Free CLE Course: How to Get Paid on California Construction Projects – The Advanced
In this free digital CLE course, Construction Attorney Christopher Ng will share his expertise on resolving nonpayment issues (for Contractors, Design Professionals, and Suppliers).
This course is accredited for a one hour CLE credit in California.
What we’ll cover:
- Evaluating available statutory remedies (mechanics lien rights, bond claims, and stop payment notices) on private and public projects
- Properly reserving lien and bond rights when receiving payments from troubled customers
- Accurately identifying the deadline to record liens or to assert bond claims
- Avoiding getting caught in fraudulent schemes when selling MBEs/WBEs/DVBEs
- Understanding contract remedies (including the future of “pay when paid” provisions under Crosno, and writs of attachment)
- Piloting through force majeure issues as a result of COVID-19
- Navigating Bankruptcy Court when your customer, the general contractor, or the owner files bankruptcy
Seth Bloom (Speaker 1) : (00:00)
All right. I guess we’ll get started. I’m Seth bloom. I’m a senior director of legal services at Levelset based at a new Orleans Louisiana. We’re super excited today to put on our third CLE. Um, this is our continuing legal education program that we want to offer to all construction lawyers or to all lawyers out there. Uh, today we’ll be having, we have a great lawyer and one of our big contributors on the attorney net network. That’s Chris Ang from Gibbs and get in today. The topic will be how to get paid on California construction projects, the advanced version. So Chris, we’re super excited and thank you so much for helping us both with, uh, the first California CLE, um, and all the other help you’ve done for us over the years in regards to webinars and answering questions and participating, we look forward to your CLA today.
Christ Ng (Speaker 2) : (00:48)
Thanks Seth. It’s my pleasure. It’s good to see you and thanks for having me. So my name is Christopher Ng. I’m the managing partner of Gibbs Gidon. We are construction attorneys. We have five offices, one in our, our hub in century city down Irvine, up in Westlake village, out in Las Vegas, and then our newest office, which we opened last month. Yes, during the pandemic in San Jose. So we’re excited that we are now covering the entire state of California and Nevada. And that’s the background that we bring to the table is we have 34 construction lawyers. We are active within the American bar association forum on construction law in leadership positions. We do lots of CLS. We do lots of educational seminars through Levelset, uh, and we write books. In fact, we write the book called California construction law. Uh, we’re coauthors of that treatise put out my Wolters Kluwer.
Speaker 2: (01:47)
I happened to have a chapter called bankruptcy and construction law, which is a fun chapter and, uh, all the more relevant in this day and age with COVID and the various impacts that it’s having on our industry. So, um, today what my goal is to talk a little bit more in depth than we typically would about California construction law and the rights to payment, not the prime or not the basic level stuff, going a little bit deeper, a little bit further getting into the advanced topics that my clients that are already have a level of sophistication are interested in. And then a lot of you that have been practicing law, or perhaps have some construction experience, but maybe don’t talk about all the ins and outs, or maybe you don’t think about all of the things that are now front and center because of coronavirus a chair with you.
Speaker 2: (02:40)
My thoughts about some of these, these, um, issues in the current setting of the current climate. So right now, um, we all know that COVID, as of October 28th is presenting lots of challenges to our industry. It’s been what, 11 months, I think since we had our first, uh, coronavirus case reported in [inaudible] and no doubt the pandemic has hit, uh, our country and the construction industry, uh, in a variety of ways. And there’s lots of impact that have come our way because of the pandemic. And even some that preceded the pandemic like labor shortages. We know that we have pre pandemic labor shortages, and they’re not going away. And the labor gaps are expected to increase. If you look at the treatises that are out there or the, the, uh, the industry players, uh, we’re looking at major gaps, especially in places like California, Texas, and New York.
Speaker 2: (03:36)
And, um, there is a significant lack of worker migration simply due to the expense of markets that we have in, um, uh, in California and New York. So, um, clearly we’re still dealing with those issues, which are being exacerbated, uh, perhaps by some folks that are maybe doing fine on unemployment or doing maybe, uh, you know, almost as well as they would be if they were employed on a project, there are, uh, increasingly less backlogs, less product backlogs, uh, less bidding opportunities, um, which is not a great thing for the longterm vision of our industry. However, as we’ll talk about, I think right now, uh, it’s a mixed bag of news for sure. Um, we are seeing more trade comp, uh, trade contractor competition, uh, made good for the GCs and the owners not so great for the subs that are competing for the same projects, rising material costs.
Speaker 2: (04:29)
We all know about the skyrocketing cost of lumber, um, uh, incredible, uh, increase there, which are increasing the cost of our projects, supply chain issues continue. I know a lot of owners and contractors are now getting away from the one material supplier, uh, formula. Uh, that’s gone and are looking for various suppliers to make sure that they have a stable supply going forward. And no doubt the tighter lending climate is a big deal. We’re seeing that all around the country, especially with certain sectors, we know about retail and amusement, uh, recreational, uh, projects. And we are seeing those fundamentals weaken fundamentals, uh, and the, the, really the uncertainty of where this is going to go. If you are building a movie theater chain or you’re building a, uh, children’s playground, uh, facility, or you are building, uh, an office, an office building, uh, a gym, a health, a health facility, there’s clearly lots of products that are in trouble right now, and trying to figure out how, uh, how we move forward, navigate forward, given the uncertainty of our economic climate, and then the last but not least.
Speaker 2: (05:38)
We also have, um, some concerning data from our public entities. And here in California, if you follow governor Newsome’s, um, uh, advice and, uh, edX that he’s, he’s put out there, we know we’re going to see significantly less construction dollars going to projects, whether they’re, uh, court construction projects, airport projects, uh, transit, um, we’re obviously keeping as much as we can in the kitty for projects, but we’re going to have a shortfall. And that is going to mean that we are going to lose, uh, millions, tens of millions, hundreds of millions of dollars for future public works construction projects. So when you look at the mixed bag of news, um, it is a, um, there are some positive signs and there’s some negative signs and I can pick whatever data you want, and we can talk, we could focus in on, uh, whatever supports are our, uh, our confirmation bias that we want to talk about.
Speaker 2: (06:33)
So when I, when I look at the future of the industry, I like to focus on the, the AIA index and the architectural billing index, because that shows us what’s in the can. When, when design professionals tell me that their, uh, their, their revenues are on decline, they’re not working on a lot of new projects. That’s a, that’s a major warning signal for us. And so we are seeing expected change in architectural revenue. Um, no doubt in this quarter, into the fourth quarter, what we’re anticipating is that a couple of percent, and then into 2021, uh, there is an anticipated change in revenue for architectural firms of about five and a half percent, according to the, the latest, uh, uh, architectural billing index that came out. So, you know, we’re, it, a lot of clients are still taking a wait and see position, a lot of other clients to figure out what they’re going to do.
Speaker 2: (07:24)
Um, and it’s an election year, which adds to some, some of the issues, but certainly, um, there is a lot of uncertainty. There are some good projects that are underway. In fact, I’ve highlighted a few here that are some of the nation’s largest products that got underway last month in California. So there are some good signs too. So it’s not all doom and gloom for sure. Clearly force majeure is front and center right now for many of us. Um, a lot of us are tracking the Levelset or not Levelset. I see, I, I, I had that play. I knew it was gonna confuse this, the level 10 construction firm, uh, who has a dispute with SeaWorld on a project of, to construct a new rollercoaster down in San Diego. It’s a lot of us are following that case to see what happens as far as force majeure and whether or not, uh, the court’s going to excuse some of the obligations, delay some of the payment obligations and what this means for the entire chain, whether you’re a subcontractor or you’re the GC in that case.
Speaker 2: (08:26)
So all eyes are on this to see what happens and remember at the end of the day force majeure, as, as hopefully we’ll talk about, we’ve got time at the end is an equitable decision. This is, um, this is the man or the woman in the black robe. They get to make these equitable decisions and calls upfront, uh, at the outset. This is, these are not jury calls. So, um, when we think about what they’re going to do, uh, the precedent that’s being set by, by, uh, judges superior court judges, that’s going to go a long way in potentially deciding new cases that are, that are coming in the pipeline. So it’s very important right now to remain proactive. I know, uh, our firm is active in putting out articles, whether they are through the state bar, through LinkedIn, through our website, through level set, a lot of you do the same thing.
Speaker 2: (09:15)
It’s important, even for us as construction lawyers, to make sure that we are, um, continuing our education to follow all the new statutes that, that are, that have come into place, ones that are coming down the pipeline, uh, clear. This is just a short list of statutes, relevant statutes that have popped up, uh, fairly recently, AB 1565 is one of the bigger ones, of course. And that’s the amendments to labor code section two 18.7, which allows what, which puts the, the, uh, risk of potential non-payment onto GCs because their subs, or even sub subs, aren’t paying wages or benefits downstream that puts the obligation on the GC shoulder. So in turn GCs now have the ability to withhold payment from subcontractors, as long as they have come up with a good subcontract form that allows them the audit rights and the ability to withhold payments.
Speaker 2: (10:10)
So that’s a, that’s a major one that I think has, um, sort of not under the radar, but it’s a little bit under reported, but we’re seeing it over and over again as a key excuse as to why people downstream are not getting paid. So whether you’re a material supplier or you’re a sub to a sub, and you’re wondering what’s happening upstream, a lot of the time, it’s a GC withholding monies from their subcontractor because their subcontractor can’t comply with their audit requirements or the requirements to show a payroll and, and open their books. And so we’re seeing a lot of conflict right there, um, uh, because of the amendments to two 18.7. Similarly, we have a bunch of new cases, uh, COVID did not stop the appellate courts from permissioning decisions in some very important cases, including, um, Carmel development was a case that came out early on in the pandemic, which did a few things.
Speaker 2: (11:05)
One it reaffirms to, to the credit industry that creditors can apply payments to any obligation that they desire. If their customer doesn’t tell them how to apply payments. And that was front and center in the Carmel case where they were getting payments in and the creditor decided how to apply them. Um, they didn’t have to go to a particular project or to pay down a particular, uh, potential in Kohut mechanics lane, uh, because it wasn’t designated to do so. So, so some important dicta and important lessons, I think that came from the Carmel case. If you haven’t read it yet, definitely want to revisit it. The Eisenberg case that just came out last month, or about two months ago now, uh, very important for practitioners in the construction world, where we now are, are, uh, pretty confident and who knows what will happen with other appellate decisions, but the disgorgement claims that come from unlicensed contractors in section 70 31, you all are very familiar with that.
Speaker 2: (12:03)
I’m sure we are subject to a one-year statute of limitations from project completion, meaning it’s a very short window. If you forget about looking at investigating a contractor’s license, uh, early on, you may be in a situation where oops, um, should have caught that, uh, your last year, year before. And, and because of the short statute of limitations, this is a big case for construction attorneys to make sure they get out in front of doing the investigation. If you represent an owner, uh, making sure that you’re looking at the GCs license to make sure that there is no issues with that and doing that upfront. And similarly, if you’re a GC and you’re looking at a subcontractor, making sure that you’re confirming their license, uh, that they were properly licensed at all times during construct performance of the construction project. Because of course, if, if you’re not, we all know the, what I call the death penalty to contractors, meaning you don’t get money and you may have to give back all the money that you’ve been paid. I’m going to show you a video clip. Why am I showing you a video clip? Laughter. After I show this to you, I will explain my, the method behind the madness of this clip. For those of you that are Narcos fans, you may have smiled or chuckled when you saw this scene.
Speaker 3: (13:21)
[inaudible] [inaudible] [inaudible] [inaudible] [inaudible]
Speaker 2: (13:50)
So what possible irrelevance does that clip from Narcos have to the construction world? Why don’t we sh why don’t we just show that? Well, of course, um, pay when paid pay, if paid, right? We have there and the narco scene, the Colombian cartel, who’s moving their cocaine through the Mexican distributors. And as our, um, our speaker was saying, Hey, you get paid what I get paid. And if you don’t like it I’ll find somebody else to do to do the work. And no, uh, no doubt that has been the bane of our existence as a subcontractor of those of us that represent specialty trade contractors pay when pay, pay pay has been a big deal. Um, the law is a little bit different in all 50 States, but no doubt, we had a major case in the Crosno case versus travelers that came out in April, basically holding that pay when paid provisions have to be reasonable.
Speaker 2: (14:48)
What the heck does that mean? Well, back before the Krasnow decision, any sophisticated GC would take the reins take control over deciding what was a reasonable time for payment. In other words, we knew that under some of the old cases like Clark versus Safeco, that pay if paid is not enforceable, but if we could take control and take charge of what the definition of a reasonable time is, what you’re gonna do that in our prime contract. So oftentimes, uh, or in our subcontract, we would say mr. Subcontractor or mrs. Con tractor, you get paid when we get paid, um, how, and that may take, um, you know, litigation, it may take appeal and you agree that a reasonable time allows us to chase our customer, uh, the owner, perhaps all the way through trial and through appeal before you’re entitled to payment. Well, we know that no longer a permissible clause that is void and no matter how you slice it, dice it.
Speaker 2: (15:49)
Um, the, the takeaway from Krasnow was clearly that, uh, payment provision that delays payment for an indefinite or unreasonably long period of time is unemployed. So a lot of us in the industry talk to clients about this at nauseum and general counsel, and I’ve talked to my construction brethren, um, and sister-in, if that’s the right word right term about what this means, what, how long can we go? What is a reasonable time? Well, I think it is important that twice the appellate court repeated California’s public policy is to ensure quick payment to subcontractors and suppliers who are proper statutory claimants. And again, they didn’t define what that means, but they did reference on a couple of occasions, the very short, statutory timing under California civil code to serve claims and enforce rights, all the timing that we know about it here. So when I think about it, and this is just sort of an off the cuff, uh, sentence here, a long sentence about what could be permissible in the post Crosno era of what is a reasonable time I’ve come up with something that I think would pass muster.
Speaker 2: (16:59)
Is it a bright line? Correct? Is it, should it be 90 days? Could it be 120 days? Could it be 180 days? Like I’ve seen some attorneys say is probably permissible? Um, I don’t know my best case, my best guess is that 90 days is safe and anything more than that is questionable. Uh, it, you know, anything over 180 days is probably not enforceable. Uh, but it all sort of depends on, on your view of this and you know, how, how, how much you want to roll the dice with what an appellate court might do, uh, in the post Crosno area era, when talking about the enforceability of pay when paid provision. So no doubt if you represent GCs, you are going into the payment provisions of your form subcontracts and making a change to make sure that that provision is not void and unenforceable.
Speaker 2: (17:48)
And when you’re representing subcontractors, you’re looking upstream and you’re knocking these provisions out saying, Hey, I don’t care that you haven’t been paid. Your provision is unenforceable. I want, I want my money now. Um, and, um, and this also even close all the way downstream to ourself, uh, suppliers and sub subs, w when they’re hearing the excuse of stream, well, there’s a payment paper version and the GC hasn’t been paid yet. Well, we all know that it doesn’t matter so much anymore that, that there is going to be a much shorter window than perhaps what was previously permitted. Okay. So diving into a little bit of the arrows in our quiver, and I’m not doing the basic deep dive and talking about how many days it is to do a preliminary notice and how many days you have to serve your mechanic’s lien. Um, uh, and all that general basic stuff.
Speaker 2: (18:43)
I’m not trying to focus on some of the more advanced topics that we don’t talk about every day. Now I’m putting on the screen here, the various remedies that most of you, if you are a construction where you’re aware of those you, that dabbled in construction, you may or may not be aware of. And those of you that are not lawyers that are industry professionals, some of these make no sense to you. So, um, I encourage you for those of you that, that, um, don’t understand what each of these remedies are to seek out counsel and talk about whether they would fit in your particular position. Um, but I do want to walk through sort of in a chronological way, the different steps that we think about, um, and we advise and counsel our clients about as they, March from the inception, from, from dealing and negotiating with the customer upfront, signing a contract, and then getting through the project, um, and then waiting for your final payment.
Speaker 2: (19:41)
Okay. So here again on the screen are the, are some of the basic ones, one that I put out right now, just to make sure that I mentioned it now, whether we have time to get back to it or not. We’ll see is the second to last one, which is the project security for direct contractors. This is one that’s still, for some reason has never really taken root. It’s never, um, latched on, in a major way in, uh, at least in the industry that I, that I see, this is a law that came about way back in 2005. So this is predated the 2012 major shift in California legislation, which, and this was sort of a reaction to some of these old cases like Clark versus Safeco, and tried to shift the tables a little bit allowing, or, or, um, really enabling the general contractor to insist on project security from an owner from a private works owner, uh, at any time during the construction of the project, it’s non waivable.
Speaker 2: (20:41)
So it’s a non waivable, um, potential obligation of an owner to post project security for the benefit of the GC comes in the form of a construction security count, let our credit, or most often a bond, a payment bond for the benefit of the general contractor. Now this is not for subs or suppliers, but this is again for GCs. And it gives a GC tremendous leverage, especially in periods of uncertainty. What more period of uncertainty could there be the now, um, to say mr. Owner, mrs. Owner, I have to stop work because you haven’t posted project security for me to make sure that I feel comfortable moving forward. So I’m giving you your 10 day notice. If you don’t come up with the product security, I’m going to walk off or suspend my obligations on the project. So for those of you that don’t, aren’t, aren’t aware of this, uh, civil code section 8,700 does a little bit deeper of a dive.
Speaker 2: (21:33)
There’s a bunch of exceptions there, but certainly I’ve used this in my practice, uh, as leverage to make sure that my GCs are getting paid. And when I need to, uh, to flex that muscle, um, uh, you know, owner attorneys, oftentimes that may or may not be sophisticated construction counsel and the maybe real estate attorneys would not construction counsel, usually go, wait, what the heck is this? What statute is this? I’ve never heard of this before. Um, and I can’t tell you the number of times that I’ve heard that, which makes me feel good, that I’m actually in the know, so civil code section 8,700, for those of you that don’t already, uh, don’t have experience with it, or aren’t comfortable with it. So again, starting from the beginning, setting ourselves up for success. As I like to say, a couple of points that I always like to emphasize to clients, especially when they are sub subs or my supplier clients is there is a heightened importance on making sure that your customer is at least a subcontractor, a GC or subcontractor, or the owner, and making sure that you are not just selling to somebody who is reselling your material.
Speaker 2: (22:45)
And of course we say that because as we all know, suppliers to suppliers do not have lien rights. Generally speaking, there’s a limited exceptions, perhaps maybe like with private works bonds that may cover suppliers and suppliers, but for the most part, the general role, and it’s not just the California rule is that suppliers to suppliers don’t have lien rights or stop notice rights or bond ranks. Um, and so they have no project security. So oftentimes a client of mine, a supplier client will say, well, how do I know that this person I’m selling to that I just extended credit for is an a subcontractor, well, I can go on the CSLB website and I can see that they’re not actually licensed subcontractors. So that’s all I have to do. Right? And of course your answer is no, there’s a lot more to the analysis. And there’s a lot of federal case law, uh, on this topic when it comes to Miller act.
Speaker 2: (23:44)
And then there is in California, a little Miller act, which is different than the federal statute, right in California, we don’t have tiers. Um, we don’t have, we don’t, we still allow a supplier to a sub sub sub recover, unlike federal law, where we only go down three layers as most of you know, but again, we have to make sure the person we’re selling to is actually performing labor, uh, or, uh, um, performing work on the project pursuant to the plans and specifications of that project. Not just that they are a licensed entity. And so the Eggers versus Flintco is the, is the key case here where it really does give, give our clients the ability to verify the information. In other words, when they’re told, Hey, I need you to display a million dollars in switch here to on this project to me. And you’re not a hundred percent certain who this person is, is there a new, a new, um, a new customer?
Speaker 2: (24:43)
It’s a great order. It sounds like a great project. It sounds like you’re going to be secure, but you want to be sure that they’re not just marking up your material and resell yet. You ask for a copy of their contract, at least ask for their scope of work, maybe a redacted contract that shows the project parties. You know, I don’t need to know the price, but I need to be able to see that you have agreed to perform work on the project. And that’s what Edgar said is that as long as the subcontract shows that the parties have agreed greed for that party to do work on the project, that’s enough, even if they end up not doing work on the project. Um, so that’s a, that’s a fantastic reliance case for those of us that represent, uh, folks downstream, especially suppliers. And the second point here is, is it’s.
Speaker 2: (25:32)
While being cut off is, uh, is, is a huge risk. And being a supplier and supplier is a huge risk. DBE fraud is potentially as big of a risk in this day and age. Now, many years ago, it was sort of an East coast problem. We didn’t think about it too much out here on the West coast. This was all these prosecutions were having happening out of the Southern district of New York, uh, federal projects, least there wasn’t a lot that that really was, was, um, that came West. And then over the last several years, um, we, we as counsel to again, suppliers or even sub subs started seeing that innocent suppliers, quote, unquote, innocent suppliers were being prosecuted with DBE fraud, Oh, along with others that helped facilitate these frauds upon public entities. So not only are you cut off with your job rights and all these wonderful things that we talk about, no, but your client or you, if you are the supplier or sub sub may be prosecuted for participating in a reign and arrangement where you are furnishing to a DBE, pass-through right.
Speaker 2: (26:46)
What is, how do we know the difference? Well, that’s a separate one hour or two hour presentation on DBE fraud. Uh, in essence, it comes down to three key words is the person is your customer that you’re supplying to. Are they serving a commercially useful function on the job? What that means? There’s lots of tests. There’s lots of factors, lots of things that you can pull up from other presentations. Um, but that’s your customer. And potentially your obligation is to try to make sure that they’re, that the person that we are supplying to is serving a commercially useful function and just closing your ears and hiding your eyes. Isn’t enough. Burying your head in the sand is not enough as the, um, as some public entity or some, uh, district attorneys that are prosecuted. These actions say you can’t be willfully blind. You can’t just sell to somebody, um, and take a risk because you’re doing a favor for them.
Speaker 2: (27:41)
You should know, and you should do some investigation to ensure that the person you’re selling to is performing commercials function. Otherwise you may end up with the entire chain being prosecuted for DB fraud, which is what we are seeing more and more of not just in the East coast, uh, HD supply a, uh, one of the biggest suppliers in the country learned this the hard way for $5 million, not so long ago, but we’re also seeing this come to the West coast. And we’re seeing this being prosecuted on state and local products in California. So again, something to be aware of, especially at the practitioner, um, to make sure that you’re counseling your clients properly on DBE fraud. Now, um, the one area preliminary notices that I, that I do like to talk about at a, at a higher level is, um, just making sure rather than the nuts and bolts of it, making sure that our clients are doing a good job at vetting and verifying information, making sure that we’re following the lessons that have been taught in appellate decisions that, that we know about, um, that give us the ability to rely upon job information sheets.
Speaker 2: (28:50)
And so the one case that comes to mind is the force framing case back in 2010, where the claimant, the subcontractor in that case had specified the incorrect lender. In fact, I think they had specified East West bank as a construction lender for a project fast forward. They wanted to record a lien and serve a stop payment notice they did, and they filed their lawsuit and they realized, Oh, wait a minute. China trust bank is the actual lender. Well, so they reserved their claims. And then you get to a motion for summary judgment. And the whole issue was, Hey, I’m trying to trust bank. I was never served with a preliminary notice. So it’s not my fault. I never got notice. I shouldn’t be subject to these claims. And the appellate court cited as they often do with the claimant saying, look, California, mechanic’s lien laws, liberally construed for the benefit of, in favor of a claimant suppliers and subcontractors.
Speaker 2: (29:43)
Especially we see that in civil code section 81, 22, when we make sure that we protect our subs and suppliers, um, and here, as long as it turns out that the subcontractor relied on trustworthy job information, whatever that means, then we’re going to say that they still have a proper claim. So make sure that your clients are setting themselves up for success. In other words, they are collecting job information sheets, whether they’re a subcontractor or they’re a supplier, making sure that they are getting reliable, trustworthy job information sheets on every project account. Hopefully it comes from the GC and maybe it comes from the owner. Um, and it specifies address odor identity, GC identity lender identity. And when it says lender, unknown or lender TBD, or there’s a big blank in the middle understand, that’s probably not a trustworthy job information sheet, right? We need to inquire further and follow all the case, law and precedent that reminds us that we still have an obligation, um, to, to vet as a claimant.
Speaker 2: (30:48)
We still have to do some diligence to make sure that that information is correct. Especially if that, if the information on the job information sheet is not trustworthy. So this is where I don’t let my clients, whether they’re suppliers or subcontractors fill out their own job information sheets, like the sales folks, they shouldn’t be filling out our own job information sheets that should be vetted and be given to us from the top, from a GC or from an owner, or at least if I’m going to fill out my form, have them bless it and sign off on it and say, Oh, this is the accurate correct information. Um, finally, when it comes to job information sheets, the one area that that’s almost always not correct is in the surety box. So job information sheets should always have a place for identification of a payment bond shirty.
Speaker 2: (31:38)
If there is one now public projects, we know that almost all of them have a payment bond attached to them. Any product over $25,000 federal, level’s a bit higher. Um, but almost certainly there’s gonna be a public works payment bond posted for the benefit of suppliers and subcontractors. That information should be on the job information sheet. In addition, on private works, we’re seeing more and more private works owners insisting upon payment bonds. They may have to pay for that upfront with their GC, but then you’re seeing a trickle-down effect where GCs are now posting payment bonds for the benefit of their private works owners. And then the GC sometimes are requiring their subcontractors to post their own individual payment bonds. So you may have multiple layers of payment bonds. So if you’re a sub sub or a supplier downstream, you would have no reason to know these things exist unless you ask for them.
Speaker 2: (32:33)
And that’s why it’s important to have that surety information there. And if it’s blank, make sure that your client’s note, we should follow up on that information, or if a file comes your direction and you’re looking forward to, to move forward your, um, your claim for your client, making sure that you consider is there a payment bond on this project because no, one’s going to volunteer it to you. You’ve got to go find that, especially if it’s, if it’s private works and again, more and more we’re seeing private works payment bonds, whether there’s multiple bonds or just one from the GC level, um, the common mistake, if there is a bond or there is the information filled out on the form where it says payment bonds is you’ll see like ABC and associates or you’ll see Mary Jane and company as the surety. Well, we all know that that is not a surety, who is that? That’s the broker. And there is precedent that says that service of claims to brokers do not qualify. They do not work. Not that you have to serve a preliminary notice upon assurety, but when you’re enforcing it down the road, and you’re, let’s say doing a Miller act bond claim, notice where you’re doing a 90 day, notice the pennant bond claim, make sure that it’s going to the surety and not the broker because broker is not sufficient.
Speaker 4: (33:52)
Okay. Don’t forget it
Speaker 2: (33:55)
All. The ways that you can get job information, I always recommend there’s a certain threshold dollar value for labor materials on a particular project. If we’re hitting that threshold and everybody’s tolerance can be a little different, I’m doing a second level of vetting, regardless of the job information sheet. Maybe I’m going through level set to make sure I’m getting project research done correctly. I’m getting information from I’m looking at the direct contract itself, which by the way, has to be provided to anybody asking for preliminary notice information. The GC must provide a copy of, uh, of the, the job information, that civil code, 82 Oh eight, um, and maybe pulling the construction trustee. You’re looking at the, the title records with the Canterbury quarters office or the building department, public jobs, foyer requests, or CPRA requests to make sure that you’ve got the proper job information.
Speaker 2: (34:49)
Very important on a, on a related note is, uh, in addition to the preliminary notice is making sure that you understand the contract contracts come in lots of shapes and sizes, as we all know, and there is no one size fits all. And this is the common mistake, especially for those home improvement contractors that are out there are those that represent home improvement, contractors, making sure that you have a compliant up-to-date form, they are complex. Rarely do I see a compliant form? I would say 90% of the time a home improvement contract form is lacking in some way, whether it’s asking for too much of a deposit or doesn’t have the correct schedule of values or doesn’t have the right warning language warning language required by statute in there. Oftentimes these home group contracts are not enforceable in that sense. Now there’s case law out there that talks about if you’re a sophisticated homeowner, I think it was Cher back in the day who had one of these old cases, then we’re not going to let you use it as an excuse and declared the contract void.
Speaker 2: (35:51)
Um, but if you’re unsophisticated don’t know any better, you’re dealing with John and Jane DOE whose house burned down in a fire and they signed a contract it’s possible quite possible that, um, that contracts would get thrown out and now you’re dealing with, well, do I have a claim for restitution or something else? So, uh, make sure if you represent, or you are a home improvement contractor that you are using the proper form, if you are a supplier, uh, understand that your terms and conditions, um, on your forms may or may not control the transaction. We know what we know that sometimes, um, purchase orders, invoices have the boiler plate attached to them. Do they become part of the contract? Are they enforceable? Uh, that’s a, that’s a whole nother three hour class, uh, that we talk about. But again, contracts come in, lots of shapes and sizes.
Speaker 2: (36:41)
One question that I get often is do prelims have to be amended. And this is a common question by clients. So there is nothing that I can point to in precedent or statute, which says, at least in California, that a claimant has an obligation to amend or supplement a preliminary notice. But when you think about the whole reason for why the preliminary notice statute exists, it’s to give fair notice upstream, right? To protect owners and GCs and lenders from secret liens. So if you gave a $5,000 preliminary notice, but your claim is actually $500,000, I don’t see how the public policy is satisfied by that. So I suggest, and this is where construction council diverged. No doubt. I always suggest to my clients to do amended or supplemental my notices. I like to follow the Arizona rule sorta hit. When you hit the 120% threshold, you do an amended or something mentally.
Speaker 2: (37:36)
And to make sure that we aren’t the ones paying the bill to litigate on appeal, whether or not we served our statutory or legislative purpose by only doing an initial preliminary notice and not ever supplementing or amending it design professional leads. This is hot right now because again, lots of projects we’re in the design phase and construction is not going forward for whatever reason, because of funding because of COVID because, Oh my gosh, we’re supposed to build a movie theater complex. And that’s not a great idea right now. So we’re, we’re seeing this front and center right now, uh, re design professional liens are, are different than mechanics lands. So make sure that you are using a proper form that complies with all of the prerequisites. Um, there has to be a written contract with the property owner. There has to be some building, a building permit or some other governmental approval for that project construction, um, has not yet.
Speaker 2: (38:36)
You have to do a 10 day notice of default to the property owner. And, um, and this is not available for single family residences where it’s owner occupied and construction is less than a hundred thousand dollars, but these have short timeframes like mechanics liens. Do you must record a design professional lien within 90 days of when you, the design professional know or should have known that construction is not going to commence on a particular project. And the lawsuit has to be then filed 90 days after recreation of that. Um, so it’s a pretty short time window. Uh, and how are you supposed to know whether construction is going to commence or not? And that’s always sort of the wiggle room here. Um, but if you represent design professionals or you are design professional, make sure you are thinking through this with your counsel to understand when you need to serve your lien.
Speaker 2: (39:23)
This is a fantastic way to make sure that you have security and end up getting paid on a job that does not go forward. If it does go forward and construction actually commences there’s a potential conversion process where your design professional lien may, um, may convert to a mechanics lien, or you may now be free to record a separate mechanic’s lien against separate presentation half-hour and design professionals, or so, but it’s a hot front and center issue because of COVID or another hot issue, um, that is popping up are waivers and releases. Now, again, this is a lot of basic stuff here. We can spend a lot of time in waivers and releases, but there’s a couple of points here that I, I like to raise in this economic climate. Um, number one is making sure that if there are things that there are rights that you are trying to preserve, especially when it comes to that final unconditional waiver, that you are carving them out on the form.
Speaker 2: (40:20)
Um, we have a superior court appellate decision for many years ago, which stands for the proposition that you could release your contract rights, not just statutory rights, but contract rights by issuing an 81 38 unconditional waiver and release form with no exceptions. And no carve-outs. Why is that? Because the last sentence of that form is claiming has been paid in full those six words. The spirit spirit court appellate division, at least in Los Angeles said, Hey, that’s enough to discharge the obligation altogether. So be very careful when you’re using these waiver release forms to carve out anything that’s not being released even potentially contract rights. And I would think twice, we always counsel clients, of course, you never provide an unconditional release until the payment has cleared the bank. Lots of appellate decisions about that. Uh, no sympathy there. I know the Tesco Tesco versus monitoring mechanical a few years ago, dealt with that issue back during the last downturn, we’re going to see a lot of those, uh, going forward.
Speaker 2: (41:27)
And one of the things to think about is if your customer, let’s say it’s a GC, let’s say it’s a key subcontractor. Um, if you are getting a payment from them and you know that they’re insolvent, you know, there’s a problem, you know, they may not survive this. And then they say, guess what? I’ve got a $500,000 payment for you. So congratulations. Here you go. Um, I need the waiver and release and exchange. Whoa. Okay, well, hold on. Wait a minute. Is there another way I could structure this? Why am I concerned about taking money? I’d want all things being equal. I’d rather have the check in hand write and deposit that check. But when I give that waiver and release and I accept the money, what happens when number one, of course, the check doesn’t clear, but number two, my customer files bankruptcy in the next 90 days.
Speaker 2: (42:17)
Now going back to the Keenan pipe supply case and other case law that that’s still good precedent out there. Most likely it is not a defense, a new value defense to give a waiver and release to a G a sub or a GC in exchange for that payment. You’re not going to be able to defend against that a preference claim for that money that you just received by saying, well, I gave a waiver and release, so that should be new value that doesn’t work. And because it doesn’t work. And by the way, the only way it does work is if it’s the owner who’s making the payment and the owner files bankruptcy because of your release of that lien and increasing the bankruptcy of state of the owner there, the court will find their new value there in that context. But if it’s a GC or sub files bankruptcy now, what do you do if you’re stuck with a preference obligation and a preference lawsuit that you get a year later for that same money, you’re not going to be able to use that waiver release as a defense.
Speaker 2: (43:12)
So what do you do now? There’s other defenses of course, that we won’t get into today, uh, potentially that exists. But what I like to do is think about, can somebody else pay me the money? Can I at least get a joint check from a solvent owner or GC, and the party that I’m worried about that makes me feel better than taking the money from somebody that I have a strong fear is going to file bankruptcy the next 90 days. So what I will do oftentimes is if that’s my only, the only way this is going to go down, that’s the only way that that payment is going to flow to my client. I am marking up the acception window and I’m writing in there expressly something to the effect of this unconditional waiver and release is expressly conditioned on no bankruptcy or insolvency proceedings voluntary and voluntary being filed in the 90 days from when the payment, uh, that is subject to this release has cleared the financial institution on which it was drawn, something to that effect, which makes of course, an unconditional really conditional upon that 90 days.
Speaker 2: (44:19)
And of course, then I get the, maybe an owner or GC going, well, wait a minute, this form, isn’t correct. You can’t do this. And in response, I say, well, um, I can do this because you can cut me otherwise a joint check, or you can take the risk, but I certainly can’t take the risk of a preference claim when I know that my customer is on the rocks and having problems. So thinking through different creative ways to try to mitigate the risk for your client, I think is super important in this, um, in this day and age, a couple other points here,
Speaker 5: (44:55)
Um, which are very
Speaker 2: (44:59)
Sensitive right now when it comes to COVID and that is understanding what completion is now. There was a case not too long ago, a few months ago, actually now got several months ago, which, which talks about a premature recording of the mechanics, like, and what that means. Um, that case was not a great case for a lot of us who like bright lines, because it’s just further muddied the water on maybe upfront what completion means. Now we know what the statute says is what completion is. Um, we generally think of it as when all of the work required by the plans and specifications. Even that last $5 soap dish dispenser that’s required by the plans and specs is installed on the project and that warranty work and callback work, repair work doesn’t extend the time for completion. Okay. Um, again, that, that analysis may have been thrown in jeopardy a little bit by, uh, by a new case.
Speaker 2: (45:56)
I think what we’re going to talk about in a minute, the precision framing case, as I recall, um, but what’s really friend center is what do you do with projects that have had a COVID suspension or are right now being suspended for whatever reason, um, financing, uh, refinancing bridge loans were, don’t forget that completion of a project can occur because there’s a complete cessation of labor for 60 continuous days when that 60 days of no work goes on in a project, you have completion, meaning all of the deadlines that we think about for mechanics liens and stop notices and all those fun things come front and center. Um, so don’t lose sight of that. That’s been a hot topic. We blog about it a lot. We haven’t, uh, blogging about it a lot. And if the project resume use, does your client now have an obligation to receive a brand new preliminary notice? Cause it’s a brand new project, theoretically, uh, these are, these are important things to think about and a common pitfalls and the subject of no doubt, lots of litigation coming down the pipeline. So,
Speaker 5: (47:03)
Speaker 2: (47:05)
See here. I’m trying to, I’m trying to move forward. I know we’ve only got a few minutes left here and think about what else I want to impress upon you all. Now when bankruptcy is filed. Yes, it is. It can be a major impact on, uh, on the, on the, on the ability to get paid. However, it depends on who’s filing bankruptcy and it doesn’t typically limit your ability to move forward your secured claim. So just for instance, when an owner files bankruptcy, you still are going to record a mechanics lien. You still may be serving a bonded stop payment notice on a construction lender. Those things can still happen. Despite the fact that you have an automatic state and a bankruptcy filing right now, if you have a lien in place or stop him, he knows the place and the owner files bankruptcy. Can you file a lawsuit to enforce that claim after the owners call bankruptcy?
Speaker 2: (48:02)
That’s a more complicated question. And for those of you that have done the deep dives and you’ve gone into the treatises, you will see oftentimes conflicting information. You’ll see citations to a case called village nurseries. You’ll see lots of treatise writers of which I am. One who will give our own opinion as to what you do. But the safe thing to do is you go get relief from the automatic stay so that you don’t have to deal with that issue to go ahead and file your lawsuit, enforce your rights. Um, you can also file a notice of perfection, which is the way that most of us do it, uh, file notes to perfection, uh, with the bankruptcy court, wherever the bankruptcy is pending to let people know that your intent is to move forward with the action, but for the automatic stay. Um, so very important to remember who it is, that’s filing bankruptcy, um, and know that even if an owner or a GC files bankruptcy, that doesn’t mean that the other parties can just stop working, right?
Speaker 2: (48:55)
You still have the obligation to continue to review performance of your contract, whether or not ultimately you have to continue to do that is potentially the subject of an assumption or rejection motion, which can happen very quickly upon an emergency motion that’s often made by GCs that don’t want to work for free. Um, so think about your Abby’s recovery, especially when you have a bankruptcy situation, oftentimes you are free to pursue and move forward. Your claims, despite the fact that an owner or GC has filed bankruptcy, a couple other points that I wanted to raise, um, here is,
Speaker 6: (49:32)
Is stop notices. Okay, what is it?
Speaker 2: (49:36)
So the difference between the mechanics and a stop notice for a lot of us, this is fundamental, but I would say for a lot of us, especially our clients, they have never heard of a stop payment notice before, or if they have, they think public project, it’s a courthouse, uh, it’s a rail line. So I got a payment bond right now of the stop payment notice, right? Whatever that is, right. Make sure you understand what a stop payment notice is. Of course it’s a lien on dispersed construction funds, but it could be a lead on, uh, other monies in the hands of the lender, as well as some of us know from the complex cases that started with the million piping supply back in the eighties, when, um, it turns out that, Hey, we’re going to force potentially a construction lender. That’s the subject of a bond and stop payment notice to not just put into the kitty, all the money that still has remaining for the construction that project, but, uh, reach back into its own pockets and pull out all the money it’s paid itself, points, interests, construction administration fees, and put that into the kitty for claimants to now come after.
Speaker 2: (50:40)
Um, that was a very important case, but it, it, it illustrates the impact of making sure that you don’t just rely on liens. And you think about stop payment notices because the pressure points are different, right? The contractors indemnity obligations for the liens, but now for a stop payment notice, which is freezing construction funds is going to put a difference. The pressure on the folks at the top, um, recovery is different. You may have the ability to get attorney’s fees when it, it comes to a bond and stop payment notice you obviously don’t have an attorney’s fee right in California for mechanics lane. So it’s a bit the consideration. I know, again, during the last downturn I was on a project with, I’m not kidding. It must’ve been 25 claimant subcontractors and suppliers. And I had a high end supplier on a particular job. And we were on a project that was upside down.
Speaker 2: (51:41)
Uh, it was a project in downtown Los Angeles. It was clearly upside down. The lender came in with the excuse. Well, I’m gonna wipe, we’re gonna wipe everybody out because of course our construction loan, which has priority and their case is going to wipe out all of the claims that followed, including the G the sees and the subs and the supplier. You guys are all gone. We’re seeing that happen right now. And for the first time I saw, I haven’t seen this in years and now friend center, I’ve got a project and we see declining equity values, especially in commercial real estate. Right. We saw the, we building in downtown Los Angeles. I think it was on the market for $750 million last year. If I remember correctly and it’s sold to Silverstein at, in New York for like four 30 this year. So we all know what’s happening with declining equity.
Speaker 2: (52:25)
And so you’re going to see more of these, these arguments for lenders that we haven’t seen in so long. Hey, we’re going to wipe you guys out. Uh, one way you get around that is a stop payment notice. And so I’m on this particular project. This is back in 2011, I believe 2010, 2011. And we were a month from trial. We’re sitting in a mandatory settlement conference in, uh, in, uh, judges, uh, in a courtroom, packed with people from, uh, from wall-to-wall and after some hustle and bustle, the judge, uh, screamed out, uh, based basically. Okay, if you guys have a mechanics lien here, then the author from the lender is $1,000. I don’t care if your claim is $1,500 or $1 million. The offer is $1,000. If you don’t accept it, we’ll see you at trial. If you have a stop payment notice, come see me, come see me and chambers.
Speaker 2: (53:23)
And there was me and there was one other attorney we both got up, took our clients back into chambers, and we got paid in full every single cent. And the whole reason there, the whole distinction there was, we were proactive and we went about it with the service of a bonded stop payment notice. Um, there is that obligation. It is money out of your client’s pocket on a private project and a private works project with a lender that’s funded by a lender. You have to theoretically at least go out and get a bond to enforce that stop payment notice. Otherwise the lender can ignore it. Um, and when you, again, when you get that bond and stop payment, notice it triggers the obligation of attorney’s fees, right? Theoretically with the lender, talk about pre talk about leverage and security. Uh, that is, it is a huge boom, even though it may cost my client a percent and a half a premium for that bond.
Speaker 2: (54:17)
So it’s not insignificant, but boy, the payoff at the end of the day, especially in this climate is huge. Now one final point is I’ve read a lot of what, not a lot, but there’s a couple of very savvy construction wares out there that talk about whether or not it’s worthwhile to serve an unbounded stop-payment payment. Notice on a private project, all things being equal. You want the bonnet stop him. I notice for the reasons I’ve already set forth. However, if your client doesn’t want to spend the money on a bond, should you just still do an Unbound and stop payment notice? And my answer to that is why not? Why not? The lender might honor it. And furthermore, there is some compelling arguments to be made that a lender still needs to reach into its own pockets and pull out what it’s paid itself for your benefit.
Speaker 2: (55:03)
If you have served in an unbuttoned stop payment, notice lots of discussion out there, lots of old articles that you can find online of some really smart people that talk about this issue and deep dive into the legislative purpose behind stop payment notices. Um, again, probably a separate one hour seminar, but something again to think about as you move forward. Um, I know Seth and the Levelset folks wanted me to try to wrap this up within an hour so that we could take a little bit of Q and a. Um, so, um, with that, I’m going to just say one more. I’ll give you one more, um, uh, thought from, from my own head here, as we, as we close out, um, this presentation, as you can tell, I have a lot of fun stuff, uh, that I have thought about, and I’ve done presentations for Levelset and others.
Speaker 2: (55:47)
Um, talking about, you know, um, COVID and what’s happening with, you know, the various recording offices and, and delays at the courthouses. Let me say this. Um, there is still delays ongoing at various County recorder’s offices and courthouses. There are ways to bypass some of the delays for recording instruments. There, there is a way where you could e-file through attorney services, or even if you get like, our firm is an authorized E provider, each service provider where you can electronically file and record. And even in Los Angeles where theoretically there’s a week backup backlog in recording documents and they don’t backdate your documents, they record them the day they process your document. So if you turn in something, it may not have a recreation date for four weeks later or however long it takes for them to get around to it. Um, see if you can cut through that delay by using an attorney service that has the ability to e-file, uh, really important, same with the court clerks, like in San Bernardino, my last filing took weeks to get back.
Speaker 2: (56:50)
Um, so be cognizant of status limitations, um, and deadlines, making sure you’re proactive, getting out way in front of these deadlines. Don’t wait until the last day or the last week, even because we all know, um, that, that, uh, these delays may come back to haunt us and why fight the fight and talk about the emergency legislation from Sacramento, whether that extends and tolls our deadlines, why fight that fight, try to get out in front of it and not have to deal with, with some of these issues. So with that, Seth, I finished two minutes early.
Speaker 1: (57:22)
Perfect. All right. Well, I, I did have a question Adam had asked and thank you for a great presentation, Chris, and I’ll probably thank you again, but, uh, the question was what might be a best practice for a contractor to submit a change order that includes both COVID and other impacts.
Speaker 2: (57:42)
Yeah, so that’s a, that’s a hot topic right now. No doubt. Look at the end of the day, it starts with your contract. What are, what does your contract say? Are your obligations as far as, uh, putting forth on a timely basis, substantively and timeliness your request for a change? Um, I like to be as exhaustive as possible. Don’t forget. It’s not just about money. It’s also about time, especially when it comes to the threat of liquidated damages down the pipeline. We know a lot of these cases are going to next year and the year after we’re going to unfold. And we’re going to see lots of, um, whatever excuses that owners or lenders or GCs can throw against the wall to see what sticks, try to protect yourself with, um, with time making sure that you let it be known that I’ve been impacted on a time basis and then a dollar basis setting forth whatever delay, disruption, or acceleration claims that you possibly can. And even if you can’t articulate the precise dollar amount, try to be broad enough to say that you’re reserving your right, because it’s not possible to calculate what that damages as you’re sitting here today, making that, um, that giving that notice to the owner or GC that you have a claim.
Speaker 1: (58:55)
Well, um, are there any other questions out there I’ll leave it open for another minute or two and Adam, thanks. You Chris, for a great presentation. Um, so thanks for coming at them. And, uh, let’s see if we have any other questions out there. If not, we’ll let Chris go and get back to his busy morning. I got nothing to going on. Yeah,
Speaker 2: (59:18)
No, seriously. I know I talked really fast and I said a there’s so much information out there. Um, but, um, I, I like many of you are, are I like to call myself a geek, um, when it comes to this stuff. So if you ever want to talk shop and, um, talk further about any of these things, happy to, happy to share info with you. Thanks for having me against them.
Speaker 1: (59:38)
Chris, thanks so much. And if anyone just so everyone knows that we’ll, uh, we’ll make all the information available so that you can get your CLE credits, uh, as soon as we get them back from the California bar. Uh, but, uh, everything’s great. And, uh, again, thank you for attending. I hope you can attend some of our future CLS, uh, both in California and across the country. And thank you, Chris and everyone.