We know that after filing a mechanic’s lien there is a certain amount of time in which an action to enforce the lien must be initiated, or the lien will become ineffective. We also know that, in at least some states, the initiation of arbitration (instead of a foreclosure action) works to meet this deadline. What we haven’t really done, is look at the benefits or difficulties of arbitration as opposed to a foreclosure action.
This post will take a brief look at this situation through the lens of New Mexico mechanic’s lien law. In New Mexico, NMSA 1978 §48-2-10 states that a mechanic’s lien becomes ineffective at the expiration of two years from the date on which the lien was filed if no foreclosure suit or binding arbitration has been commenced. So, what happens if the parties engage in binding arbitration?
The first potential problem is that binding arbitration is only available to parties who have 1) contracted for it, or 2) agreed to it prior to its commencement. Why is this important? It’s important because it is likely that the lien claimant will not be able to include other parties with an interest in the property in the binding arbitration. Parties like a mortgagee, other lien claimants, and owners with whom the lien claimant did not contract, are all unlikely to be able to be included in the arbitration proceedings. This means that once the arbitration is concluded, any award would still require a foreclosure action in court. What happens then? If the two-year period has run during the arbitration proceedings, it may be that the lien is ineffective as to the other parties with an interest in the property. This would defeat some of the benefits of the lien in the first place.
It is also unclear if the lien claimant, upon the commencement of arbitration, can file a lis pendens [a written notice that a lawsuit is pending concerning interest in real property]. By definition, it would seem likely that a lien claimant would be unable to file a lis pendens – since no lawsuit has been filed. This would present a problem. If a good-faith purchaser bought the property without notice of the mechanic’s lien he could take the property free of that encumbrance – bad news for the lien claimant.
It may be that the only safe way to go about contracted/mandated arbitration would be to file a foreclosure suit and immediately ask the court to stay the suit until the arbitration is finalized with the parties required by contract to arbitrate (if this doesn’t violate the arbitration agreement). As you can see, arbitration can open up a can of worms in the lien enforcement process.