount paid to
release the senior lien.” Brimet II, LLC v. Destiny Homes Marketing, LLC, 231

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                            HACI v. BMO, et al
                            Decision of the Court

Ariz. 457, 460, ¶ 14 (App. 2013) (citing Cont’l Lighting & Contracting, Inc. v.
Premier Grading & Util., LLC, 227 Ariz. 382, 388-89, ¶ 23 (App. 2011)). In
light of Comment E of Restatement § 7.6 and these cases, we conclude that
subrogation is only available to the extent a later loan discharges an earlier
one, and any excess funds included with a later loan may not be
bootstrapped in priority over any possible intervening interest.

¶13            Here, BMO’s construction loan amounts were considerably
larger than the Sir Mortgage loan amounts. To allow subrogation on the
entire amount of BMO’s loans would be unjust in light of HACI’s
mechanics’ lien being properly secured before BMO’s construction loans
were made. BMO is therefore entitled to subrogation only for the amount
of their loans used by Owner to discharge the Sir Mortgage loans.

II.    Attorney Fees

¶14           Both parties request their attorney fees and costs on appeal
pursuant to A.R.S. §§ 33-995, -998 and 12-341.01. We deny BMO’s request,
but as the prevailing party, HACI is entitled to its reasonable costs and fees
upon compliance with Arizona Rule of Civil Appellate Procedure 21.

                              CONCLUSION

¶15            We vacate summary judgment in BMO’s favor and remand to
the trial court for entry of judgment consistent with this decision.

                                 :ama

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