California Contractor Spills Coffee on Himself by Failing to Stay Mechanics Lien Action While Pursuing Arbitration

Garret Murai | California Construction Law Blog | July 26, 2018

It bugs the Mrs. that I have a habit of reading the directions. “Just plug the darn thing in!” said the Mrs. when we got a new coffee maker to replace our old one which we’ve had since I think before we were married (Life Lesson No. 347: Get a coffee maker you really, really like because they last forever). “But . . . the directions?,” I said.

By the time I had finished reading the instruction manual I could smell the coffee brewing in the kitchen. Granted, the Mrs. is more practical than I am in many ways (e.g., “You know, you didn’t need to buy 10 cans of corn to get the 10 for $10 discount. I guess you’re going to be eating a lot of corn”). But still. What might have happened if there was a serious coffee mishap?

And worrier as I may be mishaps can happen if you don’t read the directions. James Zenovic didn’t read the directions, and here’s his story . . .

Von Becelaere Ventures, LLC v. Zenovic

In Von Becelaere Ventures, LLC v. Zenovic, Case No. D072620 (June 6, 2018), James Zeonovic doing business as James Zeonovic Construction entered into a construction contract to build a single-family house for Von Becelaere Ventures, LLC in Laguna Beach, California. The construction contract included an arbitration provision that stated:

If any dispute arises concerning this Contract or the interpretation thereof, of concerning construction of the Improvements, or the Limited Warranty, customer service, defects, damages, or obligations therewith (a “Construction Dispute”), such Construction Dispute will be settled by binding arbitration.

As sometimes happens on a construction project, a dispute arose. The result, was that Mr. Zenovic recorded a mechanics lien asserting that Von Becleare Ventures owed him nearly $450,000 on the project.  Mr. Zenovic recorded his mechanics lien on March 20, 2017. As also sometimes happens on a construction project, Von Becleare Ventures filed a complaint against Mr. Zenovic alleging a host of claims relating to the work performed by Mr. Zenovic on the project. Von Becleare’s complaint was filed on April 3, 2017. On April 7, 2017, Mr. Zenovic filed a complaint against Von Becleare Ventures foreclosing on his mechanics lien.

About a month later, Mr. Zenovic file a motion to compel arbitration to stay the actions while the parties arbitrated their dispute pursuant to the arbitration provision of the contract. However, the trial court denied Mr. Zenovic’s motion finding that he had waived his right to arbitration because he failed to (read and) comply with Code of Civil Procedure section 1281.5 which provides in pertinent part:

(a) Any person who proceeds to record and enforce a [mechanics’] lien . . . does not thereby waive any right of arbitration the person may have pursuant to a written agreement to arbitrate, if, in filing an action to enforce the claim of lien, the claimant does either of the following:

(1) Includes an allegation in the complaint that the claimant does not intend to waive any right of arbitration, and intends to move the court, within 30 days after service of the summons and complaint, for an order to stay further proceedings in the action.

(2) At the same time that the complaint is filed, the claimant files an application that the action be stayed pending the arbitration of any issue, question, or dispute that is claimed to be arbitrable under the agreement and that is relevant to the action to enforce the claim of lien.

(b) Within 30 days after service of the summons and complaint, the claimant shall file and serve a motion and notice of motion pursuant to Section 1281.4 to stay the action pending the arbitration of any issue, question, or dispute that is claimed to be arbitrable under the agreement and that is relevant to the action to enforce the claim of lien. The failure of a claimant to comply with this subdivision is a waiver of the claimant’s right to compel arbitration.

(c) The failure of a defendant to file a petition pursuant to Section 1281.2 at or before the time the defendant answers the complaint filed pursuant to subdivision (a) is a waiver of the defendant s right to compel arbitration.

The Court ruled that because Mr. Zenovic had not: (1) included an allegation in his complaint to foreclose on his mechanics lien that he did not intend to waive his right to arbitration and within 30 days of service of his complaint would seek a stay of the action while he pursued arbitration; or (2) did not file an application to stay the action at the time he filed his complaint to foreclose on his mechanics lien, he had waived his right to arbitration pursuant to Section 1281.5.

Mr. Zenovic appealed.

The Court of Appeal Decision

On appeal, Mr. Zenovic contended that Code of Civil Procedure section 1281.5 only applied to his complaint to foreclose on his mechanics lien but did not apply to Von Becleare Ventures’ claims against him.

The Court of Appeals for the 4th District disagreed holding that, under a plain reading of the statute, Section 1281.5 applies not only to actions to foreclose on a mechanics lien, but also to any arbitrable claim relevant to an action to enforce a mechanics lien:

Section 1281.5, subdivision (a), contemplates a mechanics lien action will be separate from an action to resolve otherwise arbitrable disputes. It makes no difference if the arbitration action is initiated in a different venue or which party initiates the arbitration action. By its plain terms, the statute permits a contractor to take advantage of the statutory mechanics lien process while preserving the contractual right to arbitrate disputes as provided in the arbitration agreement. The purpose of the alternative stay procedures articulated in section 1281.5, subdivision (a), is to hold the mechanics lien process in abeyance “pending the arbitration of any issue, question, or dispute that is claimed to be arbitrable under the agreement and that is relevant to the action to enforce the claim of lien.” However, a party who commences a mechanics lien action without complying with either of the stay provisions waives any such right to arbitration.

(emphasis in original).

And, here, held the Court of Appeals, Von Becleare Ventures’ claims against Mr. Zenovic were arbitrable claims under the arbitration provision of the parties’ agreement, but Mr. Zenovic failed to preserve his right to arbitration by failing to comply with Code of Civil Procedure section 1281.5 when filing his action to foreclose on his mechanics lien.

Conclusion

So there you have it. Read the directions, or, in this case, the statutes, to avoid the risk of spilling coffee all over yourself.

Enforcing A Mechanic’s Lien In California? Don’t Waive Your Right To Arbitrate The Dispute

Jeffrey N. Brown | Thompson Coburn LLP | June 13, 2018

On June 6, 2018, the California Court of Appeal held that a contractor waived its right to arbitrate disputes because it recorded a mechanic’s lien and then didn’t follow California Code of Civil Procedure Section 1281.5 in its subsequent lawsuit to foreclose on the lien. In Von Becelaere Ventures, LLC v. Zenovic, the parties entered into a construction contract for a single-family residence in Laguna Beach, California. The contract had an arbitration provision as follows:

If any dispute arises concerning this Contract or the interpretation thereof, or concerning construction of the Improvements, or the Limited Warranty, customer service, defects, damages, or obligations therewith (a “Construction Dispute”), such Construction Dispute will be settled by binding arbitration.

After a dispute arose, Zenovic, the contractor, recorded a mechanic’s lien in the amount of almost $450,000, and Von Becelaere Ventures, the owner, filed a construction defect lawsuit, alleging that Zenovic breached the construction contract by

“(a) failing to properly perform and construct the Work;

(b) failing to hire properly licensed and insured subcontractors;

(c) failing to comply with proper license and insurance requirements;

(d) failing to obtain written subcontract agreements;

(e) failing to properly supervise the Work;

(f) failing to maintain and provide upon request proper accounting records;

(g) failing to properly manage expenses and allowing gross overages;

(h) failing to comply with requirements regarding change orders, improperly billing for extra work and improperly categorizing work as extra work which should have been covered under the contract as included work; and

(i) improperly filing and asserting an untimely mechanics lien and threatening to file suit to foreclose on the improper lien.”

Shortly after being served with the Von Becelaere Ventures lawsuit, Zenovic filed his own lawsuit, asserting causes of action for breach of contract, reasonable value, account stated, open book account, abuse of process, breach of the covenant of good faith and fair dealing, and foreclosure on mechanic’s lien.

Not long after, Zenovic filed a motion seeking to compel arbitration under the arbitration provision of the construction contract. The trial court denied that motion. On appeal, the Court of Appeal affirmed the trial court’s decision that Zenovic waived his right to compel arbitration because he didn’t comply with Section 1281.5, which provides:

Any person who proceeds to record and enforce a claim of lien by commencement of an action pursuant to Chapter 4 (commencing with Section 8400) of Title 2 of Part 6 of Division 4 of the Civil Code, does not thereby waive any right of arbitration the person may have pursuant to a written agreement to arbitrate, if, in filing an action to enforce the claim of lien, the claimant does either of the following: (1)Includes an allegation in the complaint that the claimant does not intend to waive any right of arbitration, and intends to move the court, within 30 days after service of the summons and complaint, for an order to stay further proceedings in the action. (2) At the same time that the complaint is filed, the claimantfiles an application that the action be stayed pending the arbitration of any issue, question, or dispute that is claimed to be arbitrable under the agreement and that is relevant to the action to enforce the claim of lien.

Here, Zenovic “neither included an allegation in the complaint filed in the [mechanics lien] action stating he did not intend to waive any right of arbitration and intended to seek a stay of the [mechanics lien] action (§ 1281.5, subd. (a)(1)), nor filed an application for stay at the time he filed the complaint in the [mechanics lien] action (§ 1281.5, subd. (a)(2)).” As a result, the Court of Appeal held that he waived his right to compel arbitration of the owner’s construction defect claims. The Court held that Section 1281.5 “means what it says,” and that Zenovic’s failure to comply “waived the right to arbitrate construction disputes under the terms of the construction contract.”

Enforcing a Mechanic’s Lien in California? Don’t Waive Your Right to Arbitrate the Dispute

Jeff Brown | Thompson Coburn LLP | June 12, 2018

On June 6, 2018, the California Court of Appeal held that a contractor waived its right to arbitrate disputes because it recorded a mechanic’s lien and then didn’t follow California Code of Civil Procedure Section 1281.5 in its subsequent lawsuit to foreclose on the lien. In Von Becelaere Ventures, LLC v. Zenovic, the parties entered into a construction contract for a single-family residence in Laguna Beach, California. The contract had an arbitration provision as follows:

If any dispute arises concerning this Contract or the interpretation thereof, or concerning construction of the Improvements, or the Limited Warranty, customer service, defects, damages, or obligations therewith (a “Construction Dispute”), such Construction Dispute will be settled by binding arbitration.

After a dispute arose, Zenovic, the contractor, recorded a mechanic’s lien in the amount of almost $450,000, and Von Becelaere Ventures, the owner, filed a construction defect lawsuit, alleging that Zenovic breached the construction contract by

“(a) failing to properly perform and construct the Work;

(b) failing to hire properly licensed and insured subcontractors;

(c) failing to comply with proper license and insurance requirements;

(d) failing to obtain written subcontract agreements;

(e) failing to properly supervise the Work;

(f) failing to maintain and provide upon request proper accounting records;

(g) failing to properly manage expenses and allowing gross overages;

(h) failing to comply with requirements regarding change orders, improperly billing for extra work and improperly categorizing work as extra work which should have been covered under the contract as included work; and

(i) improperly filing and asserting an untimely mechanics lien and threatening to file suit to foreclose on the improper lien.”

Shortly after being served with the Von Becelaere Ventures lawsuit, Zenovic filed his own lawsuit, asserting causes of action for breach of contract, reasonable value, account stated, open book account, abuse of process, breach of the covenant of good faith and fair dealing, and foreclosure on mechanic’s lien.

Not long after, Zenovic filed a motion seeking to compel arbitration under the arbitration provision of the construction contract. The trial court denied that motion. On appeal, the Court of Appeal affirmed the trial court’s decision that Zenovic waived his right to compel arbitration because he didn’t comply with Section 1281.5, which provides:

Any person who proceeds to record and enforce a claim of lien by commencement of an action pursuant to Chapter 4 (commencing with Section 8400) of Title 2 of Part 6 of Division 4 of the Civil Code, does not thereby waive any right of arbitration the person may have pursuant to a written agreement to arbitrate, if, in filing an action to enforce the claim of lien, the claimant does either of the following: (1) Includes an allegation in the complaint that the claimant does not intend to waive any right of arbitration, and intends to move the court, within 30 days after service of the summons and complaint, for an order to stay further proceedings in the action. (2) At the same time that the complaint is filed, the claimant files an application that the action be stayed pending the arbitration of any issue, question, or dispute that is claimed to be arbitrable under the agreement and that is relevant to the action to enforce the claim of lien.

Here, Zenovic “neither included an allegation in the complaint filed in the [mechanics lien] action stating he did not intend to waive any right of arbitration and intended to seek a stay of the [mechanics lien] action (§ 1281.5, subd. (a)(1)), nor filed an application for stay at the time he filed the complaint in the [mechanics lien] action (§ 1281.5, subd. (a)(2)).” As a result, the Court of Appeal held that he waived his right to compel arbitration of the owner’s construction defect claims. The Court held that Section 1281.5 “means what it says,” and that Zenovic’s failure to comply “waived the right to arbitrate construction disputes under the terms of the construction contract.”

Subcontractor Lien Claims “Salvaged” in New Jersey

Adam J. Sklar | Cole Schotz | June 4, 2018

Published cases examining the New Jersey Construction Lien Law (“CLL”) tend to be few and far between, but recently the Appellate Division issued a decision to be published, helping to further illuminate, albeit on a fairly narrow issue, the scope of the CLL.  In NRG REMA LLC v. Creative Environmental Solutions Corp., Docket Nos. A-5432-15T3, A-0567-16T3 (N.J. Super. App. Div. April 25, 2018), the court analyzed the novel issue of whether, under the CLL, the salvage value of scrap recovered by a demolition contractor may be included in the “lien fund” available for distribution among lien-filing subcontractors and suppliers within that contractor’s chain of contracting.

In NRG REMA, the owner entered into a contract directly with a demolition contractor, pursuant to which the contractor actually agreed to pay the owner$250,000 for the right to demolish a power station but also for title to and the right to sell the resulting scrap metals and equipment (which it estimated at the time would net it millions of dollars).  While the CLL explicitly allows liens to be filed for demolition work, it does not specifically contemplate this type of payment arrangement in determining the “lien fund” – which, at the top contracting tier, is typically based on the simple calculation of the amount owed under the written contract from owner to contractor for the work performed through the date of the lien filing.  Thus, subject to certain limited exceptions, the more paid to the contractor prior to the lien filing, the less the lien fund available for distribution.

While the CLL’s lien fund provision and its lien claim form speak only in monetary terms, other relevant CLL provisions, incorporate the term “contract” whose definition refers to “price or other consideration to be paid” the contractor.  In this case, because the contract specifically required the transfer of title to the salvage materials to the contractor and “it was an essential component of the price [the owner] agreed to pay,” the court deemed such transfer non-monetary “consideration to be paid” to the contractor, and, therefore, part of the “contract price” paid by the owner to the contractor.

Following a lengthy analysis and a balancing of the interests between owner and lien claimant, the court ultimately concluded that, in this case, the lien fund calculation should be based on a contract amount that includes the value of the scrap obtained by the contractor pursuant to its contract, but reduced by the contractor’s cash payment to the owner made prior to the lien’s filing (note: where a contractor was paid for the demolition work and also received title to the salvage, the payment to the contractor would be added to the salvage value to calculate the total contract price).  The court further held that because the owner had transferred title to the scrap at the outset of contract performance, rather than incrementally, the value of the transferred scrap did not reduce the lien fund at that top tier at the time of such transfer, as the CLL provides that the lien fund is not reduced where the owner makes payment of unearned amounts to a contractor prior to a subcontractor’s lien filing.

The court, however, remanded the case back to the trial court for the difficult task of determining, for each lien claimant, both of which resided on the third-tier, the amount of the lien fund that was available at the time each such lien was filed based on the percentage of completion of the work at that time.  The court also made clear that it was solely dealing with the facts before it, and it identified a number of issues along the way, which if the facts were different may require a different analysis or outcome, and which the court made clear, it was not determining in its decision.  Thus, while instructive and useful when dealing with a project on which a contractor obtains salvage rights, the decision is fairly narrow and limited to the facts of that case.   

After the court’s extensive analysis on the lien fund issue, and an apparent victory for the lien claimants, the court found that one of those lien claimants, however, committed a critical technical error in the execution of its lien which precluded its enforcement.  The court reiterated and strictly applied the CLL’s express requirement that a signatory of a lien claim must be an authorized corporate officer pursuant to the company’s bylaws or as designated by board resolution.  The court found that one of the subject liens had been executed by an employee who was informally titled the company’s “financial director”, and had not been properly authorized to execute a lien on behalf of the company.  This case, therefore, serves as an additional warning that any company seeking to file a CLL lien must strictly adhere to its express provisions, lest it risk forfeiture of its lien claim and a potential damages claim based on an improper filing.

Update:  The property owner has appealed the Appellate Division’s decision to the New Jersey Supreme Court, so we will monitor whether the Supreme Court decides to hear the case, and if so, what decision it renders.

Can a Contingent Payment Provision Affect a Construction Lien Claim in Washington?

Bart Reed | Stoel Rives LLP | April 24, 2018

During Seattle’s current construction boom, general contractors and subcontractors may be concentrating more on finalizing work on their projects than on worrying about the niceties of their construction contract documents. It is no less prudent now, however, for the parties to remain aware of their contractual rights and responsibilities—especially those tied to payment.  One payment term commonly contained in subcontract agreements is the contingent payment provision, which, depending on its terms, may pose an interesting challenge to construction lien rights.

Contingent payment provisions (e.g., “pay-if-paid” or “pay-when-paid” clauses) are frequently inserted in subcontract agreements. The hallmark of pay-if-paid clauses is usually “condition precedent” language, where the general contractor and subcontractor expressly agree that the general contractor’s receipt of payment from the owner is a condition precedent to payment by the general contractor to the subcontractor.  Under this clause, the subcontractor assumes the risk of non-payment by the owner.  On the other hand, pay-when-paid clauses have been interpreted to delay the subcontractor’s entitlement to payment until the owner pays, or for some reasonable time if the owner does not pay.

It is unclear whether Washington courts would enforce a pay-if-paid clause, but pay-when-paid clauses have been enforced. See Amelco Elec. v. Donald M. Drake Co., 20 Wn. App. 899, 902-03, 583 P.2d 648 (1978) (contract specifying that the subcontractor would receive payment only “to the extent that the Contractor has received payment . . . from Owner” did not create a condition precedent to the subcontractor’s payment; rather, it postponed payment for a reasonable period of time after the work was completed, during which the general contractor was afforded an opportunity to obtain funds from the owner to pay the subcontractor).

The challenge to construction lien rights could arise as follows: faced with a lien claim filed by a subcontractor, a general contractor may argue: “A lien must be supported by an underlying debt, and there is no debt here. You (sub) have no right to be paid by me, because I have not yet been paid by the owner.” Recall that a lien claim must be filed within 90 days of the claimant’s last work.  If the “pay-when-paid” defense is accepted, it could deprive the subcontractor of its lien rights (if the owner fails to pay the general within 90 days of the sub’s last work).  Should the general contractor be able to make this defense?

The answer is probably no under current Washington legal authority, although a Washington appellate court has yet to rule on the issue. Although general contractors may be pressured to exert such a defense (emanating from possible contractual duties owed to the owner to keep the property lien-free), the lien statutes in Washington are remedial in nature and liberally construed to safeguard the payment rights of those furnishing lienable improvements to real property. RCW 60.04.021.

A general contractor (as a “construction agent” of the owner) may assert defenses to the underlying debt—for example, that the claimed work was not done, or that the claimant has been paid. But, if the claimant has furnished labor, material, equipment or services to improve the property for which it has not been paid, a court will probably look for ways to permit the lien claim to go forward.

One possible approach would be to say that, when lien rights are in question, it is not “reasonable” for a general contractor to delay payment to a subcontractor more than 90 days, so the debt will always mature, as it were, in time for the lien filing. Another approach is to permit the lien filing but to stay any foreclosure lawsuit until a “reasonable” time for payment (as construed by the court) has expired.  A third approach is to interpret the lien claim statute, RCW 60.04.091, which requires the claimant to list the “person indebted to the claimant,” to be satisfied by listing the general contractor, even if the general’s obligation to pay has not yet matured.  Any of these approaches would, to some extent, enforce the pay-when-paid clause without stripping away the subcontractor’s lien rights.

It is unclear how a Washington court would handle the collision of two established principles, the enforcement of contracts and the protection of lien rights. Each case will depend on its unique set of facts and whether the general contractor seeks to rely on a pay-if-paid or a pay-when-paid clause.  As long as this uncertainty remains, general contractors should be wary of relying on contingent payment clauses to challenge lien rights.