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Watson Construction Co. v. Amfac Mortgage Corp.
Citations: 606 P.2d 421; 124 Ariz. 570; 1979 Ariz. App. LEXIS 720Docket: 1 CA-CIV 4050, 1 CA-CIV 4051, 1 CA-CIV 4212 and 1 CA-CIV 4465
Court: Court of Appeals of Arizona; October 4, 1979; Arizona; State Appellate Court
Multiple appeals involving Watson Construction Company and Amfac Mortgage Corporation were consolidated for clarity, originating from a single multi-count complaint by Amfac and an amended answer and multi-count counterclaim by Watson related to the same construction project. The appeals were prompted by the trial court granting partial summary judgments that included Rule 54(b) language, which indicates finality for certain claims. This led to complications and increased litigation costs, as the court had to address the appeals piecemeal, reviewing extensive briefs and materials to avoid inconsistent rulings. The court emphasized the need for trial courts to use Rule 54(b) judiciously in similar cases. The core issue arose from a construction contract dated July 11, 1973, between Watson and Arizona Mall of Tempe, Inc., concerning the terms of the agreement for constructing a shopping center in Tempe, Arizona. After executing the construction contract, Ericson approached Amfac for financing to purchase property and construct a shopping mall. On August 7, 1973, Amfac conditionally approved a $22.5 million loan to Arizona Mall, contingent upon obtaining an "assignment" of the construction agreement with Watson. Watson responded on August 24, 1973, confirming their role as the general contractor and agreeing to continue performance if Arizona Mall defaulted, provided they were compensated as per the contract. A major dispute arose regarding the contents of the "contract" referenced in Watson's letter and the attached "Exhibit A." Amfac claimed that "Exhibit A" contained a "Standard Form of Agreement between Owner and Contractor," specifying a guaranteed maximum construction cost of $16,854,900. Conversely, Watson argued that a "Side Agreement" was also included, stating that this maximum price was based on incomplete plans, with adjustments to be made as construction progressed. On August 27, 1973, Amfac and Arizona Mall formalized their agreement, with Amfac depositing funds into a building loan account, secured by a deed of trust. Construction commenced under Watson, but Arizona Mall later defaulted on its agreement with Amfac. Amfac sought to compel Watson to fulfill obligations under the August 24 letter at the guaranteed maximum price, which Watson refused, prompting litigation. Amfac's complaint included requests for foreclosure on its deed of trust and establishing lien priority over Watson, as well as breach of the August 24 agreement, fraud claims against Watson, and personal claims against Frederick Watson. Watson counterclaimed for Amfac's alleged breach of the same letter. Additionally, there were appeals related to the trial court's order on costs and attorneys' fees. Further details regarding the appeals will be provided later. Watson appeals the trial court's partial summary judgments that foreclosed Amfac's deed of trust, determined amounts due, and rejected Watson's claim for priority over Amfac's lien. Relevant facts include that on August 27, 1973, Amfac qualified to conduct business in Arizona, and the next day, a deed of trust between Arizona Mall and Amfac was recorded, albeit missing pages 7 and 8. Watson began constructing a shopping mall on October 16, 1973, and alleges that Amfac's prior communications and funding led it to commence construction. Watson claims Amfac should be estopped from asserting lien priority due to its actions during funding issues. Amfac had disbursed approximately $4,644,000 in principal, along with interest and fees. The appeal raises several issues: (1) whether the omission of pages 7 and 8 and a missing caption in Amfac's deed of trust grants priority to Watson's mechanic's liens; (2) whether Amfac's conduct estops it from claiming priority; (3) whether Amfac's pre-qualification actions void its deed of trust; and (4) whether the interest rate charged by Amfac was usurious, resulting in interest forfeiture. Watson argues the defect in the deed of trust undermines its priority over subsequent liens, referencing a case that ultimately does not support its position. In the case of Wahl, the mortgagee initiated foreclosure on 24 mortgages, with 18 recorded before construction began and 6 recorded afterward. The mortgagee argued that the six later-recorded mortgages had priority over material and mechanic's liens because they constituted "one project," asserting that the earlier mortgages provided constructive notice of the later ones. Both the Court of Appeals and the Supreme Court disagreed, stating that the first 18 mortgages did not provide notice of the subsequent mortgages necessary to establish their priority over previously attached liens. The current case focuses on whether the omission of two pages from a recorded deed of trust renders it defective for constructive notice. Citing Carley v. Lee, the court held that it does not. In Carley, a memorandum of sale that lacked detailed terms was deemed sufficient for constructive notice as it described the property and indicated where full terms could be accessed. Similarly, the deed of trust in question provided sufficient details—names of parties, nature of the transaction, property description, and claimed indebtedness—thus imparting constructive notice despite the missing pages. Watson argued that the deed of trust was defective due to the absence of a required caption under A.R.S. 11-480. However, the court ruled that while the deed did not have a caption, the presence of "deed of trust" on the first page and proper recording by the County Recorder sufficed. The court concluded that the lack of a caption does not render the deed void against subsequent lienholders as long as it was properly recorded and indexed. A.R.S. 11-480 mandates the responsibilities of the County Recorder regarding the recording of instruments, specifying that such recording is contingent upon compliance with the requirements outlined in A.R.S. 11-461. The statute clarifies that the County Recorder must index instruments only under categories explicitly mentioned in their captions. This was illustrated by the acceptance and proper indexing of an August 27, 1973 deed of trust, which provided constructive notice of its contents. Watson contends that Amfac is estopped from asserting priority of its deed of trust lien over Watson's mechanic and materialmen's lien, citing two actions by Amfac: accepting an assignment of the construction contract and managing a construction fund amid known cost overruns. However, Arizona law requires that a mechanic's lien claimant must demonstrate reliance on a prior mortgagee’s actions, which must be detrimental to the claimant. In a prior case (Watson Construction Co. v. Amfac), the court determined that Watson's August 24, 1973 letter to Amfac did not constitute a representation by Amfac that would induce reliance for payment, as the letter was intended to persuade Amfac to loan funds for Arizona Mall, with no representations made by Amfac itself. This ruling established the "law of the case," disallowing the letter as a basis for estoppel. Additionally, the court found that Amfac's establishment of a construction fund did not create reliance for payment obligations, as Amfac was not liable due to the project's default. The creation of the building account is deemed not to be an act on which Watson could rely, thus precluding the application of estoppel. The central issue is whether Amfac's prompt payment of draw requests, despite alleged knowledge of financing issues, undermines Amfac's deed of trust priority. Watson references cases that suggest in certain contexts a mechanic's lien may take precedence over a previously recorded mortgage, particularly when lenders provided assurances to subcontractors about available funds or took control of the project. However, the cited case, H.B. Deal Const. Co. v. Labor Discount Center, supports the notion that payments by a lender during construction financing can prioritize contractors' interests over a recorded deed of trust, a principle not recognized in Arizona law. Watson also cites cases from Washington and Delaware, which hinge on whether the lender's obligation to make future advances is mandatory or optional. The established rule is that if a mortgage has been recorded before a mechanic's lien attaches, it retains priority if future advances are obligatory. Conversely, if the mortgage allows optional advances and the lender makes an advance knowing a mechanic's lien has attached, the mortgage becomes subordinate to the lien. Watson does not argue that Amfac's obligation to make advances was optional nor does he assert that the Delaware and Washington rulings should apply in Arizona. Since Arizona law does not recognize the creation of a building fund as an inducement for contractors, Amfac's disbursements from that fund cannot create such an inducement without additional actions by the lender. Merely knowing about cost overruns does not negate the lender's prior recorded interest. Lastly, Watson contends that Amfac's actions in Arizona prior to being qualified to operate there render the deed of trust void; however, the only actions cited are negotiations leading to the deed's execution on August 27, 1973. Amfac qualified to conduct business in Arizona on August 27, 1973. Negotiations for contracts initiated after this qualification do not, by themselves, constitute "doing business" in a manner that would invalidate the contract. This interpretation prevents foreign corporations from needing to qualify as Arizona entities during potentially unfruitful negotiations, a position deemed meritless. Watson argues that the trial court erred in determining the amount due under Amfac's deed of trust as usurious. Even assuming Watson has standing as a mechanic's lienholder to challenge the loan's usurious nature, the court finds Amfac's note not usurious. The evaluation of usury considers the entire loan duration rather than just the period between receipt and acceleration post-default. In this instance, the loan's term was 24 months. Based on Watson's figures, the actual allowable interest of 18% over this period would amount to $1,201,131.50, which is not usurious according to the calculations provided. Consequently, the trial court's judgment regarding the foreclosure of Amfac's deed of trust and the amount due, as well as its priority over Watson's lien, is affirmed. Additionally, Watson appeals the partial summary judgment favoring Amfac concerning Count 13 of Watson's counterclaim, which claims that a letter dated August 24, 1973, constituted an assignment of the construction contract between Watson and Arizona Mall to Amfac. Watson asserts this letter obligates Amfac to assume Arizona Mall's contractual responsibilities. The letter indicates that Watson agrees to continue fulfilling contract obligations if Arizona Mall defaults, contingent upon being compensated accordingly. Watson's argument for this assignment is based on Amfac's requirement for Arizona Mall to obtain an assignment of the construction contract in its conditional commitment letter. Watson's letter to Amfac is characterized as a unilateral promise rather than an assignment of contract documents. Key assertions made by Watson include: (1) the letter served as an inducement for Amfac to loan money to Arizona Mall; (2) Watson waived breaches by Arizona Mall of its agreements with Amfac and potentially the construction contract with Watson; and (3) Watson committed to continue its construction contract performance, contingent on payment. This letter constituted a unilateral offer from Watson to Amfac, accepted when Amfac loaned money to Arizona Mall. The unilateral nature of the promise means Watson alone bears enforceable legal duties, while Amfac holds enforceable rights. Previous decisions indicated that the letter did not create estoppel rights for Amfac, nor could any promises from Amfac to Watson be inferred from their lack of communication. Thus, no enforceable obligation against Amfac arose from the letter. Watson's claim that Amfac's demand to perform ratified an assignment fails since no assignment existed. The trial court correctly ruled that no contractual obligation existed in Watson's favor due to the August 24 letter, affirming the dismissal of Count 13 of Watson's counterclaim. Amfac's complaint included allegations of breach and fraud against Watson, resulting in jury verdicts favoring Watson, while the trial court dismissed claims against Frederick O. Watson individually. The main dispute revolved around Watson's maximum compensation for construction performance, dependent on payment as outlined in the contract. Amfac asserted that the contract between Arizona Mall and Watson mandated a guaranteed maximum construction cost of $16,854,900. Alternatively, they claimed that a change order dated March 25, 1974, reduced this maximum to $12,642,134. Watson countered that its compensation was governed by an undated agreement with Arizona Mall, which allowed for adjustments based on evolving plans and specifications. Watson argued that Amfac was aware of this side agreement, which was referenced in a letter dated August 24, 1973, and that it determined payment conditions. Consequently, Watson claimed no obligation to perform under the August letter unless compensated per this side agreement. Following Arizona Mall's default, Amfac demanded that Watson adhere to the original contract terms, but Watson refused, insisting on payment according to the side agreement. Amfac ceased funding, leading to a halt in construction and subsequent litigation. Amfac acknowledged a factual issue existed regarding whether the side agreement was attached to the August 24 letter and whether Amfac was aware of it before funding. However, Amfac contended these issues, along with whether the March 25 change order established a new maximum cost under the side agreement, were inadequately presented to the jury. The trial court rejected proposed jury instructions from both parties regarding the breach of contract claim, instead instructing the jury on the elements required to prove the claim. Amfac argued on appeal that the jury instruction allowed speculation on whether the August letter constituted a contract and on the specific obligations of each party, but the court found that Amfac failed to preserve this objection for appeal due to not raising specific grounds during the trial. The appeal does not address the merits of Amfac's argument regarding the trial court's instruction on breach of contract, as it was not properly preserved. Amfac's objections, which claimed the instruction was insufficient, included three main points: (1) confusion over whether Amfac’s knowledge of a side agreement could serve as a defense; (2) allowance for jury speculation on the term "guaranteed maximum price for cost"; and (3) that the instruction might lead the jury to believe Watson's refusal to perform constituted no material breach. These deficiencies were largely not raised on appeal, except possibly the third. The court concluded that the instruction’s language and counsel's arguments did not mislead the jury regarding Watson's contractual obligations. Additionally, Amfac properly preserved its objection to the trial court's failure to provide requested instructions about the change order's compliance with the side agreement. However, the court found insufficient evidence to support Amfac's proposed instruction, which required the jury to determine if the change order established a guaranteed maximum price under the side agreement. Testimony from construction experts that plans existed was deemed inadequate, as the side agreement specified that such plans alone did not allow for a guaranteed maximum price. The court affirmed it is not obligated to submit unsupported instructions to the jury. Lastly, Amfac raised an argument about improper jury comments by Watson's counsel, which is noted but not elaborated upon. Counsel's comments during closing arguments were acknowledged as improper in certain respects; however, the lack of timely objections or motions for mistrial during the trial led to a waiver of the error. The issue was first raised post-verdict during a motion for a new trial, which was deemed too late. The court referenced Beliak v. Plants, establishing that failure to object timely results in waiver of the error, and declined to consider the arguments as warranting an exception. Additionally, Amfac's argument regarding inadequate jury instructions on fraud was addressed. Amfac's claims focused on fraudulent acts occurring after the loan was made, alleging omissions by Watson regarding project cost overruns, budget issues, and misleading draw requests. The trial court refused Amfac's requested jury instruction that an omission could be considered a representation, citing the absence of a legal duty for Watson to disclose such information. While the court did not resolve whether such a duty existed, it upheld the refusal of the proposed instructions, which were incomplete. Furthermore, Amfac contested the court's rejection of its instruction on "creating false impressions," asserting it was supported by evidence from Starkovich v. Noye. However, the relevance of this case to the court's decision on whether to give the instruction under the circumstances was not adequately explained. The overall conclusion was that the trial court did not err in refusing Amfac's requests for specific jury instructions related to fraud and false impressions. The objection raised lacks the necessary specificity to maintain the issue for appeal, resulting in the affirmation of the trial court's judgment. The appeal concerns the trial court's denial of Amfac's and Watson's requests for attorneys' fees and costs against each other. Previous judgments indicated that costs related to claims would be determined after the trial's conclusion, except for a judgment that addressed Amfac's deed of trust, where costs of $18,566.26 were noted but not definitively assessed at that time. Both parties submitted cost statements post-trial, with Watson claiming $34,094.66 in costs and $410,566.13 in attorneys' fees, without differentiating costs incurred by him personally versus the corporate entity, or distinguishing between winning and losing efforts. Amfac claimed $73,551.08 in costs and $456,412.00 in attorneys' fees, attributing a portion of these costs to periods before and after a judgment date of July 12, 1977. The trial court subsequently denied both parties' claims for costs and attorneys' fees, requiring them to bear their own expenses, leading to their appeals. The claims for attorneys' fees were based on A.R.S. 12-341.01, which could not be applied as the litigation started before its effective date of September 1, 1976, thereby negating both parties' claims. Regarding Frederick O. Watson, no specific costs or fees attributable to his individual defense were indicated in the cost statements, violating Rule 54(f) of the Rules of Civil Procedure, which mandates proper filing and service of cost claims. The trial court correctly denied the request for individual costs and attorneys' fees due to a lack of itemization. According to A.R.S. 12-341, the successful party in a civil action is entitled to recover all incurred costs unless otherwise specified. This provision mandates cost recovery for the prevailing party, making it straightforward in simple litigation but complex in multi-count cases, as seen here. Watson claims to be the successful party because he won the only monetary claim against him from Amfac. Conversely, Amfac argues it is the "net" successful party, having prevailed on its foreclosure claim and defended against Watson’s counterclaims. Amfac contends that it is entitled to all costs, even from its unsuccessful claims against Watson, due to the absence of cost apportionment in the statute. The "net judgment" principle from Trollope v. Koerner is cited, where a plaintiff's recovery exceeding a defendant's counterclaim warranted cost recovery for the plaintiff. This principle supports awarding costs to a successful party, regardless of the relief amount. While Amfac appears to be the "net" winner by receiving foreclosure relief, allowing it to recover substantial costs from Watson for unsuccessful claims contradicts the purpose of indemnifying successful litigation expenses. Similarly, permitting Watson to recover costs incurred from his unsuccessful counterclaims against Amfac presents the same issue. The application of the "net judgment" rationale becomes particularly challenging in cases involving non-monetary judgments. In a case involving multiple claims and counterclaims, the court considered the application of the Arizona cost statute from 1887, which may require cost apportionment when no money judgments are present. However, since neither party sought this relief and both adopted an "all or nothing" approach, the rationale for awarding costs to a successful party was not satisfied. Consequently, the court upheld the trial court's decision not to award costs to either party, affirming the judgment. Additional notes reference procedural rules, case law, and issues related to the standing of junior lienholders regarding usury claims. Communication between parties was limited, and there were formal objections to jury instructions raised post-retirement, which has drawn criticism. The costs incurred by Amfac were detailed, indicating a division based on timing relative to the claims, with specific costs associated with the contract and fraud action outlined.