Arizona Court Weighs in on Equitable Subrogation in Lien Case

September 5, 2014

The Arizona Supreme Court has weighed in on the use of equitable subrogation in a mechanic’s lien case. In The Weitz Company, LCC v. Nicholas Heth, et al, the state's high court ruled that a lien filed by a contractor does not automatically take priority over other liens recorded after work has already begun.

The court held that state statute does not preclude assignment by equitable subrogation of a lien that attached before construction began on the project at issue. It continued, “additionally, although a third party generally must discharge the entire lien obligation to qualify for equitable subrogation, when a single mortgage burdens multiple parcels, a third party may be entitled to equitable subrogation when that party has paid a pro rata amount of the obligation and obtained a full release of the parcel at issue from the mortgage.”

In the case, the general contractor in a mixed-use project in Phoenix stopped paying a general contractor after many of the condominium units within the structure had been sold to consumers. A trial court previously sided with the contractor’s argument that it had lien priority and the motion to seek foreclosure.

The American Subcontractors Association had argued in an amicus brief that "using the doctrine of equitable subrogation to establish lender priority over mechanic’s liens would 'completely defeat' the legislative intent behind mechanic's liens statutes and 'improperly shift the known and assumed risks' from construction project owners and lenders to contractors and subcontractors." (See the June 4 News Maker: “Mechanic’s Liens Take Priority Over ‘Equitable Subrogation,’ ASA Tells Arizona Supreme Court”.)

NACM Secured Transaction Services’ Chris Ring said the case is an important reminder that “material suppliers and contractors on newly constructed condo projects must assure ‘to the best of their ability’ that their liens are filed properly and before the owner parcels out and/or sells individual units. Since this lien was filed after the new owners purchased their units, the new owners should not suffer peril due to nonpayment to a contractor.”

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