Arizona Supreme Court Further Interprets Arizona Mechanics' Lien Statute
While not a hot topic to the general public, Arizona Contractors should be aware of Arizona Mechanics’ Lien Statutes and how the Courts modify and interpret them.
In a recent decision (Weitz Co LLC v. Heth), the Arizona Supreme Court recently held Arizona’s Mechanics’ lien Statutes, do not preclude equitable subrogation of lien that attached against the property prior to the start of construction. What does that mean?
First, you need to know what a mechanic’s lien is and what it does. It is a mechanism that allows contractors and suppliers to assert a lien against real property for the reasonable value of the labor and materials that the contractor/supplier incorporates into the property. More simply stated, it allows a contractor/supplier to secure an interest in the real property to ensure that the contractor receives payment from the property owner.
Second, what is equitable subrogation? Essentially it allows a junior lienholder who pays in full the debt of a superior mortgage on real property, to essentially step in the shoes of that superior mortgage. Typically this would occur when a secondary mortgage pays in the full amount of the primary lender’s debt. That second mortgage assumes the superior mortgage’s position of priority for purposes of enforcing lien rights.
This is key when dealing with situations in when there is a mechanic’s lien an the contractor brings an action to enforce the mechanic’s lien. Typically the mechanic’s lien will have priority over any other lien interest (absent a lien to secure a first position purchase money or a construction loan-even then there are situations in which a mechanic’s lien could have priority), which attach subsequent to the time that the contractor starts its work.
For a detailed factual background read the opinion here. The short story is that First Bank of Arizona loaned The Summit @ Copper Square LLC money to construct the multi use high rise in downtown Phoenix. Summit hired Wietz Company as the general contractor. Wietz later recorded a mechanics’ lien (2008). Between this time Summit sold some units, which paid a portion of the initial loan to Arizona Bank. Wietz sought to enforce its mechanics’ lien and claimed priority over all the subsequent purchaser’s interest and their respective lender’s interest. The subsequent lenders and owners claimed equitable subrogation applied and place their interest ahead of Weitz’s lien interest. Litigation commenced. Both the Trial Court and Appellate Court ruled on behalf of Wietz. The Supreme Court overturned the ruling.
The Court clarified the interplay between equitable subrogation and the Mechanic’s lien statutes and corrected the lower Court’s ruling that the mechanic lien would still have priority over the subrogee.
1. Supreme Court found the lower Court misunderstood how equitable subrogation works. The Court clarified stating that an equitably subrogated lien “attaches” when the superior lien was recorded, § 33-992(A) does not require that an intervening mechanics’ lien be given priority.
2. Nothing in Mechanics Lien statute suggest that legislature intended to eliminate the application of equitable subrogation in the mechanics’ lien statute.
3. Third permitting equitable subrogation of a lien that is superior to a mechanics’ lien is consistent with the legislature’s treatment of junior lienholders’ interests in foreclosure actions.
What does this mean to contractors and suppliers? It means that contractors and suppliers need to understand that Arizona Mechanics’ Lien Statutes are complex and the procedure to secure lien rights is highly technical. Thus contractors and suppliers should consult with an attorney who practices in this area to fully understand whether the contractor/supplier has lien rights and to what extent those rights could interplay with other lien interest.