Authored By: Jennifer Grieco and Steve McKenney
Litigators handling construction disputes are keenly aware of the respective ninety-day and one-year limitations for recording and seeking to foreclose on construction liens. Given the prevalence of arbitration provisions in construction contracts, litigators are often faced with the issue of how to pursue a claim to establish the validity of the lien in arbitration, while preserving a timely right to foreclose on a construction lien in circuit court. In a February 9, 2023, to-be-published opinion authored by Judge Noah Hood, The Michigan Court of Appeals inLegacy Custom Builders, Inc v Rogers, provided guidance to litigators and practitioners on the appropriate interplay between preserving a timely action to foreclose a construction lien and pursuing a claim in arbitration to establish the validity of the lien.
Legacy Custom Builders arose from a residential construction dispute between the builder and the property owner, Sally Rogers. Rogers disputed and refused to pay Legacy’s invoices, ultimately leading to the termination of the parties’ construction contract. Rogers indicated that she was invoking the arbitration provision of the parties’ contract, prompting Legacy to timely record a construction lien on Rogers’ property claiming $177,905.83 due for labor and materials. Shortly thereafter, Legacy filed suit in circuit court to foreclose on its construction lien, well within the one-year limitation period set forth in MCL 570.1117(1).
Rather than answer Legacy’s complaint, Rogers moved to compel arbitration and for dismissal of Legacy’s complaint under MCR 2.116(C)(7), citing the parties’ arbitration agreement. Legacy opposed Rogers’ motion arguing that enforcing the arbitration agreement would prevent it from complying with the one-year limitation period for recording and foreclosing on a lien, and that the arbitrator did not have authority to determine an interest in land. The circuit court disagreed, granted Rogers’ motion to compel arbitration, and granted summary disposition of Legacy’s complaint – including its lien-foreclosure claim. Legacy then moved for reconsideration, arguing that upon compelling arbitration of its lien claim the circuit court should have stayed the action rather than dismissing its complaint to preserve the timeliness of its lien-foreclosure claim and remedies should it prevail in arbitration. The trial court disagreed and denied Legacy’s request for reconsideration. Legacy appealed.
The Michigan Court of Appeals affirmed the circuit court’s compelling arbitration, but reversed its grant of summary disposition and dismissal of Legacy’s complaint. Citing MCL 691.1687(6) and MCR 3.602(C), the Court reasoned, “[i]nstead of dismissing the claim, the Uniform Arbitration Act (UAA), MCL 691.1681 et seq., and Michigan Court Rules both required the trial court to stay the lawsuit pending arbitration.” As to why this mattered, the Court reasoned, “[i]f a lienholder timely records a claim of lien and timely files suit to foreclose on the lien, but the court dismisses the suit due to a valid arbitration clause, the lienholder’s claims may end up time barred because arbitration does not toll the statute of limitations pending arbitration.” The Court noted, while “[c]onstruction liens, like other security interests, can be resolved through arbitration,” the trial court’s refusal to stay was significant, “[b]ecause they affect real estate titles, however, parties must often look to the circuit court to enforce arbitration awards related to construction liens.” Consequently, “[h]ad the trial court stayed the lawsuit pending arbitration, instead of dismissing, it would have enforced the arbitration agreement while protecting Legacy’s compliance with the limitations period and ability to enforce the lien after arbitration.”
Legacy Custom Builders provides important guidance on the required procedure for handling construction lien disputes subject to arbitration. Even in circumstances where a valid arbitration provision controls resolution of the parties’ dispute, practitioners can protect their client’s lien foreclosure and enforcement rights by filing a timely action for foreclosure, while also seeking to compel arbitration and a stay of the foreclosure action in circuit court.