Construction Law

This article appeared in the November 2008 issue of "The Construction Advisor" published by Lang Baker & Klain, PLC. Free Subscription to the Construction Advisor View the Construction Advisor index

You provided valuable materials, services or equipment to an Arizona construction project. You weren’t paid on time, so you recorded a mechanics’ and materialmen’s lien. What happens next?

Lien Foreclosure Six-Month Deadline

Under Arizona mechanics’ lien law, your mechanics’ lien filing expires six months after the recording date, unless you (the lien holder) file a lawsuit against the property owner to foreclose the lien. The objective of your lawsuit is to seize the owner’s property, sell it at a foreclosure sale conducted by the county sheriff, and apply the proceeds to the amount due you.

If you do not file a lawsuit within the six-month period, your mechanics’ lien automatically expires and is lost. Therefore, it is critical to calendar the foreclosure deadline and file the mechanics’ lien foreclosure action before that date.

Before the Mechanics’ Lien Foreclosure Action Is Filed

First, in order have lien rights, for work considered to be “contracting” by the Arizona Registrar of Contractors, you must be able to prove that you held a valid Arizona contractor’s license when you entered into the contract and when you performed the work. Material suppliers and equipment rental companies do not need a contractor’s license. If “you” are a corporation or limited liability company, that legal entity must be in good standing with the Arizona Corporation Commission in order to file suit.

After you record your mechanics’ lien you should meet with your attorney to discuss what a lien foreclosure action will entail and whether there are other collection methods you should consider.

Before filing a lawsuit to foreclose on a mechanics’ lien, your attorney will order a title report on the property from a title agency. The title report will show the property’s legal description, the current owner, whether there are any large lenders who have priority over your mechanics’ lien, and any other mechanics’ liens against the property. All mechanics’ liens have equal priority with one another, regardless of the date they are recorded. The title report identifies the people and legal entities you must sue in order to successfully foreclose your lien. The title report also should help you determine whether, in light of the debts against the property, there is enough equity in the property to make your lien foreclosure action worthwhile.

After the Lawsuit Is Begun

A mechanics’ lien foreclosure complaint asks the court to:

• enter judgment in your favor for a specific sum of money,

• enter judgment that you have a valid lien against the property for that amount, and

• order the county sheriff to sell the property and use the proceeds to satisfy your lien.

In addition, the complaint usually alleges a breach of contract by the party (e.g., the general contractor) that failed to pay you.

Finally, the complaint names the other mechanics’ and materialmen’s lien claimants, in order to get everyone with a claim against the property before the court in the same action.

The great majority of mechanics’ lien foreclosure actions are settled by the parties without going to trial. However, if the lien foreclosure action proceeds to conclusion, the court will enter judgment on each mechanics’ lien and will order the property sold to satisfy the valid lien claims.

Trustee’s Sales and Bankruptcy

The owner’s purchase and construction loans on a project are usually recorded before construction begins. The priority of those loans, in comparison to mechanics’ and materialmen’s liens, is determined by the “first in time, first in right” rule, and they usually have priority over mechanics’ and materialmen’s liens. As a result, if the owner defaults on its purchase or construction loan, all of the mechanics’ and materialmen’s liens may be extinguished by a trustee’s sale.

Similarly, if the property owner files for bankruptcy court protection, mechanics’ liens are affected. If you have a lien claim against an owner who files bankruptcy, you should immediately consult your attorney to evaluate the circumstances and discuss your options.

See our special section, Getting Paid, for articles, forms and instructions on mechanics’ liens, bond claims and Arizona’s prompt payment law.