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Mechanic Liens – Homeowner Exception; Willamson v. Fountain Hills Door

Family Trust Qualifies for Owner-Occupant Exception under ARS §33-1002(A)(2)

In the case of Williamson v. PVOrbit dba Fountain Hills Door & Supply, (1 CA-CV 10-0390, 01-Sep-2011), Division 1 of the Arizona Court of Appeals finally addressed the longstanding issue of whether title to a residence held in the name of a family trust will still qualify for the protections afforded by Arizona’s Homeowner Exception to the Mechanic Lien Statutes (ARS §33-981).  Subject to certain other statutory prerequisites, ARS §33-981 grants a Mechanic’s Lien to every person who labors, furnishes professional services, materials or supplies to the alteration, repair, or new construction of any building, including residential homes.

An exception to this rule is found in ARS §33-1002 — generally referred to the Homeowner Exception to the lien statutes — and provides that absent having a direct contract with the property owner (e.g. the general contractor or architect), no lien may be filed by laborers, subcontractors or material suppliers performing work or supplying materials to the project.

In order to qualify for the Homeowner’s Exception, the “Owner-Occupant” needed only demonstrate (1), that prior to start of construction, they held legal or equitable title to the dwelling by way of a recorded instrument and (2), that they resided or intended to reside in the dwelling at least 30 days during the first year following completion of the home or remodeling project.  The statute also required that an “Owner-Occupant” be a “natural person.”

The re-occurring issue addressed by the Williamson court was whether the exception would still apply when legal title to the residence was held, not by a “natural person”, but instead by a family trust which was controlled and operated by the same individuals living in the residence.  Transferring legal title to a family trust or other family limited liability company has long been a vehicle for estate planning attorneys to protect the assets of their clients and minimize tax liabilities on the death of the principals.

The Williamson court recognized that in a family trust situation, the  Williamsons’, as sole beneficiaries and trustees, still qualified as a “natural person” under the statute and thus were entitled to have the mechanic’s lien discharged.  The court held that in a trust, the trustees hold legal title and the beneficiaries hold equitable title, citing Dunlap Investors Ldt v. Hogan, 133 Ariz. 130 (1982).  Since the Williamsons’, as the trustees, held legal title, they still qualified for the exemption against liens provided in ARS §33-1002.

The court did not address the issue of whether Williamsons’ also would have qualified to the exception by virtue of the fact that as beneficiaries under the trust, they also held “equitable” title to the property.

An unanswered question also remains as to the issue when the legal title to the residence in held in the name of a Limited Liability Company with the owner(s) of the LLC being the same individuals residing (or intending to reside) in the residence.  This author believes that the court would resolve this question in the same manner since similar to the “trustee” under a family trust, the “members” in a limited liability company having been formed for estate planning purposes, effectively hold both legal and equitable title to the property in question.

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