"Defective Liens" Valid After All

In 2004, an Arizona real estate developer, Estates at Happy Valley (EHV), purchased a large vacant parcel of land in Peoria, Arizona. EHV contracted with Markham Contracting to improve the property for residential development. EHV divided the parcel into 28 lots and began selling them as site-improved lots.

In June 2005, after performing a substantial amount of work, Markham served EHV with a preliminary 20-day notice. By that time, EHV had sold most of the lots. The notice named EHV as the “owner or reputed owner” of the property and included the legal description of the entire original parcel (“Original Exhibit A”).

The legal description that Markham attached to the notice did not reflect the sale of any lots. Not knowing which lots had been sold, Markham had taken the legal description from a recorded final plat. EHV did not request correction of the 20-day notice and proceeded to sell the remaining lots.

By August 2007, Markham had performed over $3 million of work, and EHV had fallen behind on its payments. EHV signed an acknowledgement of indebtedness.

Defective Lien? Four months later, Markham recorded a mechanics’ lien (“First Lien”) on the development. The legal description (“First Lien Exhibit A”) that accompanied Markham’s lien had been updated to reflect the sold lots, but Markham did not include, with the copy of the preliminary 20-day notice, the original legal description or the correct proof of mailing.

On January 24, 2008, Markham completed striping work and recorded an amended notice and claim of lien, which changed the description of the work performed. Markham again erroneously attached to the amended lien the “First Lien Exhibit A” instead of the “Original Exhibit A.” Markham mailed the amended notice and claim of lien to each of the lot owners, along with the First Lien and First Lien Exhibit A. On February 29, the lot owners sent a letter to Markham stating that the First Lien and Amended Lien were invalid and demanding that Markham release both liens.

On March 20, Markham recorded a Notice of Correction of Replacement to the Amended Lien, attached a retyped version of Original Exhibit A (based on the original copy) and the correct proof of mailing for the preliminary 20-day notice. In April and May, Markham served the lot owners with the documents that were recorded March 20.

Lawsuit. In April, one of the lot owners sued Markham in an effort to remove Markham’s lien. Markham filed a counterclaim against EHV and all of the lot owners to enforce its lien. Markham also recorded a lis pendens on the lots. At trial, the judge found that Markham’s lien was technically defective in six respects:

• Markham’s work was not performed at the request of the lot owners, and EHV (which contracted for the work) was not an agent of the lot owners.

• The preliminary 20-day notice was not served on the lot owners.

• The mechanic’s lien was not timely recorded.

• Original Exhibit A was not attached to the First Lien.

• The preliminary notice’s proof of mailing was not attached to the First Lien.

• The lis pendens was not notarized.

• In addition to ruling for the lot owner, the judge sanctioned Markham for filing wrongful lien documents and ordered Markham to pay a total of $252,000 to the lot owners.
  

Reversal. Markham appealed the trial court’s ruling, and the Arizona Court of Appeals ruled in Markham’s favor on a number of issues.

First, the Court found that EHV was an appropriate party to receive service of Markham’s preliminary 20-day notice for the lot owners. Even though Markham’s work was performed at the request of EHV and not the lot owners, EHV was the agent of the lot owners for purposes of the lien statutes. “[EHV] was … in charge of the work on the parcel that included the lots at issue,” the Court noted. “That is all the statutes require.”

Second, the Court ruled that Markham could claim a lien on the lots for work done at EHV’s request. The Court noted that, in order for a mechanic’s lien to be valid, a contractor must serve “the owner or the reputed owner” with a written preliminary notice. “If a lien claimant names a reputed owner, it must establish that it took reasonable efforts to ascertain the owner or reputed owner of the property.” The Court found that, in trying to ascertain the owners by checking the final plat and otherwise relying on documents prepared by EHV, Markham satisfied the legal requirement.

Third, the Court ruled that Markham’s lien was timely filed. Markham was required by law to record its lien within 120 days after completion of its improvement to the site. (The statute also imposes a deadline of 60 days after the recording of a notice of completion, but, in this case, no such notice was recorded.)

At trial, a lot owner argued that, since Markham’s work on the owner’s specific lot was completed more than 120 days before Markham recorded his lien, the lien was defective with respect to that lot (and, presumably, other lots). However, although there were multiple lots and, in theory, multiple completion dates, the Court did not require Markham to lien each separate lot. The Court determined that, since Markham and EHV from the outset viewed Markham’s work as a single project, there was only one “improvement,” and it was completed only when Markham had fulfilled all of its obligations under the contract.

Fourth, the Court ruled that Markham could correct documents filed with the lien within the time period for perfecting the lien. The Court noted that while Markham was obligated to “strictly comply with the steps for perfection,” it had to “only substantially comply with any particular step.” The Court cited prior rulings in which “the failure to attach a copy of a written contract to the notice and claim of lien … did not invalidate a claim where the general terms of that contract were provided for in the written notice.” In addition, the Court stated that there is no statutory restriction against correcting a mechanic’s lien within the time for perfecting the lien.

Finally, the Court ruled that Markham’s lis pendens did not have to be notarized. “[T]he purpose of a lis pendens is to give constructive notice to interested parties of litigation that may affect title to the property. … Here, the lack of notarization did not prevent the lis pendens from serving its intended purpose.”

In the end, the Court of Appeals reversed the trial court’s ruling, vacated the trial court’s $252,000 sanctions against Markham, and sent the case back to Superior Court for trial.