Markham Contracting Co. v. Federal Deposit Insurance Co.
240 Ariz. 360
| Ariz. Ct. App. | 2016Background
- Troon Canyon Ventures borrowed under a 2006 deed of trust (First Arizona) and later took a 2008 construction loan (First Arizona and PrimeAZ) that paid off and caused release of the 2006 loan; Markham supplied construction work and recorded a mechanic’s lien in September 2009.
- About $2.9 million of the 2008 loan proceeds were used to pay off the 2006 loan; the 2006 deed of trust was released and the 2008 deed of trust recorded.
- Lenders foreclosed under the 2008 deed of trust; they credit-bid $3.175 million at the trustee’s sale and acquired the property.
- Markham sued to enforce its mechanic’s lien and obtain sale proceeds; lenders asserted equitable subrogation (or replacement) to the 2006 first-priority position.
- The superior court held the 2008 deed of trust was subrogated to the 2006 priority (to the extent of the payoff) and that the trustee’s sale extinguished Markham’s lien; Markham appealed.
Issues
| Issue | Plaintiff's Argument (Markham) | Defendant's Argument (Lenders) | Held |
|---|---|---|---|
| Whether the 2008 loan/deed of trust is equitably subrogated/replacement to the 2006 first-priority position | Subrogation may apply but should not defeat Markham if it was prejudiced by lenders’ conduct | Replacement/subrogation applies fully and places 2008 deed in first position as of the 2006 loan payoff | Court: 2008 deed is subrogated/replacement to the 2006 priority to the extent the 2008 proceeds paid off the 2006 loan (~$2.9M) |
| Standard to apply: equitable subrogation vs replacement; what equities control | Doctrine of subrogation applies; examine totality of equities and prejudice to intervening lienholder | Replacement is different and less limited than subrogation | Court: Doctrines are materially similar; totality of equities governs and prevents unjust enrichment/prejudice analysis applies |
| Whether lenders’ delay or communications prejudiced Markham and bar subrogation | Lenders’ post-lien conduct (representations and silence about subrogation) caused detrimental reliance and prejudice, so subrogation should be denied | Delay/communications do not change the risk Markham assumed when it contracted with knowledge of the 2006 deed; no material prejudice | Court: Markham assumed the risk at the time it incurred the lien; alleged reliance/representations do not defeat subrogation under the governing prejudice test |
| Whether the trustee’s sale and lenders’ credit bid extinguished Markham’s mechanic’s lien | Sale should not extinguish Markham’s lien because lenders’ credit bid exceeded the subrogated priority amount and proceeds in excess should have been paid to Markham or left lien in place | Credit bid under the 2008 deed extinguished junior liens via trustee’s sale; any remedy lies against the trustee for misdistribution | Court: Credit bid exceeded the subrogated priority amount; because excess proceeds were not distributed to Markham, equitable subrogation requires Markham’s lien remain on the property — reversal on extinguishment issue; lenders keep title but quality of title is subject to Markham’s lien to the extent of the excess |
Key Cases Cited
- Weitz Co. L.L.C. v. Heth, 236 Ariz. 405 (2014) (equitable subrogation allows later deed to assume earlier priority over intervening liens)
- Sourcecorp, Inc. v. Norcutt, 229 Ariz. 270 (2012) (subrogees who paid off prior loan receive priority to proceeds in the amount paid)
- BAC Home Loans Servicing, LP v. Semper Invs. L.L.C., 230 Ariz. 587 (2012) (prejudice for subrogation measured by risk assumed when intervening lien was created)
- Lamb Excavation, Inc. v. Chase Manhattan Mortg. Corp., 208 Ariz. 478 (App. 2004) (contractor that takes lien subject to earlier loan accepts risk the owner may not pay earlier loan)
- Cont’l Lighting & Contracting, Inc. v. Premier Grading & Utilities, LLC, 227 Ariz. 382 (App. 2011) (distinguishing replacement when the same lender refinances its own loan)
- BT Capital LLC v. TD Serv. Co. of Ariz., 229 Ariz. 299 (2012) (statutory scheme for trustee’s sales explained; did not address use of credit bid to exploit equitable subrogation)