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Markham Contracting Co., Inc. v. Federal Deposit Insurance Co.

Court of Appeals of Arizona, First Division

August 9, 2016

MARKHAM CONTRACTING CO., INC., an Arizona corporation, Plaintiff/Appellant
v.
FEDERAL DEPOSIT INSURANCE COMPANY, as receiver for First Arizona Savings and Loan Association, a federal savings bank; PRIMEAZ/LIBRA, LLC, an Arizona limited liability company, Defendants/Appellees.

         Appeal from the Superior Court in Maricopa County No. CV2010-000707 The Honorable Dawn M. Bergin, Judge

          Osborn Maledon, P.A., Phoenix By Thomas L. Hudson, Eric M. Fraser Co-counsel for Plaintiff/Appellant

          Palecek & Palecek PLLC, Scottsdale Karen A. Palecek Co-counsel for Plaintiff/Appellant

          Gust Rosenfeld P.L.C., Phoenix By Frank S. Tomkins, Scott A. Malm Counsel for Defendant/Appellee Federal Deposit Insurance Company

          Hennelly & Grossfeld LLP, Scottsdale By Richard Q. Nye, Benjamin J. Branson Counsel for Defendant/Appellee PrimeAZ/Libra, LLC

          Presiding Judge Peter B. Swann delivered the opinion of the court, in which Judge Lawrence F. Winthrop and Judge Donn Kessler joined.

          OPINION

          SWANN, Judge:

         ¶1 This is a foreclosure case. Markham Contracting Co. ("Markham") perfected a mechanic's lien on a property in second position to a first deed of trust. Lenders made a secured construction loan that was used, in part, to satisfy and release the first-position loan and deed of trust on the subject property. The lenders later foreclosed on the second deed of trust, using a credit bid, and claimed to extinguish Markham's mechanic's lien on a theory of equitable subrogation. Markham challenged the priority of the lenders' interest and demanded that it be paid from the proceeds of the sale.

         ¶2 We hold that the second loan and deed of trust were subrogated to the original loan and deed of trust's first-priority position to the extent of the payoff amount. We conclude that such subrogation caused no material prejudice to Markham, whose lien was never superior to the first deed of trust. We also hold, however, that the lenders' foreclosure on their deed of trust did not extinguish Markham's interest. At the trustee's sale, the lenders made a "credit bid" that exceeded the subrogation amount, thereby acquiring the property and retaining the full amount of their bid (minus the costs and expenses of the trustee's sale) when the portion of the bid in excess of the subrogation amount should have been distributed to the appellant, or the appellant's lien left in place. Because no proceeds were distributed, we hold that the doctrine of equitable subrogation requires that the appellant's lien remain in place.

         ¶3 We affirm the superior court's determination that the appellees were equitably subrogated to the first-priority position to the extent that the second loan was used to satisfy the first. We reverse and remand with respect to the court's ruling that the subrogation led to the extinguishment of the appellant's lien.

         FACTS AND PROCEDURAL HISTORY

         ¶4 Troon Canyon Ventures, LLC ("Troon") purchased real property ("the Property") with a $4.1 million-maximum loan ("the 2006 Loan") from First Arizona Savings and Loan Association ("First Arizona"), secured by a deed of trust on the Property recorded on April 7, 2006 ("the 2006 Deed of Trust").

         ¶5 Troon hired Pinnacle Point Developers, LLC ("Pinnacle") as general contractor to develop the Property. Pinnacle, in turn, subcontracted with Markham to perform grading, paving, and water utility work. Markham began work on the Property on June 10, 2008, and promptly complied with the preliminary notice requirements of A.R.S. § 33-992.01.

         ¶6 First Arizona and PrimeAZ/Libra, L.L.C. ("PrimeAZ") later loaned Troon $4.8 million ("the 2008 Loan") to fund the Property's ongoing development; a corresponding deed of trust encumbering the Property was recorded on September 9, 2008 ("the 2008 Deed of Trust"). Approximately $2.9 million of the 2008 Loan's proceeds were used to pay off the balance owing on the 2006 Loan, which was then several months ...


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