Possible Fallout for Contractors Following Arizona Supreme Court Decision
September 23, 2014
The Arizona Supreme Court's reversal in a case involving use of equitable subrogation in a mechanic's lien situation may embolden more primary lenders to use the tactic, at the potential peril of contractors and subcontractors.
As covered previously in NACM Secured Transaction Services’ Lien Navigator, the Arizona Supreme Court ruled in The Weitz Company, LCC v. Nicholas Heth, et al that a lien filed by a contractor does not automatically take priority over other liens recorded before construction began on a project. Chris Ring from NACM STS, believes this rejection of a lower court ruling that upheld mechanic's lien rights will only open the door for more attempts to sidestep protections long considered to be strong and safe. Ring warned that "as a subcontractor or material supplier, be mindful that the primary lender of the developer may attempt to use subrogation as a way for the mortgage lien to trump your previously-recorded mechanic’s lien."
The American Subcontractors Association (ASA) criticized the Arizona Supreme Court since the ruling for failing to side with the "bright line" rule designed to prevent the use of subrogation. ASA, which filed an amicus brief in the case, noted last week that "bright line" mandates already exist in states including Alabama, Indiana, Minnesota, Nevada, Oregon and Utah. The Arizona ruling makes paying attention to the specifics of a project, especially the reputation of the players involved, and preparing for worst-case scenarios so much more important.
ASA agreed that third parties may be more likely to try to use the doctrine, making it critical for subcontractors and suggested that contractors be increasingly "vigilant in attempting to protect payment rights."