In September 2018, in Baumgartner v. Timmins, 245 Ariz. 334, 429 P.3d 567, the Arizona Court of Appeals provided further clarification on what constitutes an “encumbrance” on a property for purposes of Arizona’s statutory scheme prohibiting the recording of “false documents.” The statute, A.R.S. § 33-420, prohibits the recording of documents that a person knows to be forged, are groundless, or that contain material misstatements (or false claims). A person who claims an “interest in, or a lien or encumbrance against” real property who records such documents can be held liable for $5,000 or treble the actual damages caused by the recording (whichever is greater), A.R.S. § 33-420(A), and perhaps even be found guilty of a class 1 misdemeanor, A.R.S. § 33-420(E).

Financial institutions' well-articulated defenses to these claims have allowed the courts to see such claims as frivolous.Undeterred, plaintiffs have adapted and recently began filing foreclosure-delay lawsuits alleging that the recordation of the (1) assignment of the beneficial interest in a deed of trust, (2) notice of substitution of trustee, and/or (3) notice of trustee's sale itself violates A.R.S. § 33-420, Arizona's false recording statute. Frequently, plaintiffs attempt to find some typographical error in these documents and use it to claim that it is a "false" document subject to liability under A.R.S. § 33-420.In a recent opinion dismissing a case from Federal District Court, Judge Neil Wake demonstrates that a strong defense to these claims is that none of the documents "assert" or "create" a "claim" of "interest in, or lien or encumbrance against, real property" as required by A.R.S. § 33-420 and, therefore, the allegations fail to state a claim upon which relief can be granted.

More specifically, the contractor cannot record a lien while “knowing or having reason to know that the document is forged, groundless, contains a material misstatement or false claim or is otherwise invalid.” A.R.S. § 33-420(A).From this sensible premise governing lawful liens, a question often arises concerning what amounts the contractor can include in the total lien amount.

In January 2015, after Zubia’s case was dismissed, Shapiro conducted the trustee’s sale and purchased the property by credit bid. After the sale, Zubia filed a lawsuit against Pena, Shapiro, ACG and others, reasserting her forgery allegations, and sought damages under A.R.S. § 33-420(A)5 and to quiet title to the property. Zubia also added a wrongful foreclosure claim, asked the trial court to declare the January 2015 trustee’s sale invalid, and sought to enjoin any further trustee’s sales.

After the sale, the wife filed a new action reasserting her forgery allegations. In this post-sale action, the wife sought: (i) damages under Arizona’s wrongful recordation statute (A.R.S. § 33-420), (ii) to quiet title to the property, and (iii) damages for “wrongful foreclosure.[1]” The Shapiros successfully moved to dismiss, arguing that the wife waived these claims by failing to obtain an injunction prior to the sale.

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).

Most of Baxter’s claims were thrown out on summary judgment; what remained was slander of title (and interference with contract, though having mentioned that the opinion drops it). This claim, the opinion says, was based on A.R.S. 33-420. It grants treble damages against a person who records a “forged, groundless . . . or otherwise invalid” document claiming an interest in title.