Arizona Mechanics' Lien Foreclosure 101
Not getting paid? Review the basics of a mechanics’ lien foreclosure action, for contractors, subcontractors and construction suppliers
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
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.
This article appeared in the November 2008 issue of "The
Construction Advisor" published by Lang & Klain, P.C.
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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,
for articles, forms and instructions on mechanics’ liens, bond claims and
Arizona’s prompt payment law.