Tuesday, May 6, 2008

Sweeping Changes Proposed to California Mechanics’ Lien, Stop Notice and Bond Claim Laws

Excerpted from a legislative analysis by construction law attorney William L. Porter

The 2008 California Legislature is proposing sweeping changes to the rules governing such familiar construction payment remedies as the mechanics’ lien, stop notice and payment bond claims. Senate Bill 1691 (Lowenthal) is currently working its way through legislative committees. Contractors, subcontractors and suppliers should watch this bill closely and register their opinions with the bill's author. Some of the most significant changes proposed are summarized below.

Changes to Private and Public Works Construction Claim Remedies

This voluminous Bill deals with changes to the rules governing construction claim remedies for both private works and public works projects, among other issues unrelated to construction. For the full 131 page Bill and its legislative status see www.leginfo.ca.gov . The analysis of the bill below is limited to construction‐related issues. Under the proposed legislation the current Civil Code sections dealing with preliminary 20 day notices, mechanics’ liens, stop notices and bond claims (Beginning with Civil Code section 3082) would be repealed and would be replaced by a new statutory scheme beginning with new Civil Code section 8000. This is not a mere renumbering. There are also significant substantive changes. Some of the major substantive changes proposed are as follows:

Important Legislative Changes Proposed as to Private Works Projects

§ 8150. Definition of Completion
Existing law defines the “completion” of a private work. The definition of completion is significant because completion triggers time limitations for a claimant to pursue statutory collection remedies, including the mechanics’ lien, stop notice and payment bond claims. Section 8150 would modify the definition of “completion” in two ways:
(1) First, the section changes an undefined reference to “actual completion” to “substantial completion.” It is the position of the Law Revision Commission that the change codifies case law and is consistent with industry practice. It is the Commission’s further understanding that practitioners presently understand “actual completion” to mean “substantial completion,” which in turn means completion of all essential work contemplated by the contract, excluding remedial, warranty, or “punch‐list” work.
(2) Second, the section deletes a vague reference to “acceptance by the owner” as a specified ground for completion. There is no existing provision governing precisely how an owner’s “acceptance” would be communicated. There is no notice or filing of a public record. Consequently, claimants might have no knowledge that an owner has “accepted” the work in question, thereby triggering the time periods in which potential claimants must act to pursue their remedies (including the constitutionally protected lien right). That lack of meaningful notice raises significant fairness concerns. Elimination of the existing provision remedies that situation.

§ 8418. Notice of Intent to Record Claim of Lien
This new provision would add an entirely new step to the familiar process of pursuing a mechanics’ lien. The new provision would require that a claimant, before recording a mechanics lien on a private work, take the additional step of providing written notification to the owner of the property in question that the claimant intends to record a lien in the near future. Some would argue that the new proposal is entirely unnecessary since the property owner has already received a notice that a mechanics’ lien may be recorded in the future. Such notice is in the form of the preliminary 20 day notice the owner receives from each subcontractor and supplier who could legally file a lien. Subcontractors and suppliers might view this new provision as an unnecessary additional step solely intended to cause the loss of lien rights for an inadvertent procedural misstep. Subcontractors and suppliers may well argue that the preliminary 20 day notices serves the same purpose and there is no need to provide an additional notice.

§ 8420. Notice Prerequisite to Recording Claim of Lien
This section is a companion to proposed Section 8418, above. It would require that a claimant attach a “proof of notice” that the above statute was met when recording a lien. Again, some would view this as yet another procedural pitfall intended to cause legitimate claimants to forfeit lien rights through inadvertent procedural error.

§ 8460. Time for Commencement of Enforcement Action (Return of Lis Pendens)
Generally, a recorded lien is invalid if an action to enforce the lien is not filed in court within 90 days after the lien is recorded. However, because the enforcement action is filed in court rather than in the County Recorder’s office, it is not possible to tell from the title records whether an apparently expired lien has actually expired or is being enforced through a court action. Consequently, title insurers are reluctant to insure title even if a lien appears to have expired.

Proposed Section 8460 would cure that problem by requiring the recording of a lis pendens (Latin for ‘a suit pending’) when bringing a legal action to enforce a lien. That places notice in the title record that the lien is being enforced. A title insurer could then easily determine that a lien has expired simply by noting the date the lien was recorded and searching for a timely lis pendens. It is interesting to note that the Civil Code some years ago required the recording of a lis pendens under such circumstances. The requirement was rescinded several years ago but now looks like it may be making a comeback. One wonders why it was rescinded in the first place. The lis pendens is a good and fair remedy to a lingering problem.

§ 8480. Expanded Grounds for Petition to Release Mechanics’ Lien
Existing law provides a summary judicial proceeding in which an owner can petition for release of an expired mechanics lien. Section 8480 expands the grounds for lien release and provides other procedural rules relating to the petition. Under existing law, this petition may be made only on the ground that the lien claimant has not commenced a lien enforcement action in the required time (generally, within 90 days after recordation of the lien). The proposed provision adds the following grounds:
(1) The demand stated in the claim of lien has been paid in full.
(2) None of the work stated in the claim of lien has been provided.
(3) The claimant was not licensed to provide the work stated in the claim of lien.
(4) There is a final judgment in another proceeding that the petitioner is not indebted to the claimant for the demand in the lien claim.

There are problems with this new proposal. While it would be wonderful to find a quick and easy method of releasing liens that will turn out to be invalid anyway, most of the above standards, which may seem straightforward at first glance, can often be quite complicated. Long trials have taken place to reach a decision on some of the above issues. These issues cannot be summarily dealt with in the same way as can the determination of whether 90 days have passed since a lien was recorded. Application of the new statute may be problematic. (The latest information is that this proposed change may be dropped entirely.)

§ 8488. Increased Fees Related to Hearing and Order to Release Lien
Under existing law, the prevailing party on a petition to release a lien may recover attorney’s fees up to $2,000. Section 8488 replaces the $2,000 limitation on such fee with a provision for “reasonable attorney fees.” It is not uncommon for the legal fees associated with such a hearing, even under the current unexpanded standards, to exceed this sum. The Commission saw no reason for the $2,000 cap on the fee award. (The latest information is that this proposal may also be dropped and fees would remain limited to $2,000.)

§ 8026. Shift in Burden of Proof from Material Supplier to Contractor
Under existing law, a material supplier who acts to enforce a mechanics lien for material delivered to a job site must prove the delivered material was actually used or consumed in the work of improvement. This legal requirement places the evidentiary burden on the person least able to bear the burden since it is the onsite contractors rather than the supplier who would best be able to determine what materials were actually used to complete the job. Section 8026 would create an “evidentiary presumption” that materials or supplies delivered to a construction site are actually used or consumed in the work of improvement. Contractors are then free to refute the presumption with contrary evidence.

§ 8058. Filing and Recordation of Lien Related Documents Without Notarization
Existing law allows the mechanics’ lien and some other documents to be recorded at the office of the County Recorder without notarization. However, documents to release a mechanics’ lien currently must bear the acknowledgment of a notary to be accepted for recording by a County Recorder. Section 8058 would allow releases of liens and other documents to be recorded without a notary acknowledgment. This proposal is problematic as it increases the ease with which a mechanics’ lien could be fraudulently released without assurance that the person who purportedly signed the lien release is the person they claim to be. Once the lien is released the property could be sold free and clear of the lien to a bona fide purchaser.

§ 8152. Time for Notice of Completion Expanded from 10 to 15 Days After Completion
Under this proposal, the time in which an owner may record a notice of completion would be extended from 10 days after completion to 15 days.

§ 8214. Discontinuing Practice of the County Recorder Providing Notice of Completion to Those who Record Preliminary 20 Day Notices
Under existing law, a person can record a preliminary notice with the expectation that the County Recorder will send them a Copy of the Notice of Completion as to the property when it is recorded. County Recorders sometimes fail to comply with this provision. Existing law provides no consequence for non‐compliance. Current law may do little more than serve as a potential trap for a claimant who relies on the Recorder’s office for critical notices. For example, a claimant who does not receive notice from the County Recorder when an owner has recorded a notice of completion will not know that the time limit for claimant remedies has been moved up. Section 8214 discontinues the practice of requiring County Recorders to provide those who record their preliminary 20 day notices with any notice of further filings in relation to the property, including the notice of completion.

§ 8490. 20 Day Delay in Enforcing Court Order or Judgment Releasing a Lien to Allow for Appeal
This section adds a 20 day hold period on the effectiveness of an order or judgment releasing a lien, to allow a losing claimant time to seek a stay of the order or judgment if the claimant petitions for appellate review of the order. Without the hold period, an owner could use the release order to immediately sell the property to a bona fide purchaser, without the claimant having a reasonable opportunity to contest the trial court’s order. However, for releases which are intended to be expedited, for example where a lien is released because no enforcement action was brought within 90 days, an additional 20 days would be added to the process.

Important Proposed Changes in the Area of Public Works Projects

§ 45010. Payment bond requirement
On a public works contract of more than $25,000, a general contractor is generally required to provide a payment bond for the project. This part of the proposed legislation addresses the situation where the original contract is later supplemented by a second contract, increasing the overall cost of the work of improvement. Section 45010 would provide that the original bond would cover all work, including work under the supplemental contract. Surety groups might object to this provision on the grounds that it could theoretically expand their liability on the original bond, without any offsetting increase in the bond premium.

§ 42210. Duration of Cessation of Labor Necessary to Constitute Completion Changed from 30 to 60
Existing law defines the “completion” of a public work, an event which triggers time limitations for a claimant to pursue a statutory remedy. Section 42210 would modify one definition of “completion” to conform to a definition governing a private work: the period of continuous cessation of labor necessary to constitute completion would be changed from 30 to 60 days. This would provide uniformity and would be of sufficient length to insure that a cessation of labor would not prematurely trigger “completion” for public works projects.

§ 42230. Time for Notice of Completion Expanded from 10 to 15 Days After Completion
This section mirrors Civil Code Section 8152 in the proposed private work provisions and provides that the time in which an owner may record a notice of completion would be extended from 10 days after completion to 15 days.

§ 42240. Notice of Completion of Contract for Portion of Work of Improvement
In a private work, an owner may choose to treat a single large project as a number of smaller separate projects, provided that there is a separate direct contract for each smaller part of the whole. The owner is specifically authorized to give a notice of completion for each separate contract, to hasten the resolution of claims as to that part of the work. Section 42240 would extend the same option to public works of improvement. A public entity could choose to give a notice of completion for a separate part of a larger work of improvement, so long as that separate part is governed by a separate contract. This change was requested by California State University. It should increase procedural efficiency by allowing public entities to manage a large public work project as several smaller projects. However, it will confuse subcontractors and suppliers as to their deadlines for pursuing public works claims remedies, particularly if they are unaware that a project has been broken into multiple smaller projects, each with a separate notice of completion.

§ 44170. Notice to Claimant of Notice of Completion
Under existing law, a claimant can pay a small fee ($2) to be put on a list to receive certain notices from a public entity, including a copy of the Notice of Completion. Section 44170 would increase the fee to $10 to reflect increased administrative costs.

Preliminary 20 Day Notice Disciplinary Provisions Not Continued for Both Private and Public Works
Current Civil Code Sections 3097(h) and 3098(b), describing the requirements for the preliminary 20 day notices for private and public works provide that the failure of a subcontractor to give preliminary notice when providing more than $400 of work constitutes grounds for discipline by the Contractors’ State License Board. Those provisions are not continued in the proposed law. While the waiver of lien rights associated with the failure to serve a preliminary 20 day notice does seem a sufficient consequence for not serving the notice, the current law does serve a useful purpose that will be lost under the new proposal. When owners currently question why a subcontractor has found it necessary to serve a preliminary 20 day notice, subcontractors have been able to point to the existing law as justification. Thus, rather than responding to such an inquiry with an ominous statement that the prime contractor might not pay its bills, the subcontractor can instead simply note that the law requires the notice and if the subcontractor did not provide it then it would risk discipline by the licensing agency. To this extent existing law provides a practical means to describe an action and thereby avoid a problem. This benefit will be lost under the new proposal.

The changes which have been proposed and are described above do not include all changes proposed and the descriptions given are only brief summaries. The full text of this Bill and all Assembly and Senate Bills can be viewed at http://www.leginfo.ca.gov/. Questions about these Bills can be directed to the sponsor of the Bill or to the California Law Review Commission whose membership and phone numbers are listed at http://www.clrc.ca.gov/.

About the author
William L. Porter is a partner in the Porter Law Group, Inc., Sacramento, California. The article was based on analysis of draft legislation as of mid-April, 2008 and on the California Law Revision Commission Summary of the legislation in question. Mr. Porter can be reached at (916)3817868 or at http://www.porterlawinc.com/.

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