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What rights do the material supplier have if:

What rights do the material supplier have if: - Materials was used but not incorporated into the property (i.e. plywood was used as concrete forms but then taken off after concrete cured and is available to be reused by contractor) - Contractor received payment for materials from project, but then abandoned the job - Contractor did not pay the material supplier Since the materials are not incorporated, will the material supplier prevail with its mechanics lien lawsuit against the property? If material supplier also sues the contractor, has not closed its credit account with the contractor, and continues to sell to the contractor, has material supplier damaged its case against the property? Thank you for your insights.

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Sep 27, 2019

Good afternoon. Depending on your precise factual situation, it sounds like an experienced construction lawyer can argue this either way. The material supplier does not necessarily have to prove "incorporation" of the material, but may also use the "used and consumed" standard which has been liberally interpreted (e.g., scaffolding that is reusable on projects). Yes, owners (or direct contractors) sometimes argue that a supplier has made its own bed by continuing to supply to a non-creditworthy contractor, but I have not seen that argument prevail in practice. I do not believe there is any authority on point to support that position and the lien law is liberally construed for the benefit of suppliers and other claimants. --CN

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Sep 28, 2019

How would you argue for the property? How could the material supplier possibly lose substantively?

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Sep 28, 2019

I agree 100% with Christopher in this situation. In all likelihood, because of the nature of the materials being supplied and their use (though not incorporation) in the project, this looks like it would qualify for the "use and consume" exception. The material supplier very likely has lien rights here. Of course, an attorney for the property owner may want to present arguments that the materials were not incorporated and are not "lienable." It is possible to win on these arguments if the facts are favorable. But, based on how they are outlined in your question, they are not favorable. Next, there is the issue of the material supplier continuing to provide materials to a defaulting contractor. I have a very hard time buying into this argument. The fact is that the material supplier's credit decisions about a contractor have no relevance to the supplier's underlying lien right on the job, and the property owner's ultimate responsibility to the supplier to make sure that all supplies are paid for. There may be some facts in the pile that allow the owner to argue some type of detrimental reliance argument - or something - but these arguments would be a stretch, and would have a hard time toppling the strong public policy in favor of supplier liens (it's in the California constitution, after all!). If I were representing the property owner in this situation, I would lean very heavily into the contract between the owner and the general contractor. There is likely a lot of favorable arguments against the general contractor here.

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Sep 28, 2019

If the material supplier did not pre-lien the property, issued a conditional partial release of lien when contractor was paid (for amount of recorded lien), and accepted a payment from owner's representative (project manager) but did not credit that payment against lien, does material supplier have as strong of case? Why is able material supplier able to rely upon a mechanic liens and not demonstrate some responsibility for managing its own credit risk against the contractor? Seems like the material supplier is able to pick and choose how it recovers against its credit risk to maximize profitability. Is that in the California Constitution?

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Sep 28, 2019

There are a few things going on in your reply here. Let's break them down. Can Material Suppliers File Liens & "Pick & Choose" How It Recovers? The short and terse answer here is yes. The mechanic's lien rights in California (and all across the country) protect material suppliers and contractors against non-payment on a construction job. If they are unpaid, they can recover against the property and the property owner. The property owner has the ultimate responsibility to make sure that everyone on the construction project is actually, completely paid. That is the property owner's responsibility. In California, Preliminary Notice Is Required Your comment here says "...If the material supplier did not pre-lien the property..." The California laws help property owners manage their risk of liens by requiring folks on the job to provide a "preliminary notice" when they first start supplying materials or labor to a job. You say "pre-lien" in your comment, but I'm presuming that you refer to the preliminary notice instrument. In California, preliminary notices must be sent by material suppliers and contractors within 20 days of when they start work on a job. If they send the notice late, that is okay, but it only is effective for materials/labor provided within 20 days of their sending the notice. Here is a lot more information about the California preliminary notice requirement. If the material supplier in question did not send a timely preliminary notice, it is highly likely that the supplier will not have any lien rights. So, if what you are saying is correct, their lien rights and their ability to get the property owner to pay up, will be impaired and likely non-existent. Conditional lien waivers in California....are conditional Your comment further states that the material supplier "issued a conditional partial release of lien when contractor was paid (for amount of recorded lien)." A conditional lien waiver is effective against the material supplier only if it's condition is met: payment. If you have a conditional lien waiver in hand from a material supplier and the material supplier was actually paid, then the condition is met and the lien waiver is effective. The material supplier would not have a lien right in this instance because, of course, they were actually paid, and you can't file a lien asking for money that is not due to you (actually, this is true irrespective of the lien waiver document itself). However, if you have a conditional lien waiver in hand and the condition was not met -- meaning the supplier was not ever paid -- then the lien waiver isn't waiving anything. If a supplier signs a conditional lien waiver, and their customer -- the contractor -- gets paid, that is irrelevant to the supplier and their lien waiver. Their lien waiver is not conditional on the contractor getting paid. It is conditional on them getting paid. They get paid, then the lien waiver is effective. If they don't get paid, the lien waiver is not effective. You can learn more about the conditional lien waiver v. unconditional lien waiver nuances here. And here is an article that goes through the California Conditional Lien Waiver on Progress Payment in detail. There are a lot of nuances in this stuff, but the simple fact will remain throughout your study of all these documents and rules: the owner is usually responsible to make sure the material supplier is actually paid. How A Material Supplier Credits Invoices Your comment goes on further to state "accepted a payment from owner’s representative (project manager) but did not credit that payment against lien." This is a very sticky and tricky issue that comes up pretty frequently and is hard to wrestle down. Generally speaking, material suppliers provide materials to contractors on credit. The supplier usually is supplying materials to multiple jobs for a contractor, and thus, the materials themselves are being shipped to different addresses. The supplier typically keeps track of all the addresses and sends invoices to the contractor that enumerate all the money due, and what the money is due for. But then, the contractor just sends back a chunk of money to the supplier and the contractor doesn't designate what the money is specifically for. In many cases, this leaves it to the supplier to allocate those funds to open invoices. The supplier may allocate the payment toward the invoices that are most tardy. This works a lot like your credit card bill. The contractor basically has a credit card account open with the supplier and then sends in a payment, which goes toward the oldest charges. That's how it works. When contractors are behind on cash (which they almost always are), this creates the "robbing peter to pay paul" dynamic, and can leave property owners falling through the cracks. Which is why it's so important for property owners to make sure the supplier is actually paid for the materials that are on their job, and the supplier acknowledges this. Owners may rely on waivers to do this, but those waivers need to be unconditional, or they need to be conditional with some type of proof that the supplier was paid for the materials. Another thing owners do is they pay the contractor with a joint check: a single check that names both the contractor and supplier on it. Conclusion I am extremely sympathetic to your situation. This is a confusing process and it is close to impossible to do everything right and stay on top of everything. It's really unfortunate for all the stakeholders on a job that this is so complex, and in fact, I've dedicated my career toward this problem because I'm pretty passionate that this should be cleaned up. However, there are some ground rules in the clean-up process, and unfortunately for property owners, the first ground rule is that suppliers & contractors have the ultimate right to get paid, and the people making payment (ultimately, the owners), are the most responsible. That is a principle invented by Thomas Jefferson, it is the fountainhead and basis of all labor laws in the world, and this is what gets re-stated by the California Constitution. In your case, if the material supplier did not send a preliminary notice, that will be very favorable to you and may protect you against a supplier lien. The preliminary notice process exists to assist owners in managing the flow of funds down the payment chain. However, if the supplier did send notice, they will likely be in a very strong position to make the property owner fork overpayment to them...and that's because, ultimately, it was the property owner's responsibility to make sure they actually got paid for the materials that were used in their job.

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Sep 28, 2019

Brilliant, thoughtful analysis Scott!

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