Transfer of Property Title to a Holding Company Did Not Divest Landowner of Owner-Occupant Status Under A.R.S. § 33-1002(B)

Recently, in Marco Crane & Rigging Co. v. Masaryk, 703 Ariz. Adv. Rep. 29 (Dec. 30, 2014), the Arizona Court of Appeals established that a subcontractor on a residential project has no lien rights against an owner-occupant, even though the homeowner transferred the property’s title to a holding company (an Arizona limited liability company) after the subcontractor commenced work.

In other words, the lien protections afforded to owner-occupants are determined, at the latest, when a contractor records its lien.  After the contractor commences work and records its lien, the homeowner’s actions in negating owner-occupant status do not divest the homeowner of statutory protections against lienholders.  Owner-occupant status remains intact.

The unanimous decision in Marco Crane followed a short and simple analysis of A.R.S. § 33-1002 and facts common to residential construction.  In 2003, Linda Masaryk held title to property in Paradise Valley, Arizona.  In 2006, Masaryk hired Mendelsohn Construction as the general contractor to build a home on the property.  Marco Crane was a structural steel subcontractor to Mendelsohn, but Marco Crane had no direct contract with Masaryk.  Because Marco Crane had no direct contract with Masaryk, Marco Crane had no lien rights against owner-occupants under A.R.S. § 33-1002(B).

When the architect terminated construction on the project in 2008, Marco Crane was not paid for its work and materials.  Marco Crane had timely served its preliminary twenty-day notice under A.R.S. § 33-992.01(B) and recorded a lien against the property under A.R.S. § 33-993(A).  In 2010, construction of the home was complete and ready for occupancy.  Masaryk moved in and lived there for eighteen months.

Prior to completion of the home in 2010, however, Masaryk transferred title to her holding company   Thus, Marco Crane argued in the Superior Court that the property was no longer entitled to owner-occupant status because the LLC was not a “natural person” required under A.R.S. § 33-1002(A)(2).  Marco Crane insisted that its lien was valid.  The Superior Court agreed and granted summary judgment in Marco Crane’s favor.

The Court of Appeals reversed the Superior Court.  The Court of Appeals said that, under A.R.S. § 33-1002(A)(2), Masaryk was an owner-occupant because she personally held title prior to construction and intended to occupy the home (as she did) for at least thirty days after completion of the home.

The Court of Appeals ruled that “[w]hether Masaryk is shielded against the lien under A.R.S. § 33-1002(B) hinges on her status as an ‘owner-occupant’ before Marco commenced its work on the house.”  At the same time, the Court said “[b]ecause Masaryk satisfied the statutory requirements to be an ‘owner-occupant’ at the time Marco recorded the lien, we hold that the lien violated A.R.S. § 33-1002(B).”  From these two (apparently inconsistent) rulings, contractors should presume that owner-occupant status is determined, at the latest, when the contractor records its lien.

Finally, the Court of Appeals emphasized that it is the contractor’s obligation to determine owner-occupant status before recording a lien.  The worst-case scenario plays out if the contractor does not correctly determine owner-occupant status and improperly records a lien.  The contractor could face treble damages and attorneys’ fees and costs for wrongful lien under A.R.S. § 33-420.

At least in Marco Crane, the contractor will probably have to pay Masaryk’s attorneys’ fees and costs based on the Court of Appeals’ decision that the lien violated A.R.S. § 33-1002(B).  Worse, Marco Crane has no lien rights to recover for its work and materials on Masaryk’s home.  Marco Crane is left with a last resort of equity (unjust enrichment) to collect from Masaryk and a hollow breach of contract claim against Mendelsohn (which was not paid for Marco Crane’s work, either).

To be certain of owner-occupant status and its effect on lien rights in the future, it may be advisable for contractors to insist on provisions in their contracts whereby the homeowner commits to satisfy the requirements under A.R.S § 33-1002(A)(2) or otherwise waives owner-occupant protections due to the homeowner’s inability to satisfy all the elements necessary for owner-occupant status.  If the homeowner changes her owner-occupant status during construction, the homeowner should be contractually required to notify the contractor.  This may help to avoid costly lien disputes like the one in Marco Crane.