Division One of our Court of Appeals masterfully clarified certain problems affecting the interpretation of Arizona’s mechanic’s lien statutory scheme early last week, but left a little clutter of its own in its opinion issued May 31, 2011, styled FAGERLIE V. MARKHAM CONTRACTING CO., INC., which is called below “the opinion”; the group of folks aligned with Fagerlie, more or less, I’ll call collectively “Plaintiffs.”
The statutes on mechanics’ liens are full of terms that do not appear in everyday English usage, so the opinion is valuable for clarity lent to some of the proceedings. First of all, the Court sorted out long-standing confusion about whether the statutes must be liberally or strictly construed by explaining that a mechanic must strictly adhere to the steps in the lienhold perfection and execution process, but that any particular step is successfully hurdled so long as the mechanic substantially complies with a statutory requirement.
One of the sections of those statutes says that a lien is valid if the work was done or materials were furnished “at the instance of the owner . . . or his agent.” The court pointed out that our lien statutes don’t create a conventional principal-agency relationship; instead, there’s a “statutory agency fiction” permitting a contractor or materials supplier to pursue remedies directly against the owner. This fiction is much less stringent than the usual common law agency-creation standards.
In the realm of what is required to satisfy service of a preliminary 20-day notice on the “reputed owner,” the opinion says that a mechanic who has reviewed a final plat for a subdivision or a subdivision’s public report filed with the Department of Real Estate (using in the Notice and Claim of Lien the names thereby discovered as the “reputed owner”) has conducted sufficient due diligence to meet the obligation of a mechanic to take “reasonable efforts to ascertain the owner or reputed owner” of the property. The opinion also informs us that any party that still owns lots or has obligations related to those lots is an “interested party” for the statutes’ purposes of affirmatively informing the mechanic or material supplier that the wrong “owner” has been served with the 20-day notice, if that party is aware that the wrong person indeed was served.
To determine when a project has been “completed” for purposes of starting the clock on when a lien must be recorded (that is, under the statute, within 120 days of the project’s completion), the opinion says that if a contractor is renting barricades to prevent access to a project that is maintained for safety reasons while the parties are awaiting utilities work by a public utility, that is a continuation of a contractor’s work – so the project is not yet completed at that stage. Furthermore, the opinion states that since the statutes don’t bar correction of a mechanic’s lien filing during the time permitted for perfecting a lien via a filing, such correction (if accurate itself in substance) in the public records is permissible. The opinion also reminds us that if a mechanic or supplier won’t remove a notice and claim of lien from the records due to a good faith dispute regarding its validity, there’s no scienter (a sort of evil-mind standard) on the part of the contractor or supplier that would justify a court handing down a statutory penalty against that party under A.R.S. Sec. 33-420, Arizona’s “groundless lien” statute.
If the opinion is shy of perfection, it’s due to the Court’s holding on the impact of failure to notarize a lis pendens in connection with the bringing of the enforcement action on the mechanic’s lien. The FAGERLIE Court held that since the purpose of a lis pendens is to give constructive notice of a suit to interested parties affecting title to property, the lack of notarization of the lis pendens instrument there “did not prevent” that document “from serving its intended purpose.” In the process, the Court sort of dismisses the statutory text of A.R.S. Sec. 33-411(B). The problem is that this section of the recording statutes expressly excepts out a single type of instrument – the “master mortgage” – from the universe of instruments that must be notarized. This implies that every other instrument has to be notarized to be lawfully recorded. The Court points out that this section 411(B) applies to recording instruments “affecting real property,” and not to constructive notice-purposed instruments per se. Yes, but . . . .
The whole purpose of a mechanic or supplier recording a lis pendens in Arizona is to make it virtually impossible for the title company to calculate its risk of its issuing a title policy on a parcel burdened with a pending mechanic’s lien dispute. Since the calculation is speculative and because to begin with, title companies hate to pay claims in any sum, the immediate impact of the lis pendens is to stymie progress in the sale or ground lease of any portion of the property described in the instrument. And that’s what affords the filer of the lis pendens leverage against the parcel’s owner. If you adopt the proposition that the lis pendens’ effect is to jam up the owner, it’s hard to adopt the Court’s suggestion that there’s no “affecting real property” involved in a lis pendens’ recording. No adoption here, at least. This seems a closer issue of law reviewable by the Supreme Court, should the Plaintiffs want an official “second opinion.”