California Landmark Cases on Mechanics' Lien Law
A mechanics' lien is an involuntary encumbrance against the real property on which the claimant has furnished labor, services, equipment or material for the value of the items or services. (Civ. Code, 3110.)
The mechanics' lien is frequently a subcontractor's sole remedy against an owner because a subcontractor generally has no privity with the owner, and the lien may be imposed and enforced without a contractual relationship. (See Basic Modular Facilities, Inc. v. Ehsanipour (1999) 70 Cal.App.4th 1480, 1483-1484.)
An unpaid subcontractor may also secure a claim by serving a stop notice on the owner or construction lender to freeze construction funds in the possession of these parties. (See Civ. Code, 3103, 3083, 3158-3167.)
Filing an action to enforce a stop notice seeks a money judgment against the party who held construction funds, and may provide for the immediate equitable garnishment of any remaining funds. (See Mechanical Wholesale Corp. v. Fuji Bank, Ltd. (1996) 42 Cal.App.4th 1647, 1654.)
A contractor enforces a mechanics' lien by filing a superior court complaint for foreclosure of the lien and establishing the contractor was not paid for the work performed and/or for the materials provided. (Civ. Code, 3144, subd. (a); see Basic Modular Facilities v. Ehsanipour, supra, 70 Cal.App.4th at p. 1485.)
When bringing an action to foreclose a mechanics' lien, the subcontractor must name all persons who claim an interest in the property, including the property owner and all beneficiaries under deeds of trust. (See Monterey S.P. Partnership v. W. L. Bangham (1989) 49 Cal.3d 454, 459.)
Thereafter, each person who claims an interest in the property, including a junior encumbrancer, has an independent right to dispute the validity, amount, and priority of a mechanics' lien. (See Grinnell Fire Protection Systems Co. v. American Sav. & Loan Assn. (1986) 183 Cal.App.3d 352, 358.)
An action to foreclose a mechanics' lien sounds in both equity and law. The validity of the underlying claim is a factual issue that the parties are entitled to have resolved by a jury. (See Basic Modular Facilities v. Ehsanipour, supra, 70 Cal.App.4th at p. 1485; Selby Constructors v. McCarthy (1979) 91 Cal.App.3d 517, 526.) The issues pertaining to the manner in which the lien was perfected and the right to foreclose on the property are equitable issues to be decided by a court. (Selby Constructors, supra, at p. 526; A. A. Baxter Corp. v. Home Owners & Lenders (1970) 7 Cal.App.3d 725, 732.)
Each of these issues may be decided in arbitration if the parties have agreed to do so in their arbitration agreement.
California's Mechanic's Lien law ( 3082 et seq), which is derived from a constitutional mandate to protect laborers and materialmen (Cal. Const. Art. XIV, sect. 3), permits a person who furnishes labor or materials on a work of improvement, and who is owed money on the project, to file a lien against the real property upon which the work is located. ( 3110; Connolly Development, Inc. v. Superior Court (1976) 17 Cal.3d 803, 808, 132 Cal. Rptr. 477, 553 P.2d 637.)
After the claimant provides the requisite preliminary notice and records the lien, "the mechanics' lien constitutes a direct lien citation on the improvement and the real property to the extent of the interests of the owner or the person who caused the improvement to be constructed citations. The lien is subordinate to recorded encumbrances antedating the commencement of the work of improvement citation, but takes priority over all subsequent encumbrances citation." (Ibid.)
A lien claimant (the worker or materialman) is required to serve preliminary notice on three parties before his or her lien can be perfected. ( 3097.) Section 3097 explains that a claimant "shall, as a necessary prerequisite to the validity of any claim of lien, ... cause to be given to the owner ..., contractor ..., and to the construction lender ... a written preliminary notice as prescribed by this section." ( 3097, subd. (a), italics added; 3114.)
Section 3097 provides in part: "(a) ... Every person who furnishes labor, service, equipment, or material for which a lien or payment bond otherwise can be claimed under this title, or for which a notice to withhold can otherwise be given under this title, shall, as a necessary prerequisite to the validity of any claim of lien ...,cause to be given to the owner or reputed owner, to the original contractor, or reputed contractor, and to the construction lender, if any, or to the reputed construction lender, if any, a written preliminary notice as prescribed by this section. ...
"(c) The preliminary notice ... shall contain the following information: (1) A general description of the labor, service, equipment, or materials furnished, or to be furnished, and an estimate of the total price thereof. (2) The name and address of the person furnishing that labor, service, equipment, or materials. (3) The name of the person who contracted for purchase of that labor, service, equipment, or materials. (4) A description of the jobsite sufficient for identification...."
Section 3114 states: "A claimant shall be entitled to enforce a lien only if he has given the preliminary 20-day notice (private work) in accordance with the provisions of Section 3097, if required by that section, and has made proof of service ...."
The preliminary notice applies to the materials or labor provided by the claimant during the 20 days prior to notice and anytime thereafter. ( 3097, subd. (d).)
The purpose of the notice is to provide owners and lenders advance warning that their property or funds may be subject to claims arising from contracts to which they were not parties and would otherwise have no knowledge. ( Romak Iron Works v. Prudential Ins. Co. (1980) 104 Cal. App. 3d 767, 778, 163 Cal. Rptr. 869; Truestone, Inc. v. Simi West Industrial Park II (1985) 163 Cal. App. 3d 715, 721, 209 Cal. Rptr. 757.)
There is no exception for the event that a claimant has no actual knowledge of the identity of the construction lender to whom notice must be given. (See Romak Iron Works v. Prudential Ins. Co., supra, 104 Cal. App. 3d at p. 773.)
In such a situation, the claimant bears a one-time obligation to inspect two public records -- the building permit and the construction trust deed -- to determine, if possible, the identity of the construction lender. ( Id. at p. 775; Kodiak Industries, Inc. v. Ellis (1986) 185 Cal. App. 3d 75, 84, 229 Cal. Rptr. 418.)
The claimant is required to check the two records once during the 20-day notice period. (Id. at pp. 84-85.) If the claimant fails to examine the building permit and the construction trust deed, subdivisions (i) and (j) of section 3097 operate to charge him with constructive notice of the information contained in them. ( Romak Iron Works, supra, 104 Cal.App.3d. at p. 775.)
There has been much discussion regarding the strictness with which section 3097's preliminary notice requirements should be applied. Some courts have concluded strict compliance is required for perfection and enforcement of the lien against any party. ( Kodiak Industries, Inc. v. Ellis, supra, 185 Cal. App. 3d at p. 81; see also Truestone, Inc. v. Simi West Industrial Park II, supra, 163 Cal. App. 3d at p. 721 strict compliance with the notice statute is required; IGA Aluminum Products, Inc. v. Manufacturers Bank (1982) 130 Cal. App. 3d 699, 704-705, 181 Cal. Rptr. 859 doctrine of liberal construction of mechanic's lien laws does not apply here because the statute is unambiguous in its notice requirements.)
In Kodiak Industries, for example, a plumbing subcontractor sued to foreclose mechanic's liens against three types of defendants -- property owners, purchase moneylenders, and the construction loan lender. The subcontractor, however, had failed to serve preliminary notice on the construction loan lender. The court determined that the validity of the lien as to all defendants hinged on the subcontractor's compliance with the notice requirements. ( Kodiak Industries, supra, 185 Cal. App. 3d at p. 81 "validity of the subcontractor's liens depends on notice to the construction loan lender ....".)
By contrast, other courts have held that a more liberal construction of the notice law promotes the policy favoring the worker or materialman; but even those courts seem to agree that a lien cannot be perfected unless the parties who are affected by the lien have been given notice. ( Industrial Asphalt, Inc. v. Garrett Corp. (1986) 180 Cal. App. 3d 1001, 226 Cal. Rptr. 17 (Industrial Asphalt); Wand Corp. v. San Gabriel Valley Lbr. Co. (1965) 236 Cal. App. 2d 855, 46 Cal. Rptr. 486.)
In Industrial Asphalt, where the asphalt paving subcontractor attempted to foreclose a mechanic's lien against the owner, the owner claimed the lien was not perfected because the subcontractor had failed to serve notice on the contractor. In that case, the court upheld the lien because it found the party affected by the lien (the owner) had been given notice, whereas notice to the contractor would have served no purpose. ( Industrial Asphalt, supra, 180 Cal. App. 3d at p. 1007.)
The court noted the statutory scheme protects owners and lenders from possible claims against property or funds arising from otherwise unknown contracts, and concluded that notice should not strictly be required to a party who has no property interests at stake and who is entirely unaffected by the lien. (Ibid.)
The contractor functioned in contractual privity with the subcontractor and therefore was aware of potential lien claims brought by the subcontractor. The owner, on the other hand, did not have the benefit of contractual privity with the subcontractor and thus required preliminary notice. ( Id. at pp. 1007-1008.)
The court concluded that "the party who needed notice in fact received it, while the one who did not need notice (because he knew plaintiff's identity, and owned no real property against which plaintiff could file a lien) received none.
The original contractor also accepted delivery of plaintiff's materials. For all these reasons statutory notice to the original contractor would have been a useless, even futile act which the law does not require." ( Id. at p. 1008.) The court explained:
" ... Strict notice requirements apply only to parties a lien will affect. In the case at bench, by contrast, defective notice concerned a party not affected by the lien, about whom the statute does not specifically manifest a legislative intent to strictly construe the notice requirements.
"We find that the notice served upon the defendant in the case at bench conformed to the purposes of the statutory notice requirement and sufficed for the plaintiff to perfect his mechanics' lien. To hold otherwise would come close to defeating the lien because of 'meaningless technicalities' citation where a property owner properly noticed is not prejudiced by lack of notice to some other party.
"We agree with Wand Corp. v. San Gabriel Valley Lbr. Co., supra., 236 Cal. App. 2d 855, 861: 'Where the purpose of the relevant statute is achieved and no one is prejudiced , technical requirements shall not stand in the way of achieving the purpose of the Mechanics Lien Law.'Here the defendant received proper notice and has made no showing of any prejudice arising from plaintiff's failure to serve notice on the original contractor. Neither does it seem just that the innocent party which pursued its legal rights should suffer instead of the innocent party which, though properly placed on notice, took none of the steps to protect its property interest which the law afforded it." ( Industrial Asphalt, Inc. v. Garrett Corp., supra, 180 Cal. App. 3d at pp. 1009-1010.)
Industrial Asphalt has been cited as an example of cases holding that, in the absence of prejudice to the property owner, general contractor, or surety, technical defects in conforming a claim to statutory requirements can be tolerated. ( Blair Excavators, Inc. v. Paschen Contractors, Inc. (1992) 9 Cal.App.4th 1815, 1819-1820.)
In Harold L. James, Inc. v. Five Points Ranch (1984) 158 Cal. App. 3d 1, 204 Cal. Rptr. 494, the Court reconciled the conflicting holdings on preliminary notice in this way: "where the Legislature has provided a detailed and specific mandate as to the manner or form of serving notice upon an affected party that its property interests are at stake, any deviation from the statutory mandate will be viewed with extreme disfavor." ( Id. at p. 6.)