Category: Insights

Although the general rule is that an action to foreclose on the mechanics’ lien must be filed within 90 days after the lien has been recorded at the County Recorder’s office where the property is located, it is possible to extend this 90 day deadline. Civil Code section 8460 describes the means to do so.

Where California mechanics’ liens are concerned there are few dates, the passages of which are more appreciated by property owners than the last day to file a lawsuit to foreclose on a mechanics’ lien. This is because unless the deadline to file a lawsuit to foreclose on the mechanics lien has been extended by a properly drafted and notarized “Notice of Credit” which has been duly recorded with the County Recorder in the county where the property is located, under California Civil Code section 8460, the deadline to file such a lawsuit will expire ninety (90) days after the mechanics lien was recorded. While exceptions may possibly exist when that date falls on a holiday or weekend, for the most part the 90th day is the absolute drop dead date for filing a suit. After that date the mechanics’ lien automatically expires and is no longer enforceable.

The usual rule in California is that the first to file documents of record with the County Recorder impacting on title to property have priority over later filed documents. This general rule allows, among other things, lenders to view the title to property before granting a loan on the property. The lender can then see if there are existing encumbrances on the property in question. Unfortunately for lenders, this practice does not always work in the case of mechanics’ liens.

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.

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.

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.)

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.

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).