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.