This case came out last week but our eyes glazed over reading about whether equitable subrogation can give priority over a materialman’s lien. We were reminded of it today, took it out of the slush pile, and it turns out to be not entirely uninteresting. We sympathize with these defendants, who got sued for a debt they didn’t incur on property they’d already paid for. Apparently the Supreme Court did, too.

The case concerns the financing of The Summit at Copper Square, the high-rise condominium complex between Chase Field and the U. S. Airways Center. First National Bank loaned Summit LLC the money to build it, secured by deeds of trust. The Weitz Company was the general contractor. Summit sold most of the condos before construction was finished; as a condo was sold Summit applied some of the money to FNB’s loan and the unit was released from FNB’s deed of trust (to make room for the deeds of trust securing the buyers’ lenders). Near the end of construction Summit failed to make a $4 million dollar payment to Weitz, which recorded a mechanics lien in May 2008 and later sued Summit. It also sued the individual condo owners and their lenders because under the statute (33-992A) its mechanics lien has priority over all liens that attach after construction begins (and presumably also because Summit was teetering on the edge of the bankruptcy it later fell into; these urban hipster heavens hit a hard patch when the economy slowed).

The owners and lenders moved for summary judgment, arguing that they were equitably subrogated to FNB’s original deed of trust (given before construction). The trial court and the Court of Appeals disagreed with them, though for different reasons. But the Supreme Court reverses and remands.

Arizona recognizes the doctrine of equitable subrogation, which in this context means, basically, that if you pay off someone else’s obligation then you can step into the shoes of the obligee. So the owners and lenders contended that because the purchase price of a condo had been used to pay down the deed of trust their position was the same as FNB’s – that of a pre-construction lienholder.

The Court of Appeals decided, based on a Nevada case, that equitable subrogation couldn’t apply because the statute, by giving the mechanics lien priority over liens occurring after the commencement of construction, prohibited it. The Supreme Court is quite critical of the appellate court’s analysis and says that it “misapprehends how equitable subrogation operates.”  Equitable subrogation is the equivalent of assignment and does not change the time when the assigned rights attached.

Perhaps realizing that this doesn’t quite explain why the express language of the statute has no effect on courts’ ideas of equity, the court goes on to tell us that the legislature didn’t intend to preclude equitable subrogation. That’s so because mechanics liens protect laborers and materialmen, whose rights are not prejudiced when a superior lien is assigned from one party to another. Right or wrong, this is just a restatement of the first argument, dressed up as statutory analysis.

The court also says that its solution is “consistent with the legislature’s treatment of junior lienholders’ interests in foreclosure actions.” In those cases, under 33-723, a junior lienholder can get an assignment of a senior lienholder’s rights by paying off the senior lien. Since this statute makes no exception for mechanics liens it allows, the court says, a junior to vault over a mechanics lien. “We have no reason to conclude that the legislature intended to preclude assignment of a superior lien by equitable subrogation in the mechanics’ lien context while permitting an assignment by statutory subrogation in a foreclosure action.”  Maybe this sentence was intended to compare mortgages with deeds of trust and got fouled up somewhere along the way, since as written it doesn’t mean much. In any event, the court does not explain why 723, by saying nothing about 992A, automatically overrides it. Wouldn’t this normally be considered a statutory conflict? And isn’t the fact that the deed of trust statutes don’t include a close analogy to the mortgage statute, 723, a “reason to conclude” that the legislature may have meant to treat them differently? We frankly don’t know why the legislature would do such a thing but the court’s approach is slight of hand, not analysis.

The trial court had decided that equitable subrogation couldn’t apply because the owners and their lenders didn’t fully discharge Summit’s debt. The doctrine normally requires that. But the court decides that “a prospective subrogee is required to discharge only the portion of an obligation that is secured by the property at issue.”  Subrogation is prohibited only where it would “divide security between the original obligee and a payor who discharges part of the obligation.” The court considers that security was not divided here because FNB had released the condos sold from Summit’s security obligation.

(link to opinion)