Category Archives: California Lien Laws

Don’t Let This Happen to Your Preliminary Notices!

The following was first posted on our blog in 2011. It is as relevant now as it was 8 years ago. This is a true story and it can happen to you if one of these behaviors finds it’s way into your Preliminary Notice processing: Carelessness or Ignorance. All to often we hear from customers who may have prepared their own preliminary notice or had it prepared by a service who uses a “cut and paste” process for preliminary notices.

“Don’t let this happen to your preliminary notices”.

Case Study: Breach of Contract & Foreclosure of Mechanic’s Liens

Improperly Served Preliminary Notices Cost Client More Than $50,000

Properly executed Preliminary Lien Notices would have saved our client significant legal fees and allowed them to collect on unpaid receivables.  Following the 20-day notice requirements is critical to a successful and enforceable mechanic’s lien, stop notice, and/or payment bond claim.

Background

Cummins & White, LLP, represented a commercial sprinkler supply company (Plaintiff) in litigation brought against property developer, Lennar Homes of California, American Contractors Indemnity Company, La Costa Verde, Inc., and an individual (Defendants).  The commercial sprinkler supply company has been serving the landscaping industry for more than 30 years from multiple locations throughout California.

In 2009, the sprinkler supply company entered into an agreement with the property developer’s subcontractor, La Costa Verde, Inc., to provide irrigation and landscaping materials for a new housing development in the San Diego area.  The company furnished materials and services between October 2009 and February 2010, and provided invoices for payment.  When payments were not received, the company recorded two separate mechanic’s liens and subsequently sued Lennar Homes and its subcontractor, claiming breach of contract and requesting foreclosure of the mechanic’s liens.  Damages sought totaled more than $65,000.  The mechanic’s liens were processed by company employees and served from corporate headquarters.

Legal Defense

In 2011 (two years after supplying the materials), the sprinkler supply company retained Cummins & White to proceed with foreclosing on the mechanic’s liens.  After careful review of the case, attorneys Jim Wakefield and Charles Murawski advised the company that there might be issues with the way the mechanic’s liens were processed and recorded.

The Defendant’s legal team also found similar issues with the mechanic’s liens and filed a motion for summary judgment to have the case dismissed without further action.  The issues raised in connection with the mechanic’s liens were pursuant to California Civil Code Section 3097.1(c) and included claims that the sprinkler supply company:

  • Did not serve the Preliminary Notices with affidavits of proof of service.  Subsequently, the person who served the Preliminary Notice was not available to testify that she had complied with the code.  Therefore, the company was unable to conclusively prove that the Defendants were served in compliance with the code.
  • Sent the Preliminary Notice to an incorrect address.  Therefore, the Defendant was never served.
  • Specified that materials supplied were for specific units instead of the entire track of homes.  Therefore the company had to provide proof that those materials were actually used within or for the specific property units.  This was not possible.
  • Sent one Preliminary Notice for two defendants (La Costa Verde and Lennar Homes).  In practice, each Defendant must be served separately under its legal name and proper address.

Result/Implication

The judge agreed with the Defendants, citing that the sprinkler supply company had not satisfied the prerequisites to the validity of a mechanic’s lien.  Based on the company’s failure to properly execute the Preliminary Notices, it was unable to collect on outstanding balances rightfully owed and incurred significant legal fees in trying to collect.

Cummins & White regularly handles mechanic’s lien cases, which are typically easy to prove, especially for companies that supply products, such as electrical, plumbing, and landscaping suppliers.  If the supplier upholds its end of the agreement by supplying products, defendants typically do not have any legal reason not to make payment.  However, a simple mistake made in filing a Preliminary Notice could be very costly.

Many companies choose to handle Preliminary Lien Notices in-house in order to save the costs of hiring a professional lien processing company.  However, when the company employees do not address details, this could end up costing a company a lot more than it ever imagined.  The State of California requires strict compliance with Civil Code Section 3097, and by failing to meet even one criterion, a company permanently risks the ability to collect for materials supplied.

The statutory prerequisite for an enforceable mechanic’s lien, stop notice, and/or payment bond claim is the presentation of a valid 20-day preliminary lien notice.  If you fail to meet the statutory requirements relative to the form of the notice, timing of the notice, and service of the notice, your lien, bond, and/or stop notice claim may be denied.  As a result, following the 20-day preliminary lien notice requirement is critical to a successful claim.

Confusing a Lien with a Prelim

So what’s the difference?

Here is a simple analogy:

Let assume that you want to see the latest summer blockbuster movie before it is out of the theater and only available on DVD or Streaming. You make plans to go to the theater on Saturday night. You arrive at the theater, parking is free and now you proceed to the box office. What happens next?

  1. You show them your prepaid ticket on your iPhone or
  2. You buy a ticket which is your admission into the theater to view the movie.

Here’s the analogy: The ticket (which you paid for) is your “Prelim” while the “Movie Viewing Experience” is your Lien.

So you need a ticket to see the movie the same way you need a prelim to have the right to file a lien.

Therefore, a prelim, or pre-lien is NOT the same as a lien.

Once you have clarity on the purpose and scope of these two very different documents, your ability to protect your job related accounts receivables will become a whole lot easier.

Another way to remember is:

  1. A prelim SECURES my RIGHT to file a lien
  2. A lien SECURES my job related unpaid accounts receivables.

Now the kicker: You must take one of the following three actions before either of these documents will result in collecting your job related accounts receivables:

  1. Sign a release of your lien in exchange for payment in full from the entity named in your lien.
  2. Negotiate payment terms and refile an extended lien.
  3. Have your attorney use the lien as a basis upon which to file a foreclosure lawsuit against the property named in your lien and collect the amount claimed in your lien from the proceeds of the sale of the property.

This is a very simple yet accurate summation of the prelim/lien process. However, there are variables that can affect any of these conditions:

  1. Timing (time to serve your prelim, time to record and serve your lien, and time to commence a foreclosure lawsuit).
  2. Not all states require a prelim (check the CRM 50 state guide)
  3. You must be legally eligible to claim a lien (A contractor with an expired license, may not be able to claim a lien)
  4. Not every state offers the option to extend a lien.

Need more information on these and other options for methods to secure your job related accounts receivables?

Don’t shoot the Messenger

 

Looks like the California Mechanics Lien process just got a little more expensive.

Governor Brown has signed into law an amendment to the California Government Code:

Title 3, Division 2, Part 3, Chapter 6, Article 5 “Fees”

Effective January 1, 2018 the recordation of a Mechanics Lien, Notice of Completion and possible a Release of Mechanics Lien will now be subject to an additional $75.00 recording fee, Ouch! Now this new fee reaches far beyond the recording of a mechanics lien. It applies to almost any document which applies to real estate and must be recorded. So many many transactions of California Real Estate will be handicapped by this new charge.

Naturally, just like the new California state tax increase on gasoline, the public is being encouraged to contact their representative and launch a complaint as to what may have the appearance of unfair price gouging. After years of being subject to reasonable rates like $8.00 per page or something close to this rate, the new $75.00 surcharge surely takes on the aura of this kind of behavior. However, until this is changed, or overturned by the courts. Everyone will need to pay the new fee.

So what is the best strategy? How should you prepare to work with these unavoidable increases?

For Starters: Make sure that you are prepared to RECOVER these fees within the scope of your business contract. Have your attorney review your sales order, proposal, quotes, etc. and make sure the language is included that will allow you to recover all of your cost to pursue a mechanics lien without risking these cost.

Also, avoid choosing the California Mechanics Lien process for amounts that are minimal. If you need to expose yourself to a higher lien filing cost, be ready to follow it through and that your claim is bullet proof.

Make sure that your negotiations take all of these cost into consideration. If you hold a mechanics lien on a property and have negotiated a price in exchange for a release of lien, it would be wise to add the cost of having a Release of Lien prepared, including the new cost to record the release.

The mechanics Lien will continue to be the best tool for securing your unpaid receivables on any construction project. However, reviewing your collections processes and taking action to ensure your mechanics lien is supported by well researched preliminary notices, and guarded by an alert system that keeps you away from stressful, 11th hour decisions, will keep you in the drivers seat.

For additional information on these new California Government Code changes contact CRM

1-800-773-5467

Why can’t I lien my customer?

Seems like a logical assumption. You provided materials or services to your client and they have the ultimate responsibility to pay you. So why can’t you put a lien on them?

The answer is a little complex but I will do my best to clarify. The primary concept you will need to wrap your mind around is:

Mechanics Liens may only be placed on REAL PROPERTY

 

Now chances are that your agreement with your customer is that they pay you by cash, check, or some sort of transfer of money into your account. You cannot put a lien on money* so there is no mechanism for you to put a lien on your customer.

However, your customer does have an obligation to pay you. So when your customer decides not to pay you, the best option is to consider filing a “Breach of Contract” Lawsuit. or if the amount owed is within the limits allowed by the local “Small Claims” Courts, then consider filing a “Small Claims” action. This is surely a method available to you to secure your unpaid balance. However, these options may cost much more than the cost to place a mechanics lien on the REAL PROPERTY you helped to improve.

So, while a mechanics lien may not be used against your client. It can, and should be used, to secure the amount due to you from your client because the “FINAL BENEFICIARY” of the materials or services you provided is the Owner of the Real Property.

So the next most asked question is: Can I do both?

Can I lien the job and file a Breach of Contract Suit against my customer? Yes you can. BUT!

There is always a “but”. You may only collect once for the amount due to you. You cannot collect twice for the same balance due.

So we get down to asking: What is the wisest business decision?

My thinking is to file the mechanics lien. Why? because chances are that your customer is not paying you because they have not been paid for the work they performed on the same project in which they hired you. So if they were paid, the breach of contract suit becomes more strategic. But if they are still waiting to be paid, then the mechanics lien may be your most efficient method.

This subject can get a lot deeper depending on many different conditions which may exist. But to answer the question: Why can’t I lien my customer? this should provide you with a good understanding.

One last point. The mechanics lien can be a little tricky. It must be done properly to have any real impact. Make a small mistake and the time and money you invested in your mechanics lien may be easily squandered. Unless you are experienced in the preparation of mechanics liens, we recommend you consider using CRM Lien Services as your professional resource for this process.

(* you cannot lien the money your customer owes you. However, in some cases it is possible to put a lien on the money which is being used to fund the project – see Stop Notice or Lien on Funds)

I filed my lien . . . now what?

This is a very common question once a mechanics lien has been filed and served. The most important thing to consider is that your recorded mechanics lien: “Is not an end in itself”.

Most states offer two distinct options for a recorded mechanics lien. Some offer a third option which will be covered later. The first thing to be aware of is the “Life Cycle” for your mechanics lien. In many states the mechanics lien will become invalid 90 days after it has been recorded. Meaning that all of the time and expense you incurred to protect your lien rights and file your lien, will go down the drain on the 91st day. Why?  . . . because you must take action to advance your mechanics lien.

The most common action is to release your mechanics lien. This is the least expensive and is required if within the 90 day life cycle of your mechanics lien, the property owner has paid you for the full amount, or an amount which you have agreed to settle your claim of mechanics lien. Of course this action, releasing the lien, is only a viable action if you are paid. Should you not be paid, you must present your mechanics lien to a licensed attorney and have them begin a “Foreclosure Lawsuit” before your mechanics lien expires. This can be expensive. However, you may be able to capture your expenses should you win your case in court and request the judge allow recovery of your expenses in addition to the amount claimed in the mechanics lien.

Remember Option #1 Release of Lien (inexpensive), Option #2 Foreclosure Lawsuit (expensive)

Now there are some states, California for example, which offer a third option.

Option #3 Extend your mechanics lien.

This option buys you time (as much as 270 additional days) before you must start foreclosure. But the Lien Extension will cost you the price of a new mechanics lien. While the lien extension is designed to lengthen the time allowed to settle the claim, it must be agreed to and signed by both the claimant and the owner. Set terms for payment of the claim must be declared in the lien extension. And the claimant may advance the mechanics lien to foreclosure anytime during the extension if the terms of repayment are breached.

Not all states have this option but for those that do, it presents a very affordable and secured method to collect on your mechanics lien claim while holding the property in a collateral position.

Now with all of that said, be aware of the 91st day! Your mechanics lien, if left without action for 90 days, will become invalid and a cloud against the title of the property will be created. Your mechanics lien must be removed, with prejudice, when requested by the owner. It makes no difference if you have been paid or not. You are only allowed a limited period to take action with your mechanics lien. Should you let this time slip by. You will be literally up the creek without a paddle.

Have questions? Call us. We can help.

If my customer serves a prelim will I be covered?

My customer, who is a local distributor of roofing materials, served a prelim on a job and I will be supplying the roofing materials to the job and invoicing my customer. Am I protected under his prelim?

Short answer is ABSOLUTELY NOT and there are many possible reasons why you are not protected.

To start, the property owner has the ultimate responsibility to become liable to all who participated in the project who have a Right to Lien as evidenced in the most current state statute. When the statute demands that all who may be able to claim a lien must first notify the owner with a properly prepared notice. Then this means you, not your customer.

It is also possible, as in this example,  that you may be providing materials to another supplier who in turn is supplying to the job. This would be viewed as a Transfer of Inventory even if you shipped the materials directly to the job.

Many other conditions could impact your ability to have a Right to Claim a lien on a project. It is always best to request a prelim from CRM on or before the day you ship materials or start to work on a project. Let CRM conduct the research and make certain that you have a properly prepared and served notice to secure your Right to Lien.

There are many examples of conditions, which could exist, which may impact your Right to Lien. From a suspended or delinquent Contractors License to a misrepresentation of your business entity by failing to properly state your legal business identity on your contract or your clients order for services.

Keep in mind. This whole process of serving notices is driven by strict compliance with the laws that govern improvements to real property. Something as simple as forgetting to use “Inc.” after your company name when your are in fact an incorporated business, may invalidate your notice. Don’t take chances. When you have an experienced company like CRM prepare your notices, you may expect them to “peel back the onion skin” and look for all of the details, which those who may want to invalidate your Right to Lien, are hoping you overlook.

Here is the bottom line! When you have true lien rights to protect, you do not want to make a simple mistake that could cost you your lien claim after you have spent a ton of money to enforce your claim. Silly things like

  • Claiming a lien right or a lien under a business name of which you have no right to lien. (That is why CRM request that you enter into a “Service Agreement” with CRM.  This allows CRM to confirm that the notices we serve for you will actually protect you because you proper business identity is listed in the notice)
  • Or trying to claim a mechanics lien for the sale of some services or materials that could not be substantiated as having improved Real Property. ( Example: If you rented a Forklift to a job, you may protect the “RENTAL INCOME” earned on the Forklift ONLY IF the Forklift was used to help improve the Real Property. If the Forklift was used to unload tractor trailers of materials or supplies used in the business operations of the company whose property was being improved, then the rental income was earned but DID NOT help to improve the value of the real property.
  • Staying with the Forklift example: What if the Forklift is DAMAGED on the job? What if the cost to repair the Forklift is $10,000.00? Should you include the cost to repair the Forklift in your Lien? Most likely not. Why? The damage to the Forklift should be covered by Liability Insurance. (The Rental Industry usually refers to this as “Damage Waiver” Insurance.) So an insurance claim for the damages should be filed and this transaction should not be part of your claim for a mechanics lien.
  • Another scenario is when a Materials Supplier is supplying materials to someone else who has contract “to supply materials” to the project and they claim their right to lien for materials that you supplied. They are protected, you are not protected! If you try to claim a lien right it will be disqualified even if you delivered the materials to the job as a service to your Materials Supplier Client who ordered the materials from you. (Perhaps you should have sold the materials under a “Joint Check” agreement. This would help your protection if your client must go to court to collect on the materials you supplied.

There are many conditions which could surface in any business transaction. To be safe, we encourage you to use a service who ask the right questions and understands what it will take to make sure your notices do the job you expect them to do. To learn more about preliminary notices and other methods for securing your job related accounts receivables.

ContactUS

eSystems “Online Notice Management”

We have made some major improvements to our eSystems online document management program. Most significant is our online compatibility with the new Windows IE Browser. All Waivers and Releases are now available to be prepare without reformatting, print direct from Internet Explorer, and save as a .pdf file for attachment to your email or text message.

In addition, the login screens have been upgraded to allow personal modification and updates to Account Passwords, and our new “User Password” security. Allowing CRM eSystems clients the ability to assign an “eSystems” Administrator to edit and create all User level password protection.

If you are using CRM to have your preliminary notices prepared and served, then you won’t find a more efficient and effective program to manage your served notices and prepare current versions of Releases and Waivers of your lien Rights, then eSystems.

Best of all, eSystems is available to all CRM Open Account Clients for a small annual subscription fee of only $69.00

To learn more about using eSystems, or to have eSystems added to your account today.

Contact CRM at ContactUS

An Update on California Lien Laws

SB189 will become a California Lien Law in 2012 and the current forms used to release lien rights will become a thing of the past. The new:

  1. Conditional Waiver and Release on Progress Payment
  2. Unconditional Waiver and Release on Progress Payment
  3. Conditional Waiver and Release on Final Payment
  4. Unconditional Waiver and Release on Final Payment

contain new language, structure, a broader scope of application, and identification of exceptions.

The primary intent of each of these documents will remain the same: To release the lien rights of those who have properly executed and served a valid “Preliminary Notice”. However, form compliance and signature by the claimant are critical to meet the requirements as set forth on Chapter 3 Waiver and Release section 8124 (a)

CRM open account clients may subscribe to “eSystems” a comprehensive preliminary notice management tool which offers the ability to:

  • Create New Request fir preliminary notices to be researched, prepared and served
  • Manage fully executed copies of your served preliminary notices, including the ability to track the actual serving of the preliminary notice.
  • Prepare and Print, or eMail; Conditional, Unconditional, Progress, and Final Waivers and Releases of Lien Rights as granted by the Preliminary Notice.

For additional information please contact CRM Lien Services at 1-800-Prelims (773-5467).

Are you protected by the California Lien Law?

If you own a construction business in California, it’s important for you to know and understand the key elements of the California Mechanics Lien Law. The provisions in the California Lien Law are designed to protect your Lien Rights; however, you have to make sure that you follow the law exactly as it is laid out in the California Civil Code § 8000 et seq. One small mistake can invalidate your entire Mechanics Lien claim.

If you need to file a Mechanics Lien in California, you must comply with the statutes laid out in the California Lien Law. Navigating the California Mechanics Lien Law on your own can be difficult, so we’ve highlighted a few key provisions to help you better understand the laws and requirements for your California-based business.

In California, a Preliminary Notice is a Requirement
The first thing to note is that a Preliminary Notice is required in the state of California. According to the California Lien Law, if you do not deliver a Preliminary Notice “at the start of furnishing labor or materials”, you risk losing your Mechanics Lien rights. The law requires everyone who is not in direct contract with the property owner to deliver a Preliminary Notice within 20 days of first furnishing labor and materials to the project. General contractors (that is, those who are in a contract with the property owner) must file a Preliminary Notice only if the project has a construction lender. It’s also important to note that the Preliminary Notice must contain all of the information required by California Lien Law, and it must be sent to the property owner, general contractor, and construction lender (if applicable).

As a General Rule, You Have 90 Days to File a Mechanics Lien in California
When it comes to filing a Mechanics Lien claim, you need to know the deadline for filing your Mechanics Lien. In the state of California, you have 90 days from the actual completion of the project to file a Mechanics Lien. However, if the property owner or contractor files a Notice of Completion formally announcing the project’s completion date, the deadline may be reduced to 30 days from when the notice was filed.

California Limits the Amount You Can Claim in a Mechanics Lien
California’s Lien Law is one of the strictest in the country when it comes to the amount you can and cannot include in a Mechanics Lien claim. According to the California Lien Law, the value of a Mechanics Lien claim is limited to the lesser of (1) the reasonable value of the work provided by the claimant or (2) the price agreed upon by both parties (as laid out in the contract). This leaves no room for additional fees, such as late payment penalties, attorney fees, interest, or lien costs.

These are just three key provisions included in the California Mechanics Lien Law. There are hundreds more that are just as important to the success of your Mechanics Lien. Don’t risk your Mechanics Lien Rights by trying to navigate the laws on your own – hire a Preliminary Notice and Mechanics Lien Service to prepare and serve your California Preliminary Notices and Mechanics Liens. While there are many reasons to use a professional Preliminary Notice and Mechanics Lien Service, the best reason is the research that the service provides.

Quite often the information gathered by your sales force or customer service team may list a business owner and not the property owner. The job address referenced on your clients work order may be completely different than the address actually being improved. Any misinformation entered into the initial prelim may end up on your lien document and render your entire effort as being invalid.

CRM Lien Services will thoroughly research and verify all of the information included in your Preliminary Notice and Mechanics Lien so your Lien Rights are fully protected. We stay current with the changes to the California Lien Law so your notices are prepared according to the latest statutes.

If you’d like to request a proposal for our services, click here.

California Introduces New Waiver and Release Forms

CALIFORNIA introduces NEW WAIVER and RELEASE forms for those holding valid Mechanic’s Lien, Stop Payment Notice, and /or Payment Bond Claim Rights.

The new Forms will be required as of July 1, 2012 to facilitate the release of Mechanic’s Lien, Stop Notice, and Bond Claim Rights on Private and Public construction projects.

The existing:

CONDITIONAL WAIVER AND RELEASE UPON PROGRESS PAYMENT

UNCONDITIONAL WAIVER AND RELEASE UPON PROGRESS PAYMENT

CONDITIONAL WAIVER AND RELEASE UPON FINAL PAYMENT

UNCONDITIONAL WAIVER AND RELEASE UPON FINAL PAYMENT

will take on a slightly different look in July of 2012.

The changes to these commonly used forms are driven by Senate Bill 189, which was chaptered and became law this year.

The release forms now include language, which specifies not only the mechanic’s lien, but also the Stop Payment Notice (previously known as a Stop Notice) and Payment Bond Rights (also known as Payment Bond Claim Rights).

The new waiver and release forms also include language under the title: “Exceptions” which specify Retentions, Extras for which the claimant has not received payment. Reference to previously issued conditional waivers and releases for which the claimant has not received payment and detailed reference to:

Contract Rights, including a right based on rescission, abandonment, or breach of contract and the right to recover compensation for work not compensated by the payment”.

These new forms will be available from CRM Lien Services, Inc. on January 1, 2012 and are incorporated into the 2012 version of CRM ReleaseMaker.