Critical Change for Serving Preliminary 20-Day Notices for Arizona Public Projects
Cemex v. Falcone Bros.
On April 30, 2015, Arizona's most common construction industry practice for serving a Preliminary Twenty Day Notice ("Prelim") on an Arizona public project—first class mail with certificate of mailing—was invalidated by the Arizona Court of Appeals in Cemex Construction Materials South, LLC v. Falcone Brothers & Associates, Inc. In Falcone Bros., the court acknowledges that its decision "may have a negative impact on an apparently longstanding industry practice" and invites the legislature to amend the applicable Prelim service statutes if it disagrees with the court's interpretation of the statutes. Nevertheless, effective immediately, suppliers and subcontractors must ensure that their Prelims on Arizona public projects are served by registered or certified mail and NOT by regular mail with a certificate of mailing.
Arizona's Preliminary Lien Notice History Relevant to Falcone Bros.
On a typical private construction project, contractors and suppliers can secure payment for their labor and materials by recording a mechanics'/materialmen's lien on the improved real property. To perfect and preserve this lien right in Arizona, the supplier or contractor must timely do each of the following: (1) serve a Prelim; (2) prepare and record the lien; and, (3) sue to foreclose on the lien. A properly recorded lien and lien foreclosure lawsuit (or even the threat of such a lawsuit) provides the lien claimant significant leverage to obtain payment from the property owner.
Unlike private projects, a typical public project cannot be liened. This is due to sovereign immunity laws (often summarized as, "You cannot sue [or lien] the King."). To level the playing field for subcontractors and suppliers on federal projects, the federal "Miller Act" was enacted and required posting a "payment bond" in lieu of lien rights as payment security for certain tiers of sub and suppliers working under the general contractor. To perfect and preserve payment rights on a Miller Act payment bond, second-tier subcontractors and suppliers (those two tiers below the general contractor) must provide written notice of their payment claim to the general contractor within 90 days from their last date of furnishing labor and materials ("90-day notice") and must file suit against the bond within one year of that date. There is no Prelim requirement for federal Miller Act projects.
Arizona's "Little Miller Act" ("LMA") (A.R.S. §§ 34-221 through 34-227) applies to most Arizona public projects. As its name suggests, the LMA is modeled after the federal Miller Act and similarly requires second-tier subcontractors and suppliers to serve the general contractor with a 90-day notice and file suit within one year. Unlike the Miller Act, the LMA was amended in 1984 to require second-tier subcontractors and suppliers to also serve a 20-day Prelim as required by the mechanics'/materialmen's lien statutes. Since the 1984 amendment, it has been accepted industry practice to serve Prelims on LMA public projects in the same three ways permitted by the mechanics'/materialmen's lien statutes: (1) first class mail with a certificate of mailing, (2) certified mail, or (3) registered mail. The least expensive service option is first class mail with a certificate of mailing, which understandably made it the predominant method and long standing industry standard for serving Prelims on both private and public projects in Arizona.
Falcone Bros. Analysis
The central LMA provision at issue, A.R.S. § 34-223(A), does not clearly state how a Prelim must be served for LMA public projects. The provision is only two sentences, but the first sentence is 270 words long! Boiled down, the first sentence identifies two categories of claimants who can sue against an LMA payment bond: (1) first-tier subs and suppliers (those in direct contract with the general contractor) who have not been paid, and (2) second-tier subs and suppliers who have not been paid and who timely serve both a 20-day preliminary notice and 90-day notice on the general contractor.
The second sentence states, in pertinent part, "Such notice shall be served by registered or certified mail . . . ." But the sentence does not specify whether the "notice" it refers to in the first sentence is the 20-day preliminary notice, the 90-day notice, or both.
As courts typically will do when there is statutory ambiguity, the Falcone Bros. court resorts to several principles of statutory interpretation to determine the legislature's intent. By the end of its analysis, the court concluded that "§ 34-223(A) of the LMA does not incorporate the [regular] mailing provision found in [the mechanics'/materialmen's lien statutes]," and that if the legislature had intended the regular mailing provision to apply to the LMA, it should have done a better job saying so in the LMA statutes.
Second-Tier Subs and Suppliers can Overcome Invalid Service through "Actual Notice"
Not all is lost for second-tier subs and suppliers who served their Prelims by regular mail and are beyond the time to serve a Prelim by certified or registered mail. The Falcone Bros. decision, perhaps in sympathy to the subs and suppliers adversely affected by the decision, adopts the "actual notice" standard for Prelims, at least in the context of LMA public projects. Relying on federal and Arizona cases permitting alternative methods of serving the 90-day notice where the notice was actually received by the general contractor, Falcone Bros. extends the same saving grace to Prelims if it can be proven that the general contractor actually received the Prelim.
This actual notice holding will likely fuel future litigation in both LMA and private projects where "actual notice" of the Prelim will become the central issue if the Prelim was not properly served.
The Falcone Bros. decision makes a valiant effort to discern legislative intent from an awkwardly written statute, and it is hard to disagree with the court's assessment that the legislature could have been clearer in drafting the statute. However, in this author's opinion—perhaps biased from nearly 20 years of believing that Prelim service requirements do not differ between private and public projects—the decision appears to lose the forest through the trees in concluding that Arizona's specific Prelim service statute is trumped by an ambiguous and non-specific service statute.
While the Falcone Bros. decision may be further appealed or made moot by a legislative fix, for now, suppliers and subcontractors must take immediate steps to ensure that their Prelims on Arizona LMA public projects are served by registered or certified mail.
About the author: Mark Bogard is a construction law attorney at the Phoenix law firm of Jaburg Wilk. For nearly 20 years he has assisted suppliers, contractors, owners/developers, lenders and registered professionals in virtually all areas of construction law, including payment remedies such as mechanics' liens, payment bonds, stop notices, and "prompt pay" on private and public projects. Got a legal question for Mark? Contact him directly.
This article is not intended to provide legal advice and only relates to Arizona law. It does not consider the scope of laws in states other than Arizona. Always consult an attorney for legal advice for your particular situation.