While, as a whole, California’s mechanics lien laws are relatively clear and decently put together, there are still areas that may give rise to some confusion or differing interpretations. In a fairly recent case that is just now making its way through the California court system in the aftermath of the “great recession”, California’s Fourth District Court of Appeals had the opportunity to review some mechanics liens (and the associated laws) from the start of the process to the end – preliminary notice to amount of interest applied to foreclosure judgment – from soup-to-nuts.

Background of the Case

This case arises out of financial difficulties encountered during the construction of a Kohl’s department store. During the construction process the money ran out and four subcontractors filed mechanics liens. Three of these subcontractors were able to successfully obtain judgments of foreclosure (the only subcontractor unable to do so had become a suspended corporation by the time the mechanic lien was to be foreclosed). The property owners, Kohl’s and Wells Fargo Bank, appealed the foreclosure judgments of the the subcontractors in the instant consolidated case Palomar Grading & Paving, Inc. v. Wells Fargo Bank, N.A. et al..

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As the case was consolidated from two appeals arising from three foreclosure actions, and there are multiple issues strung out along the trail of the mechanics lien process, the court decided to tackle the issues in a linear fashion, from preliminary notice to foreclosure interest. In doing so, the court examined the 10 separate and distinct issues of the case in light of the requirements of California’s mechanics lien law. At the risk of spoiling the discussion of the outcome, below, the mechanics lien claimants were successful on 9 of the 10 issues.

Issues Examined and California Mechanics Lien Law

To complement the background given above, some basic are likely necessary to understand the case. As noted, the case involves the construction of a Kohl’s department store, during which, at some point, money ran out. The Kohl’s was to be constructed on parcel 2 of a three parcel tract of land, no actual physical differentiation between which exists. Because of the logistics of the planning and initiation of the work, some subcontractors began work prior to Kohl’s obtaining ownership of the parcel. Additional timing and other specific details will be noted as needed.

Kohl’s Not Named on Preliminary Notice

At the time the preliminary notice was sent by subcontractor Cass, Kohl’s was not an owner of the property. The argument that the subcontractor knew the project involved, or would involve Kohl’s, and therefore, Kohl’s was somehow required to be named in the preliminary notice given by Cass (or receive preliminary notice from Cass) is incorrect. Cass sent the preliminary notice on March 21, while Kohl’s did not become the property owner until May 17. California mechanics lien law is clear that the information required, and the party to whom the notice is required to be given does not extend to parties that “will be” involved on the project, or will eventually own the property. Since Kohl’s was not an “owner or reputed owner” at the time the notice ws given, they were not required to be named on, or receive, the notice.

Work Performed After Mechanics Lien Recorded

The next issue examined by the court is whether a filed mechanics lien was invalid as prematurely filed due to the performance of some work after the date on which the mechanics lien was recorded. Cass recorded its mechanics lien on January 21 (or January 26, the case is inconsistent or unclear in this regard), but some records indicated that work was performed subsequent to that date. Because of this, Kohl’s argued that the mechanics lien should be declared invalid as prematurely filed. Cass, on the other hand, contends that the work performed after the filing of the lien was merely “punch list” work insufficient to render the contract incomplete.

a mechanics lien must be filed after the claimant “completes his contract”
After a brief discussion of the time requirements for the proper filing of a valid mechanics lien, the court declines to address the question in the manner (and by the facts) by which it was set forth. In California, a mechanics lien must be filed after the claimant “completes his contract”. The exact method of determining what actually constitutes completion of the contract at issue for these purposes, however, is not completely clear. In Howard S. Wright Const. Co. v. BBIC Investors, LLC (2006) 136 Cal.App.4th 228, the court set forth two statements to be used in determining the complete-ness of the contract work, but the two statements do not align as well as one would hope.

The first statement defining completion of the contract set forth a “substantial completion” test, that a “contractor completes the contract upon substantial performance of its obligations”. That statement is tempered, however, by the second statement that “a contract is complete for purposes of commencing the recordation period under section 3115 when all work under the contract has been performed, excused, or otherwise discharged”.

The court in Palomar Grading, decided not to determine the validity of the timing of the lien’s filing by using either of these metrics, however, and based the determination on the fact that Cass and the GC agreed to terminate Cass’s work in “mid to late January”. Cass receives the benefit of the doubt in determining whether the contract was concluded in mid-January or late-January, and as such, the contract was determined to be completed in mid-January, prior to the filing of the lien on January 21 (or 26).

Kohl’s and Wells Fargo Not Named on Lien

This argument of Kohl’s hinges on the fact that when mechanics liens were filed, Kohl’s was the owner of parcel 2 within the 3-parcel tract. Because Kohl’s was the owner of the property, and Kohl’s was not listed as an owner on the face of the liens, Kohl’s argues that the liens should be invalidated.

The requirements of California mechanics lien law, however, do not support this conclusion. Because a mechanics lien in California requires the party to be listed on the lien to be “the owner or reputed owner, if known“. [emphasis added]. Therefore, the statutory language clearly shows that the a party not known to be an owner or reputed owner of the property is not necessary to include on the face of the lien, and the law does not require any proactive title searching to find the actual ownership of the property. The question, therefore, was simply whether the parties actually knew that Kohl’s was an owner of the property when the liens were drafted and filed, and still failed to include Kohl’s on the document. The court concluded that the claimants had no actual knowledge of Kohl’s’ ownership of the property, so therefore, the failure to include Kohl’s on the lien claim had no effect.

“Incorrect” Address of Property Location on Lien

This issue relates to the municipal address included on one of the mechanics lien claims, and whether a mistake in such address would invalidate the claim. Specifically, a claimant described the location of the property subject to the lien (Kohl’s property) as 1491 E. Second Street, when the actual correct address of the Kohl’s store was 1479 E. Second Street. California cases regarding what constitutes a sufficient description of property subject to a mechanics lien stretch back a long time, and are not completely consistent.

Lien claimants are afforded some protection in the description of the property, however, by statute. California law holds that

No mistake or errors in the . . .  description of the property against which the lien is recorded, shall invalidate the lien, unless the court finds that such mistake or error in the statement of the demand, credits and offsets, or of the balance due, was made with the intent to defraud, or that an innocent third party, without notice, direct or constructive, has since the claim was recorded become the bona fide owner of the property, and that the notice of claim was so deficient that it did not put the party on further inquiry in any manner [emphasis added]

Because there was no evidence presented that the lien claimant in this case was attempting to defraud any party, or that any innocent third party became the owner of the property without direct or constructive notice of the lien, the argument that the incorrect address invalidates the lien as a matter of law fails. The potential argument as to whether the description of the property was practically or functionally sufficient was not brought up by Kohl’s, so it was not examined.

Later Addition of Kohl’s and Wells Fargo Related to Timeliness of Foreclosure Action

California law requires an action to enforce a mechanics lien to be initiated within 90 days of the lien’s filing. The mechanics lien claimants in this case complied with this 90-day deadline, but failed to name either Kohl’s or Wells Fargo as parties to the original enforcement actions. As both Kohl’s and Wells Fargo were owners of parcels in the tract at the time the original action was instituted, they contend that the failure to name them in the original complaint and the passing of the 90-day deadline prior to naming Kohl’s and Wells Fargo as replacements for the Doe defendants originally listed caused the enforcement of the liens to be untimely. The court again determines that this is not fatal to the mechanics lien claims.

the 90-day enforcement action deadline was met when the action was initiated, despite the later required supplementation of the parties
The language of the statute providing the 90-day deadline for enforcement only holds that “an action” be filed within the 90-day period. It makes no mention of the contents of the action and whether or not the actual owner(s) of the property at issue must be named in the original compliant, or if a “Doe” defendant may stand-in until the actual owner(s) can be determined. The court here decide that, similarly to the requirement that the property owner or reported owner must only be named on the lien  if known, and that no proactive title search is required for a valid mechanics lien, the listing of a “Doe” defendant as a stand-in for an unknown property owner on a mechanics lien enforcement action is acceptable. Also similarly to the name-on-lien determination is the fact that no evidence was presented to show that any of the mechanics lien claimants actually knew of either Kohl’s or Wells Fargo’s ownership of any of the parcels subject to the lien. Therefore, the court found the 90-day enforcement action deadline was met when the action was initiated, despite the later required supplementation of the parties.

Amount Listed On Lien and Amount That May Be Collected

While the amount listed on one of the foreclosed mechanics liens (and the action to enforce it) was $1,835,999.59, the trial court awarded $2,023,896.21, irrespective of any interest. The appeals court held that this was not in error, by applying several sections of the mechanics lien law together. The court noted that a “demand” required to be stated on the mechanics lien does not in itself denote “exactitude”, but rather a claim subject to negotiation or litigation. This is both moderated and strengthened by other language in the statutes.

California law provides for the complete forfeiture of a mechanics lien if the lien amount includes amounts willfully exaggerated, or for labor and/or materials not actually furnished to the project. While this provides a strong incentive for a lien claimant to not exaggerate at the expense of their lien’s validity, and if s/he should err to do so on the said of caution, it also implies that claimants who do err may have the ability to make up for that caution in the foreclosure award. Since the legislature had an opportunity to strictly limit the available award to the amount listed on the face of the lien document and didn’t, the court determined that was not the intent.

What Constitutes “Claimant” and Amount of Lien

This particular issue is sticky and difficult, and has to do with the amount of a lien claim award in relation to a sub-subcontractor that was no longer a corporate entity at the time of the enforcement action initiated by the sub with whom that sub-sub contracted. The sub-sub TNT contracted with sub Cass, was unpaid for a little over $600,000 worth of work, filed a timely mechanics lien, and timely initiated an enforcement action. By the time trial commenced, TNT’s corporate status had been suspended, and TNT filed for a dismissal of its action. Nonetheless, Cass represented to the court that Cass had agreed to pay TNT though a pass-through agreement, despite no evidence of a pass-through agreement or assignment of rights agreement being presented. Further, Cass did not give any evidence that it had an obligation to pay TNT after TNT’s suspension of corporate status, and doesn’t claim that it would pay the $600,000 to TNT (that Cass itself originally didn’t pay on its sub-subcontract with TNT) if Cass’s award of that amount stood.

The court determined whether it was appropriate to award the $600,000 to Cass hinged upon the determination of whether TNT was a “claimant” as contemplated by California law. Statutory language provides that :

[a]ny original contractor or subcontractorshall be entitled to recover, upon a claim of lien recorded by him, only such amount as may be due him according to the terms of his contract after deducting all claims of other claimants for labor, services, equipment, or materials furnished and embraced within his contract.

The statute also provides that a “claimant” is defined as “a person entitled . . . to record a claim of lien . . .”. The court notes that because a suspended corporation is dead to the law, contracts it entered into are voidable, and it is not able to prosecute or defend an action, TNT was not a claimant at the time of the enforcement action. The court further notes that this decision does not put Kohl’s and Wells Fargo in any worse position, as they owed the $600,000 in any event, and if the determination was made the other way, it would likely result in a windfall to Kohl’s and Wells Fargo, in that they would be off the hook for $600,000 worth of improvement to the property.

The court recognized that the award of the $600,000 to Cass would result in a windfall, provided that Cass failed to keep their “promise” to TNT to pay that amount. Also noted, however, was that if TNT revived as a corporation, and attempted to foreclose on their lien within the acceptable time period, Kohl’s and Wells Fargo would be protected from paying twice, and would be able to offset that $600,000 amount as contained within the payment to Cass – to whom TNT would be required to look for payment.

Project Over Multiple Parcels and Allocation

Because there were three parcels in the tract, and work was performed on all three parcels, despite the actual building being located only on parcel 2, Kohl’s and Wells Fargo claim that the mechanics liens judgment should have been allocated between the three parcels by the trial judge. While there is some statutory support for the allocation of lien foreclosure awards between multiple parcels when work is done on each, that is applicable only when there was more than one “work of improvement”. In this case, no evidence was provided that the work as a whole was more than one “work of improvement” and the facts that when the work started there was one owner, one lender, and one GC all support the determination that the work performed on all three parcels was part of a unified whole.

Even in the case of a single work of improvement over more than one parcel, a mechanics lien may be apportioned between the parcels improved by the court when it would be inequitable not to do so. For example, in one such case, a work of improvement consisted of work on more than one parcel, but the work on the two adjoining properties was enormously disproportional – on one, a housing development was constructed, while the work on the other parcel was limited to a tee box and small green area. In the case at issue, however, there was no evidence that the work performed on parcels 1 and 3 was either so separate and distinct, or so disproportionate, from the work on parcel 2, such that the failure to apportion the mechanics liens would result in an unconscionably inequitable result.

Allocation, Precise Calculation, and Prejudgment Interest

This question was easily dismissed by the appeals court because the determination of whether prejudgment interest should be awarded was based entirely on the determination of whether the trial court erred in not allocating the mechanics lien judgment. Since no allocation was necessary, it was easily determinable to calculate the the prejudgment interest.

Determination of Prejudgment Interest

Finally, we get to the only one of the 10 distinct questions of California’s mechanics lien law examined by the court in which the court found in favor of Kohl’s and Wells Fargo. The question was whether the prejudgment interest should be calculated at 10% or at 7% – and statutory support was given for both views. The default rate of interest provided by the California Constitution for “things in action”, of which a right to foreclose on a mechanics lien is one, is 7 percent per annum. However, the legislature codified a statute which holds that the default interest for breach of contract is 10 percent (distinct from the constitutional default rate of 7).

Cass argued that since the mechanics lien entitles it to recover the amount due pursuant to its contract, it should be awarded interest at the 10% rate. The court, however, determined that specifically in the case of an “innocent” owner (where the owner itself didn’t breach a contract and the broken contract was between other parties on the work) the interest rate should be set at 7%. Since neither Kohl’s nor Wells Fargo breached there own contracts, but nonetheless ended up with mechanics liens encumbering their property, the prejudgment interest in the case should properly have been calculated at the 7% rate.

The court specifically noted that the decision regarding this question did not address the issue of a culpable owner – one who did in fact breach their own contract – instead of an innocent one. The language of the court in this regard seems to point to the likely determination that a culpable owner would probably be required to pay the less favorable 10% interest rate.

Conclusion

This case presents an interesting and fairly unique opportunity to see a court’s determination of multiple aspects of mechanics lien law over the life of the entire mechanics lien process. While there was not really any ground-breaking determinations made by the court, this examination of the mechanics lien law can provide helpful guidance to lien claimants in California.

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California Court of Appeals Examines Mechanics Lien Law from "Soup-to-Nuts"
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California Court of Appeals Examines Mechanics Lien Law from "Soup-to-Nuts"
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A recent California case examined multiple issues regarding mechanics lien law, and provided helpful clarification regarding many aspects of CA lien law.
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