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Construction Law

Lien Discharge Bonds and Lawsuit Deadlines

The Arizona Court of Appeals rules that the state’s lien discharge statute does not provide an extension for filing suit on a lien

 

 

This article appeared in the June 2012 issue of "The Construction Advisor" published by Lang & Klain, P.C.


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Alliance TruTrus v. Carlson Real Estate Company, et al.

In 2007, Carlson Real Estate Company started a commercial construction project. One of the subcontractors on the project set up an open account with Alliance TruTrus to supply trusses and related materials.

On September 10, 2008, holding more than $31,000 in unpaid invoices, Alliance recorded a mechanics’ and materialmen’s lien on the real property. On February 17, 2009, Carlson executed a Discharge of Mechanic’s Lien by posting a discharge bond in the amount of $49,926. The discharge bond was served on Alliance three days later.

(A mechanic's lien discharge bond comes into play when the one of the parties wants to keep the property free of liens. Bonding a mechanic's lien does not extinguish the lien; rather, the lien is removed from the property and attaches to the discharge bond.)

On May 1, 2009, Alliance sued Carlson for payment on the discharge bond. The trial court granted Alliance summary judgment, finding that Alliance timely filed its lawsuit pursuant to A.R.S. § 33-1004. The trial court held that if a “claimant is served with the discharge bond less than ninety days before the expiration of the six-month period prescribed by A.R.S. § 33-998, the claimant has ninety days from the date of service of the discharge bond to commence suit against the surety and its principals.”

Carlson appealed, arguing that the trial court misinterpreted A.R.S. § 33-1004(D). The Arizona Court of Appeals found that Alliance’s lawsuit failed to meet the deadlines set forth in the statute. The Court ruled in favor of Carlson and dismissed Alliance’s suit.

About the Court’s Ruling

After a lien is recorded, a lien claimant has six months to file suit, per A.R.S. § 33-998(A).

The lien-discharge statute, A.R.S. § 33-1004, allows property owners to discharge a lien against their property by securing a surety bond in an amount equal to 150% of the lien claim (which Carlson did). The bond can be recorded either before or after the claimant files suit to foreclose on the lien. Once the bond is recorded, the lien is discharged, and the claimant must pursue the bond (not foreclosure on the property) for the lien payment.

Alliance recorded its lien on September 10, 2008, but did not file suit until May 1, 2009 – almost two months after the statutory six-month allowance.

At trial, Alliance had argued (and the trial court agreed) that Alliance’s limitation period was extended by A.R.S. § 33-1004(D)(2) in its provision that:

If the bond is served upon the claimant within less than ninety days from the date claimant would be required to commence his action pursuant to section 33-998, the claimant shall have ninety days from the date he receives a copy of such bond to add the principal and the sureties as parties to the lien foreclosure suit. (Emphasis added.)

This is where the Court of Appeals took issue with the trial court’s ruling for Alliance. The Court of Appeals found that the statute “does not grant a claimant an additional ninety days to file its lawsuit, but allows an additional ninety days to amend any complaint to add the principal and sureties.” (Emphasis added.)

In other words, starting from September 10, Alliance had six months to file its lawsuit – period – and it failed to meet that deadline.

The Court ruled that the “extension” to which Alliance had pinned its hopes simply allowed time for a claimant to “add the principal and parties” to an existing lawsuit that had been timely filed.

The Takeaway

If you are making a claim on a lien discharge bond, you must file your lawsuit within six months from the date you record your lien.