Friday, September 26, 2008

Why Bonding Around a California Mechanics’ Lien can Unintentionally Extend the Deadline to File a Mechanics’ Lien Lawsuit by Six Months or More

by William L. Porter, Attorney at Law

Where California mechanics’ liens are concerned, there are few dates, the passages of which are more appreciated by property owners than the last day to file a lawsuit to foreclose on a mechanics’ lien. This is because unless the deadline to file a lawsuit to foreclose on the mechanics lien has been extended by a properly drafted and notarized “Notice of Credit” which has been duly recorded with the County Recorder in the county where the property is located, under California Civil Code section 3144, the deadline to file such a lawsuit will expire 90 days after the mechanics’ lien was recorded. While exceptions may possibly exist when that date falls on a holiday or weekend, for the most part the 90th day is the absolute “drop dead” date for filing a suit. After that date, the mechanics’ lien automatically expires and the property owner cannot be sued for purposes of foreclosing on a mechanics’ lien.

Often, when a mechanics’ lien is first filed by a subcontractor or supplier, the owner instantly demands that the prime contractor record a “Bond to Release Mechanics’ Lien.” While the owner often has that right under the contract to make such a request, if the prime contractor can convince the owner to exercise a little patience, such a delay will often yield a much better result. If the prime contractor can persuade the owner to wait until 90 days have passed since the lien was recorded, the lien will of course become unenforceable through the passage of time. The lien claimant will then no longer have the right to pursue the particular mechanics’ lien claim against the property.

It is well known to contractors that many subcontractors and suppliers, while extremely good at their trades, will, for a variety of reasons, ultimately fail to file suit to foreclose on their mechanics’ lien within 90 days, thereby losing their mechanics’ lien rights against the owner and his property. As far as the contractor and owner should be concerned, the mechanics lien problem is then solved.

A different rule applies, however, when the prime contractor is forced to supply a mechanics’ lien release bond. In such a case the deadline to file a lawsuit is extended by another six months. Moreover, in the event the contractor fails to properly notify the lien claimant that the release bond has been recorded, the deadline to follow suit continues, perhaps indefinitely, until six months after the notice is finally properly given. The relevant statute on the subject is Civil Code Section 3144.5, which states as follows:

“Civil Code 3144.5. Any person who obtains a lien release bond which is recorded pursuant to Section 3143 shall give notice of the recording to the lienholder by mailing a copy of the bond to the lienholder at the address appearing on the lien. Service of the notice shall be by certified or registered mail, return receipt requested. Failure to give the notice provided by this section shall not affect the validity of the lien release bond, but the statute of limitations on any action on the bond shall be tolled until the notice is given.

Any action on the lien release bond shall be commenced by the claimant within six months of the recording of the lien release bond.”

Under the statute, if the owner had simply waited until 90 days had passed, there would be no need for the lien release bond. The lien would simply have expired under Civil Code section 3144. There would also be no new right to a new claim on which to sue based on the lien release bond. There would be no need to give notice and wait an additional six months to see if the new six month deadline to file suit would be missed.

An even more unfortunate situation can arise when the contractor does not wait for the 90 days to pass and bonds around the mechanics’ lien and fails to properly inform the lien claimant that he has in fact bonded around the mechanics lien. If the lien claimant does not file its suit within 90 days after the lien was recorded, it may ultimately believe that it has missed its deadline. In truth though, it still has a right to bring suit on the mechanics’ lien release bond and will maintain its rights to sue on the lien release bond until six months after it has been notified that the lien release bond exists. This could conceivably go on indefinitely. The prime contractor may be caught in the unfortunate dilemma of choosing between notifying the lien claimant that the there is a lien release bond and that the lien claimant has six more months to sue or paying successive indefinite premiums to renew its lien release bond.

All in all, whereas a little patience could have resulted in all mechanics’ lien rights expiring after 90 days, the failure to exercise this patience and precipitously bonding around the lien can give rise to additional significant liability exposure and bonding costs for at least six months and potentially longer. The message to be gleaned from this is that it is generally more convenient, cheaper, and less troublesome to wait for the 90 day mechanics’ lien lawsuit deadline to expire than unnecessarily jumping the gun and bonding around the mechanics’ lien.

William L. Porter is a principal in Porter Law Group, Inc. in Sacramento, California. He can be reached at (916) 381-7868.

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