In Re Mortgages Ltd.
444 B.R. 585
| Bankr. D. Ariz. | 2011Background
- Hotel Monroe remodeling project; owner Central & Monroe, LLC; mechanics' liens relate to work begun November 2006.
- Initial mortgage: First Commonwealth Mortgage Trust lien recorded May 2002 for 3.2M; refinanced in 2005 by Mortgages Ltd. for 8.5M, with payoff and release of the First Commonwealth lien.
- December 2006: Choice Bank loan for 9.3M recorded; Mortgages Ltd. debt ~7.3M paid off with release of Mortgages' 2005 lien.
- Work began before the December 2006 Choice Bank lien; KGM was the general contractor starting November 15, 2006.
- May 2007: Mortgages Ltd. refinanced with a 75.6M loan; over 8.9M used to discharge Choice Bank debt and release its lien.
- January 1, 2008 onwards: Summit Builders (Jeffrey C. Stone, Inc.) began work on the project and recorded a lien in July 2008; Summit argued some work overlapped with KGM’s prior project.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Summit's announced lien dismissal created a settlement | Summit intended to dismiss, seeking settlement. | Announcement was unilateral, not a settlement agreement. | No binding settlement; not a valid settlement agreement supporting summary judgment. |
| Whether Summit failed to provide the preliminary 20-day notice as required | Summit substantially complied; owner had notice and Mortgages had actual knowledge. | Failure to serve proper notice defeats lien; estoppel arguments possible. | Mortgages entitled to defense estoppel; failure to notice by previous owner cannot be leveraged by successor owner; summary judgment on notice defense granted for priority. |
| Whether equitable subrogation gives Mortgages priority over prior deeds | Mortgages advanced funds to discharge prior encumbrances and seeks substitution. | Subrogation should not override lienholders without clear meeting of minds and inequity allegations. | Mortgages entitled to equitable subrogation to the Choice Bank and later loan proceeds, establishing priority dates. |
| Scope of subrogation to chain multiple liens (Choice Bank and Mortgages’ prior deed) | Subrogation extends through the chain to give priority to funds used to discharge prior liens. | No precedent for two-step daisy-chain subrogation; may be inequitable to other lienholders. | Two-step subrogation permitted; Mortgages obtains the priority positions as to the discharged liens. |
| Overall priority outcome among Mortgages, KGM, Summit and subcontractors | Mortgages should have superior priority due to subrogation and discharge of prior liens. | Mechanics' lien claimants should retain priority under labor-start rules. | Mortgages granted partial summary judgment establishing priority dates July 1, 2005 and May 16, 2007 to the specified discharged amounts. |
Key Cases Cited
- Peterman-Donnelly Engineers & Contractors Corp. v. First National Bank of Arizona, 2 Ariz.App. 321, 408 P.2d 841 (Arizona Court of Appeals, 1965) (subrogation defined; non-volunteer payment may allow substitution of lien priority)
- Lamb Excavation Inc. v. Chase Manhattan Mortgage Corporation, 208 Ariz. 478, 95 P.3d 542 (Arizona Court of Appeals, 2004) (escrow closing instructions can satisfy the 'agreement' element for subrogation)
- Columbia Group Inc. v. Jackson, 151 Ariz. 76, 725 P.2d 1110 (Arizona Supreme Court, 1986) (purpose behind § 33-992.01 to inform owners of lien rights)
- SK Drywall Inc. v. Developers Financial Group, Inc., 169 Ariz. 345, 819 P.2d 931 (Arizona Supreme Court, 1991) (support for application of subrogation principles in lien disputes)