Two New Important Preliminary Notice Court Cases Warrant Attention

The California appeals court issued two new cases recently that warrant the attention of any contractor wishing to preserve its lien, bond or stop notice rights.  Both cases address the importance of getting the preliminary notice requirement right.

The first case, Shady Tree Farms v. Omni Financial (12 C.D.O.S 5544, May 22, 2012), dealt with a material supplier who had a contract with the project owner to supply trees for a large development project.  Shady Tree Farms supplied $3.2 million in trees to be used to landscape the development. 

Shady Tree sold the trees directly to the developer.  The trees were to be stored on site and maintained and later planted by the developer’s separate landscape contractor.  The development ran into financial difficulties and was not completed.  The developer failed to pay for the trees.  The project lender sought to foreclose on the project.  In the meantime, no one watered the trees, and they died.  Shady Tree Farms attempted to collect for the trees by filing a mechanics’ lien. 

The construction lender, which by then owned the property, claimed the lien was invalid because Shady Tree did not serve a preliminary 20-day notice, as required by the mechanics’ lien law.  Shady Tree argued that because it had a direct contract with the project owner, it was not required to serve a preliminary 20-day notice.  One section of the law that imposes the preliminary notice requirement (Civil Code section 3097(a)) says that the notice is not required to be served by someone with a “direct contract with the owner.”  However, the appeals court ruled that a separate section of the notice law (Civil Code section 3098(b)) requires a preliminary notice to be served on the construction lender even by claimants who have a direct contract with the owner, excepting only a claimant who is a general contractor or a single prime contractor.  Shady Tree was not the general contractor, it was a supplier, and was required to serve a preliminary 20-day notice on the construction lender.  Shady Tree’s lien was declared invalid.

The “take away” from the Shady Tree case is that only true general or single prime contractors are excused from the preliminary notice requirement on private jobs.  Suppliers or prime contractors on a multi-prime job working in direct contract with the owner must serve the construction lender with a timely preliminary 20-day notice.

The second case, California Paving and Grading Co. v. General Insurance Company (12 C.D.O.S. 5455, May 21, 2012), tackled the issue of whether public site improvements constructed and paid for by a private developer were public works of improvement under the mechanics’ lien law.  In that case a developer obtained subdivision approval from a City.  As a condition to approval, the City required the developer to enter into a subdivision improvement agreement, under which the developer agreed to construct and pay for the subdivision roads and sidewalks, which ultimately were to be used by the public.  The contract required the developer to post a labor and materials payment bond.  California Paving and Grading (CPG) was the subcontractor hired to construct the roads.  This development also stalled, and both the developer and general contractor filed bankruptcy, leaving CPG unpaid.  CPG asserted a claim against the payment bond. 

The bond surety defended the claim on the basis that the subcontractor had not followed the procedural rules applicable to bond claims on public works jobs.  For example, CPG served its preliminary 20-day notice under the rules applicable to mechanics’ liens on private works jobs, so it did not serve the public agency (City) with the notice as required for public works claims.  CPG argued that since the street improvements were built and paid for by the developer with private funds, the project was not a public works project, and the procedures CPG followed to enforce its bond rights met the private works requirements.

The court of appeals sided with the surety.  It held that the Mechanics’ Lien Law defines a “public work” as “any work of improvement contracted for by a public entity.”  In this case, the City entered into the subdivision improvement agreement that required the developer to build the street improvements, so the City had “contracted for” the construction of the improvements.  It did not matter that they were not built with public funds.  Because CPG did not follow the procedural requirements to enforce a public works bond claim, including serving the preliminary 20-day notice on the public agency, its claim should be dismissed.

As less public funding is available for new construction, we see more projects using a mix of public and private investment, and the line between public and private improvements becomes blurred.  The California Paving and Grading case shows that anyone wishing to protect payment rights must do a careful analysis of the nature of the work and strictly follow the correct process to protect those rights.

Lastly, while we are on the topic of mechanics’ liens, don’t forget that the major re-organization and renumbering of the mechanics’ lien statutes goes into effect on July 1 of this year.  Most of the changes are non-substantive, but it is advisable to update lien documents with references to the new code sections and to note any changes that may affect your business.  A very useful summary of the changes and a cross-reference between the new and old code sections can be found at:

 www.gravel2gavel.com/2012/05/significant-changes-to-californias-mechanics-lien-law-coming-july-1-2012.html