2011 Mechanic’s Lien Changes – Overlook Them at Your Own Peril!

Beginning January 1, 2011, contractors and material suppliers must fulfill additional requirements to record and foreclose on a Mechanic’s Lien for a work of improvement on real property. The new laws are designed to afford property owners more protection when a lien is recorded against their property. Failure to follow the new rules will invalidate your Mechanic’s Lien claim. (Refer to Civil Code § 3084).

Under the new law, prior to recording a Mechanic’s Lien, you must serve a copy of the Lien and also a “Notice of Mechanic’s Lien” on the property owner, or if unable to do so, then on the lender or the general contractor. Failure to serve the Notice and Mechanic’s Lien in the required manner will cause your Lien to be unenforceable. A “Proof of Service Affidavit” must now be recorded with the Mechanic’s Lien, to prove that the Lien and the Notice were served in accordance with the new law.

The new law also requires a Notice of Pendency of Action (sometimes called a “Lis Pendens”) to be recorded within 20 days of filing a lawsuit to foreclose on the Mechanic’s Lien. (Civil Code § 3146). In the past, recording this Notice was not mandatory.

California Mechanic’s Lien Notice Requirements to Change in 2011

The California State Legislature has amended Civil Code sections 3084 and 3146 to require two additional notices relating to mechanic’s liens: the "Notice of Mechanic's Lien" and the "Notice of Pendency of Action." The new laws become effective on January 1, 2011.

These amendments were passed in response to numerous complaints from property owners who were unaware that a mechanic's lien had been recorded against their property until after a lawsuit was filed to foreclose the lien.

Under existing law, most contractors and material suppliers on private works projects are required to serve a preliminary 20-day notice either prior to the start of work or within the first 20 days of working on the project. This preliminary notice must be served on project owners, contractors and lenders as a pre-condition to later asserting mechanic’s lien claims. Those in a direct contractual relationship with the project owner (prime contractors) are exempt from this requirement, and there are no additional requirements to notify a property owner when a mechanic's lien is recorded. The new laws will require two additional notices relating to the enforcement of mechanic's lien claims.

Notice of Mechanic's Lien

Assembly Bill 457 amended California Civil Code section 3084 to require that a “Notice of Mechanic’s Lien,” and a copy of the mechanic’s lien, be served on the property owner via registered mail, certified mail or first-class mail before a mechanic's lien is recorded. The notice and mechanic's lien must be sent to the owner’s residence or business address, the address shown on the building permit, or as provided by other statutes. The lien claimant must also prepare and sign a sworn proof of service affidavit, which must be included in the mechanic’s lien. If such service is not possible, the lien claimant may fulfill the notice requirement by serving the notice on the construction lender or the prime contractor using the same methods.

After January 1, 2011, an otherwise proper mechanic’s lien will be unenforceable as a matter of law if this "Notice of Mechanic’s Lien" was not properly served before the mechanic's lien was recorded. The purpose of this notice is to explain to the property owner the consequences of the mechanic's lien, and action the property owner must take to avoid having a lien enforced against his or her property.

The amended statute specifies the language of the notice and its type size (at least 10 point), as follows:

NOTICE OF MECHANIC’S LIEN
ATTENTION!

Upon the recording of the enclosed MECHANIC’S LIEN with the county recorder’s office of the county where the property is located, your property is subject to the filing of a legal action seeking a court-ordered foreclosure sale of the real property on which the lien has been recorded. That legal action must be filed with the court no later than 90 days after the date the mechanic’s lien is recorded.

The party identified in the mechanic’s lien may have provided labor or materials for improvements to your property and may not have been paid for these items. You are receiving this notice because it is a required step in filing a mechanic’s lien foreclosure action against your property. The foreclosure action will seek a sale of your property in order to pay for unpaid labor, materials, or improvements provided to your property. This may affect your ability to borrow against, refinance, or sell the property until the mechanic’s lien is released.

BECAUSE THE LIEN AFFECTS YOUR PROPERTY, YOU MAY WISH TO SPEAK WITH YOUR CONTRACTOR IMMEDIATELY, OR CONTACT AN ATTORNEY, OR FOR MORE INFORMATION ON MECHANIC’S LIENS GO TO THE CONTRACTORS’ STATE LICENSE BOARD WEB SITE AT http://www.cslb.ca.gov/.

Notice of Pendency of Action (Lis Pendens)

In addition, Civil Code section 3146 was amended to require the filing and recording of a Notice of Pendency of Action (also sometimes referred to as a lis pendens) within 20 days after a suit to foreclose on a mechanic’s lien is filed. Previously, a lis pendens was permitted but not required. The new section 3146 provides that subsequent purchasers and encumbrancers are deemed to have constructive notice of the mechanic’s lien foreclosure action only from the time the lis pendens is filed and recorded.

Are Slow-Paying Customers Slowing You Down?

Many contractors are feeling the pinch.

Slow-paying customers don’t just cause headaches – their actions (or inaction) causes a ripple effect that touches everyone you do business with, from the supply house to your insurance broker, and can result in incredible stress if your business does not have the cash on hand to carry the job.

Contractors whose customers are paying on time often employ these three simple strategies:

• Upfront and constant communication


• Prepayment requirements


• Credit card back-up plans for customers who don't pay on time

To further enhance your chances at receiving timely payment, consider the following:

• Require payment at time of service: Be clear in your contract terms that payment is due immediately upon completion of a job (or whatever the contract’s progress payment schedule provides for). Consider collecting a deposit upfront (no more than 10% or $1,000 – whichever is less – for home improvement contracts, but you have some flexibility in other types of contracts).


• Communicate: Be upfront with your payment requirements so there are no surprises, and stay in constant communication with your customer.


• Accept credit cards


• Consider alternative payment options: Short-term financing plans may offer way to recoup payment from customers who are unable to make full payment. A contractor can earn interest off the unpaid balance and it provides the customer a dignified way to resolve a potentially embarrassing situation.


• Be flexible: If you require payment at completion of service but your customer can't pay you until "the 15th of the month," offer to come pick up payment on that date.


• Screen potential customers when they call: Trust your instincts. If a potential customer activates your “spidey sense” and you don't feel good about doing the job, it may be in your best interests to pass on the project.


• Offer upfront pricing: If applicable, agree to a set price for the work being performed, rather than completing the project on a time and material basis. That way, the customer is not surprised by – and therefore reluctant to pay – your invoice.


• Email your invoices: Many businesses use e-mail as a cost-effective means to invoice customers. E-mails are more likely to be read and noticed than an envelope plucked from a mailbox stuffed with catalogs, solicitations and the Pennysaver.


• Enforce your legal rights: A mechanic’s lien or stop notice may not be applicable to every situation (such as those with an extremely low dollar value); however, the process can be completed in a cost-effective manner and can result in prompt payment (particularly when the property owner is attempting to refinance , or when a lender is trying to sell a foreclosed property, for example). To ensure you preserve your mechanic’s lien or stop notice rights, make sure you serve a Preliminary 20-Day Notice on the owner and prime contractor (if you are a subcontractor); if you are a prime contractor, take care to ensure that your contracts contain any required disclosures, notices, etc. If the amount you are owed is low enough, consider filing a small claims action, which is quicker and less costly than initiating litigation to foreclose a mechanic’s lien or enforce a stop notice.

Contractors State License Board Alerts Contractors to Renewed Enforcement of Building Permits in January 2010

State and local agencies ready to take action against those who fail to pull permits

Accelerated building permit enforcement efforts will begin in January 2010, following the Contractors State License Board’s (CSLB) unanimous vote to make this a higher priority. Building permits are a critical element to any construction project, helping to ensure that construction is performed according to established state and local code, and safety standards. Sections 7090 and 7110 of the California Business and Professions Code mandate that CSLB help regulate these laws and safety standards, and discipline violators.

Permit violations are not only a health and safety issue for the property owner, but can also become a financial liability if someone is injured. When a contractor performs work that requires a permit and doesn’t have one, a local building department can issue a "Stop Work" notice and assess fines against the property owner. Contractors who violate the permit process may be held responsible for any fine issued to the property owner by the building department, as well as the cost of complying with the code requirements.

Contractors who break these laws are subject to disciplinary action by CSLB. The contractor may be subject to civil penalties of up to $5,000 per citation and/or suspension or revocation of their license. The contractor’s complaint history and seriousness of the violation are factors considered when determining the appropriate level of discipline.

CSLB has partnered with the California Building Officials (CALBO) to effectively work with local building departments, help identify suspected offenders, and perform proactive investigations of violations. CSLB also has begun more stringent enforcement of permit requirements when performing regular investigation of consumer complaints. Permit complaints can be filed by consumers, contractors, or building department staff.

CSLB will continue to educate consumers and contractors during the mediation phase of the more than 20,000 complaints received each year, and during community outreach events. By stringently enforcing permit requirements, CSLB is complying with its mandate of public protection while preserving the integrity of California’s construction industry.

Contractors State License Board Stings More Than 100 in Series of Simultaneous Undercover Sting Operations

The Contractors State License Board (CSLB) has wrapped up five simultaneous undercover sting operations around the state. The annual fall "California Blitz” was conducted by 20 CSLB investigators during a three-day period, September 15, 16, and 17, 2009. A total of 113 people received Notices to Appear (NTA) in court or administrative citations. One went to jail for a $20,000 warrant for domestic violence, and two others for having outstanding traffic warrants.

CSLB’s Statewide Investigative Fraud Team (SWIFT) conducts these multi-county blitzes every fall and spring to enhance its smaller sting operations, which take place on a weekly basis. These operations crack down on the underground economy that harms consumers and legitimate, licensed contractors. The fall 2009 Blitz involved stings in Los Angeles, Monterey, Riverside, Sacramento, and Yolo Counties.

SWIFT investigators posed as business owners, landlords, or tenants at commercial properties in Monterey and Riverside, and as homeowners in Saugus (Los Angeles County), Sacramento, and Woodland (Yolo County). They solicited bids for a variety of projects, ranging from landscaping, concrete, fencing, painting, and flooring to wrought iron and installation of a swimming pool safety fence.

Investigators primarily targeted those who were previously caught contracting without a license. Six of the people arrested had been caught before. Fortunately, a majority of those contacted for bids said they either had gotten out of the business or the job sounded too big for them to perform—possibly an indication that enforcement operations conducted by CSLB and its partner agencies are improving awareness of state contracting laws. By law, all contractors who perform work that totals $500 or more for labor and materials must be licensed by CSLB.

Other targets were identified from advertisements in various local publications and online, and those identified from leads from local law enforcement or trade associations.

Joining CSLB in the operation were local police and sheriffs’ departments, district attorney offices, local building officials, and the California Department of Toxic Substances Control. Those who received NTAs will be required to appear in court in November and December to face misdemeanor charges. The charges carry a maximum of six months in jail or a $1,000 fine for the first offense. A second violation carries a mandatory 90-day jail sentence.

"Consumers must realize that they are taking a risk when they hire an unlicensed contractor to work on their home or business," said CSLB Registrar Steve Sands. "Not only are licensed contractors required to demonstrate competence in their trade, but they also must carry workers’ compensation and bonds to protect home or business owners in the event something goes wrong."

Unlicensed contractors often submit lower bids than their licensed counterparts because they do not carry insurance or bonds, and they pay their employees in cash, "under the table." If a worker is injured during a construction project, the home or business owner could be legally and financially responsible.

Education is another important component of the Blitz and all of CSLB’s sting operations. "We don’t want to stop people from earning a living," said Sands. "But, if they’re going to be in business, they need to follow the law." Those arrested during the sting operation were encouraged to get a license, and given an application package with information and all the necessary forms.

Here are some highlights from the various sting sites:

Sacramento

• One suspect arrested on $20,000 domestic violence warrant.

Saugus

• One suspect, who was just released after serving four years in state prison for possession and sale of methamphetamines, showed up with his toddler son to give a bid.
• One suspect who provided a bid for laminate flooring has two unpaid administrative citations with a total civil penalty of $3,000. He was also driving with an expired driver’s license.
• One suspect who provided a bid for a block wall was a previous offender who had paid his prior citations.

Riverside

• One suspect arrested was on probation for his prior conviction for contracting without a license.
• Another repeat offender also had an arrest warrant for failing to appear on his previous charge of contracting without a license.
• One suspect ran from the sting site to avoid getting an NTA. Fortunately, our backup from the Riverside Police Department positively identified the suspect, who will now still face charges.

Monterey

• One suspect arrested had previously received two CSLB administrative citations. He’ll now face criminal charges.
• Another suspect who was previously cited showed up at the sting with a "partner" who is a licensed plumber. Both men were arrested and received an NTA.
• One suspect was arrested for a third time on charges of contracting without a license.

Woodland

• Two individuals were arrested on traffic warrants and released on a promise to appear.

The CSLB urges consumers to follow these tips when hiring a contractor:

• Be especially hesitant when approached by someone offering home improvement services door-to-door.
• Verify the contractor's license by checking online at http://www.cslb.ca.gov/ or via CSLB’s automated phone service at 1-800-321-CSLB (2752).
• Don't pay more than 10% down or $1,000, whichever is less.
• Don't pay in cash, and don't let the payments get ahead of the work.
• Check references, obtain three bids, and ask for a written contract.
• Contact CSLB if you have a complaint against a contractor.

Construction Managers on Private Works Do Not Need to Be Licensed

By Attorney Sam Abdulaziz
Abdulaziz, Grossbart & Rudman
Reprinted with permission

It has always been thought that a Construction Manager needs to be licensed on public works. However, in a recent case, The Fifth Day, LLC, v. James P. Bolotin, held that this may not be the case. The Court of Appeal reversed the judgment that was entered by the Los Angeles Superior Court. This ruling, which was not a unanimous decision, may be considered factually specific. There was one very strong dissenting opinion.

The Plaintiff (Fifth Day) had entered into an agreement to give some "industrial real estate development and construction project management" services on private work property. Fifth Day sued Bolotin for compensation owed to Fifth Day for services rendered. Fifth Day was also responsible for financing some of the construction. Some of the duties that Fifth Day was to perform was to assist, on behalf of the owner in coordinating activities to complete assigned tasks, to maintain various records such as financial books and insurance certificates, keep the owner up to date on the project as well as be the on-site "point person", responding to issues that may arise. Fifth Day was not responsible for performing any of the construction work. Fifth Day performed all of its duties under the contract and construction was completed. Fifth Day stated that they were not paid all of the monies due to it.

When the case went to appeal, the main question was if Fifth Day provided Construction Management services to a private owner of property; Did Fifth Day have to be licensed in accordance with the Contractors’ State License Law? The law itself, does not classify Construction Managers as requiring a license.

The main areas of the law that were discussed were Business and Professions Code Sections 7026 and 7057. Section 7026 defines the term "contractor" and explicitly states different activities in the law. It was an undisputed fact that Fifth Day did not contract with the Owner to perform any of the activities that are listed in Section 7026, nor to perform any of those activities.

Bolotin also cited Section 7057 of the Business and Professions Code. This section basically defines what a general building contractor is. The Court of Appeal felt that "Section 7057 provides that any contractor who engages in the listed activities is a general building contractor….If Plaintiff is not a contractor (because it does not perform the activities listed in section 7026 which defines a contractor), it is, by definition, not a general contractor."

Basically when the Court of Appeal rendered its decision, they stated that the Legislature is empowered to determine whether a Construction Manager on a private works project needs to be licensed as they do for public works and that unless and until the Legislature does this through the proper channels, Construction Managers do not need to be licensed.

The dissenting judge felt that this decision leaves room for unqualified, unscrupulous, and unlicensed contractors, to use a loophole in the license requirement by calling themselves Construction Managers instead of Contractors, which is not what the Contractor’s License Law is intended to mean.

Be very careful using the term Construction Manager.

Attorney General and CSLB Stop Massive Statewide Home Repair Scheme

SAN DIEGO - California Attorney General Edmund G. Brown Jr. and the Contractors State License Board (CSLB) have finalized an agreement that will stop a massive service and repair scheme that unfairly overcharged thousands of Californians for "shoddy and woefully inadequate" home repair work.

"This massive scheme defrauded thousands of California homeowners who were charged exorbitant fees for shoddy and woefully inadequate home repair work by unlicensed and unskilled contractors," Attorney General Brown said. "The agreement stops the illegal practices and gives homeowners a chance to recover some of their losses."

A months-long investigation by the Attorney General's Office and the Contractors State License Board found that SRVS Charge Inc. and its affiliated companies had been cheating some 6,000 customers each year for overpriced and substandard home repair work since 1989.

To stop the companies' illegal practices and provide restitution to those who were victimized, Brown and the CSLB reached a settlement with:

• SRVS Charge Inc. and its affiliates;
• Principal owner, Sarkis Terabelian, 43, of Burbank;
• General manager, Zohrab "Rob" Mkhitarian, 40, of Burbank; and
• Associates Marine Metspakyan, 33, Avetik Avo Gyandzhyan, 38, Lilit Lusparyan, 28, Alisa Oganyan, 35, Estine Akopyan, 28, and Vardui Terabelian, 45

The defendants operated various service and repair companies that employed electricians, plumbers, and heating and air-conditioning technicians in Southern California, the San Francisco Bay Area, and the Sacramento region. These companies routinely targeted elderly Californians.

Exorbitant customer fees enabled Sarkis Terabelian, Mkhitarian, and his associates to purchase two helicopters, a Mercedes-Benz, and real property valued in excess of $1 million. Title to these vehicles and real property were seized by the Attorney General's Office last year and will be released as a result of the settlement.

SRVS Charge Inc.'s scheme worked like this:

• The company placed millions of dollars in telephone directory advertising, including many full-page ads. The ads, which listed different company names, claimed a 100% satisfaction guarantee and senior discounts. When customers called the numbers listed in any of the ads, they would be directed to a central call center.
• Many times repairmen would be dispatched from a different company than the customer called.
• Often, these workers had not undergone the criminal background check required of all contractors and Home Improvement Salespeople licensed by the Contractors State License Board since January 1, 2005.
• Customers were charged high prices for emergency home service and repair, often unrelated to the actual home repair work. Much of the work was poorly done or never completed.
• If a customer refused to pay, the company would file a lien against the home to force payment.

Because the company used multiple business names, it was difficult, if not impossible, for customers to seek recourse for incompetent workmanship, incomplete work, or any other issue that arose on their project. Customers were often denied refunds, despite the existence of the "100% satisfaction guarantee" promised in the ads.

Over several years, the Attorney General and the CSLB shut down affiliates of SRVS Charge, Inc. But instead of ending their scheme, the defendants continued to run their company under a labyrinth of business names and fraudulent contractor license numbers that were interchangeable. When CSLB either revoked a license or received an excessive number of complaints, the company would establish a new corporate identity and business would continue without interruption.

As part of its investigation, CSLB conducted undercover stings against service technicians suspected of using these fraudulent licenses and referred instances of the illegal activity to the San Diego, Los Angeles, Santa Clara, and Sacramento County district attorney's offices. In one instance, the San Diego District Attorney's Office found that a service technician had also committed burglary and theft and is now being prosecuted for his crimes.

Attorney General Brown entered into a final agreement with the defendants in San Diego Superior Court on March 12, 2009, and the agreement was made public today. The settlement provides for the following.

A permanent injunction against the defendants' prior illegal activities. This includes:

• CSLB monitoring of the defendants' operations for one year;
• Mandatory registration of all company service technicians with CSLB. This requires technicians to undergo a criminal background check;
• Capping the number of business licenses that the defendants can use to a maximum of five;
• Preventing the defendants from charging exorbitant fees or fees that have nothing to do with the actual work that is performed;
• Fully disclosing to CSLB the names of the directors, officers, and employees of their company;
• Mandatory customer complaint tracking with proper complaint investigation and reasonable efforts to resolve them; and
• Prohibiting the defendants from engaging in false advertising.

$3 million in penalties and restitution to be distributed as follows:

• $1.3 million to be used for consumer restitution;
• $450,000 to be assessed in penalties for state Business and Professions Code violations; and
• The remainder to be used to reimburse CSLB for investigative costs, legal costs, and costs of monitoring future compliance with the judgment.

"This settlement is a victory for California consumers and legitimate contractors, and brings resolution to thousands of hours of investigative work," said CSLB Registrar Steve Sands. "Victims will now be able to regain some of their money, and CSLB will be able to watch this company closely so others aren't harmed."

If the terms of the settlement are violated, the defendants could face jail time.

The following companies are affiliated with the defendants and are included in the settlement:

• American Electric (CSLB #834398)
• American Home Repairs, Inc. (CSLB #834206)
• 59 Minute Service (CSLB #837697)
• Cal Repair Services, Inc., dba Pick Red Plumbing (CSLB #797241)
• Answering Resources, Inc., dba Thrifty Electric (CSLB #723375)
• Orbell Enterprises, Inc., dba Plumbing One (CSLB #713006)
• USA Services, Inc. (CSLB #775863)
• Love My Home, Inc. (CSLB #811361)
• Electric Avenue, formerly A Plus Electric Company (CSLB #569322)
• American Electric 911 Fast Inc. (CSLB #826916)
• Pro Electric Co. (CSLB #670171)
• RG Electric (CSLB #516892)
• Pacific West Heating & Air Conditioning (CSLB #604150)

If you think you have been the victim of fraud by this company and its affiliates, please contact the Contractors State License Board at 1-800-321-CSLB (2752) and press 7.

Attachments:

• Complaint for Civil Penalties & Injunctive Relief
• Stipulation for Entry of Final Judgment
• Final Judgment