KAZ Construction, Inc. v. Newport Equity Partners (3/2/2012)

March 14, 2012

Arizona Court of Appeals Division Two Holds That the Specific Terms of a Land Trust Limit the General Rule that a Beneficiary May Encumber a Property and That a Mechanic’s Lien Claimant Must Provide Written Twenty Day Notice to a Reputed Construction Lender Holding an Invalid Recorded Deed of Trust

In December 2006, Zanderholm created the Title Security Agency of Arizona (TSA) Trust, conveying a property to TSA as a trustee for the purpose of holding title, selling, conveying, receiving payment for, or otherwise dealing with the property.  The trust agreement identified Zanderholm as the beneficiary and the TSA as the trustee.

In September 2007, Robert and Lisa Strohbachs loaned Zanderholm $1.98 million to finance development of the property, evidenced by a promissory note.  In return, Zanderholm executed a deed of trust naming the Strohbachs as beneficiaries.  TSA was not a party to either the note or the deed of trust, which was recorded in October 2007. 

In November 2007, KAZ Construction, Inc. submitted a proposal to perform work on the property.  Zanderholm accepted and signed the proposal.  TSA did not sign the proposal.  KAZ sent a preliminary twenty day notice to Zanderholm in February 2008, but did not provide notice to the Strohbachs.  In June 2008, KAZ recorded a notice and claim of lien against the property. 

KAZ sued to foreclose its lien.  The Strohbachs countered with a claim to declare their deed of trust a valid, first position lien on the property.  The Strohbachs filed a motion for summary judgment to establish the validity and priority of their deed of trust and to declare the KAZ lien invalid as to them.  KAZ filed a cross-motion for summary judgment asserting that the Strohbachs’ deed of trust was invalid because it had been executed by Zanderholm rather than TSA.  The trial court granted summary judgment in favor of KAZ, declaring the Strohbachs’ deed of trust invalid and holding that KAZ had a valid first-position lien.  The Strohbachs appealed.

On appeal, the Strohbachs argued that Zanderholm had the right to execute the deed of trust and encumber the property.  The Strohbachs also asserted that the KAZ lien was invalid as to them because KAZ never provided them with a twenty day notice.

The Court of Appeals upheld the trial court’s determination that the Strohbachs’ deed of trust was invalid because Zanderholm lacked the ability to encumber the property.  While recognizing the principle that a trust beneficiary may freely encumber his interest in the trust, the Court held that the trust’s terms govern.  Here, the trust provided that equitable and legal title vested in the Trustee and none in the Beneficiary.  The trust further provided that all instruments affecting the property must be executed by TSA.  Additionally, the trust explicitly permitted Zanderholm to encumber the property only after the TSA first conveyed legal title to him.  The Court noted that the trust was recorded and the Strohbachs had constructive notice of the required procedure to encumber the property.  Because the TSA never authorized Zanderholm to execute the deed of trust, the Court upheld the trial court’s determination that the Strohbachs’ deed of trust was invalid. 

The Court, however, reversed the trial court’s determination that the KAZ lien was valid as to the Strohbachs.  A.R.S. § 33-992.01(B) requires that a reputed construction lender be provided with a preliminary twenty-day notice of the lien.  The statute states that a mechanic’s lien claimant “shall, as a necessary prerequisite to the validity of any claim of lien, serve the owner or reputed owner, the original contractor or reputed contractor, the construction lender, if any, or reputed construction lender, if any,…with a written preliminary twenty-day notice as prescribed by this section.”  A.R.S. § 33-992.01(B).  The Court reasoned that the policy underlying the statute was to provide notice to those parties reasonably construed as having an interest in the property so they might protect their respective interests.  The Strohbachs had recorded a construction deed of trust, accurately describing the property and showing them as a beneficiary.  KAZ had constructive notice of the Strohbachs’ reputed interest in the property and was statutorily required to provide the with a twenty-day notice.  Because KAZ failed to provide the required notice, KAZ’s mechanics lien was invalid as to the Strohbachs.

Affirmed in part and reversed in part.   

Judge Brammer authored the opinion; Judges Eckerstrom and Howard concurred.