Fagerlie v. Markham Contracting Co. – 5/31/2011

June 8, 2011

Arizona Court of Appeals Division One Holds That A Laborer May Assert Mechanics’ Lien Claims Against Owners of Subdivision Lots Even Though the Laborer Contracted With The Subdivision’s Developer. The Court Also Holds That The Land Owner Has The Burden To Prove The Existence of A Statutory “Cessation of Labor” Which Would Invalidate A Lien, That a Claimant May Record Corrections To an Already-Recorded Lien, And That A Lis Pendens Recorded In Connection With a Mechanics’ Lien Need Not Be Notarized.

EHV bought a large parcel of vacant land to develop the land for a residential subdivision.  Markham successfully bid to build the improvements needed, and EHV started selling “site-improved” lots at the subdivision.  To comply with Arizona’s mechanics’ lien statutes, Markham served a preliminary twenty-day notice on EHV in June 2005, naming EHV as the “owner or reputed owner.”  Although EHV had already sold many lots, Markham sent the notice to EHV based on the recorded final plat listing EHV as the owner.  EHV never responded to the preliminary notice. 

Markham performed millions of dollars of work, but by August 2007, EHV had stopped paying Markham when it still owed more than $500,000.  On December 28, 2007, Markham recorded a lien on the property but failed to include copies of certain documents required by statute.  Meanwhile, Markham was providing for the rental and maintenance of barricades at the worksite.  After completing some road striping in January 2008, the City of Peoria allowed Markham to remove the barricades. 

Counsel for the subdivision’s lot owners sent a letter to Markham’s attorney in February 2008, arguing that the documents Markham recorded were invalid.  On March 20, Markham recorded a correction to its lien with the required documents.

Fagerlie, one of the lot owners, sued Markham to remove the mechanic’s lien and also requested penalties under A.R.S. § 33-420, which provides for punitive damages when a person knowingly records an invalid document affecting property.  Markham counterclaimed and sued the remaining lot owners to foreclose the lien.  The lot owners moved for summary judgment, arguing that Markham’s lien was technically deficient on numerous grounds.  The trial court agreed and awarded damages to each lot owner under section 33-420.  Markham appealed.

A unanimous Court of Appeals reversed and remanded.  The mechanics’ lien statutes impose numerous technical requirements on laborers and suppliers seeking to perfect a lien. Although each “statutory step” must be followed, a laborer need only meet a test of “substantial compliance with any particular step.”  The lot owners argued that Markham’s lien failed to satisfy several of the statutory “steps” to perfection.  The Court rejected each of the lot owners’ contentions.

First, A.R.S. § 33-981(A) provides that a lien is valid for work “done . . . at the instance of the owner . . . or his agent.”  An “agent” is defined as a person “having charge or control” of the work, including the “subdivider.”  The Court held that Markham could properly claim a lien for work done for EHV because, as the subdivider in charge of the work, EHV was the statutory “agent” of the lot owners. 

Second, A.R.S. § 33-992.01(B) requires all laborers to serve the “owner or the reputed owner” with a preliminary twenty-day notice.  The lot owners argued that Markham failed to do this because it served only EHV, not all existing lot owners.  The Court held that Markham’s service on EHV was proper because Markham could reasonably believe that EHV was the owner based on the facts known at the time, such as the recorded final plat.  In addition, after receiving the notice, EHV never informed Markham of the additional owners, as required by A.R.S. § 33-992.01(I).

Third, A.R.S. § 33-993(A) required Markham to record the lien within 120 days after “completion” of the “improvement.”  Among other things, the statute defines “completion” to mean the “cessation of labor” for sixty consecutive days.  A.R.S. § 33-993(C)(2).  The lot owners argued that two separate gaps of labor made the lien untimely; Markham’s timesheets showed gaps in work by Markham’s employees.  As to the first gap, the Court held that the evidence showed that work (whether by Markham or someone else working on the overall project) occurred after the lot owners argued labor stopped. Moreover, the lot owners had the burden to prove that there was a cessation of labor which would make Markham’s lien invalid.  The Court held that it was not sufficient at summary judgment to merely point to gaps in Markham’s timesheets.

As to the second gap, the lot owners argued that Markham stopped all work on the project in August 2007, which would render their final corrected recording of the lien in March 2008 untimely and invalid.  Markham argued that work was ongoing because it paid for barricades for the project until January 2008, bringing the March recording within the 120-day limit.  The Court agreed with Markham, concluding that the provision of barricades – even if trivial – would qualify as labor if it was called for in the contract.  Ultimately, the Court reversed the summary judgment because there were genuine issues of fact regarding when precisely “completion” occurred.

Fourth, the lot owners argued that a laborer may not record a “correction” to an original lien recording.  The Court disagreed, holding that correction may be filed so long as the corrections are within the original time limit.

Fifth, A.R.S. § 33-998 required Markham to record a lis pendens within five days of bringing its claims to foreclose the mechanics’ lien.  Markham recorded the lis pendens without a notarized signature.  The lot owners argued that a notarized signature was required under A.R.S. § 33-411(B), which provides that an “instrument” “affecting real property” is only validly recorded if it is “acknowledged,” or notarized.  The Court held that section 33-411 did not relate to lis pendens.  In addition, the Court noted that Markham’s unnotarized lis pendens served its statutory purpose of notifying interested parties of litigation affecting title to real property.

Finally, the Court vacated the award of sanctions under A.R.S. § 33-420.  That statute provides that a person who knowingly records an invalid document or refuses to remove or correct an invalid document, such as a lien, must pay a penalty and treble actual damages.  The Court held that there was no evidence to show that Markham knew or had reason to know its lien-claim was invalid when it was first recorded and that Markham could not be sanctioned for refusing to remove the lien because there was a “good-faith dispute regarding the validity of its mechanics’ lien.”

Judge Irvine authored the opinion; Judges Winthrop and Norris concurred.