Why California Contractors Fail to Enforce Mechanics Liens

Treg Julander, a construction lawyer from the Ostergar Law group in Irvine, California discusses how to enforce a mechanics lien in California.

Transcript

Seth Bloom: 

All right. We’ll begin today with our webinar. And if anyone else joins us, they’re, um, they’re able to get this afterwards in case they miss anything at the beginning, but my name’s Seth bloom. Um, I’m senior director of attorney services at a Levelset here in new Orleans. Uh, we were happy today to be putting on another one of our webinars. Uh, the title today is why California contractors failed to enforce mechanics lien. Uh, today we’re lucky enough to have Treg, from the Ostergar Law group in Irvine, California. Come on, he’s a partner there. Uh, so we look forward to Treg’s presentation today. We also look forward to all of your questions. You can ask questions live while you’re on here. In addition to that, you can always post them on our attorney network and get, uh, someone like Treg or another lawyer in your area to answer those questions. So Treg, we look forward to the webinar today, so it’s all yours.

Treg Julander:

Fantastic. Thank you very much, Seth. I appreciate it. It’s my pleasure. I hope that everyone out there is surviving the pandemic and the fires and the heat, and soon to be arriving the Santa Ana winds, at least in Southern California. So pretty exciting times these. So the first step in, uh, being able to enforce the mechanics lien, actually wanting to make a note about the preferred position of mechanics and contractors under California law. In fact, under the California constitution, there is a right to a mechanics lien. And the reason that, uh, that this right is favored is because contractors provide labor and materials to a work of improvement, which increases the value of the improvement. So the law in California favors those contractors and provides them security, uh, as, uh, to, to provide security for recovering the value of the labor and materials that they furnished the project.

Treg Julander:

So, uh, mechanics lien is a great remedy. So the first step in making sure that you have an enforceable mechanics, lien is to serve a preliminary notice if it’s required and it is required. If you have no direct contract with the property owner, and you’re not a laborer, so laborers are not required to serve a preliminary notice and a direct contractor with the owner. For example, a general contractor also is not required to serve a preliminary notice. Otherwise you want to serve it. So the checklist for preliminary notice is first, you want to make sure that it’s addressed to the owner, to the direct contractor and the construction lender. And oftentimes the general contractor will provide the subcontractors, a list of the entities to serve with a preliminary notice, as well as the address for those entities. You want to serve your preliminary notice within 20 days of starting work.

Treg Julander:

Uh, if you serve at later than 20, that could jeopardize the amount of the lien to which you’re entitled to recover. And finally, you want to include a general description of the work to be performed and an estimate of the total cost of the work that you expect. Then the next step for a mechanics lien is to furnish the labor and materials to a private work of, of improvement. Uh, if you don’t furnish labor and materials, there’s no mechanics. So in order to record a mechanics lien, you need to complete the mechanics lien form. And I understand that Levelset can help with both the preliminary notices as well as a lien. So with respect to a lien, you need, I’ve included a list of elements that should be included in your lane. The first is it has to be signed and verified by the claimant.

Treg Julander:

You have to have a statement of demand. The name of the owner, that’s the owner of the property and general description of the work that was furnished to whom the work was furnished. So for example, if you’re a subcontractor and you’ve furnished work to the general contractor, then you would list the general contractor as the party to whom work was furnished. You want to include a description of the site where the work was performed, your address, a proof of service affidavit, and it has to be served according to the statute. And you have to include a proof of service affidavit signed under penalty of perjury. Again, otherwise it won’t be enforceable and include the statutory language from civil code section 84 16. And that is notice language that’s providing notice to the owner that Elaine has been attached to the property. So the next step is to include the amount of the lien.

Treg Julander:

You have to be careful in enlisting the amount of your lane. The, the general rule is that it, the lien, the value of your lien is the reasonable value of the labor and materials furnished, or the price agreed upon by all involved parties, whichever is less. And usually if you insert the contract amount, then you should be in good shape. There. One thing to be careful of is to not inflate the amount of your lien. You might think that you’ll get some additional leverage from the owner or the general contractor. If you increase, if the amount of your lien, if you record a lien for more than the value of the work that was performed, or the price agreed upon by the parties, then that can also invalidate your lien. Don’t want to do that. The next step is to timely record your mechanics lane.

Treg Julander:

So it’s recorded in the, in the, uh, the County recorder in where the property is located. The deadline also, again, is very strict deadline for a subcontractor. Your lien has to be recorded within 30 days of the owner recording a notice of completion. If a notice of completion is properly recorded in circ, if it’s not properly recorded and served, then the longer 90 day deadline applies. And that would be 90 days within 90 days of completion of the project. If you are a general contractor, you have a few more days, you have 60 days from the recording of a notice of completion. And again, if no notice of completion is properly recorded and served upon you, then the 90 day period would apply. The next step is to serve the lien on the property owner. And again, you want to do this via certified or registered mail and keep your certificate of mailing as evidence together with your proof of service to show that you serve the lien on the owner.

Treg Julander:

So once you’ve got a lien that is properly completed, properly recorded in the County recorder’s office, the next step is to file a lien foreclosure lawsuit. So actually even before you file a lawsuit, it, it would generally be a good idea to, uh, send a demand letter to the owner, to the general contractor, with the leverage that you create by having a mechanics lien attached to the property, you may get paid before actually having to re, having to actually file a lawsuit. But if you have to file a lawsuit, that’s the next step. The first important note is that there is a deadline of 90 days. You have to file the foreclosure lawsuit within 90 days after recording the lien. If you don’t record, if you don’t file the lawsuit within 90 days, again, lean is not enforceable. Uh, the deadline can be extended by a credit agreement with the owner, and that can be extended for up to one year after completion.

Treg Julander:

So if the owner is, is wants to pay, uh, for the work that was performed, but, um, maybe just doesn’t have the financing yet or need some additional time in order to get paid. You can extend that 90 day deadline with a written credit agreement has to be written and signed by the owner and by you in order to extend that deadline for filing a lawsuit. So once you’ve filed your lawsuit, make sure that you re and I’ll show you an example of that. When we get into the details of the actual foreclosure complaint, you want to make sure that within 20 days after filing the foreclosure lawsuit, that you record a LIS pendens. So illicit pendants is a notice of your legal action pending that affects the real estate. And the reason that you record a LIS pendens is to give notice to the world.

Treg Julander:

You record this again in the County recorder’s office. And this gives notice to the world that you have a claim on the real property, so that if, uh, uh, someone makes it perhaps a secured loan against the property, or even buys the property, if they have notice of your claim via the lien, the LIS pendens, then they would be buying the property subject to your lawsuit. Otherwise, if you don’t record a LIS pendens, there is a risk that someone could buy the property and it, and it would not be subject to your, uh, your loose pendants. So let me in your lawsuit, here’s an example of a LIS pendens.

Treg Julander:

So this is on a type of pleading paper that you would normally include in a lawsuit, and I’ll show you the complaint. And just a second. So you would have at the top, the name of the court, where it’s being filed and the lawsuit, as well as the list of dependence would list the County where the property is located. In this example, it would be Santa Clara County. The caption for the document is on the right, the notice of pendency of action or Liz pendants. The effective property is also listed there. And this is just an address that I made up. You can see the parties listed on the left, which again are made out the contractor, inc, which is a phony name for a general contractor in this situation and the defendant, which I just named David owner on the second page. This is the substance of the list pendants. This is where you would have the legal language giving notice to the world than an action was commenced affecting that real property, whatever the real property is. So the LIS pendens would recite the recording of the mechanics, lien the date, it was recorded, the instrument number, where it was recorded, the address for the property, and then, uh, to the extent that you can get at a legal description of the property, and you have to be able to get that through the County recorder’s office. And then it is signed at the bottom.

Treg Julander:

That is a LIS pendens. So in addition to, uh, a lien foreclosure cause of action in your complaint, it’s also a good idea to include all other claims that you might have against the general contractor or the owner of the property. For example, you would include contract claims. So if you’re a subcontractor, you would want to name the general contractor, as well as the owner, uh, so that you can include your claims against the general contractor for breach of contract. If you’re not getting paid on a construction project, and you’re a subcontractor, it’s likely that the general contractor has breached its subcontract with you, you should also include any stopped payment notice claims that you have. If you’ve served a stop payment notice on the construction lender and any bond claims such as payment bonds, or if a lien release bond or a stop payment notice release bond has been filed. And then you should include those claims as well in the same lawsuit. And the next important deadline is to bring the lawsuit to trial within two years. And if you don’t, again, you lose, you lose the enforceability of the cause of action.

Treg Julander:

I just wanted to jump in and how much I’m enjoying the webinar, but I know we have a lot of people in the audience, so I just want to encourage them to maybe ask some questions now while we’re going and not save them all for later, but, uh, sorry, interrupt Treg. Just wanted to make sure everyone knows that they can ask questions.

Treg Julander:

Sounds great. Yep. The, uh, let’s take a specific look at, at the lien foreclosure cause of action in the lawsuit. So let me flip over to the foreclosure complaint. And again, this is, uh, a complaint that I have used and I changed the names and addresses and amounts just for the purposes of having a sample to show. So again, at the top, you’ve got the name of the court where it’s filed the names of the parties on the left, the party filing the lawsuit is the plaintiff with the phony name contractor, inc. And the phony name of the defendant David owner is the owner of the property. So the caption for this pleading would be the complaint for breach of contract and foreclosure and mechanics won’t spend much time here, but typically in the complaint you would recite the names of the parties, uh, a background of the facts and the dispute, and then get into the causes of action.

Treg Julander:

So the first cause of action that I have listed here is just a simple breach of contract cause of action. In this situation, the contract was a direct contract with the owner. So the contract claim is directly against the owner. Uh, in this situation, a simple contract to perform some remediation work on property. The owner did not pay the contractor. So the contractor alleges in paragraph 11, that the contractor has performed all of its part of the contract in 12, the defendants have breached the contract by not making payment. Paragraph 13, as a result of that, contractor has been damaged, the amount that they’re owed $20,000 and then interest in addition to that. So the second cause of action would be the foreclosure of the mechanics lien. And this is where you would actually get into the details of how of foreclosing the lien that has been recorded on the property.

Treg Julander:

So the first paragraph there, number 16, identifies the property, the common, uh, address for it in paragraph 17, it alleges a direct contract between the owner and the contractor in paragraph 18. A demand for payment has been made, but no payment was made. And then in paragraph 19 begins the allegations related specifically to the mechanics lien. The date, the mechanics was recorded, the recording number, the County in which it was recorded. Then in paragraph 20, the mechanics lien amount of $20,000, which we alleges the reasonable value of the labor and materials that were furnished as well as additional costs that were required in order to record the mechanics lien and filed a lawsuit in paragraph 21, uh, paragraph plaintiff recorded its verified claim of lien after ceasing performing services. And the amount is owing and unpaid paragraph 22, plaintiff is informed that the defendant is the owner of the property.

Treg Julander:

And 23 is simple allegation that the contractor has complied with all the requirements of the code relating to mechanics lanes. The requirements that we mentioned above on the bottom is what we call the prayer for relief. And this is where you say, this is what I want to recover as a result of my lawsuit. So the first one in paragraph a would be damages for breach of contract. And that’s just simply we perform the work didn’t get paid. This is the demand for the $20,000, but because of the rights under the contract, um, and then with respect to the mechanics lien in paragraph D the complaint would pray for that the mechanics lien before closed and that a judgment be made for the sale of the property.

Treg Julander:

That is a very simple example of a lien foreclosure cause of action. So I’ve listed on the PowerPoint, the elements that must be included within the foreclosure cause of action. You’ve got the existence of a debt owed to the claimant, the amount of the debt. In other words, the amount of the lien, the fact that the claimant is a person entitled to a mechanics lien. And that relates to the elements that we mentioned above that it was that you, that the contractor is someone who furnished labor and materials to a private work of, of, uh, improvement and is a licensed contractor under California law. Uh, the next element would be the priority of the lien over other encumbrances and liens on the property. And finally, the fact that the claimant has complied with the statutory requirements, such as the preliminary notice when required and satisfaction of all applicable deadlines, as we mentioned above.

Treg Julander:

So who do you name as defendants? In my sample complaint, I just named a fictitious owner of the property. So specifically with respect to a foreclosure of mechanics, lien claim, you want to name as defendants, all owners of the property, all persons claiming an interest in the property. So if there is a junior date of trust on the property, you would also want to include as defendants the trustee and the beneficiary of the junior deed of trust. You want to, you need to determine the lien priority so that you can know who you need to name as defendants. And one other note include DOE defendants. If all interest holders are not known, that’s one thing that’s typically included in all complaints is in California. Our list of DOE defendants, for example, here, I’ve listed DOE one through 10 inclusive. That’s like saying John DOE I’m suing David owner, the owner of the property, as well as John DOE one through 10.

Treg Julander:

The reason that you do that is if you don’t know the name of all the parties that you need to list, when you filed the lawsuit, you can name them later. And with a simple amendment called a DOE amendment to the complaint, you can include them in the lawsuit. And that will relate back to the date that the lawsuit was filed. So it’s, there’s strict deadlines in, in filing a lawsuit to enforce your mechanics. Lien filed, you have to file within 90 days, but then you can add defendants later on that you didn’t know the identity of when you initially filed and then they can be relayed back and still come with them that 90 day window. Hope. That makes sense. So I wanted to make a note about determining the lien priority based on the date of commencement. So a mechanics lien has priority over other liens on the property based on the date that work actually commences.

Treg Julander:

That can be a little bit tricky, but let’s say that a general contractor begins work on a project on January one and the construction lender records its date of trust on sale February one. So the mechanics lien would have priority over the construction loan date of trust entirely, not just for the work that was performed before the date of trust was recorded, but for all of the work performed by the contractor, because the mechanics link would relate back to the date of commencement for determining lien priority. But the, the issue here is the work that is commenced has to be visible. I think that’s the word that the courts have said that the word invisible work has to be commenced. And that can be tricky. I worked on a case where, uh, the general contractor actually performed some work before the construction lender recorded the date of trust, but the work was deemed not to be visible because it was work.

Treg Julander:

It was some demolition work that was performed on a roof. And when the construction lenders inspector came out to review the project, he couldn’t see it or he didn’t see it. He didn’t get up on the roof to see the tiles have been removed at some of the mastic had been removed around some of the pipes. And so the lien was determined not to have priority the consequences of that. The construction lender, the project went bankrupt. A general contractor couldn’t get paid by the developer because they were bankrupt. And the construction loan completely took all of the equity in the project. So general contractor lost. So that’s a very important rule in this, the lien priority based on date of commencement

Seth Bloom: 

Treg. We have a question here from, uh, Jennifer. Um, Jennifer asks the lawsuit within 90 days of the recreation of the lien. Is there a timeline for mediation?

Treg Julander:

The only, uh, the only way that a mediation would extend the deadline in order to file a lawsuit and come within that 90 days, if there is a credit agreement with the owner, that’s it, but there is no exception in the statute for mediation that, that the, that the, that the deadline is automatically extended if the parties mediate. So, uh, in what would most likely happen is the contractor would want to file the lawsuit and then mediate so that you make sure that you don’t miss that deadline unless the owner is willing to enter into a credit agreement. And then that’s fine too, cause that will extend that deadline. Hope that answers the question.

Seth Bloom: 

Okay. We have another one coming in. Things are warming up, uh, SB, can we include the attorney, attorney costs and lawsuit and or lien? What percentage interest could be applied in these cases

Treg Julander:

With respect to attorney’s fees under California law, your right to recover attorney’s fees is generally limited unless there is a statute or a contract that permits you to recover them. Then you can’t recover them even in a lien foreclosure action. So if your subcontractor, your general contract includes the right to attorney’s fees, then you can recover them in the lawsuit. I wouldn’t necessarily include them in the lien. And I don’t remember that the case law off the top of my head, but my recollection is that you can’t include in the lien, the amount of your, uh, the amount of your attorney’s fees with respect to interest, yes, you can recover interest in. And if there is in the contract a, an interest amount, then you can recover that amount. Even if there isn’t an amount of interest at a percentage rate in the contract, you should be able to recover prejudgment interest is what it’s called under the statute.

Treg Julander:

And I think the legal rate is 10%. So the requirement to recover prejudgment interest would be that there was some certain amount of money that was due at us at a point in time. It wasn’t paid and therefore you can recover interest from that date forward at 10%. So if a mechanics lien makes that real easy, if you record a mechanics lien on a particular date, you are making a claim that a, some certain is due on that date, on the date it was recorded, and then you can recover prejudgment interest from that date forward. Otherwise, if you have no right to prejudgment interest, then you can only recover interest from the date. The judgment is entered until, until the judgment is paid again. I hope that makes sense. Um, with respect to claiming interest in a mechanics lien amount, uh, I’m not familiar with the case law relating to that, but I would probably avoid including an interest amount, but I would look at the case law before I, um, I did something one way or the other on that.

Seth Bloom: 

And we’ve got another one Treg in your experience. What is the success of a contractor recovering contract value, uh, during this entire process in house versus

Treg Julander:

Outsourcing? What was that last part

Seth Bloom: 

Versus outsourcing

Treg Julander:

Versus outsourcing?

Seth Bloom: 

I know, um, from Melissa, Melissa, can you get a little bit more detail about that or clarify what you’re trying to say?

Treg Julander:

I can comment on the first part and that is, yeah,

Seth Bloom: 

I don’t want on the first part, try going to Pitt, she clears it up. She says outsourcing to either a lawyer or Levelset. 

Treg Julander:

Okay. Um, I am not aware of anyone who has pursued a lien, foreclosure action act, the actual lawsuit without an attorney. Um, I’m not aware of anyone trying it and whether they’ve been successful or not, you know, it’s, it’s oftentimes you follow the law, you record the lien that gives you leverage to get paid. Then you can file a lawsuit and that gives you a leverage to get paid. And my experience has been that 60, 70% of, of claims get resolved before the lawsuit is actually filed. And another 90% after the lawsuit is filed. But before you actually go to trial and have to enforce your mechanics lien. So just the, the, the lean over the property is a powerful remedy. It gives you a lot of leverage to get paid before you file a lawsuit. And, and even after you file a lawsuit, it can help a lot, just a few more quick notes on the outline, where do you file a lawsuit?

Treg Julander:

And that would be in the place where the property is located. That’s an easy one. Um, so what happens when you complete the lawsuit? How do you enforce your judgment? Well, hopefully you’ll get a judgment for two things. Hopefully you’ll get a money judgment for your breach of contract claim. And if you get a money judgment in a certain amount, then you can, you can file with the court a petition for a writ of execution, and then give that rid of execution to the sheriff and ask the sheriff to levy or to seize any bank accounts and other personal property assets owned by the debtor. So for example, if you’re suing the general contractor for breach of contract and you get a money judgment against the general contractor, then you can levy on that his bank accounts and other personal property assets, like equipment computers, um, whatever, whatever you can find with respect to a foreclosure judgment.

Treg Julander:

If you get a judgment enabling you to foreclose on your mechanics lane, then you would petition the court for a writ of execution in order to have the sheriff sell the real estate at a public auction. And then you would be paid out of the proceeds of that public auction. Oftentimes a lien will be removed from the property via a lien release bond, and that could either be recorded by the owner or by a general contractor if they’re required to. And if that happens, that will, that’s a good thing that will remove the lien from the property so that the owner can sell the property or get additional financing on it without having to worry about the lien being there. And what it does is it replaces that property with the security of the bond, which is a promise from the surety company who issued the bond to pay whatever judgment is issued on your lane, foreclosure action.

Treg Julander:

So if a lien release bond is served and recorded, then you would need to Sue in your lawsuit, you would need to Sue the surety as well as the principal on the bond, which is probably in this example and the general contractor, you would include some of the base, same basic allegations as in the lien foreclosure action. And, uh, it needs to be filed that lawsuit needs to be filed within six months after recreation of the bond. But if it’s not recorded, then the statutes either give you three or four years. It’s a little bit ambiguous. Um, so that’s, uh, that’s a good thing. And you might have to, in the middle of your lawsuit, amended, amend the complaint in order to add these additional parties. And in that situation, your lien, foreclosure cause of action would essentially be eliminated because Nolene is no longer there. It looks like we have reached the end of the time. If there are additional questions, I’d be thrilled to answer them. Yeah, we’ve got a couple of questions. One is from Steven and he says, can you include the retention in the lane? Yes. Yeah. Retention is, is part of the value of the labor and materials that were furnished to the project. So retention should be included, have every, all the entire amount of all the contract payments that are owed to you should be included in your lane and then in

Seth Bloom: 

Your lien, foreclosure lawsuit. Yup. Good question. I’m trying to, it was a good question trying to get this one up. Um, can you speak about deter, uh, determining completion that triggers the ML clock to file? Does it include a punch list? And there was a recent case about a contractor coming back to look at potential repair work and that changed the start date. Wow. That is a tricky question and is loaded with so many, uh, fact intensive issues. Um, and I haven’t looked recently at the statute, but my understanding is that when that come, that completion means the substantial completion of the work. If there is an item or two that’s left over, um, then that may not necessarily change the completion date. Um, but that’s something I would want to review the statute. I’d want to look at the specific facts and apply the facts to the situation. In fact, if, if, um, if the person asking that question wants to email me at the email address there, I’ll be happy to take a look at the statute and look at the facts and, and talk about it. Yeah,

Seth Bloom: 

It looks like there is another question out there, but I’m just asking them to restate it because I didn’t seem to go real. It wasn’t very clear, but I just wanted to thank you Treg, uh, and start to say goodbye and just let everyone know that they can call Treg, uh, directly. His information is all up here. Uh, and that’s at the Ostergar Law group, uh, there in Irvine, California, and we really, really appreciate them coming on today. Um, I’m the senior director of thank you, Troy. I’m the senior director of attorney services here at a Levelset in new Orleans. Uh, we’d love for you use our attorney network and ask attorneys questions. So if drag didn’t answer all your questions today, you’re more than welcome to contact him, but also posted on the, uh, hosted on the, uh, attorney network where you can ask questions and get free answers. So there’s nothing better than that. And then if you do need a lawyer there’s lawyers on there within your regional area. So thank you so much Treg. Um, we really appreciate it and, uh, you have a very nice day. Thank you very much. Thanks everybody. Alright, thanks again.