There’s distractions impairing my posting tendencies of late. I’m going to get caught up here this week, perhaps. Here’s a case of mild interest decided by the Arizona Court of Appeals in Tucson a month ago, called KAZ CONSTRUCTION V. NEWPORT EQUITY PARTNERS. The Superior Court had ruled a deed of trust was invalid and therefore that Kaz’s mechanic’s lien was in first position as an encumbrance against the property. The Strohbachs, who thought they had a deed of trust lien on the property, were displeased, and the Court of Appeals weighed in.
The issue with the deed of trust is that the property was itself owned by a Title Agency Trust. The Strohbachs loaned Zanderholm almost $2 Million to fund improvements to the property that Kaz made some of. That purpose was set forth in the deed of trust itself. Problem is that only the Title Agency Trust had the sole right to encumber the property, according to the terms of that trust. The Court of Appeals noted further that Zanderholm could not encumber the property unless the Trust first conveyed legal title to Mr. Z. So the appeals court found that the trial judge was correct – no interest in the property was conveyed by Mr. Z to the Strohbachs by the deed of trust.
Nonetheless, the Strohbachs contended that months before the Kaz 20-day preliminary notice period began, they recorded the deed of trust, effectively rendering them construction lenders to Mr. Z. As such, they contended, they were “reputed construction lenders” entitled to a 20-day notice under the Mechanic’s Lien statutes. The appeals court found that even an invalid lien of someone making a construction loan was sufficient to define a person as a “reputed construction lender”. (Here the court was aided by the omission of any definition of that term in Arizona’s case law or statutes.) The court further noted that even an invalid lien, if recorded, can provide constructive notice to a mechanic or materialman so as to inform the contractor upon whom a 20-day preliminary notice must be served. Since the Strohbachs were not given the 20-day notice, KAZ’s lien was invalid where they were concerned; thus, the Strohbachs were not going to be foreclosed out by KAZ.
Wowser – the Court of Appeals remanded the matter to the trial judge “for further proceedings consistent with” its decision. What further proceedings?! One presumes that the further proceedings will require KAZ to give the Strohbachs notice of its inention to foreclose (notice it already has, of course) to give the latter a chance to pay KAZ what it’s owed as reflected in its Notice and Claim of Lien, thereby preventing the loss of traction of the Strohbachs’ invalid lien? Sometimes, the Court of Appeals needs to remand to the trial court with a road map of “coming events.” Practice tip for deed of trust drafting lawyers, do-it-yerselfers and title insurance agency employees: Don’t record anything until you have confirmed fee title ownership of the collateral real property. And for mechanics and materialmen: Get a title commitment; and then give everyone in the resulting list of title liens notice, whether or not you think the liens in the commitment are (or ought to be) valid encumbrances on the property you seek to foreclose upon. Don’t look behind the curtain; an extra certified mailing is worth the cost.