Cont'l Lighting & Contracting Inc. v. Premier Grading & Utilities Llc

• Decision Date: 01 June 2011
• Docket Number: No. 2 CA–CV 2010–0109.,2 CA–CV 2010–0109.
• Citation: 227 Ariz. 382,258 P.3d 200,609 Ariz. Adv. Rep. 32
• Court: Arizona Court of Appeals
• Parties: CONTINENTAL LIGHTING & CONTRACTING, INC., an Arizona corporation, Plaintiff/Appellee,v.PREMIER GRADING & UTILITIES, LLC, Defendant/Appellee/Cross–Appellant,Real Estate Equity Lending, Inc., Defendant/Appellant/Cross–Appellee.

227 Ariz. 382
258 P.3d 200
609 Ariz. Adv. Rep. 32

CONTINENTAL LIGHTING & CONTRACTING, INC., an Arizona corporation, Plaintiff/Appellee,
v.
PREMIER GRADING & UTILITIES, LLC, Defendant/Appellee/Cross–Appellant,Real Estate Equity Lending, Inc., Defendant/Appellant/Cross–Appellee.

No. 2 CA–CV 2010–0109.

Court of Appeals of Arizona, Division 2, Department B.

May 31, 2011.As Corrected June 1, 2011.

[258 P.3d 202]

Keller & Hickey, P.C. By Craig L. Keller and Ryan C. Curtis, Tempe, Attorneys for Plaintiff/Appellee.Bueler Jones, LLP By Gordon S. Bueler, Chandler, Attorneys for Defendant/Appellee/Cross–Appellant.Gust Rosenfeld P.L.C. By Scott A. Malm and Ramras Legal PLC By Ari Ramras, Phoenix, Attorneys for Defendant/Appellant/Cross–Appellee.OPINION VÁSQUEZ, Presiding Judge.

¶ 1 In this mechanics' lien foreclosure action, appellant Real Estate Equity Lending, Inc. (“REEL”) appeals from the trial court's grant of summary judgment in favor of appellees Premier Grading & Utilities, LLC (“Premier”) and Continental Lighting & Contracting, Inc. (“Continental”). REEL argues the court erred in finding that the doctrines of equitable subrogation and replacement did not apply and that Premier's and Continental's mechanics' liens had priority over REEL's refinancing mortgage. For the reasons set forth below, we reverse and remand for further proceedings consistent with this decision.

Factual and Procedural Background

¶ 2 We view the facts in the light most favorable to the party against whom summary judgment was entered. Simon v. Safeway, Inc., 217 Ariz. 330, ¶ 2, 173 P.3d 1031, 1033 (App.2007). In August 2005, Karl Conover, a real estate developer, purchased approximately ten acres of vacant real property in Apache Junction, Arizona. Conover financed the purchase with a loan from REEL in the amount of $825,000, pursuant to a promissory note secured by a deed of trust on the property. The deed of trust (“original deed of trust”) was recorded on August 30, 2005.

¶ 3 Conover subsequently subdivided the property into thirty-eight lots, and, in August 2006, conveyed the property to his limited liability company, Casa Villa Subdivision, LLC (“Casa Villa”) by quit claim deed. Casa Villa then contracted with Premier to make improvements in the subdivision, and Premier and its subcontractor, Continental, began work on the property. Continental and Premier recorded their notices and claims of mechanics' liens in February and May 2008, respectively.

¶ 4 In September 2007, Casa Villa, with Conover acting on its behalf, refinanced the loan secured by the original deed of trust with REEL pursuant to a new promissory note in the amount of $1,000,000, which was secured by a deed of trust in favor of REEL. This deed of trust (“2007 deed of trust”) was recorded on September 5, 2007. The escrow settlement statement for this second loan provided that $803,125.08 of the loan proceeds would be used to pay the outstanding balance of the loan secured by the original deed of trust. A portion of the proceeds were used to pay costs related to the close of escrow, and the remaining amount was disbursed to Casa Villa directly. REEL's lender's instructions to the title company handling the escrow further provided that the 2007 deed of trust was to be recorded in first position.

¶ 5 Casa Villa refinanced the property for a third time in January 2008. In this transaction, REEL agreed to make additional construction loans on lots one through seven, secured by a separate deed of trust on each lot (“2008 deeds of trust”). Some of the loan proceeds were used to pay a portion of the loan secured by the 2007 deed of trust. And, once again, REEL instructed the title company to record the 2008 deeds of trust on lots one through seven in first position.

¶ 6 Casa Villa ultimately defaulted on the notes secured by the 2007 and 2008 deeds of trust, and REEL sold all of the lots pursuant to its power of sale under the 2007 and 2008 deeds of trust. In May 2008, Continental initiated this mechanics' lien foreclosure action against REEL and Premier. In the meantime, Premier had filed a separate mechanics'

[258 P.3d 203]

lien foreclosure against REEL, and in October 2008 the trial court consolidated both actions.

¶ 7 REEL moved for summary judgment on Premier's and Continental's foreclosure claims, arguing that its 2007 and 2008 mortgages (hereafter collectively referred to as the “refinancing deeds of trust”) had priority over both mechanics' liens under principles of equitable subrogation and that those liens had not been perfected properly in any event. Premier and Continental each filed cross-motions for summary judgment, to which REEL responded that it also was entitled to priority under the doctrine of replacement. The trial court denied REEL's motion for summary judgment and granted Premier's and Continental's motions, finding the doctrine of equitable subrogation did not apply and that both mechanics' liens had priority over REEL's refinancing mortgages. REEL filed a motion for clarification and reconsideration, which the court denied. After entry of final judgment in favor of Premier and Continental, REEL filed this appeal. Premier also filed a notice of cross-appeal challenging the court's award of interest on the judgment at a statutory rate of ten percent per annum.

Discussion

¶ 8 REEL argues the trial court erred in finding the doctrines of equitable subrogation and replacement did not apply to the refinancing mortgages and in granting summary judgment in favor of Premier and Continental. A trial court's grant of summary judgment is appropriate if the moving party is entitled to judgment as a matter of law. Ariz. R. Civ. P. 56(c)(1); Orme Sch. v. Reeves, 166 Ariz. 301, 305, 802 P.2d 1000, 1004 (1990). “On appeal from a summary judgment, we must determine de novo whether there are any genuine issues of material fact and whether the trial court erred in applying the law.” Bothell v. Two Point Acres, Inc., 192 Ariz. 313, ¶ 8, 965 P.2d 47, 50 (App.1998). And, the issue whether the trial court properly applied the doctrines of equitable subrogation and replacement involves a question of law, which we review de novo. See Sun Valley Fin. Servs. of Phoenix, L.L.C. v. Guzman, 212 Ariz. 495, ¶ 17, 134 P.3d 400, 404 (App.2006).

Equitable Subrogation

¶ 9 Generally in Arizona, “previously recorded liens have priority over subsequent mechanics' liens recorded after labor has begun or materials have been furnished.” Lamb Excavation, Inc. v. Chase Manhattan Mortg. Corp., 208 Ariz. 478, ¶ 6, 95 P.3d 542, 544 (App.2004). Mechanics' liens take priority over later-recorded encumbrances. Id.; A.R.S. § 33–992; Nw. Fed. Sav. & Loan v. Tiffany Constr. Co., 158 Ariz. 100, 104, 761 P.2d 174, 178 (App.1988) (mechanics' lien generally has priority over all liens attaching after work begins). Equitable subrogation, however, allows “a subsequent lender who supplies funds used to pay off a primary and superior encumbrance to be substituted into the priority position of the primary lienholder, despite the recording of an intervening lien.” Lamb Excavation, 208 Ariz. 478, ¶ 6, 95 P.3d at 544.

¶ 10 In Lamb Excavation, this court clarified the appropriate legal standard for assessing whether equitable subrogation should apply. Id. Noting that Arizona's approach is consistent with the Restatement (Third) of Property (Mortgages),¹ we held “the doctrine will apply when there is an express or implied agreement to subrogate, ... and when an intervening lien claimant suffers no prejudice.” Id. ¶¶ 6, 13. A subsequent creditor's knowledge, actual or constructive, of an intervening lien is irrelevant in deciding whether equitable subrogation should apply. Id. ¶ 15. However, the second loan must be made by a different lender than the holder of the first deed of trust, because, by definition, one cannot be subrogated to one's own previous deed of trust.

[258 P.3d 204]

Restatement § 7.6 cmt. e; see also Sun Valley Fin., 212 Ariz. 495, ¶ 18, 134 P.3d at 404 (subrogation is “substitution of another person in the place of a creditor”), citing Mosher v. Conway, 45 Ariz. 463, 468, 46 P.2d 110, 112 (1935).

¶ 11 In this case, however, REEL's 2007 loan paid off and discharged its own original loan made in 2005. Under the Restatement, where a loan secured by an original deed of trust is refinanced by the same lender, priorities are determined under principles of replacement and modification of mortgages, not equitable subrogation. See Restatement § 7.6 cmt. e (in same-lender refinancing, “a mortgage securing the new loan may be given the priority of the original mortgage” pursuant to replacement and modification of mortgages). Accordingly, because equitable subrogation does not apply in a single-lender refinancing transaction, REEL's argument below that it had priority over Premier's and Continental's mechanics' liens on the basis of equitable subrogation lacked merit and the trial court therefore did not err in so finding.²

¶ 12 REEL nevertheless contends that “[b]ecause equitable subrogation has been adopted in Arizona, the analogous legal theory of replacement should be applied in a single-lender refinancing transaction.” Premier and Continental contend REEL has waived its replacement argument on appeal by failing to raise it below. The general law in Arizona is that legal theories must be presented timely to the trial court so that the court may have an opportunity to address all issues on their merits. Airfreight Express Ltd. v. Evergreen Air Ctr., Inc., 215 Ariz. 103, ¶ 17, 158 P.3d 232, 238 (App.2007). If the argument is not raised below so as to allow the trial court such an opportunity, it is waived on appeal. Id.

¶ 13 In its motion for summary judgment, REEL argued only that it was entitled to priority over the mechanics' liens on the basis of equitable subrogation. REEL did, however, make the replacement loan argument in its response to Premier's and Continental's cross-motions for summary judgment....