Western States Lien Company

Guy W. Bluff, Esq. 29-Oct-2011

In the case of Fagerlie v. Markham Contracting Co, (1 CA-CV-10-0051, 31-May-2011), Division 1 of the Arizona Court of Appeals held that (1) Markham could claim a lien on the lots for work done at the “instance” of the developer, Estates at Happy Valley, LLC (“EHV”), as the agent of the lot owners; (2) that Markham properly served the preliminary twenty-day notice on EHV as an owner/reputed owner or, alternatively, as an interested party; (3) that the beginning of the time period for recording the lien presents a genuine issue of material fact; (4) that Markham could correct documents filed with the lien within the time period for perfecting it, and that it substantially complied with the recording requirements in doing so; and (5) a lis pendens filed with a lien foreclosure action does not have to be notarized.

The Markham court re-affirmed the basic rule of law applicable to mechanic’s liens. Arizona’s lien statutes are remedial in nature and should be liberally construed to primarily protect laborers and materialmen who enhance the value of another’s property. Performance Funding, L.L.C. v. Ariz. Pipe Trade Trust Funds, 203 Ariz. 21, 24, ¶ 10, 49 P.3d 293, 296 (App.2002). At the same time, the statutory requirements for perfecting a mechanic’s lien must be strictly followed. MLM Constr. Co. v. Pace Corp., 172 Ariz. 226, 229, 836 P.2d 439, 442 (App.1992). These seemingly inconsistent principles are harmonized by requiring that all the statutory steps for perfecting a lien be followed, but permitting substantial compliance with any particular step so long as the purposes of the mechanic’s lien statutes are achieved.

The Markham case is important because it resolved several reoccurring problems for lien claimants and their counsel which trial court judges have troubled with in past years. First – a lien claimant can file supplements and amendments to correct an otherwise initially defective or deficient lien so long as the amendments are recorded within the statutorily mandated time period. Previously, it was not uncommon for property owners and their banks to argue that a defective or deficient lien claim, once filed, constituted a improper instrument, not capable of amendment or supplement, and thus subjected the lien claimant to statutory sanctions under ARS §33-420.

Second, that for purposes of service of the 20 day preliminary notice, the subdivision developer, here EHV, was considered the legal agent of the individual lot owners. In so holding, the court cited to Lewis v. Midway Lumber Inc., 114 Ariz. 426, 431, 561 P.2d 750, 755 (App.1977) (holding service on the owner of record sufficient even if the record owner is not the true owner) and concluded that service of the 20 day notice on EHV was therefore effective to give proper notice to the individual property owners,

Third, and probably the most important aspect of the case is the court’s discussion as to “completion” of the work for purposes of Markham timely recording its lien. ARS §33-993(A) provides the general rule that a lien must be filed within 120 days of “completion” In subsection C(1), completion is defined as 30 days final inspection and written acceptance by the governmental body which issued the building permit. In subsection C(2), completion is defined cessation of labor for a period of sixty consecutive days. When there is no building permit, or if the governmental body does not issue final inspections and written final acceptances, then “completion” for the purposes of subsection A of this section means the last date on which any labor, materials, fixtures or tools were furnished to the property.

These conflicting time periods are probably the single most confusing aspect of Arizona’s mechanic lien laws and are a common source of contention among practitioners. The statutory period could therefore be 60 days (in instances where a Notice of Completion has been recorded, see ARS §33-993(E), 120 days (when there is no building permit), 150 days (when there is a building permit and final inspection), or 180 days (when there has been a work stoppage).

Holding that Markham’s Lien was timely recorded, the court concluded that for purposes of subsection C(2), the ultimate question is not when Markham completed its work, but when the “improvement” was completed. Citing A.R.S. § 33–993(A) and S.K. Drywall, Inc. v. Developers Fin. Group, Inc., 169 Ariz. 345, 349, 819 P.2d 931, 935 (1991).

The last significant issue addressed by the Court was whether the Notice of Lis Pendens, required A.R.S. § 12–1191(A) must be notarized. While it is common practice for attorneys to have such notices notarized (acknowledged), nothing in A.R.S. §§ 33–998 or 12–1191 requires the lis pendens to be notarized. The court held that lack of notarization did not prevent the lis pendens from serving its intended purpose – giving constructive notice to interested parties of litigation that may affect title to the property – and therefore concluded that a lis pendens filed in conjunction with an action to foreclose a mechanic’s lien need not be notarized.

In the case of Allstate Utility Construction, LLC v. Towne Bank of Arizona (1 CA-CV-10-0556; 0747, 25-Oct-2011), Division 1 of the Arizona Court of Appeals finally addressed several issues relating to alleged defect with the 20 day preliminary notice accompanying Allstate’s mechanic’s Lien.  The court held that 1) 20 day notices need not contain an original handwritten signature of the claimant, 2) that certain typeface in the notice was not too small; 3) that the “time of day” of mailing the 20 day notice is not required, and 4) that failure of the lien claimant to include a form of acknowledgement with are not material defects invalidating the lien claim.

Allstate Utility contracted to perform work on property owned by ALC Builders.  Within 20 days of first stating work, Allstate served ALC Builders with its preliminary 20 day notice by first class mail.  When Allstate was not timely paid, it recorded and then sued to foreclose its mechanic’s lien for $112K.  Towne Bank held a security interest in the property which, if Allstate’s lien was determined valid, was admittedly junior to the lien of Allstate.

Towne Bank first argued Allstate’s preliminary 20-day notice was defective because it was not properly signed pursuant to ARS § 33-992.01(C) in that it did not contain an “original” signature of the lien claimant but instead was electronically signed by the notice preparation company.  The statutorily mandated 20 day notice form includes lines labeled “Company name” and “Signature,” as well as “Title.”  In Allstate’s case, in the space labeled “signature,” the notice stated, “SIGNATURE AND TITLE ON FILE.”  The Court held that as a matter of law, Allstate’s name, along with the other information and the notation that the claimant’s “signature and title” were “on file,” were sufficient to manifest Allstate’s intention to authenticate the notice.

Towne Bank next argued that the preliminary notice failed to contain statutorily mandated language in the proper font size.  ARS § 33-992.01(D) requires the preliminary 20-day notice to warn the property owner or other recipient that it has only 10 days to correct any inaccuracies in the notice. The statute provides that the warning “be in type at least as large as the largest type otherwise on the document.” ARS § 33-992.01(D). Towne Bank argues Allstate’s notice was invalid because the warning language was not as large as the largest type otherwise on the document.  The Court held that the font size, while small, was not materially different that the size of any other language on the notice and summarily rejected this argument.

Towne Bank’s third argument was that Allstate’s lien is invalid because the copy of the preliminary 20-day notice that Allstate averred it served on ALC Builders lacked a form by which ALC Builders could “acknowledge” receipt of the notice.  In Arizona, a claimant may prove that it served the 20-day notice by recording an acknowledgment of receipt executed by the recipient of the notice.  ARS § 33-992.02(1).  Alternatively, the claimant may prove it served the notice by recording an affidavit of service together with its lien. ARS § 33-992.02(2).  The court held that while the 20 day notice failed to include an “acknowledgment” as provided by statute, this defect was not fatal because Allstate recorded an affidavit of service with its lien – the alternative method of proving delivery.  The court further held that failure to provide an acknowledgment form to the recipient of a preliminary 20-day notice does not invalidate the notice or the subsequent notice and claim of lien.

Towne Bank’s final argument was that the affidavit of service was defective because it did not state the time of day that the notice was mailed to ALC.  The court summarily disposed of this argument as well finding that there is nothing in the statutory language which requires that the precise time of day when the 20 day notice is mailed be noted.

In summary, the Court reaffirmed the long standing rule of law applicable to Arizona Mechanic Liens.  Arizona’s lien statutes generally have two purposes: To protect laborers and materialmen who have provided goods and services, and to protect the right of property owners to notice of lien claims against them. See Kerr-McGee Oil Ind., Inc. v. McCray, 89 Ariz. 307, 311, 361 P.2d 734, 736 (1961); Lewis, 114 Ariz. at 431, 561 P.2d at 755.

SW Contractor – 2008 Professional Services Guide

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