Mechanics’ liens (which include for purposes of discussion here those filed by mechanics, materials suppliers and those who provide professional services to landowners such as surveyors, civil engineers, land planners and architects) afford as nasty a chokehold as there is on a real property owner. Under Arizona law, a mechanics’ lien has priority over all encumbrances, including loans, arising after commencement of any work performed on a parcel (except for the lien of real property taxes, but foreclosure on tax liens isn’t an immediacy issue, so it’s not nearly as pernicious). Even if the landowner files bankruptcy, there is no relief from the force of the mechanics’ lien, so long as perfection is properly achieved after the date the bankruptcy petition is filed; that perfected lien is exempt from the effect of the automatic stay under Bankruptcy Code §363, see In re Designer Doors, Inc., 389 B.R. 832, 2008 WL 2445090 (Bkrtcy.D.Ariz. 2008).
This post is not to regurgitate suitable summaries of Arizona mechanic’s lien laws; a particularly fine outline is by Michael Ripp, Esq. found at this address on the Internet: http://www.rcalaw.com/Publications/Lending. Instead, my intent is to provide a property owner with a few, hopefully useful, tips on how to limit the leverage of the would-be lien filing party (call it the “lienor” here) in asserting a right to be paid via the mechanics’ lien statutes. Most owners become aware that many contractors use a “service” (an independent contractor) to prepare both the preliminary 20-day notice and the Notice and Claim of Lien, which is filed in the County Recorder’s Office in the county where the land is located. Many of these contractors offer very average to below-average service, since the principals or employees are in the habit of filling out a form but not researching the facts carefully; particularly egregious (and frequent) are these failings:
• Failure correctly to identify the Owner; often the services mistake the requirement of naming the “reputed” owner and doing so incorrectly (such as by identifying an officer or manager instead of the entity actually owning the land)
• Failure correctly to identify the parcel; often the services make one or more of these mistakes:
–incorrect statement of the legal description in the public records, or
–incorrect statement of the Assessor’s Parcel Number (a common error is to identify an old APN, meaning a larger lot pre-split that resulted in the creation of the subject (newer) parcel), or
–incorrect street address
• Garbling the name of the general contractor (or identifying a corporation by the name of its principal) or identifying a contractor subsidiary or a trade name instead of the legal name of the general contractor
• Significantly late service of the 20-day notice on the owner or general contractor
Understand, please, that perfection is not required in filling out these notices. Because the mechanics’ lien statutes are to be remedial in purpose, equity requires that substantial compliance with the statutory requirements be sufficient. However, in the decision of Lewis v. Midway Lumber, Inc., 114 Ariz. 426, 431, 561 P.2d 750, 755 (App. 1977) Arizona’s Court of Appeals held that where the defect in recording or some other step in perfecting a lien “is material to the perfection of a lien, it is beyond the remedial scope of equity . . . to protect the lien claimant against the untoward consequences of what may be and probably was his own neglect.” 114 Ariz. at 432, 561 P.2d at 756. So, the mechanic doesn’t get a complete “pass” on any error, no matter how egregious or easily correctable it [they] may have been. Indeed, the statutes provide for one specific mistake in 20-day notice filing that requires a “do-over”; that’s when the contractor’s initial estimate of the amount due from the owner is less than the amount claimed under the lien statutes by more than 20%. In such a case, the contractor is obligated, in order to avail itself of the lien statute remedies, to re-notice the owner and add the excess amount. A.R.S. §33-992.01(G).
The owner must respond to an information request from a party desiring to file a preliminary 20-day notice by sending information to the potential future lienor under part I. of §33-992.01. This has me wondering what would happen if an owner reviewed every preliminary 20-day notice served on him and sent out a notice enumerating errors to the contractor. I’m curious to know how the outcome of a foreclosure-of-lien suit would be affected if the owner timely identified all mistakes contained in a 20-day notice and mailed a “notice of correction” to the mechanic. What if the mechanic received such an owner’s notice but [in all likelihood]:
1. Doesn’t read the writing and cause any corrections to be made, or
2. Gives the writing to the hired filing service, which (a) ignores the corrections noted by the contractor, or (b) miscopies them or (c) forgets to re-notice/re-serve the Owner, or
3. Makes certain corrections to the notice but files the corrected notice long after the contractor’s work is completed on the project.
The answer to this “what if” hypothetical involving the mechanic’s neglect is suggested by the text of part J. of the statute: “If the [right] information is received by the claimant after the claimant has given a preliminary twenty day notice and the information contained in the preliminary twenty day notice is inaccurate, the claimant shall, within thirty days of the receipt of this information, give an amended preliminary twenty day notice in the manner provided in this section. An amended preliminary twenty day notice shall be considered as having been given at the same time as the original preliminary twenty day notice, except that the amended preliminary twenty day notice shall be effective only as to work performed, materials supplied or professional services rendered twenty days prior to the date of the amended preliminary twenty day notice or the date the original preliminary twenty day notice was given to the owner, whichever occurs first.”
Unfortunately, I can’t find an Arizona case that supports the theory that volunteered, accurate information forwarded by the owner, if the mechanic or its independent contractor (filer) fails to file an amended 20-day notice responsive to the corrections, imperils the availability of the mechanic’s statutory relief—or to limit the lienor’s relief to some lesser amount than that claimed in the notice. The problem is that I cannot tell if part J. only applies if a request for information was made by a contractor under part I.
At the stage of recording the Notice and Claim of Lien (NCL), the lienor oddly is given more slack under Arizona case law as to the contents of the notice. The owner’s identity in the NCL doesn’t have to be correct, as long as there’s some evidence that the lienor checked some public records and the statement of the “reputed owner” is the result of the research effort. The legal description doesn’t have to be very accurate, as long as someone can figure out where the job site is from the description provided in the NCL. The scope of work can be fairly generic, and it appears that if work is done on several adjoining lots, a reference to some of the lots is sufficient. Even if the demand for payment is not allocated among several lots, if all of them are owned by the owner identified in the NCL, that’s close enough. Obviously, Arizona’s case law indicates that the owner’s preferred point of attack is action taken at the time of the 20-day preliminary notice’s service, if the owner’s contention is that this notice, if not corrected and re-served with accurate facts provided to the contractor, is fatally defective.
In the filing of the Notice and Claim of Lien, one common error is the failure to attach a copy of the complete contract and the 20-day notice. This invalidates the NCL under the text of the statute, which means it has to be re-recorded—and remember, recording has to occur within 120 days of the substantial completion of the project in question if the lien statutes are to be available to the would-be lienor. (If an owner records a notice of substantial completion, this period is reduced to 90 days.) But once again, Arizona’s appellate courts interpreting the statutory provision–at least once—have given relief on the theory of “close enough” to a lienor if the principal terms of the contract are incorporated into the body of the NCL and only the “fine print” terms are lacking. There is no case law describing what outcome results if several of the principal terms are not explicit in the NCL and the lienor does not attach to the recorded document the construction/services contract.
Other frequent errors occur when the contractor attempts to serve a copy of the lien on the tenant and/or owner. Assuming the owner of the property to be a partnership, trust or individual, the lien must be personally served on such entity or persons, and there are strict requirements set forth in the statutes governing such service. This service must be completed within 30 days after the lien has been filed. Proof of such service must be filed within 35 days after service has been accomplished. The contractor’s failure to comply with these strict time frames and service requirements will cause him to lose his lien, but likely this becomes the outcome only after the complaint is filed by the lienor, and owner’s counsel brings such errors to the court’s attention.
It’s a bonanza to the owner when the lienor, or its lien-filing service, serves the 20-day notice late in the performance of the contractor’s work; the statutes provide that lien rights for labor performed or materials provided only relate back 20 days from the date of the service. Once, I reviewed a preliminary 20-day notice that was served on the owner about 30 days after the last day on which the liening contractor had worked on the owner’s project. Game, set and match to owner.
The inability of the wannabe lienor to avail itself of the mechanics’ lien statutes eliminates the leverage of having a NCL in the public records at the very time the owner is attempting to sell or refinance its project. So, the optimal counseling advice includes (1) to scrutinize promptly the 20-day notice or the NCL if either is forwarded to you by the owner or the notice-preparation service, (2) to suggest sending a notice of errors and corrections to the contractor in the hope that it will not be addressed in a timely manner–or at all, (3) to recommend to the owner that he or you review the manner and timing of service of the NCL, and (4) to remind the owner that it’s not over just because the NCL goes away. (Legitimate claims for payment from a contractor can (and likely will, if the amount claimed is large enough and there’s no mechanic’s lien statute relief available) be pursued on the theory of “reasonable value of the service performed/materials supplied” in a civil action.)
A seemingly wacky thing that contractors do in conjunction with recording a NCL is to record a Notice of Lis Pendens concurrently with the NCL foreclosure lawsuit. It appears to me entirely redundant; I don’t have any reason to think that the title company will locate a Notice of Lis Pendens performing a title search without noticing the NCL. So, what’s the point? My theory is the redundancy has little to do with title-cloud “insurance” but something else instead. In any case, if an owner records a lien discharge bond (of 1.5 times the NCL claim) pursuant to A.R.S. Section 33-1004, any action brought by the lienor “is transformed into one which does not affect title to real property.” Hatch Companies Contracting, Inc. v. Arizona Bank, 170 Ariz. 553, 557, 826 P.2d 1179, 1183 (App. 1991).
The danger of playing around with lis pendens filings was discussed in an earlier post, and it would be entertaining to see how a court ruled if an owner recorded a lien discharge bond and the lienor, ignorant that the suit no longer affected realty, refused to terminate the Notice of Lis Pendens after the bond was recorded and served on the lienor and the owner demanded a termination of the Notice. The penalty for lis pendens dynamite-play is under appellate scrutiny now in Arizona. The Court of Appeals will hear oral argument on February 10, 2009, in the matter styled Galeb v. Markham, following a superior court order in which the judge penalized the contractor $5,000 per residential lot in a subdivision that was described in a recorded Notice of Lis Pendens–or $215,000 for the 43 lot subdivision. While an amici brief was filed in the matter by several groups engaged in the building trades, the arguments center on the inequity of the size of the penalty and the attending “chilling effect” on contractors. But, since no one forces the lienor under the NCL to record a Notice of Lis Pendens to begin with, it seems there’s an argument that if you undertake to employ a nuclear weapon, you’d best watch the wind’s direction. (In Galeb, the lienor claims that the lien discharge bond was not served on the contractor—but the public records among which it was filed are, well, public.) We’ll see whose side the court likes best among this cast of miscreants.