California Contractors - Mechanics Liens or Prejudgment Liens - Which is Better?
|Prepared By: Melissa C. Marsh, Los Angeles Real Estate Attorney
Written: March 2009
California law provides a number of remedies to contractors to resolve construction payment disputes. Among the tools available to for collecting payment on construction projects are stop notices, mechanics' liens, bond remedies, and a prejudgment attachment lien. While each of these remedies is protected, California law imposes strict procedures to prevent the abuse of these remedies.
In California, an unpaid contractor working on a private property that follows the statutory notice procedures can record a mechanic's lien against the property to which the contractor provided labor, service, materials or equipment. The mechanic's lien makes the property security for the debt owed to the contractor. After the mechanic's lien is filed, if the owner of the property still refuses to remit payment, the contractor can ask a court to enter judgment on the lien and order a foreclosure sale of the private property so the debt can be paid from the sale proceeds.
Meeting the strict statutory notice requirements and deadlines for notice, recording and filing, however, poses many traps for the unwary contractor. First the contractor or supplier must serve the property owner, any lender on the project, and where applicable the general contractor with the required Preliminary 20-day Notice within 20 days of the date the contractor first provides services or materials to the project. (California Civil Code §§3097, 3097.1, 3114.). It is also a good idea to serve the Preliminary 20-day Notice just before any of your work begins at the site, or your materials are supplied to the site. Once served the Preliminary 20-day Notice should be recorded with the County Recorder. If 20-days has passed, the Preliminary 20-Day Notice can still be served, but any future lien will only apply to unpaid work that occurred 20 days before service of the Preliminary 20-Day Notice and to unpaid work that occurred after the date of service. Service should be done via certified mail, return receipt requested.
It should be noted that suppliers should ensure that someone signs a form for any materials delivered: “Received by _______________, title: ___________, for ______________ contractor on ____________(date) for the project located at: __________________________, _____________ County, _______.”
If a dispute later arises, within 90 days of completing the project, the contractor/supplier must either record a Mechanics' Lien at the office of the County Recorder where the construction project is located (California Civil Code §§3115, 3116.), or serve a timely stop notice on the construction lender. If the property owner properly records a Notice of Completion or Cessation within 10 days after actual completion of work on the project (Civil Code §3093), then the contractor must record the Mechanics Lien within 60 days if the contractor had a contract with the owner (California Civil Code §3115 b) and within 30 days if the contractor worked through a third party. (California Civil Code §3116 b).
"Actual Completion," which triggers the ninety (90) day period within which the contractor must record a Mechanics Lien and/or serve a Stop Notice occurs when:
- 1. The property, or work of improvement, is being used and there has been a cessation of labor thereon;
- 2. The property owner accepts the work of improvement; or
- 3. There is a cessation of labor for a continuous period of sixty (60) days (30 days if the owner files a Notice of Cessation in compliance with California Civil Code §3086.
A Notice of Cessation may be recorded by the property owner when work on the project is temporarily halted for more than 30 continuous days. (Civil Code §3092). If the work stops and then starts again within a 30-day period, the owner is not permitted to record a valid Notice of Cessation. A Notice of Completion, to be effective, must be recorded by the property owner after work has actually been completed, as that term is defined in Civil Code §3086. If the Notice of Completion is filed more than 10 days before the project is completed, or more than 10 days after the work is completed, it is invalid and the contractor will have 90 days from actual completion to record a mechanics lien. It should be noted that California courts tend to liberally construe when a job is complete. Technically, a job is not complete until every detail required by the contract, plans, specifications, or drawings is completed. Substantially completed is not complete unless there is a cessation of work.
It should be noted that the general contractor cannot record a mechanic’s lien until he or she has substantially finished with the entire and overall project. A subcontractor or supplier, on the other hand, can record a mechanic’s lien when their portion of the work is substantially completed, even though the overall job is still continuing. If a contractor or subcontractor prematurely records mechanic’s lien, the contractor/subcontractor can re-record the mechanic's lien to preserve their rights, as long as the lien is filed within the applicable time deadline. (For example, within 90 days of overall completion).
If a mechanics lien is inappropriately filed, the property owner may file a lawsuit against the contractor/ subcontractor/supplier who filed the lien and if the court finds in favor of the owner, the contractor will be responsible for all actual damages incurred as well as the plaintiff's attorney’s fees and costs. So...exercise caution and do it right or don't do it at all.
After the Mechanics Lien is filed, it is important for the contractor/subcontractor/supplier to file a lawsuit in the Superior Court to foreclose on the lien within 90 calendar days of recording the lien. If the lawsuit to foreclose the lien is filed even one day late, the court will not foreclose on the lien. Although the mechanics lien will still remain recorded at the Recorder’s Office, it will automatically become null and void. California Civil Code §3144.
Pre-Judgment Attachment Liens.
If a contractor has a contract with the owner (not another contractor) and the contractor fails to meet any of the notice or other statutory requirements of the Mechanics Lien, the contractor still has another option to secure payment. The contractor can file a lawsuit and thereafter seek a pre-judgment writ of attachment, otherwise called a Prejudgment Attachment Lien. (California Code of Civil Procedure §§481.010, et seq.) A Prejudgment Attachment Lien is a document indicating that a court has issued a plaintiff (secured party) a writ of attachment on the personal property of a defendant (alleged debtor). The lawsuit must be filed within two (2) years if the contract was verbal, and within four (4) years if the contract was written, and once filed the attorney can apply for a writ of attachment.
To obtain a prejudgment writ of attachment, the contractor-plaintiff must prove via detailed evidentiary affidavits or declarations and supporting documentation that: (1) the underlying claim has specified certain damages on which an attachment may issue;(2) the plaintiff is more likely than not to win on his or her claim; (3) that the attachment is not sought for any purpose other than to secure recovery on the claim; and (4) the amount to be secured by attachment is greater than zero. California Civil Code of Procedure § 484.090(a). If the court determines that the contractor-plaintiff proved the above four elements, the will issue a write of attachment so long as the contractor plaintiff posts a bond (typically $10,000) to secure any damages the defendant may suffer should the attachment later be found to have been wrongful. California Civil Code of Procedure §§ 484.090(b) and 489.210.
In some cases, a Prejudgment Attachment Lien may better serve the contractor, especially if the private property on which s/he labored or supplied materials has little or no equity in it. A Mechanics Lien only secures payment from the sale of the property, while a Prejudgment Attachment Lien can be placed on any of the owner's assets located within the state, including: the owner's bank accounts, equipment, inventory, stocks, home, etc... If a bank account is levied, the bank account will be frozen, and turned over to the court. Certain physical property can be confiscated and held by the sheriff on behalf of the court. A county's title records reflect a recorded Prejudgment Attachment Lien as a claim against title to real property, just like a mechanic's lien.
It should be noted that a Prejudgment Attachment Lien is not available in small claims court proceedings. California Code of Civil Procedure §116.140(b).
Both the Mechanics Lien and the Pre-Judgment Attachment Lien have their pluses and minuses and both require the expenditure of time and costs.
© 2009 Melissa C. Marsh. All Rights Reserved.