This isn’t a fascinating opinion but it introduces law new to Arizona and also illustrates that it’s better late than never even if there’s really no excuse for late.
Lender financed the purchase of property and took a first deed of trust. Contractors then developed the property, noticing their mechanics’ liens appropriately. Lender then refinanced the loan twice (for the borrower’s LLC, to which he had by then transferred the property), taking new deeds of trust each time. Naturally, the L.L.C. then ran out of money to pay anybody. The question in this action to foreclose the mechanics’ liens is whether they have priority over the later deeds of trust.
Lender argued that they didn’t, under the doctrine of equitable subrogation. A perfectly good doctrine – except that it doesn’t apply here. You can’t be subrogated to yourself (the doctrine works when the refinancing comes from a new lender). Contractors presumably pointed that out in their responses to Lender’s motion for summary judgment, for its reply came up with a new argument: the doctrine of replacement. This is apparently not one Arizona appellate courts had dealt with yet. According to the Restatement, if lender and borrower modify or replace their agreement then the new mortgage/deed of trust can retain the priority of the old to the extent not materially prejudicial to junior lienholders. Why Lender hadn’t figured out what its case was before moving for summary judgment isn’t clear but the Court of Appeals accepted the reply as having raised the argument below. (It helped that Lender then moved for reconsideration, asking the trial court whether it had considered the replacement argument, and the court replied that it had considered everything.)
The opinion adopts the replacement doctrine. It holds that Lender has priority to the extent of the principal amount of the first loan (the refinancings were a little larger). Contractor’s argued that it couldn’t because the borrowers were technically different (borrower’s L.L.C. versus borrower himself); the court says that doesn’t make any difference, at least in this case.
(link to opinion)