What do you do about your Mechanics’ Lien When the Developer Files Bankruptcy?

The California mechanics’ lien is a powerful tool for contractors, subcontractors and material suppliers to secure payment of unpaid construction related debts. The goal of the mechanics’ lien is to force a sale of the real property where the work was performed in order to obtain the funds necessary to pay the delinquent debt. Under the usual procedure, the first step is the recording of mechanics’ lien in the chain of title to the property at the County Recorder’s office. A lawsuit must then be filed in state civil court within ninety days after the mechanics’ lien is recorded. The goal of the lawsuit is to foreclose on the mechanics’ lien. A successful foreclosure lawsuit will result in a court mandated sale of the property. The proceeds of the sale will be used to pay the unpaid construction debt originally secured by the recording of the mechanics’ lien. While this may seem an oversimplification, it is necessary to grasp this basic process in order to understand the complications discussed below.

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Architect, Engineer, and Design Professional Liens in California: A Different Animal than the Mechanics’ Lien

Most in the construction industry are familiar with the rules of California mechanics’ liens. They know that the Preliminary Notice of Civil Code Section 8034 and 8200-8216 is often the foundational document and that the deadline to record a mechanics’ lien is generally triggered by events occurring at the end of construction, including completion of the work of improvement and the recording of the notice of completion or notice of cessation. Most of these rules are found in California Civil Code sections 8160-8494.

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Penalty for Filing a False or Inflated Stop Payment Notice

A prime contractor recently came to me with a problem involving a stop payment notice. It seemed that a supplier to a subcontractor on a project had a dispute with the subcontractor. As a result, the supplier filed a stop payment notice on the project. The problem was that the cumulative unpaid billings from the supplier amounted to no more than $65,000, while the stop notice filed was for approximately $75,000. In my subsequent conversation with the supplier, he acknowledged that there was only $65,000 in unpaid principal. He said he filed a stop notice in the higher amount because he wanted to be sure to cover anticipated interest, fees, costs and lost profits. I advised him that filing the stop notice in such an amount and for such a purpose was improper and requested he release the stop notice. He refused. I confirmed the conversation in writing and promptly took him to court.

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The Public Works Affidavit vs. Counteraffidavit Process

In some cases, when a California Stop Payment Notice is served, the direct contractor will serve an “Affidavit” on the public entity, demanding that the public entity release all funds withheld. Upon receipt of such an Affidavit, the public entity will serve the subcontractor or supplier who served the Stop Payment Notice with a copy of the Affidavit, along with a Demand For Release of Funds. If the Stop Payment Notice claimant does not respond with a “Counteraffidavit” by the date stated on the notice sent by the public entity, then the public entity will release the funds to the direct contractor and the Stop Payment Notice claimant will relinquish its Stop Payment Notice rights. If the Stop Payment Notice claimant is served with such an Affidavit and Demand For Release of Funds, the claimant should fill out the “Counteraffidavit” form (available at www.porterlaw.com) and serve it on the public entity and the direct contractor. This should at least temporarily stop release of the funds by the public entity and preserve the Stop Payment Notice remedy. (See Civ. Code §§ 9400-9414.)

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Construction Project “Stop Work Notice” Unintended Trap for Prime Contractors

California law provide “original”, “prime” or “direct” contractors with apparent relief from their contractual obligations when owners of property on which the original contractor works fail or refuse to pay them. This law can be found in the “10 Day Stop Work Notice” specified in Civil Code sections 8830-8848. Unfortunately, the applicable statutory procedures have a number of important shortcomings of which contractors, subcontractors and suppliers should be aware.

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When Service of a “Payment Bond Notice” is Required Before Bringing a Lawsuit on a Payment Bond Claim on California Construction Projects

The payment bond is a valuable source for payment to subcontractors and suppliers who have not been paid for work performed on California construction projects. Although a payment bond is typically associated with public works projects, payment bonds can also be used on private works projects. If there is a payment bond on the project there are important deadlines which must be followed. If the original contractor was required to post a payment bond for the project, then follow the deadlines described below. (See California Civil Code sections 8600 – 8614 for private works and §§ 9550-9566 for public works).

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Federal Public Works Construction Collection Remedies: The Miller Act Payment Bond Claim

Federal public work construction projects are unique in that there are no Stop Payment Notice or Mechanics Lien remedies available. Furthermore, although a remedy is available by proceeding against the original contractor’s payment bond under a federal law known as the “Miller Act” and its corresponding Federal Regulations (40 USCS 3131 et seq. and 48 CFR 28.101-1 et seq.), this remedy is not available to all subcontractors or suppliers. In addition, there are circumstances where a different form of security can be substituted for the payment bond (40 USCS 3131(b)(2)).

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