Opinion
NOT FOR PUBLICATION
Argued and Submitted at Phoenix, Arizona: February 18, 2011
Appeal from the United States Bankruptcy Court for the District of Arizona. Bk. No. 08-18920-RJH, Adv. No. 09-00345-RJH. Honorable Randolph J. Haines, Bankruptcy Judge, Presiding.
Carlos. M. Arboleda, Esq., Arboleda Brechner argued for Appellants Bryan L. Funk, Tina R. Funk.
Theodore P. Witthoft, Esq., Collins, May, Potenza, Baran & Gillespie, P.C. argued for Appellee G.W. Custom Homes, LLC.
Before: MARKELL, PAPPAS and JURY, Bankruptcy Judges.
MEMORANDUM
INTRODUCTION
Appellants, Bryan and Tina Funk (" Funks" or " Appellants"), appeal from the bankruptcy court's judgment granting summary judgment for Appellee, G.W. Custom Homes, LLC (" G.W. Homes" or " Appellee"), on G.W. Homes' adversary complaint to determine dischargeability of certain debt under Section 523(a)(6). We REVERSE and REMAND.
All references to " Section" shall be to provisions of the Bankruptcy Code, 11 U.S.C. section 101 et seq., unless otherwise indicated. All references of " Rule" are to the Federal Rules of Bankruptcy Procedure. All references to " FRCP" shall be to the Federal Rules of Civil Procedure.
I. FACTS
On August 14, 2006, the Funks entered into a contract (" Original Agreement") with G.W. Homes that required G.W. Homes to construct three homes (referred to collectively as the " Properties" or individually as " Lot A, " " Lot B" and " Lot C") in Phoenix, Arizona. G.W. Homes began work on the Properties. It did not, however, send a twenty-day preliminary lien notice pursuant to Arizona Revised Statute (" ARS") § 33-992.01. The consequence of this failure was that G.W. Homes did not obtain an enforceable statutory mechanics' and materialmens' lien encumbering the Properties.
Notwithstanding G.W. Homes' failure to send a preliminary notice within twenty days of beginning construction, ARS § 33-992.01 provides that G.W. Homes was not precluded from giving a preliminary notice after expiration of twenty days. ARS § 33-992.01(E). However, G.W. Homes would be entitled to claim a lien only for such labor or professional services furnished within twenty days prior to service of the notice and at any time thereafter. Id .
On September 25, 2006, however, G.W. Homes sent the Funks a letter (" Modification Letter"). The Modification Letter sought to modify the Original Agreement by reducing the cost of construction and granting a second-in-position consensual lien on the Properties in favor of G.W. Homes. Bryan Funk, but not Tina Funk, acknowledged and accepted the modification and lien by placing his initials at the bottom of the Modification Letter as requested by G.W. Homes. Notwithstanding this modification, the Funks never executed and G.W. Homes never filed a deed of trust securing this obligation.
Lot C's sale closed on August 1, 2007, and Lot B's sale closed on September 7, 2007. Prior to the sale of Lots B & C, the Funks' attorney sent correspondence to G.W. Homes indicating that the Funks knew of and acknowledged the existence of the consensual second lien upon the Properties, and that the Funks understood they were to pay G.W. Homes out of the escrow related to the sale of the Properties. As it turned out, however, the Funks did not pay G.W. Homes with the proceeds from the sales. G.W. Homes did not attempt to record and follow its lien on Lots B & C to pursue the purchasers of those lots.
In his Rule 2004 examination, Bryan Funk also admitted that it was his understanding that the Modification Letter created a lien on all the Properties.
The Funks asserted before the bankruptcy court, and on appeal, that they did not pay G.W. Homes the proceeds from the sales because G.W. Homes did not satisfactorily complete construction on Lot A. However, the judgment on appeal is related only to Lots B and C.
On December 30, 2008, the Funks filed a voluntary Chapter 7 petition. On March 31, 2009, G.W. Homes filed an adversary complaint asserting that the debt owed by the Funks related to the Properties was nondischargeable pursuant to Sections 523(a)(2), (4), (6) & (7).
G.W. Homes filed its first motion for partial summary judgment on its Section 523(a)(6) claim on July 23, 2009, arguing that the Funks converted property consisting of the sale proceeds which were subject to an equitable lien in its favor. On September 30, 2009, the bankruptcy court ruled that G.W. Homes was entitled to an equitable lien on the proceeds created by the Modification Letter, and that the Funks converted those proceeds, making the debt owed to G.W. Homes nondischargeable under Section 523(a)(6).
In making its decision that the debt owed to G.W. Homes was nondischargeable, the bankruptcy court relied, in part, on Lockerby v. Sierra, 535 F.3d 1038 (9th Cir. 2008).
On December 24, 2009, G.W. Homes filed a second motion for partial summary judgment on the issue of attorneys' fees related to the debt. The bankruptcy court heard that motion on April 5, 2010. The bankruptcy court also granted this motion for summary judgment. Thereafter, on May 18, 2010, the bankruptcy court issued a final judgment in favor of G.W. Homes in the amount of $115,000.
The Funks timely appealed.
II. JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. § § 1334 and 157(b)(2)(I). This panel has jurisdiction to hear this appeal pursuant to 28 U.S.C. § 158(a)(1).
III. ISSUES
A. Should the panel consider issues raised by the Funks for the first time on appeal?
B. Can an equitable lien ever be the basis of a conversion claim?
C. Is an equitable remedy, such as an equitable lien, only appropriate where there is no adequate remedy available at law?
D. Is the prevailing party in this appeal entitled to attorneys' fees and costs pursuant to ARS § 12-341.01? Related to this point, is G.W. Homes entitled to attorneys' fees and costs as a sanction for bad faith conduct?
IV. STANDARD OF REVIEW
We review the bankruptcy court's grant of summary judgment de novo. Woodworking Enters. v. Baird (In re Baird), 114 B.R. 198, 201 (9th Cir. BAP 1990). The task of an appellate court in reviewing a summary judgment is the same as a trial court under FRCP 56. Id . Thus, " [v]iewing the evidence in the light most favorable to the non-moving party, the appellate court must determine whether the bankruptcy court correctly found that there was no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law." Id . (citing FRCP 56(c)).
V. DISCUSSION
A. The panel will consider whether an equitable lien can serve as the basis for a conversion claim, and whether a court can provide an equitable remedy where there is an adequate statutory remedy, even though those issues are raised for the first time on appeal
The Funks raise two issues on appeal. First, the Funks assert that the panel should reverse the bankruptcy court's judgment because an equitable lien can never serve as the basis of a conversion claim. Second, the Funks assert that reversal is appropriate on the basis that a court cannot provide an equitable remedy where there is an adequate remedy at law. G.W. Homes contends, however, that the panel should not consider the issues raised by the Funks as those issues were not raised before the bankruptcy court.
Generally, a federal appellate court will not consider an issue raised for the first time on appeal. United States v. Patrin, 575 F.2d 708, 712 (9th Cir. 1978) (citing Singleton v. Wulff, 428 U.S. 106, 120, 96 S.Ct. 2868, 2877, 49 L.Ed.2d 826 (1976)). However, like most rules of law, this general rule is subject to exceptions. Specifically, " [t]hree exceptions to this rule exist: (1) in an 'exceptional' case when review is necessary to prevent a miscarriage of justice or to preserve the integrity of the judicial process, (2) when a new issue arises while appeal is pending because of a change in law, or (3) when the issue is purely one of law and the necessary facts are fully developed." Romain v. Shear, 799 F.2d 1416, 1419 (9th Cir. 1986).
With regard to the third exception, the " principle underlying this exception is that the party against whom the issue is raised must not be prejudiced by it." Patrin, 575 F.2d at 712; See also United States v. Shaltry (In re Home Am. T.V.- Appliance Audio, Inc.), 232 F.3d 1046, 1052 (9th Cir. 2000). For instance, a court should not consider an issue raised for the first time on appeal if the party against whom the issue is raised " might have tried his case differently either by developing new facts in response to or advancing distinct legal arguments against the issue." Id .
1. The issues raised by the Funks here on appeal were not raised before the bankruptcy court
The Funks initially contend that they did assert before the bankruptcy court that an equitable lien cannot serve as the basis for a conversion claim. Specifically, the Funks contend, in their Reply Brief before this Panel, that " [t]he [Funks] argued below that [G.W. Homes] is merely an unsecured creditor; which is another way of stating that [G.W. Homes] had no legal lien in the subject real estate or its proceeds; which is also another way of saying an 'equitable lien' does not create a sufficient legal right to support the tort of conversion."
It is apparent that the reference to G.W. Homes as an unsecured creditor was premised on the Funks' belief that the bankruptcy court should not imply an equitable lien in favor of G.W. Homes due to G.W. Homes' alleged unclean hands with regard to the improvements on Lot A. This is a different argument than arguing that an otherwise unsecured creditor cannot assert an equitable lien. If the Funks meant to argue that an equitable lien could not serve as the basis for a conversion claim, the Funks would have specifically argued such and provided the bankruptcy court with case law that supports such an assertion. Although the case law the Funks cite on appeal was not difficult to locate, the Funks failed to provide it to the bankruptcy court. As such, the only reasonable conclusion is that the Funks have first raised the issue that an equitable lien cannot serve as the basis for a conversion claim here on appeal.
For instance, in the Funks' Response in Opposition to G.W. Homes' Motion for Partial Summary Judgment, the Funks sets forth, " [i]t is an (sic) historical legal maxim that one who seeks equity must do equity."
Second, the Funks assert that they proffered to the bankruptcy court the argument that an equitable lien is only appropriate when there is no adequate remedy at law. In particular, the Funks suggest that they asserted such when they argued that G.W. Homes failed to protect its interest with any of a number of available remedies at law, such as a mechanics' and materialmens' statutory lien. However, the Funks' assertion is not convincing.
If the Funks raised before the bankruptcy court the issue that a court should not provide an equitable remedy when there is an adequate remedy at law, one would think that the Funks surely could point to a specific passage in the record or to an instance where they cited an applicable case. But the Funks have not, and the record shows that the Funks cannot. We thus reject the contention that the issue was raised before the bankruptcy court.
The panel must next determine whether there is an applicable exception to the general rule that an appellate court should not consider issues raised for the first time on appeal.
2. As the new issues raised on appeal are purely matters of law that do not depend on the record, the panel will consider the new issues raised for the first time on appeal because G.W. Homes will not be prejudiced
In this case, the first two exceptions to the bar against raising issues for the first time on appeal do not apply. The only applicable exception would seem to be the third exception, which allows a court to consider new issues raised on appeal when the issue is purely a matter of law and does not depend on the factual record.
The issues the Funks raise here are purely matters of law and the record is adequately developed. That said, according to Patrin, 575 F.2d at 712, and Home America, 232 F.3d at 1052, the panel should only consider issues raised for the first time on appeal under this exception where the party against whom the issue is raised will not be prejudiced.
G.W. Homes suggests that it will be prejudiced if the panel considers the Funks' new arguments. In particular, G.W. Homes suggests that it would not have agreed to allow a final judgment to be entered regarding its Section 523(a)(6) claim as it would have gone to trial on its other nondischargeability claims under Section 523(a)(2), (4) and (7). Additionally, G.W. Homes asserts that it would have raised distinct legal arguments against the new issues raised on appeal similar to those it asserted in its brief before this panel. G.W. Homes' assertions are not persuasive.
The fact that G.W. Homes stipulated to the entry of a final judgment on its Section 523(a)(6) claim will not prejudice G.W. Homes. Specifically, reversal of the bankruptcy court's summary judgment order will allow the bankruptcy court to retain jurisdiction over all matters legitimately raised in the original complaint; it restores the case to where it had been before entry of judgment. Thus, G.W. Homes would be able to pursue each of its additional nondischargeability claims against the Funks. Moreover, although G.W. Homes maintains that, had the Funks raised the arguments they raise on appeal before the bankruptcy court, it would have raised distinct legal arguments and developed additional facts, G.W. Homes failed to specifically articulate what legal arguments it would have raised and what facts it could have developed. As such, it appears that any prejudice is minimal -- confined to the actions related to this appeal -- and the Panel will consider the two legal issues raised by the Funks on appeal.
B. The bankruptcy court did not err in finding that an equitable lien can serve as the basis of a conversion claim under Arizona law
The Funks ask this panel to reverse the bankruptcy court's judgment on the grounds that an equitable lien cannot serve as the basis of a conversion claim. " It is a fundamental bankruptcy concept that property rights are to be determined pursuant to state law." Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). As such, to determine the validity, nature and effect of a lien courts must look to state law. In re S. Cal. Plastics, 165 F.3d 1243, 1248 (9th Cir. 1999).
Under Arizona law, an equitable lien can arise from " an express contract where the parties indicate an intent to charge or appropriate particular property as security for an obligation." Kalmanoff v. Weitz, 8 Ariz.App. 171, 172, 444 P.2d 728, 729 (Ariz.Ct.App. 1968). According to Wolfswinkel v. Super. Ct., 145 Ariz. 154, 700 P.2d 852 (Ariz.Ct.App. 1984):
An equitable lien is a right over property constituting an encumbrance, so that the property itself may be proceeded against in an equitable action and either sold or sequestered upon proof of a contract out of which the lien could grow or of a duty on the part of the holder so as to give the other party a charge or lien on it.
145 Ariz. at 156, 700 P.2d at 854. An equitable lien " is merely floating equity until the time that a judgment or decree is rendered actually subjecting the property to the payment of the debt or claim." Id.
Arizona law defines the tort of conversion " [a]s an act of wrongful dominion or control over personal property in denial of or inconsistent with the rights of another." Warfield v. Gardner, 346 F.Supp.2d 1033, 1045 (D. Ariz. 2004) (citing Case Corp. v. Gehrke, 208 Ariz. 140, 143, 91 P.3d 362, 365 (Ariz.Ct.App. 2004). " To maintain an action for conversion, a plaintiff must have had the right to immediate possession of the personal property at the time of the alleged conversion." Gehrke, 208 Ariz. at 143, 91 P.3d at 365 (citing Sears Consumer Fin. Corp. v. Thunderbird Prods., 166 Ariz. 333, 335, 802 P.2d 1032, 1034 (Ariz.Ct.App. 1990); Empire Fire & Marine Ins. Co. v. First Nat'l Bank of Ariz., 26 Ariz.App. 157, 159, 546 P.2d 1166, 1168 (App. 1976)). Key to this analysis is that, absent a present possessory right over the personal property, no cause of action for conversion may lie. 208 Ariz at 145, 91 P.3d at 367. Consequently, to determine whether an equitable lien can ever serve as the basis of a conversion claim, the panel must determine if the equitable lien here constituted a present possessory right over the sales proceeds.
Here, the bankruptcy court found that the September 25, 2006 Modification Letter created an equitable lien by agreement. While the bankruptcy court acknowledged that an equitable lien implied to rectify inequitable conduct attaches to property only when the lien is declared in a judgment or decree, the bankruptcy court asserted that an equitable lien created by agreement attaches at the time of formation of the agreement creating the lien. In support of its position, the bankruptcy court cited In re Farnsworth, 384 B.R. 842 (Bankr. D. Ariz. 2008).
Farnsworth held that where an express agreement indicates an intent to charge or appropriate particular property as security for an obligation " courts will likely order the lien to relate back to the time of the agreement." 384 B.R. at 850 (citing In re Aumiller, 168 B.R. 811, 821 (Bankr. D. Col. 1994) (" An equitable lien, although not judicially recognized until judgment is rendered declaring its existence, relates back to the time it was created by the conduct of the parties")). Farnsworth relied on Aumiller, which cited to Illinois and California state law to support the " relate back" proposition, and Arizona state law appears to be in accord.
For example, while in Wolfswinkel, 145 Ariz. at 156, 700 P.2d at 854, the court described an equitable lien as " a mere floating equity until the time a judgment or decree is rendered, " the court did not foreclose the ability of a court to relate back to the date of the agreement the lien's effective date if equity so demands. In fact, according to American Jurisprudence 2d, while " [a]n equitable lien is a mere floating equity until a judgment or decree subjecting the property to the payment of the debt or claim is rendered, once the judgment is entered, the lien relates back to the time it was created by the conduct of the parties." 51 Am. Jur. 2d Liens § 32 (2010)(footnote omitted).
Additionally, Aumiller set forth reasoning similar to that of the Supreme Court of Arizona when the Supreme Court of Arizona was hearing a case as a court of equity. Specifically, in Stephen v. Patterson, 21 Ariz. 308, 188 P. 131 (Ariz. 1920), the court set forth:
The form or particular nature of the agreement which shall create a lien is not very material, for equity looks at the final intent and purpose rather than at the form, and if the intent appears to give, or to charge, or to pledge, property real or personal, as a security for an obligation, . . . the lien follows.
21 Ariz. at 311, 188 P. at 132. Similarly, in Aumiller, based upon the equitable maxim that " equity regards as done that which a party has agreed to do, " the court held that the equitable lien attached at the time the party promised by agreement to give a lien upon demand. 168 B.R. at 821. Consequently, regardless of whether a court sits in equity in California, Illinois or Arizona, the intent of the parties is dispositive in determining when an equitable lien attaches.
See also Nunez v. Nunez (In re Nunez), 196 B.R. 150, 153 & n.1 (9th Cir. BAP 1996) (holding that where an equitable lien is created either by an express agreement or by the conduct of the parties, equity requires that the lien relate back to when the implied agreement took place).
Thus, the bankruptcy court appropriately held that, as the equitable lien was created by agreement, the equitable lien ordered by the bankruptcy court on September 29, 2009, related back to September 25, 2006. As the equitable lien attached to the proceeds on September 25, 2006, when the sale of Lot C closed on August 1, 2007, and the sale of Lot B closed on September 7, 2007, G.W. Homes at the time of each closing had a present possessory right in the proceeds of the sales. Accordingly, there is no analytical error in holding that any equitable lien would have arisen upon each closing. The error, unfortunately, was holding that equitable liens arose in the first place.
Under ARS § 47-9315, a security interest in personal property also attaches to the identifiable proceeds of the collateral. However, security interests in real property are governed by common law, not by Article Nine of the Uniform Commercial Code. According to the Restatement (First) of Restitution " [w]here the equitable lien is upon other property the court will ordinarily decree that unless the holder of the property pays the amount of the lien the property be sold and out of the proceeds the amount of the lien be paid." Restatement (First) of Restitution § 161, cmt. b (1937). Moreover, although Arizona law has not specifically recognized that an equitable lien on real property attaches to the proceeds of the real property, the equitable maxims discussed herein and adopted by Arizona courts dictate that it is the intent of the parties that should guide any determination of whether an equitable lien on real property also attaches to identifiable proceeds.
C. The bankruptcy court erred in implying an equitable lien where adequate remedies were available
The Funks maintain that this panel should reverse the bankruptcy court's judgment because an equitable remedy, such as an equitable lien, is only appropriate when there is no adequate remedy at law. In Arizona, " [w]here a statutory right is given, with a statutory remedy provided to enforce that right, the parties to whom the right is given are limited to the remedy provided by statute." Nat'l. Sur. Co. v. Conway, 43 Ariz. 480, 487, 33 P.2d 276, 278-79 (Ariz. 1933). But where there is a statutory right that provides no specific method of enforcement, " [t]he parties may resort to such remedies as are provided by the general principles of law." Id . The Supreme Court of Arizona provided in Sparks v. Douglas & Sparks Realty Co.:
A court of equity will strive to get at the intention or general design of the legislature, even though it be against the strictness of its letter; but when the statute is perfectly clear and has determined the matter with all its circumstances, equity cannot intermeddle to supply a supposed deficiency of those things which are required.
This would be a determination of what the law ought to be, not what it is, and such a determination must necessarily depend upon views to be varied and fluctuating according to the personal capacity or sense of right and justice possessed by the individual judge. Such is a function of the law-making power, not of the courts.
19 Ariz. 123, 129, 166 P. 285, 288 (Ariz. 1917).
Here, the Funks contend that the mechanics' and materialmens' statutory lien provisions preclude assertion of an equitable lien. Under ARS § 33-981, a licensed contractor who labors or furnishes professional services, materials, machinery, fixtures or tools in the construction of any building, or other structure or improvement, shall have a lien on such building, structure or improvement. ARS § 33-981(A) & (C) (2011). While some states only provide mechanics' and materialmens' liens to parties that do not have privity of contract with the owner of the property, Arizona's mechanics' and materialmens' lien statute does not make that distinction.
Specifically, ARS § 33-981 provides in pertinent part:
[e]very person who labors or furnishes professional services, materials . . . shall have a lien on such building, structure or improvement . . . whether the work was done or the articles were furnished at the instance of the owner of the building, structure or improvement, or his agent .
ARS § 33-981 (italics added). In fact, when the property is an owner-occupied dwelling, only a party in privity of contract with the owner of the property can obtain a mechanics' and materialmens' lien under Arizona law. In particular, when the subject property is an owner-occupied dwelling:
[n]o lien provided for in [ARS § 33.981] shall be allowed or recorded by the person claiming a lien against the dwelling of a person who became an owner-occupant prior to the construction, alteration, repair or improvement, except by a person having executed in writing a contract directly with the owner-occupant .
ARS § 33-1002(B) (italics added).
Moreover, prior to an amendment of ARS § 33-993, it was clear that an " original contractor" could obtain and perfect a mechanics' and materialmens' lien even though it had privity of contract with the owner of the subject property. ARS § 33-993 provided that " [i]n order to impress and secure the lien provided for in the article, every original contractor, within ninety days, and every other person claiming the benefits of this article, within sixty days . . . shall [take certain steps to perfect their lien]." Ray Suiter & Son Constr. Co. v. Allied Contract Buyers, 13 Ariz.App. 318, 319, 476 P.2d 524, 525 (Ariz.Ct.App. 1970). After amendment to ARS § 33-993, the Arizona Legislature simply provided one hundred twenty days after completion, or sixty days if a completion notice was recorded, for " every person claiming the benefits of [ARS § 33-981]" to perfect their lien.
Of course, to impress, secure and perfect a mechanics' or materialmens' lien, the party claiming the lien must, among other things, provide notice of the purported lien, ARS § § 33-992.01 & 33.992.02, and record the lien with the county recorder of the county in which the property or some part of the property is located pursuant to ARS § 33-993. " The purpose of the requirement of ARS § 33-993 is to give the property owner an opportunity to protect himself and time to investigate the claim to determine whether it is a proper charge." Lewis v. Midway Lumber, 114 Ariz. 426, 431, 561 P.2d 750, 755 (Ariz.Ct.App. 1977).
Mechanics' and materialmens' liens as provided by ARS § § 33-981 through 33-1008 " [a]re preferred to all liens, mortgages or other encumbrances upon the property attaching subsequent to the time the labor was commenced or the materials were commenced to be furnished" subject to narrow exceptions. ARS § 33-992(A). Mechanics' and materialmens' liens are also preferred to all liens, mortgages and other encumbrances of which the lienholder had no actual or constructive notice at the time the lienholder commenced labor or began furnishing materials. Id . Upon judgment of foreclosure and order of sale, a mechanics' or materialmens' lien may be satisfied by sale of the property. ARS § 33-997. Consequently, the Funks assert that the equitable maxim that a court should not provide an equitable remedy where there is an adequate remedy at law mandates reversal of the bankruptcy court's judgment.
To further support their assertion, the Funks discuss Hunnicutt Constr. v. Stewart Title & Trust, 187 Ariz. 301, 928 P.2d 725 (Ariz.Ct.App. 1996). In Hunnicutt, the court set forth the proposition that, " [w]here a legal remedy such as a statutory lien exists, but has not been utilized, a claimant should not be permitted to substitute an equitable remedy." 187 Ariz. at 304-05, 928 P.2d at 728-29 (citing Valley Drive-In Theatre Corp. v. Super. Ct., 79 Ariz. 396, 400, 291 P.2d 213, 215 (1955); Lewis, 114 Ariz. at 432, 561 P.2d at 756). That said, the court's ruling in Hunnicutt was not necessarily based upon that proposition and the court did not expressly void the equitable lien that the lower court implied.
More specifically, in Hunnicutt, Hunnicutt Construction (" Hunnicutt") entered into an agreement with Ultra Membrane International (" Ultra") to construct a warehouse and office facilities on property owed by Ultra . 187 Ariz. at 302, 928 P.2d at 726. Although Hunnicutt finished the project, Ultra was unable to pay the balance due under the agreement. Id . In return for Ultra's promise to borrow money to pay Hunnicutt, Ultra convinced Hunnicutt to refrain from recording a mechanics' lien on the property. 187 Ariz. at 302-03, 928 P.2d at 726-27.
Commonwealth Mortgage Company (" Commonwealth") came to an agreement with Ultra to refinance Ultra's debt and to provide Ultra with working capital " in return for a promissory note secured by a first position deed of trust on Ultra's improved real property." 187 Ariz. at 303, 928 P.2d at 727. Nevertheless, Ultra refused to pay Hunnicutt upon close of the loan transaction with Commonwealth. Id . Shortly thereafter, Commonwealth, with no knowledge of the understanding between Ultra and Hunnicutt or of any claim by Hunnicutt against the property, recorded its deed of trust. Id .
Consequently, Hunnicutt filed an action against Ultra, alleging that Hunnicutt had an equitable lien on the property due to fraud with priority over all other liens and sought to impose a constructive trust on the property dating back to the time Hunicutt entered into the original agreement with Ultra. Id . An order was entered on the fraud claim granting Hunnicutt an award for the total amount owed to Hunnicutt. Id . The order imposed a first lien constructive trust in the amount owed to Hunnicutt on Ultra's property relating back to the date the original agreement was entered into and provided that the constructive trust must be considered prior in right and time to all other liens on the real property including Commonwealth's. Id . Before Hunnicutt obtained its judgment, Commonwealth assigned its interest in the note and deed of trust to Stewart Title & Trust (" Trust") with Commonwealth as beneficiary. Id . The Trust noticed a trustee's sale and was the successful bidder at the sale. Id .
After obtaining and recording its judgment, Hunnicutt sought to foreclose on the property. Id . The Trust was allowed to intervene in the foreclosure action. Id . On the Trust's motion for summary judgement, the trial court ruled that Hunnicutt had no judgment of constructive trust with priority over Commonwealth, Hunnicutt's constructive trust was junior to Commonwealth's claim and thus extinguished by the trustee's sale, and Commonwealth was entitled to judgment of quiet title against Hunnicutt. 187 Ariz. at 303-04, 928 P.2d at 727-28. Hunnicutt appealed. 187 Ariz. at 304, 928 P.2d at 728.
On appeal, the court sought to determine " [w]hether an equitable, unrecorded constructive trust on real property, arising from a party's having been fraudulently induced to furnish material and labor for improvements on the property, has priority over a bona fide purchaser[']s . . . subsequent recorded deed of trust on the property." 187 Ariz. at 302, 928 P.2d at 726. While the court recognized that a court should not substitute an equitable remedy where a legal remedy such as a statutory lien exists because " [i]t would allow a contractor who fails to comply with the mechanics' or materialman's lien statutes to nonetheless obtain and prioritize a lien, " the court did not expressly invalidate Hunnicutt's equitable lien. 187 Ariz. at 305, 928 P.2d at 729. Instead, the court held that " [t]he recorded interest of a BFP . . . has priority over an unrecorded equitable lien which could have been obtained under Arizona's mechanics' and materialman's lien statutes" because " 'a bona fide purchaser's rights have always been held superior to prior equitable interests. . . .'" Id . (quoting Osin v. Johnson, 243 F.2d 653, 657, 100 U.S.App.D.C. 230 (D.C. Cir. 1957)).
G.W. Homes argues that, because the Hunnicutt court did not expressly invalidate the equitable lien, the assertion that the mere existence of the statutory mechanics' lien precludes imposition of an equitable lien is not supported by Hunnicutt. However, the Hunnicutt court set forth, " [w]e agree with the Trust that where a legal remedy such as a statutory lien exists, but has not been utilized, a claimant should not be permitted to substitute an equitable remedy." 187 Ariz at 304-05, 928 P.2d at 728-29. The court simply found other grounds asserted by the Trust more persuasive and applicable to the case before it.
The Funks additionally cite to Valley Drive-in. In Valley Drive-in, the Arizona Supreme Court held that " [w]hen a statute creates a right and also provides a complete and valid remedy for the right created, the remedy thereby given is exclusive." 79 Ariz. at 400, 291 P.2d at 215. More specifically, in Valley Drive-in, the lower court disregarded an Arizona Statute that required a defendant in a replevin action to post a bond equal to double the value of the property to remain in possession of the property where the plaintiff in the litigation posted a bond to obtain possession of the property. 79 Ariz. at 398-99, 291 P.2d at 214. The lower court disregarded the statute by issuing an injunction, based on equity, that allowed the defendant to retain possession of the property upon posting a $100 bond instead of the required $80,000. Id . However, on appeal, the court issued a peremptory writ of prohibition preventing the lower court from enforcing the injunction on the basis that the lower court exceeded its equitable powers by " restrict[ing] the plaintiff's clear statutory right to take possession of the property [under the statute], and thereby enlarg[ing] the defendant's statutory right to repossess the property without requiring compliance with the clear provisions of [the statute]." 79 Ariz. at 400, 291 P.2d at 215.
Lastly, the Funks cite to Lewis. In Lewis, several contractors provided services and materials in making improvements on real property. 114 Ariz. at 428, 561 P.2d at 752. The dispute in Lewis was between several of those contractors who all purportedly obtained mechanics' and materialmens' liens and a mortgagee regarding priority. Id .
Several of the alleged lienholders suggested that, even though they failed to comply with the perfection requirements as set forth in ARS § 33-993, the court should hold that their liens were valid because their failure to abide by the statute was not prejudicial. 114 Ariz. at 432, 561 P.2d at 756. The court did not agree. Id . In particular, the court held that:
If the default or neglect is material to the perfection of a lien, it is beyond the remedial scope of equity, in the exercise of its usual powers, to protect the lien claimant against the untoward consequences of what may be and probably was his own neglect. The courts cannot read into either the statutes or the claim of lien what is not there, or take from either what is there. If the courts may say that the record owner need not be served, then with equal reason they may hold that any other requisite of the statute need not be observed and followed. We do not perceive this to be the law.
Id . Therefore, the court found that the contractor and mortgagee who properly recorded their interests had priority over those that did not fully comply with the statute. Id .
Here, G.W. Homes is a licenced contractor that did not perfect a mechanics' and materialmens' lien. G.W. Homes has provided no argument or excuse as to why it did not do so. A review of the mechanics' and materialmens' lien statute reveals no reason why G.W. Homes could not have perfected such a lien.
The mechanics' and materialmens' lien statutes provide an adequate remedy which ensures that contractors like G.W. Homes get paid for the services and materials they provide, but also sets forth a process so that owners like the Funks can ensure that the work they contract for is properly completed and that they get what they are paying for. See Columbia Group, Inc. v. Homeowners Ass'n, 151 Ariz. 299, 727 P.2d 352 (Ct. App. 1986). As such, after review of the applicable statutes, it appears that the Arizona legislature has provided adequate rights and remedies for G.W. Homes such that resort to equitable remedies are not necessary to remedy any wrong.
In addition to the statutory right to a mechanics' and materialmens' lien, G.W. Homes possessed other remedies at law to protect its interests. In particular, G.W. Homes had a contractual right pursuant to the Modification Letter to obtain a deed of trust. It did not do so. Further, as G.W. Homes' equitable lien ran with the Properties, G.W. Homes could have pursued the purchasers of the Properties. Again, it did not do so. As G.W. Homes failed to utilize any of the avenues available to protect its interest, it is difficult to see how it can claim the court should invoke equity to cure its lack of diligence.
Consequently, the Funks' argument that a court cannot provide an equitable remedy where there is an adequate remedy at law is persuasive based on the Arizona cases cited by the Funks as well as secondary sources. For instance, according to Corpus Juris Secundum, " [w]hile equity has the power to pierce rigid statutory rules to prevent injustice, where substantial justice can be accomplished by following the law, and the parties' actions are clearly governed by rules of law, equity follows the law . . . [and] courts of equity cannot modify or ignore an unambiguous statutory principle in an effort to shape relief." 30A C.J.S. Equity § 128 (2010). Therefore, the bankruptcy court erred in implying an equitable lien where G.W. Homes failed to exercise its statutory right to obtain a mechanics' and materialmens' lien, its contractual right to obtain a deed of trust, as well as its right to record its lien and pursue the purchasers of the Properties.
D. The award of attorneys' fees and costs by the bankruptcy court to G.W. Homes is vacated, an award of attorneys' fees in favor of the Funks for this appeal is appropriate, but the panel remands to the bankruptcy court the determination of reasonable attorneys' fees for this appeal
" It is the filing of a notice of appeal that invokes our jurisdiction and establishes the issues to be addressed." Culinary & Serv. Employees Union, Local 555 v. Hawaii Employee Ben. Admin., Inc., 688 F.2d 1228, 1232 (9th Cir. 1982). In this matter, the bankruptcy court awarded attorneys' fees and costs to G.W. Homes on April 6, 2010. The Funks' notice of appeal indicated that the Funks appealed the May 18, 2010 judgment, which incorporated both the September 29, 2009 minute order related to the first motion for partial summary judgment, as well as the April 6, 2010 minute order related to the second motion for partial summary judgment on attorneys' fees and costs. Additionally, the Funks' statement of issues filed with the bankruptcy court asserted a challenge to the award of attorneys' fees and costs in favor of G.W. Homes. As the award of attorneys' fees and costs was entered because G.W. Homes was the prevailing party, that award is vacated because G.W. Homes is no longer the prevailing party.
Moreover, G.W. Homes and the Funks request attorneys' fees and costs for this appeal pursuant to ARS § 12-341.01. Arizona law provides that " [i]n any contested action arising out of a contract, express or implied, the court may award the successful party reasonable attorney fees." ARS § 12-341.01. Under this statute, " the prevailing party is also entitled to fees on appeal." In re Holiday Mobile Home Resorts, 803 F.2d 977, 979 (9th Cir. 1986) (citing Wenk v. Horizon Moving and Storage Co., 131 Ariz. 131, 133, 639 P.2d 321, 323 (Ariz. 1982)).
When exercising discretion to award fees, courts are to consider six pertinent factors: (1) the merits of the claim or defense presented by the unsuccessful party, (2) the novelty of the legal question presented and whether such a claim has previously been decided in the jurisdiction, (3) whether the successful party prevailed with respect to all claims, (4) whether an award of fees would discourage other parties with tenable claims from litigating legitimate contract issues, (5) whether litigation could have been avoided so that successful party's efforts were superfluous, and (6) whether awarding fees would impose an extreme hardship on the unsuccessful party. Associated Indem. Corp. v. Warner, 143 Ariz. 567, 570, 694 P.2d 1181, 1184 (Ariz. 1985).
After considering the above factors, the Funks attorneys' fees for this appeal are appropriate under Arizona law. In recognition of the bankruptcy court's essential competency in this area and its familiarity with the parties, however, we remand to the bankruptcy court the specific determination of the amount of attorneys' fees to be awarded to the Funks. Such fees should be awarded consistent with the above enumerated factors.
Lastly, G.W. Homes requests attorneys' fees and costs on the basis that the Funks brought this appeal in bad faith. An award on that basis is not appropriate because the Funks prevailed on this appeal. Although the Funks raise arguments on appeal that were not raised before the bankruptcy court, an exception to the general rule regarding arguments raised for the first time on appeal is applicable. For those reasons, bringing this appeal was not in bad faith and certainly not like that of the party against whom attorneys' fees and costs were awarded in FEC v. Toledano, 317 F.3d 939, 953 (9th Cir. 2002), in which the party against whom attorneys' fees and costs were awarded was told by the lower court that the claims were clearly frivolous.
VI. CONCLUSION
For the reasons set forth herein, the judgment of the bankruptcy court in favor of G.W. Homes is REVERSED. Accordingly, the bankruptcy court's award of attorneys' fees and costs in favor of G.W. Homes is VACATED. The panel REMANDS to the bankruptcy court the determination of reasonable attorneys' fees for this appeal under ARS § 12-341.01.
Section 523(a)(6) provides that " [a] discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt . . . for willful and malicious injury by the debtor to another entity or to the property of another entity."
Here, the bankruptcy court found that the equitable lien held by G.W. Homes attached to the proceeds of Lots B and C as the court found that the Funks converted G.W. Homes' equitable interest when they failed to pay G.W. Homes from the proceeds of those sales. Such a finding was supported by the record as the Funks acknowledged in the letter sent to G.W. Homes by their attorney that they knew the equitable lien was to be satisfied from the proceeds held in escrow from the sales of Lots B and C.