On January 26, 2009, this Blog informed you about the Galeb-Miller v. Markham Contracting case on appeal that would be argued the following week, and invited your continued attention to those proceedings. The opinion in the case (1 CA-CV 07-0872) was published as a Memorandum Decision (e.g., one not to be used as precedent in future Arizona litigation) on May 19, 2009. So, was this blogista inattentive? Not really; the loser – big loser, actually, filed a motion for reconsideration in June, and the briefing on that motion was concluded just a few weeks ago. The Galeb case involves the imposition of damages in the form of a penalty upon a party (here, the contractor, supposedly) for the filing in the public records of a groundless lien under A.R.S. Section 33-420, the false lien statute. The big loser here was the owner; the Court of Appeals is being asked to reconsider its decision to deny Galeb-Miller any manner of damages whatever arising under the statute.

The factual background is that Markham Contracting’s attorney filed a lawsuit to foreclose on a lien, and concurrently recorded a notice of lis pendens confirming the existence of a suit and the entitlement of the contractor to a claim sounding in ownership against the real property. Problem was, Galeb earlier had procured and recorded surety lien-discharge bonds to “insure over” the claim of mechanic’s lien before the lis pendens recorded. (By operation of law, the recording of such bonds discharged Markham’s liens.) Now, the surety was one Contractors Bonding and Insurance Co. (“CBIC”); the attorney for Markham had obtained from a title company a “litigation guarantee” report, which identified an interest in the property owned by CBIC. The title company did not apparently disclose the capacity in which CBIC had an encumbrance against title, and the attorney did not inquire – at least, not until it was served with the bonds, into the nature of CBIC’s interest in the property. But the counsel knew that the title company had identified CBIC as a party in interest, who had to be named in the suit (and was not, for reasons unknown here).

The parties tried to settle, but got stuck in a few places, so Galeb sued and asserted it was entitled to damages for the violation of the statute on several groundlessness grounds, being:

a. Markham’s principals knew that the lis pendens was groundless themselves;
b. Markham’s attorney’s knowledge must be imputed to Markham if the officers knew the lis pendens was being recorded, and IF the attorney knew or had reason to know that the lis pendens was groundless;
c. Markham’s counsel was an agent for Markham, and therefore the knowledge of the attorney should be imputed to the principals under common law agency doctrine; and
d. Markham’s lien filings asserted termination fees and interest, categories of expense that are not recoverable under the mechanics’ lien statutory scheme (aka “non-lienable damages”).

Our court of appeals ruled that:

(i) Markham neither knew or had reason to know the discharge bonds had been filed, and did not read the “litigation guarantees,” so Markham likely did not know that the lis pendens filings were groundless; and

(ii) It was improper for the trial court to impute the attorney’s knowledge about the CBIC bonds, which was incomplete at best, to Markham; and

(iii) Because Markham had a good faith belief that it could rightfully impose a lien and therefore refused to relinquish it after demand from the owner, the contractor cannot be acting in bad faith, because the lien statutes are obscure.

Galeb got nothing in damages in the appeal; and the Court of Appeals opinion ends by remanding the matter to Superior Court for fact findings on whether the liens contained a material misstatement or false claim, and whether a letter sent to Markham’s counsel imputed to Markham (or afforded to Markham actual) knowledge that the liens were at least partially invalid due to the termination fees and interest that is statutorily unrecoverable. Galeb filed for reconsideration, likely because it went from having several hundred thousand dollars in a settlement posture to having squatola, other than a big bill from its counsel. So, we await the outcome of the motion to reconsider, and the treatment of the likely Notice of Appeal to the Supreme Court of Arizona to be filed by Galeb to follow.

The Court of Appeals had a little footnote of interest in its decision, numbered 18; it says that given that the recording of the bonds “killed” the mechanics’ liens in the total amount of those bonds, Markham only can be liable for the balance (the amount of the liens not discharged by the recorded bonds) under ARS 33-420. That’s interesting since the lis pendens was recorded after the bonds were; that lis pendens remained of record, which might arguably have chilled prospective purchasers’ inquiries about the property. Maybe someone will reconsider the wisdom of that footnote or at least explain what the Court was thinking along those lines. Also, it would be nice to hear from a court why Markham isn’t required to review the exceptions noted on the litigation guaranty report from the title company, once it has notice that there’s an evident conflicting claim of an encumbrance against the property. Eventually.