Kaz Construction, Inc v. Sierra Cobre Estates, LLC

FILED BY CLERK
IN THE COURT OF APPEALS
STATE OF ARIZONA MAR –2 2012
DIVISION TWO
COURT OF APPEALS
DIVISION TWO

KAZ CONSTRUCTION, INC., )
) 2 CA-CV 2011-0108
Plaintiff/Appellee, ) DEPARTMENT A
)
v. ) OPINION
)
NEWPORT EQUITY PARTNERS; )
SIERRA COBRE ESTATES, L.L.C.; )
STEVEN ZANDERHOLM, )
)
Defendants/Appellees, )
)
and )
)
ROBERT I. STROHBACH and LISA )
A. STROHBACH, husband and wife, )
)
Defendants/Appellants. )
________________________________ )
)
ROBERT I. STROHBACH and )
LISA A. STROHBACH, husband and )
wife, )
)
Counterclaimants/Appellants, )
)
v. )
)
KAZ CONSTRUCTION, INC., )
)
Counterdefendant/Appellee. )
________________________________ )
)
ROBERT I. STROHBACH and LISA )
A. STROHBACH, husband and wife, )
)
Cross-Claimants/Appellants, )
 )
v. )
)
NEWPORT EQUITY PARTNERS; )
SIERRA COBRE ESTATES, L.L.C.; )
and STEVEN ZANDERHOLM, )
)
Cross-Defendants/Appellees. )
)

APPEAL FROM THE SUPERIOR COURT OF COCHISE COUNTY

Cause No. CV200801123

Honorable James L. Conlogue, Judge

AFFIRMED IN PART; REVERSED AND REMANDED IN PART

Pak & Moring PLC
By Thomas S. Moring and S. Gregory Jones Scottsdale
Attorneys for Plaintiff/Appellee/
Counterdefendant KAZ Construction, Inc.

Baird, Williams & Greer, LLP
By Craig M. LaChance Phoenix
Attorneys for Appellees/Defendants/
Cross-Defendants Newport Equity Partners
and Steven Zanderholm

Gust Rosenfeld, P.L.C.
By Robert M. Savage and Mark L. Collins Tucson
Attorneys for Appellants/Defendants/
Counterclaimants/Cross-Claimants
Robert I. and Lisa A. Strohbach

B R A M M E R, Judge.

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¶1 Appellants Robert and Lisa Strohbach appeal from the trial court’s grant of

summary judgment in favor of appellee KAZ Construction, Inc. (KAZ). The court found

invalid the Strohbachs’ deed of trust on property securing a nearly $2,000,000 debt, and

further concluded KAZ had a valid first-position mechanic’s lien on that property. The

Strohbachs argue the court erred in finding appellee Steven Zanderholm did not have an

ownership interest in the property, rendering the deed of trust he executed in their favor

invalid. They also argue KAZ’s mechanic’s lien is invalid because they had not been

provided the statutorily required preliminary twenty-day notice. We affirm in part,

reverse in part, and remand for further proceedings.

Factual and Procedural Background

¶2 We view the facts in the light most favorable to the party against whom

summary judgment was entered, drawing all justifiable inferences in its favor. Modular

Mining Sys., Inc. v. Jigsaw Techs., Inc., 221 Ariz. 515, ¶ 2, 212 P.3d 853, 855 (App.

2009). At the center of this action is property described generally as lots 1-56 of the

Sierra Cobre Estates located in Cochise County. In December 2006, Zanderholm created

the Title Security Agency of Arizona (TSA) Trust Number 1025 (Trust 1025), conveying

the subject property to TSA as trustee for the purpose of holding title, selling, conveying,

receiving payment for, or otherwise dealing with the property. The trust agreement

identified Zanderholm as the beneficiary and TSA as the trustee. Under the trust

agreement, Zanderholm had the authority to instruct TSA regarding the property and TSA

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“w[ould] deal with [the property] only on [his] written direction.” Zanderholm retained

the right to receive profits from the sale of completed lots on the property.

¶3 In September 2007, the Strohbachs loaned Zanderholm $1.98 million,

evidenced by a promissory note, to finance development of the property. Zanderholm

executed a deed of trust to secure repayment of the loan, naming the Strohbachs as

beneficiaries. TSA was not a party to either the note or deed of trust given the Strohbachs.

The Strohbachs’ deed of trust was recorded in October 2007.

¶4 In November 2007, KAZ submitted a proposal to Zanderholm to perform

site work on the property. Zanderholm accepted and signed the proposal on behalf of

appellee Newport Equity Partners, LLC (Newport). TSA did not sign the proposal. In

February 2008, KAZ sent Trust 1025 and Newport a preliminary twenty-day notice

pursuant to A.R.S. § 33-992.01. No notice was given to the Strohbachs. In June 2008,

KAZ recorded a notice and claim of lien against the property.

¶5 KAZ then filed a complaint against Newport and appellee Sierra Cobre

Estates, LLC (Sierra), to foreclose its lien. KAZ later amended the complaint to add the

Strohbachs, Zanderholm, and TSA as defendants. The Strohbachs filed a counterclaim

and cross-claim to declare their deed of trust a valid, first-position lien on the property,

having priority over KAZ’s lien. The Strohbachs filed a motion for summary judgment to

establish the validity and priority of their deed of trust and to declare the KAZ lien invalid

as to them. Sierra, Newport, and Zanderholm responded and urged the trial court to deny

the Strohbachs’ motion for summary judgment. KAZ filed a cross-motion for summary

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judgment asserting the Strohbachs’ deed of trust was invalid because it had been executed

by Zanderholm rather than TSA. The court granted summary judgment in favor of KAZ,

declaring the Strohbachs’ deed of trust invalid and that KAZ had a valid first-position lien

on the property. This appeal followed.

Discussion

¶6 Summary judgment is appropriate when “there is no genuine issue as to any

material fact and . . . the moving party is entitled to a judgment as a matter of law.” Ariz.

R. Civ. P. 56(c)(1). A trial court should grant a motion for summary judgment “if the

facts produced in support of the claim or defense have so little probative value, given the

quantum of evidence required, that reasonable people could not agree with the conclusion

advanced by the proponent of the claim or defense.” Orme Sch. v. Reeves, 166 Ariz. 301,

309, 802 P.2d 1000, 1008 (1990). “On appeal from a summary judgment, we must

determine de novo whether there are any genuine issues of material fact and whether the

trial court erred in applying the law.” Bothell v. Two Point Acres, Inc., 192 Ariz. 313, ¶ 8,

965 P.2d 47, 50 (App. 1998).

Validity of Strohbachs’ Deed of Trust

¶7 The Strohbachs argue Zanderholm had the right to execute the deed of trust

in their favor and thereby encumber the property because a trust beneficiary may “freely

encumber or alienate any or all of his interest in the trust res.” Dunlap Investors Ltd. v.

Hogan, 133 Ariz. 130, 132, 650 P.2d 432, 434 (1982). Notwithstanding this principle, the

trial court concluded the terms of the trust here limited Zanderholm’s interest and

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authority. The Strohbachs have provided no legal authority to support their implication

that a trust’s terms cannot limit a beneficiary’s powers. To the contrary, the cases upon

which they rely recognize a trust must be interpreted according to its terms. E.g., Lane

Title & Trust Co. v. Brannan, 103 Ariz. 272, 277-78, 440 P.2d 105, 110-11 (1968) (trust

“governed by the provisions of the instrument which creates it or general trust law”);

Dunlap, 133 Ariz. at 132, 650 P.2d at 434 (beneficiary has vested interest in property

itself absent agreement to the contrary); cf. In re Estate & Trust of Pilafas, 172 Ariz. 207,

210, 836 P.2d 420, 423 (App. 1992) (terms of trust limit powers of settlor even where

settlor named as trustee for benefit of himself and others).

¶8 Trust 1025 was created to allow TSA to hold, sell, convey, and otherwise

handle the property as directed by Zanderholm. The trust provided “the whole equitable

and legal title to the said property shall be vested in the Trustee and no equitable and legal

interest in and to said property shall be vested in the Beneficiary.” However, the deed of

trust Zanderholm gave the Strohbachs purported to grant the entire property with power

of sale and warranted Zanderholm had a free and unencumbered “good and marketable

title in fee simple to the real property.” See A.R.S. § 33-435 (if “grant” used in fee simple

conveyance, grantor covenants he has not conveyed same estate, right, title, or interest

therein to another and estate unencumbered). Although there may be some dispute as to

the extent and nature of Zanderholm’s equitable interest in the property under the trust,

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because he retained a right to control the property,1 it is undisputed that TSA was the

legal title owner of the property.

¶9 The terms of the trust resolve any potential ambiguity regarding

Zanderholm’s power to encumber the property.2 See Restatement (Third) of Trusts § 49

& cmt. a; § 51 cmt. d (2003) (extent of trust beneficiary interest depends upon intention

manifested by settlor in terms of trust; terms of trust may require notice to or consent of

trustee as condition of transfer); In re Herbst, 206 Ariz. 214, ¶ 17, 76 P.3d 888, 891 (App.

2003) (we follow Restatement in absence of contrary controlling authority); cf. Dunlap,

133 Ariz. at 132, 650 P.2d at 434 (“[a]bsent an agreement to the contrary” in trust

document, beneficiary retains power of encumbrance and alienation of res). The trust

provides “[a]ll instruments affecting any property included in th[e] Trust shall be

executed solely by [TSA].” The Strohbachs argue Zanderholm retained the power to

1
Although generally under a trust a legal estate is separated from the equitable
estate, in some land trusts the trustee holds both legal and equitable title. 76 Am. Jur. 2d
Trusts § 253 (2011). Although the Strohbachs acknowledge the trust language limited
Zanderholm’s interest to a mere contractual right, they argue the beneficiary of a trust by
definition must retain an equitable interest in the trust. Because the issue in this case is
not whether Zanderholm retained any equitable interest in the trust res, but whether he
had the power to execute the deed of trust to the Strohbachs, we need not address this
argument.
2
Although TSA and the Strohbachs stipulated in the trial court that Zanderholm
had the authority to encumber the property, one of the trust parties cannot revise explicit
language in the trust by unilaterally disavowing it after the questioned documents have
been created. See In re Estate of Zilles, 219 Ariz. 527, ¶ 11, 200 P.3d 1024, 1028 (App.
2008) (relevant intent is that of trustor at time of creation of trust); see also Taylor v.
Hutchinson, 17 Ariz. App. 301, 304, 497 P.2d 527, 530 (1972) (when intent plainly
expressed, court will not go outside terms of instrument to interpret).

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execute instruments because the trust also provides that TSA, “in its discretion, may

refrain from executing any such instrument and, at its option, may cause or permit such

instrument to be executed by some other person.” They argue this qualification should be

interpreted to mean “‘some other person,’ including Zanderholm, could execute

instruments affecting the [property].” The plain language of this provision does not

support the Strohbachs’ interpretation that Zanderholm was intended to possess such

authority without permission or direction from TSA, especially when viewed in light of

additional trust terms. See Lane Title & Trust Co., 103 Ariz. at 277-78, 440 P.2d at 110-

11.

¶10 First, the trust provides that Zanderholm may direct TSA “to convey . . . to

[him], the legal title to any portion of the Trust property for purposes of allowing the

recordation of an encumbrance covering said portion as security for any loan on said

property.” It further requires such conveyance “be accomplished by the consecutive

recordation by the Trustee . . . of a deed from the Trustee to the Beneficiary, a mortgage

or deed of trust wherein the grantee is the mortgagor or trustor, and a deed from the

mortgagor/trustor to the Trustee.” This clear language is evidence Zanderholm had no

authority to encumber the property unless TSA first conveyed to him legal title.

¶11 Similarly, the recorded assurance agreement executed by TSA, Zanderholm,

and the city of Bisbee shortly after the trust was created provides additional evidence of

the requirements of the trust, as understood by TSA and Zanderholm. It includes a

procedure by which TSA may convey the property to Zanderholm “to create security for

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additional loans for the purchase or improvement of [the property],” in which case “the

property shall immediately thereafter be reconveyed to the Trustee.” The assurance

agreement further states that such procedure “shall be deemed to be a condition on and

restriction on the rights and interests of any third party whose interest in the property

arises after the date of this Agreement.” Clearly, Zanderholm contemplated that he might

need to secure additional funds to improve the property and developed in advance a

procedure to use the property to do so. However, when that precise need arose,

Zanderholm bypassed the specified procedure and attempted to convey an interest in the

property directly, in violation of the trust’s terms.

¶12 Importantly, the assurance agreement and the initial conveyance to TSA

were of record when the Strohbachs loaned Zanderholm the funds to develop the property.

Therefore, the Strohbachs had constructive notice of those documents and should have

been aware of the procedure necessary to encumber the property.3 See A.R.S. § 33-416.

Last, and even more telling, is that nothing in the record suggests that TSA ever “cause[d]

or permit[ted]” Zanderholm to execute any document to encumber the property to secure

the loan from the Strohbachs.

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The harshness of this result could have been avoided had the Strohbachs, having
constructive notice of both the deed to the property showing title in TSA and the
assurance agreement with Bisbee, undertaken before making this sizeable loan some
diligence in determining the extent of Zanderholm’s interest in, and ability to convey or
encumber, the property, including an examination of the terms of the unrecorded trust
agreement. Nothing in the record suggests they made any such inquiries, nor that a
routine title search was sought or a standard policy of title insurance issued.

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¶13 Because Zanderholm’s ability to encumber the property was severely

restricted by the trust’s terms, and because TSA never authorized Zanderholm to execute

the deed of trust to the Strohbachs, the trial court did not err in determining the

Strohbachs were conveyed no interest in the property by the deed of trust Zanderholm

executed.

Validity of KAZ’s Mechanic’s Lien

¶14 The Strohbachs argue KAZ’s mechanic’s lien was invalid because KAZ

failed to provide them, as, at minimum, a reputed construction lender, with a copy of its

preliminary twenty-day notice pursuant to A.R.S. § 33-992.01(B). We interpret statutes

de novo. Green v. Lisa Frank, Inc., 221 Ariz. 138, ¶ 48, 211 P.3d 16, 33 (App. 2009).

¶15 Section 33-992.01 provides in relevant part:

A. For the purposes of this section:

1. “Construction lender” means any mortgagee or
beneficiary under a deed of trust lending funds all or a portion
of which are used to defray the cost of the construction,
alteration, repair or improvement . . . .

....

B. . . . [a mechanic’s lien claimant] shall, as a necessary
prerequisite to the validity of any claim of lien, serve the
owner or reputed owner, the original contractor or reputed
contractor, the construction lender, if any, or reputed
construction lender, if any, . . . with a written preliminary
twenty day notice as prescribed by this section.

The Strohbachs contend they were a “construction lender” or “reputed construction lender”

entitled to notice under the statute. Although the Strohbachs have failed to prove they

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were the beneficiaries of a valid deed of trust on the property, this does not end our

inquiry. The Strohbachs had recorded a “construction deed of trust,” accurately

describing the subject property and showing them as its beneficiary, months before KAZ

began its twenty-day notice procedure. The deed of trust stated the Strohbachs had made

a loan for the purpose of constructing improvements on the property. And, although the

term “reputed construction lender” is not defined by statute or case law, that language

would serve no purpose if it had no different meaning than “construction lender.” See

City of Tucson v. Clear Channel Outdoor, Inc., 218 Ariz. 172, ¶ 33, 181 P.3d 219, 230

(App. 2008) (we avoid interpretation that makes statutory language superfluous). We

therefore cannot agree with the trial court that “a claimant’s lien rights should not be

defeated for failure to serve a reputed construction lender that turns out not to be the

actual [construction] lender.”

¶16 The apparent policy reason underpinning § 33-992.01 is to provide notice to

those parties reasonably construed as having a reputed interest in the property so they

might protect their respective interests. See § 33-992.01(A); see also Delmastro & Eells v.

Taco Bell Corp., 228 Ariz. 134, ¶ 13, 263 P.3d 683, 688 (App. 2011) (purpose of notice

statute to allow meaningful communication among owner, lender, and general contractor

to ensure payment of potential lien claimants). According to the terms of the deed of trust,

Zanderholm and the Strohbachs agreed the loan was made to fund improvements on the

property, and KAZ had constructive notice of this intent. See A.R.S. § 33-818 (recorded

trust deed provides notice of content to all persons); see also Watson Constr. Co. v. Amfac

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Mortg. Corp., 124 Ariz. 570, 575-76, 606 P.2d 421, 426-27 (App. 1979) (recorded deed

of trust containing names of parties, nature of transaction, and property description not

defective for constructive notice purposes; adequate to apprise third parties of nature and

substance of rights claimed under it). Therefore, as to the Strohbachs, KAZ’s mechanic’s

lien is invalid, and the trial court erred in concluding otherwise. § 33-992.01(B); see also

Delmastro & Eells, 228 Ariz. 134, ¶ 9, 263 P.3d at 687 (because mechanic’s liens created

by statute, claimant must comply strictly with statutory requirements).4

Disposition

¶17 For the foregoing reasons, we affirm the trial court’s decision in part and

reverse it in part. We remand for further proceedings consistent with this decision.

/s/ J. William Brammer, Jr.
J. WILLIAM BRAMMER, JR., Judge

CONCURRING:

/s/ Peter J. Eckerstrom
PETER J. ECKERSTROM, Presiding Judge

/s/ Joseph W. Howard
JOSEPH W. HOWARD, Chief Judge

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The harshness of this result also could have been avoided by the simple provision
by KAZ to the Strohbachs of a copy of the preliminary twenty-day notice. The
Strohbachs were shown of record as the beneficiary of a construction deed of trust,
executed by the same person with whom KAZ had dealt and contracted for construction.
It was not for KAZ to make the legal determination of the bona fides of the Strohbachs’
construction deed of trust, but rather, to protect its lien rights by giving the statutorily-
required notice to those contemplated by the statute.

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