Arizona Court of Appeals Division One Holds That the Doctrine of Equitable Subrogation Does Not Permit a Court to Reorder the Priority Given to Mechanic’s Liens by Statute.

First National Bank of Arizona (“First National”) provided a large construction loan to Summit at Copper Square LLC (“Summit”) to build a mixed-use commercial and residential condominium project in downtown Phoenix.  First National recorded a first position deed of trust on the project to secure Summit’s payment obligations under the construction loan.  The Weitz Company (“Weitz”) served as the general contractor, recorded a mechanic’s lien, and then sought to foreclose after Summit failed to pay about $4,000,000 of Weitz’s billed work.  In the meantime, Summit had sold 92 units paid for with cash or new financing, the proceeds of which were applied to pay off allocated portions of the First National construction loan.

Weitz then filed a lien foreclosure action to foreclose on its mechanic’s lien.  The various cash purchasers and lenders who had paid monies the proceeds of which went to pay down the first-position First National loan argued they were equitably subrogated to First National’s position, and thus had priority over Weitz’s lien.  Equitable subrogation allows “[o]ne who fully performs an obligation of another, secured by a mortgage, [to] become[] by subrogation the owner of the obligation and the mortgage to the extent necessary to prevent unjust enrichment.”  Sourcecorp, Inc. v. Norcutt, 229 Ariz. 270, 272, ¶ 5, 274 P.3d 1204, 1206 (2012) (quoting Restatement (Third) of Property: Mortgages § 7.6(a)).  Stated more succinctly, equitable subrogation enables a later-filed lienholder to leap-frog over an intervening lienholder.

The Arizona Court of Appeals, however, found the doctrine inapplicable to mechanics’ liens.  The Court emphasized (1) the historical preference given mechanics’ liens since 1865, (2) that the mechanics’ lien statutes are remedial, and construed liberally to achieve their primary purpose, and (3) that the mechanics’ lien statute, A.R.S. § 33-992(A), expressly and unambiguously gives mechanics’ liens priority over other liens subject to a limited exception not applicable in this case.  The Court further noted that equity cannot override unambiguous statutory language and that although other Arizona cases have applied equitable subrogation to mechanics’ liens, none explicitly considered whether the plain language of § 33-992(A) permitted that result.  Lastly, the few non-Arizona cases that have addressed the issue in states with similar statutes have reached consistent results.  Accordingly, the Court held that equitable subrogation cannot operate to supersede the statutory requirement that mechanics’ liens have priority over all subsequent encumbrances, except for construction loans filed within the narrow time constraints of the statutory.

Judge Brown authored the opinion; Judges Gould and Kessler concurred.