A basic feature of a mechanics lien is that a lien enables an unpaid contractor or subcontractor to receive the money that he or she is owed.  Unfortunately, determining exactly how much a lien claimant is owed is anything but a simple task.  Should the amount be determined by how much the party was supposed to be paid in the contract?  Should it be how much that party’s work was worth?  Should a different standard be used, and can California courts pick and choose which standard they apply?  A recent California mechanics lien case addressed and deftly answered these questions.

The Recent California Mechanics Lien Case

As another blog post noted, the case Appel v. Superior Court of Los Angeles County is an “all-too-common scenario of a failed project.”

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Wilshire, a property owner and developer, originally contracted with Webcor Construction to build a 23-story condominium complex in the heart of Los Angeles.  Webcor was to be paid $65.5 million for its work, but under the terms of the contract the Guaranteed Maximum Price (GMP) could be increased or decreased so long as the change was in writing.  Indeed, the parties later increased the GMP to $81 million.

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The opinion doesn’t go into the details but eventually the project went bust and construction had to be halted.  In a pre-trial settlement after Webcor placed a mechanics lien on the property, Webcor and Wilshire again raised the GMP to $95.5 million.  By that time, the “owner” of the property was a group of unit owners, and they became the defendants in the suit to foreclose on the lien.

At trial, this increase to $95.5 million “befuddled” — and frankly angered — the court.  Specifically, the court reasoned that the only reason the parties raised the GMP to $95.5 million was to obstruct any defense the property’s unit owners could raise in the suit to foreclose on a mechanics lien.  After several other pre-trial motions were filed, the court intentionally ignored the increased GMP of $95.5 and held that the lien amount would be determined based on the reasonable value of the work performed alone.

Lien Amount Law in California

On appeal to the California Court of Appeals, Second District, Webcor argued that this decision was in direct conflict with California lien law, which dictates that courts must consider both the reasonable amount of the work performed and the agreed-upon contract price and then order that the lesser of those is the lien amount.

The relevant statute, California Civil Code § 3123, states that:

(a)  The liens provided for in this chapter shall be direct liens, and shall be for the reasonable value of the labor, services, equipment, or materials furnished or for the price agreed upon by the claimant and the person with whom he or she contracted, whichever is less.

It would seem clear that, as Webcor argued, courts must consider both potential lien amounts – the contract amount and the amount that the work is “reasonably worth” and then apply the lower one. The court in Appel, however, did not take this approach.  Instead, it cited another case, ECC Construction v. Ganson, in its decision to only consider the reasonable value of the work Webcor performed to determine the lien amount. The court reasoned that since the defendant in Webcor’s suit to foreclose on its lien — the unit owners — were not parties to the agreement between Webcor and Wilshire, the amount that Webcor and Wilshire agreed upon in their settlement could be ignored entirely.

What Standard Should California Courts Apply to Determine Lien Amounts?

Was the trial court permitted to ignore the $95.5 million sum the parties had agreed upon and look only to the reasonable value of the work Webcor performed in determining the value of Webcor’s mechanics lien?  The Appeals Court’s resoundingly answered in the negative and, on remand, ordered the lower court to evaluate both the contract price and the reasonable value of Webcor’s work.

Simply put, no matter who the defendants are in a suit to foreclose on a mechanics lien – even if the defendant was not a party to the contract between the contractor and original owner – courts cannot ignore the contract price entirely.  Instead, courts must consider both the contract price and the reasonable value of the contractor’s work and then take the lesser as the amount of the contractor’s mechanics lien.

The court’s holding does not, of course, mean that the lower court must set the amount of Webcor’s lien at the contract price of $95.5 million.  Rather, the lower court must simply take the steps clearly spelled out in the state statutes and set the lien amount based on that determination.  The case is, therefore, an important step forward in standardizing how California mechanics lien law is applied.