Chapter 15
Construction Claims Analysis
Summary:
The author explains in this chapter typical payment and collection remedies beginning with a written demand. He also discusses ceasing performance, filing a lawsuit, prejudgment writ of attachment and self-help. In addition to these remedies, it is explained that the architect, engineer, general contractor, subcontractor and vendor have statutory rights as improvers of real property pursuant to the provisions of Civil Code §§ 8000 and 9000, et seq. The California Prompt Payment statutes are also summarized.
§ 15.1 Who Has These Rights?
The California Constitution created payment remedy rights for contractors, subcontractors, suppliers, architects and engineers who provide tangible improvements to real property.
In general, any provider of labor, site services, equipment, or material incorporated into a jobsite has the right to pursue a mechanic’s lien, stop notice and payment bond. However, the rules for these procedures are very strict and careful compliance with the statutes, and legal advice, is required to perfect these rights.
This is subject matter where a brief discussion with a competent construction lawyer can be worth tens of thousands of dollars. Such a brief consultation is available online at www.ConstructionLawyers.com.
DO NOT TRY THIS ALONE!
In 2006, The California Law Revision published a 272-page list of Tentative Recommendations (http://www.clrc.ca.gov/pub/Misc-Report/TR-MechLienLaw.pdf). A further Tentative Recommendation was issued in 2016 (http://www.clrc.ca.gov/pub/Misc-Report/TR-H859.pdf)
These recommendations resulted in a complete overhaul of the Mechanics Liens, Bond Claims and Stop Notice Statutes in California. The statutes, enacted in 2012, are contained in Civil Code § 8000, et seq. (private works) and § 9000, et seq (public works). Mechanic’s liens are foreclosure rights asserted against private property.
In general, there are no mechanic’s lien rights against public projects. However, the careful practitioner should always search for private real property interests on public projects. Examples include ship liens (e.g. the Queen Mary in Long Beach), private leases and concessions (e.g. airport restaurants and build outs).
Similarly, construction projects involving tribal lands have limited remedies in the event of nonpayment by the owner or general contractor. The availability of appropriate remedies is affected by complex tribal sovereign immunity and jurisdictional issues.
As this book focuses on public works, as well as mention of private works and homebuilding, a brief summary of the statutory remedies is useful as a starting point for your research.
There is also a separate group of complex statutes that are commonly called, Prompt Payment Statutes. These statutes create duties that owners and general contractors must follow, or suffer penalties and interest charges under existing contracts that can be substantial.
It must also be mentioned that there is an entirely separate body of law to pursue payment on federal projects known at the Miller Act, 40 U.S.C. §§ 3131-3133. A treatment of federal project rules is beyond the scope of this work. (The Appendix contains valuable resources to explore both the California and federal payment remedies, their rules and practical considerations.)
§ 15.2 Preliminary Notice
As a general matter, a claimant under these statutes (other than an original contractor or persons performing actual labor for wages) must file a Preliminary Notice in order to have any mechanic’s lien rights. This written notice must be provided within 20 days of providing labor, services, or equipment, Civil Code §§ 8034, 8102, 8104, 8116, 8170, 8172, 8174, 8200, 8202, 8204, 8206, 8208, 8210, 8212, 8214, 8216.
The notice must be served upon all interested parties, although failure to serve one party may only defeat the right against that party. In general, the owner, the lender, and all upper-tier contractors should be served with the Preliminary Notice. Forms are generally available, but they must be checked against current statutory requirements. See Civil Code § 8102.
In one case, In re Baldwin Builders (Bankr. 9th Cir. 1999) 232 B.R. 406, the bankruptcy court held that a creditor’s post-petition suit to enforce a mechanic’s lien was in violation of the automatic stay. The Bankruptcy Appellate Panel affirmed. Here, Southern Counties Landscape (SCL) gave notice of a mechanic’s lien against Baldwin Builders before Baldwin filed for bankruptcy. After Baldwin filed, SCL sued to foreclose two different times, but failed to give notice to Baldwin or its trustee in both occasions. (This case was distinguished by a Fourth Circuit, U.S. District Court case called In re Concrete Structures, Inc. (E.D. Va. 2001) 261 B.R. 627.) As the only purpose for SCL’s foreclosure attempts was “to maintain or continue perfection,” an action that § 546(b) of the Bankruptcy Code says requires notice, the foreclosure suits were found to be void.
§ 15.3 The Mechanic’s Lien
The mechanic’s lien is a security interest against private real property. It is almost never available against public property. It must be the property that is being improved by the claimant. The mechanic’s lien must contain a demand after payments and offsets, a description of the real property, the name of the reputed owner, the person who employed the claimant, and a verification, Civil Code § 8416. The lien must be filed by the general contractor within 60 days of a valid notice of completion or notice of cessation is recorded. Civil Code § 8412(b). The general has 90 days from completion if no notices are filed regarding completion or cessation, Civil Code § 8412(a). Subcontractors have 30 days after recording of a notice of completion or cessation, Civil Code § 8414(b)(2) A Notice of Completion must be filed within 15 days of actual completion to be valid, Civil Code § 8182 (a prior version of this statute, former Civil Code § 3093, required filing within 10 days). The date of recording starts the time period.
These statutes and the resulting case law contain various tricks and traps. Always get competent legal advice before determining whether you have a claim or what steps you need to take. “Googling” these rules will often lead to an old version of these statutes (e.g., Civil Code § 3000, et seq.)
Mechanic’s liens are only available against private real property. There are generally no mechanic’s liens against public improvements. However, private lease interests in public property may be liened.
In Schmitt v. Tri Counties Bank (1999) 70 Cal. App.4th 1234, the court of appeal affirmed a trial court decision, holding that a contractor’s (Northstate Asphalt’s) site improvement lien had priority over a lender’s (Tri Counties Bank’s) recorded deed of trust. While recorded deeds generally have priority over mechanics’ liens, Civil Code § 8458 gives priority to site improvement liens unless the lender ensures that all site improvement liens are satisfied before releasing any funds. Here, Country National Bank, and its successor, Tri Counties Bank, both failed to comply with the relevant portions of (at the time Civil Code § 3137, now found at Civil Code § 8458). Consequently, Tri Counties Bank’s deed of trust was not afforded priority over the site improvement lien of Northstate.
In D’Orsay Internat. Partners v. Superior Court (2004) 123 Cal.App.4th 836, the court of appeal held that a design professional’s statutory lien did not allow a contractor providing design services to assert a mechanic’s lien before construction commenced.
The failure of a public entity to verify the existence of a payment bond from the original contractor can result in the public entity becoming liable on the claim. The public entity was statutorily liable as it was required by law to assure that a bond was obtained. N.V. Heathorn, Inc. v. County of San Mateo (2005) 126 Cal.App.4th 1526.
In a similar case, Electrical Electronic Control, Inc. v. Los Angeles Unified School Dist. (2005) 126 Cal.App.4th 601, the court held the public entity liable to a subcontractor for its failure to obtain a payment bond from the initial general contractor, even though the replacement contractor was required to post a payment bond, as the replacement bond was not shown to cover the previous subcontractor’s payment claims.
§ 15.4 Enforcement of Mechanic’s Liens
A lawsuit to enforce the mechanic’s lien must be commenced no later than 90 days from the date of recording the lien, Civil Code § 8460(a). There is a statutory mechanism, called a “Notice of Credit,” for extending this period for another 90-day period, Civil Code § 8460(b) If the lawsuit is not timely filed, the mechanic’s lien is void, Civil Code § 8460. There is a statutory procedure for removing an invalid lien, involving notice to the claimant, and award of attorneys’ fees if the claimant does not execute a release of lien, see Civil Code §§ 8480, 8482, 8484, 8486, 8488.
The waiver of a mechanic’s lien right must exactly follow the statutory release form or risk being held invalid. The release forms, drafted by the legislature, leave much to be desired. As such, many contractors and owners require a series of side letters and other documentation in addition to the lien release.
A statutory release does not foreclose a claimant’s ability to exercise lien rights on sums that become due after the release date. Tesco Controls, Inc. v. Monterey Mechanical Co. (2004) 124 Cal.App.4th 780, 792.
§ 15.5 Public Project Mechanic’s Liens (Rare)
Mechanic’s lien rights do not apply to public works projects.302 However, if title to any of the real property involved in a public project is held by private owners rather than a public agency, general contractors, subcontractors, or material suppliers may place a lien on the project. This issue can also arise in redevelopment projects or private ground lease situations. In fact, a mechanic’s lien can be filed against virtually any privately held real property interest, including boat slip contracts and air rights agreements. However, the public agency has immunity against mechanic’s liens filed on any public-owned real property itself.
§ 15.6 Payment Bonds and Stop Notices
A very important area of evaluating claims and assessing liability is the issue of bonds and stop notice requirements for public entities. Claimants may be secured in contracting with public agencies by means of payment bonds or stop notices. A stop notice is a form of garnishment and is accomplished by a written notice, signed and verified by the claimant or its agent. The notice must state the type of work performed and of the work agreed to be performed.
Civil Code §§ 8034 & 9300 provide requirements for subcontractors or material suppliers to file a preliminary 20-day notice with a public entity in order to preserve stop notice rights on a public works project. Once the preliminary notice has been filed, the subcontractor or material supplier may file the stop notice. Upon receipt of a stop notice, the public agency or construction lender is obligated to withhold money due the contractor to satisfy the claim.
The time for filing a stop notice is set forth in Civil Code § 9356. By filing a stop notice with the owner or construction lender, a subcontractor or supplier gains a lien against the construction funds that would otherwise be paid to the claimant’s alleged debtor.
In order to recover on a stop notice, a suit must be filed. The time requirements for filing such a suit are set forth in Civil Code §§ 9502 - 9508. It must be brought to trial in two years or it may be dismissed. When the validity of a stop notice is in dispute between a contractor and a subcontractor, a stop notice may be released by the public entity by allowing the prime contractor to file a bond. The public entity then releases the stop notice and disburses the money withheld pursuant to such notice.351 The subcontractor’s cause of action is then on the bond, not on the stop notice.352
In addition, the prime contractor awarded a public works contract is required to post a payment bond with the public entity if the contract is in excess of $25,000.303 The amount of the payment bond to be posted varies, depending upon the contract amount.304 In order to recover on the payment bond, a claimant must provide a 20-day written notice or provide written notice to the surety and the bond principal within 15 days of recording the notice of completion, or, if no notice has been recorded, within 75 days after completion of the work or improvement.305 Other requirements for filing an action on the payment bond are also set forth in the same statutes. A suit must be filed and brought to trial in a timely manner to perfect a claim on the payment bond.
§ 15.7 Prompt Payment Statutes
California’s prompt payment laws are scattered throughout the State’s Business and Professions Code, Public Contract Code and Civil Code. Depending on the code section, the provisions may be waivable in writing, may be subject to a good faith dispute exception, and may bear interest and penalties ranging up to 2% per month.
This is a brief summary of some of the major prompt payment provisions (condensed from Garret Morui’s California Construction Law Blog):
I. Private Projects
A. Progress Payments – Owners to Direct Contractors
Deadline: An owner must pay a direct contractor within 30 days after notice demanding payment pursuant to the contract. (Civil Code § 8800)
B. Retention Payment – Owner to Direct Contractors
Deadline: If an owner has withheld retention from a direct contractor, the ownermust pay the direct contractor within 45 days after completion of the work of improvement. However, if a part of the work of improvement will become property of a public entity, the owner may condition payment of retention on acceptance by the public entity of the part of the work improvement. (Civil Code § 8812)
C. Progress Payments – Direct Contractor to Subcontractors and Subcontractors to Other Subcontractors
Deadline: A direct contractor must pay its subcontractors, and a subcontractor must pay its subcontractors, within 7 days after receiving a progress payment. (Business and Professions Code § 7108.5)
Good Faith Disputes: If there is a good faith dispute between the direct contractor a subcontractor, or between a subcontractor and its subcontractor, as to a progress payment otherwise due, the direct contractor or subcontractor may withhold from the progress payment up to 150% of the disputed amount. (Business and Professions Code § 7108.5)
D. Retention Payment – Direct Contractor to Subcontractors
Deadline: If a direct contractor has withheld retention from one or more of its subcontractors, the direct contractor must pay its subcontractors within 10 days after receiving all or a portion of retention, unless the retention received is specifically designated for a particular subcontractor. (Civil Code § 8814)
Good Faith Disputes: If there is a good faith dispute between the direct contractor and a subcontractor as to retention otherwise due, the direct contractor may withhold from the retention up to150% of the estimated value of the disputed amount. (Civil Code § 8814)
II. State Public Works Projects
A. Progress Payments – Public Entities to Direct Contractors
Deadline: A public entity must pay a direct contractor within 30 days after receipt of an undisputed payment request. (Public Contract Code § 10261.5)
Disputes: A payment request determined not to be proper must be returned to the direct contractor not later than 7 days after receipt. (Public Contract Code §10261.5)
B. Retention Payment – Public Entities to Direct Contractors
Deadline: A public entity must pay a direct contractor within 60 days after completion of the work of improvement. (Public Contract Code § 7107)
Disputes: If there is a dispute between a public entity and the direct contractor as to retention otherwise due, the public may withhold from the retention up to 150% of the disputed amount.
C. Progress Payments – Direct Contractor to Subcontractors and Subcontractors to Other Subcontractors
Deadline: A direct contractor must pay its subcontractors, and a subcontractor must pay its subcontractors, within 7 days after receiving a progress payment. (Business and Code § 7108.5; Public Contract Code § 10262)
Good Faith Disputes: If there is a good faith dispute between the direct contractor and a subcontractor, or between a subcontractor and its subcontractor, as to a progress payment otherwise due, the direct contractor or subcontractor may withhold from the progress payment up to 150% of the disputed amount. (Business and Professions Code §7108.5; Public Contract Code § 10262.5)
D. Retention – Direct Contractors to Subcontractors
Deadline: A direct contractor must pay its subcontractors within 7 days after all or any portion of retention, unless the retention received is specifically designated for a particular subcontractor. (Public Contract Code § 7107)
Bona Fide Disputes: If there is a bona fide dispute between a direct contractor and a subcontractor as to retention otherwise due, the direct contractor may withhold from the retention up to 150% of the estimated value of the disputed amount. (Public Contract Code § 7107)
III. Public Utility Projects
A. Progress Payments – Direct Contractor to Subcontractors
Deadline: A direct contractor must pay its subcontractors within 21 days after receiving a progress payment. (Civil Code § 8802)
Good Faith Disputes: If there is a good faith dispute between the direct contractor a subcontractor as to a progress payment otherwise due, the direct contractor may withhold from the progress payment up to 150% of the disputed amount. (Civil Code § 8802)
IV. California State University (CSU) Projects
A. Progress Payments – CSU to Direct Contractors
Deadline: CSU must pay its direct contractors within 39 days after receipt of an undisputed and properly submitted payment request. (Public Contract Code § 10853)
Disputes: A payment request determined not to be proper must be returned to the direct contractor not later than 7 days after receipt. (Public Contract Code § 10853)
V. Local Public Works Projects
A. Progress Payments – Local Public Entities to Direct Contractors
Deadline: A local public entities must pay a direct contractors within 30 days after of an undisputed and properly submitted payment request. (Public Contract Code § 20104.50)
Disputes: A payment request determined not to be proper must be returned to the direct contractor not later than 7 days after receipt. (Public Contract Code § 20104.50)
VI. Contracts with Design Professionals
A. Private Works Projects
Contractually Agreed Late Payment Penalties: In a written contract for a private work of improvement entered into on or after January 1, 1996, a contracting party and design professional may agree to contractual provisions that include a late payment penalty in lieu of any interest otherwise due. The term “design professional” is defined as a licensed architect, registered professional engineer, or licensed land surveyor. (Civil Code § 3319).
B. Public Works Projects - Public Entities to Design Professionals
1. Progress Payments
Deadline: For contacts for public works of improvement entered on or after January 1, 1996, a public entity must pay a prime design professional within 30 days after receipt of a written demand for payment. (Civil Code § 3320)
Disputes: If a public entity disputes in good faith any portion of the amount due, it may withhold from the payment an amount not to exceed 150% of the disputed amount. (Civil Code § 3320)
2. Retention
Deadline: For contacts for public works of improvement entered on or after January 1, 1996, a public entity must pay a prime design professional within 45 days after receipt of a written demand for retention. (Civil Code § 3320)
Disputes: If a public entity disputes in good faith any portion of the amount due, it may withhold from the payment an amount not to exceed 150% of the disputed amount. (Civil Code § 3320)
Note: Does not apply to state agency contracts subject to Government Code § 927.6. (Civil Code §3320)
C. Design Professionals to Subconsultant Design Professionals
Deadline: A prime design professional on a public works of improvement must pay its subconsultant design professionals within 15 days after receipt of each progress payment or retention payment. (Civil Code § 3321)
Disputes: If a prime design professional disputes in good faith any portion of the amount due, it may withhold from the payment an amount not to exceed 150% of the disputed amount. (Civil Code § 3321)
These statutes are very complex with a great deal of case law interpretation. This is another area where a brief discussion with a competent construction lawyer can be worth tens of thousands of dollars. Such a brief consultation is available online at www.ConstructionLawyers.com.