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 Our Response
The Honorable
Assembly Member Howard Wayne, Chairperson
RE:
MECHANIC'S LIEN STUDY
Dear Assembly
Member Wayne:
I was one of
the people at your November 30, 1999 meeting covering the referenced matter. As
I indicated to you when I spoke, I'm an attorney in a law firm that emphasizes
construction law. Although we represent prime contractors and material
suppliers, our main group of clients are subcontractors. It is for that reason
that we are becoming involved in this study.
I personally
lecture to the construction trade on the subject of mechanic's liens, stop
notices and bonds as well as contract rights, etc. Most of my seminars are to
the trade. However, some of my seminars have been approved for continuing
education of the Bar. I have qualified as an expert in these areas before the
courts.
I give you the
foregoing as background for my point of view and to illustrate that I am a
practitioner in this field and not a lobbyist. However, I try to be objective.
In general, the term "mechanic's lien" describes a bundle of rights dealing with the improvement of real property. The bundle of rights includes stop notices and payment bond rights. At this point, it would be too technical to describe how each item works. However, I suspect that your staff and your consultants will bring you completely up to speed on all of them.
Unless
otherwise noted, my comments will be referring to the bundle of rights rather
than the mechanic's lien rights alone.
Each of
the people that spoke before you tended to have differing points of view. Your
consultant gave you a very good overview of the lien process and its history. I
would not attempt to better that explanation. Although some had argued before
you as to your consultant's point of view, there's no question but that he has
laid out the process for you and gave you an accurate history.
What may
not have been sufficiently pointed out, is that mechanic's liens, in addition to
providing security for being paid, provide an additional entity to sue that
material suppliers and subcontractors would not otherwise be able to sue. That
is, in the typical scenario there is no contractual relationship between
subcontractors or material suppliers and the owner of the project. Given that,
the mechanic's lien allows subcontractors and material suppliers to sue the
owner through an action in rem. Further, in a mechanic's lien action,
the damages are for the value of the improvement and no deficiency
judgment can be had in the lien action.
There are substantial differences between the various parties that you have heard from to date and will hear from in the future. Clearly, prime contractors would prefer to limit the lien rights if kept at all. That is because prime contractors have a direct contract with the owner and can enforce their rights contractually without jumping through the number of hoops that the mechanic's lien process requires them to do.
Title
insurance companies do not like the liens because they are an off-record cloud
on title. Generally, a mechanic's lien attaches when work first begins on a
construction project. However, at that time nothing is recorded. Therefore,
the property is subject to being clouded but the cloud is not a matter of public
record. This is the very reason that title insurance companies do not like
mechanic's liens. However, there are two types of title insurance policies.
One that just searches the record and another when the insurer goes out and
looks at the property. If one looks at the property, they can usually discern
whether any construction is going on that might cause a potential lien to exist
that would or may have priority over a potential buyer or lender.
Owners do not like mechanic's liens because they are a cloud on title and may require them to deal with a subcontractor or material supplier even though they may have already paid their prime contractor for the work that was done. Realtors do not like mechanic's liens because they may keep escrows from closing quickly.
However, there
is a method for releasing mechanic's liens through the use of a mechanic's lien
release bond. This type of bond substitutes the bond as security in lieu of the
property. Your consultant advised you that the lien has been held to be
constitutional, and is not an unconstitutional "taking."
As I stated
during your last meeting, although you have been charged by the Legislature to
review the process, one of the things that must be looked at is whether the
process needs wholesale changing rather than minor changes that are similar to
the ones that have been made over time. It seems foolish to change something
that has worked for over 100 years without a study to determine if a problem
exists, and if so, the scope of the problems. I suggest that you recommend to
the Legislature that it directs and authorizes the Contractors' State License
Board to retain a company to study the scope of whether problems exist and the
scope. By doing things such as searching public records, interviewing people
and any other method that researchers would deem appropriate.
I also urge
you to obtain information derived by the Contractors' State License Board
dealing with this issue. There are other ways to protect owners, including
owners of single-family, owner-occupied, residences. I would urge you to have
your staff contact Ellen Gallagher, Staff Attorney, Contractors' State License
Board, P.O. Box 26000 Sacramento, CA 95826, to obtain information and
suggestions. Some ways to protect owners that come to mind are more descriptive
notices, checklists to be given to the owner to be used before making payments,
etc. As an aside you have been told that owners of single-family,
owner-occupied residences need additional protection because they are not
sophisticated in the process. Our experience would indicate that the
contractors that are performing this type of work are no more sophisticated in
the process than the typical owner.
Quite
honestly, it appears to me that the very first thing this Commission should do
is determine whether wholesale changes in the process are appropriate. I have
heard nothing but anecdotal statements. I don't believe that much needs to be
done.
Importantly, I believe that when you consider all of the tentacles of the
construction industry, it is the largest industry in the State of California.
Yet I am not aware of any significant number of people that have suffered a loss
because of the "mechanic's liens" bundle i.e., lost their homes or have paid
twice. Indeed the only "large scale" problem occurred in the 1970's when Sunset
Pools filed for bankruptcy leaving approximately twenty-five pools
unfinished. That was many years ago. Certainly this is not sufficient to merit
the proposed upheaval in the constitution and civil code.
On the other hand, the financing of construction projects leaves contractors severely leveraged. Typically, contractors work on a very narrow margin of profit -- something like ten percent. If they are not paid timely, or if their payments are not made at all, one can see that it would take a whole lot of profitable jobs to make up for only one unprofitable job. Without lien rights more contractors could go bankrupt, substantially hurting the economy. It is for that reason that I urge the Commission to not recommend making wholesale changes in the mechanic's lien process unless they are proven truly necessary.
Specific Suggestions
As I stated
earlier, we agree with the consultant's analysis almost to the letter. We have
three differences and those are detailed herein.
The
Consultant's Proposed Changes To Civil Code
''
3115 & 3116 First, we would allow contractors of all tiers and material suppliers to file a stop notice whenever they were due money and not paid rather that having to wait until they complete their tasks (original contractors may not serve an owner with a stop notice). The reason for that is that the stop notice ties up construction funds. If one were to wait until they were completed with all of their work, then much of the construction funds may have been already distributed. Therefore, there would be very little left to tie up or to assure payment. In order for the stop notice to be effective there needs to be a construction fund.
Proposed
Changes To Civil Code
'
3262
Secondly,
with respect to the Conditional and Unconditional Waiver and Releases upon
final payment, we would leave words to the effect that the release does not
cover contract claims. The reason for that is that the amount of the mechanic's
liens goes to the value of the improvement of real estate. Contract claims
could be very different and broader. As an example, a material supplier may be
entitled to interest at the rate of one and one-half percent per month pursuant
to their contract with their customers (generally a subcontractor). However,
they are only entitled to the statutory rate of interest on the mechanic's
lien. Similarly, one may be entitled to attorneys fees on a contract action but
not entitled to attorneys fees on a mechanic's lien claim. Breach of contract
damages could also include lost profits or other consequential damages. That is
not true with mechanic's liens.
Lastly,
with respect to the two Unconditional Releases, there is a statutory notice.
Your consultant carries that same general tenor along. It seems to me that it
would be appropriate to put in words to the effect that the Unconditional
Release waives any claim even if the releasor accepts a check that later is
dishonored by a bank. The reason for including that language is that the
general rule in the State of California is that if a check is dishonored it is
as if that check was never given. There are no cases on point; however, it
seems to me that based on the language of the present notice in the statute,
people may be giving up their rights regardless of whether the check they
receive is honored or not.
Please keep us
as an interested party in this matter. Respectfully Yours,
SAM K. ABDULAZIZ The information and comments throughout this website are intended to be of a general nature. Our comments/advice should not be relied upon without your seeking the aid and advice of legal counsel who will have the opportunity to take the time to research all your issues. The firm can be reached at: Please note that any information you provide to
us via e-mail may be viewed by others and therefore, it is not a privileged
communication. Copyright © 2006 by Abdulaziz, Grossbart & Rudman. All rights reserved. |
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