Close Enough Only Counts in Horseshoes and Hand Grenades

Garret Murai | California Construction Law Blog

In State Farm General Insurance Company v. Oetiker, Inc., Case No. B302348 (December 18, 2020), a manufacturer sued in subrogation action under the Right to Repair Act almost got away. Almost.

The Oetiker Case

James and Jennifer Philson’s home was substantially completed, and a notice of completion was recorded, in 2004. In 2016, the Philsons tendered a claim to their homeowner’s insurance carrier, State Farm General Insurance Company, after their home experienced significant water damage due to a defective stainless steel ear clamp.

In 2018, after paying the Philson’s claim, State Farm filed a subrogation action against the manufacturer of the ear clamp, Oetiker, Inc. State Farm’s complaint, which included causes of action for negligence, strict products liability and breach of implied warranty, alleged that the home was “damaged by a water leak from the failure of a defective stainless steel ear claim on a water PEX fitting” and that the ear clamp was “defective when it left the control of [Oetiker].”

Because Philson’s home was newly constructed when purchased, Oetiker claimed that State Farm’s subrogation claim was subject to the Right to Repair Act which included a 10-year statute of repose for latent defects and filed a motion for summary judgment on that basis. The trial court granted Oetiker’s summary judgment finding that “Oetiker has established that Plaintiff’s claims for property damage . . . fall within Civil Code section 896(a)(14), (15) [of the Right to Repair Act].”

State Farm appealed.

The Appeal

On appeal, the 2nd District Court of Appeal explained that the Right to Repair Act, while it applies generally to “builders,” also applies as set forth in the Act, “to the extent set forth in Chapter 4 . . . [an] individual product manufacturer . . . [who] shall, except as specifically set forth in this title, be liable for, and the claimant’s claims or causes of action shall be limited to violation of . . . the standards [set forth in the Act].”

Thus, explained the Court of Appeal, the threshold question was whether the defective ear clamp fell within the standards set forth under the Right to Repair Act. The Court held that it did explaining that the standards require that the “lines and components of the plumbing system . . . shall not leak” and that the “[p]lumbing lines . . . shall not corrode so as to impede the useful life of the systems.” And, here, explained the Court, the ear claim at issue was installed on a PEX fitting, a type of plumbing line fitting, and thus was part of the “lines and components of the plumbing system.”

In response to State Farm’s claim that the Right to Repair Act did not apply because Section 896(g)(3)E) of the Act excludes “any action seeking recovery solely for a defect in a manufactured product located within or adjacent to the structure,” the Court of Appeal held that the exception does not apply when a defective product causes a violation of the standards set forth in the Act.

Nevertheless, explained the Court of Appeal, while the Act precludes State Farm’s negligence cause of action, the Act did not preclude State Farm’s strict products liability and breach of implied warranty claims. Citing, McMillin Albany LLC v. Superior Court (2018) 4 Cal.5th 241, in which the California Supreme Court held that the Right to Repair Act replaces common causes of action including causes of action for negligence, strict products liability, breach of contract, and breach of warranty, the Court held that the Act applies different standards to builders versus non-builders, and as to product manufacturers Section 936 of the Act only provides that the Act only applies to a product manufacturer’s negligent act or omission or breach of contract. Thus explained the Court of Appeal:

[A] product manufacturer is liable under the Act only where its negligence or breach of contract caused a violation of the standards [set forth under the Act]. . . . State Farm is therefore precluded from bringing its negligence cause of action . . . [but] [w]e reach a different conclusion with respect to State Farm’s strict liability and breach of implied warranty causes of action. Nothing in the Act restricts a homeowner or its insurer from bringing causes of action which fall outside of the Act.

Conclusion

I’ve never had the chance to the see the Right to Repair Act applied to a products manufacturer, so this case was interesting. The Right to Repair Act is a relatively dense statute with a complicated history and I’m always surprised when reading the cases that come out of it.

California Court of Appeal Addresses Remedies When Contractor Records Invalid Mechanic’s Lien

Blake Robinson | Davis Wright Tremaine

The California Court of Appeal recently discussed an owner’s remedies (and some limits to those remedies) when a contractor improperly records a mechanic’s lien. According to the court’s analysis, the owner’s primary remedy will generally be removal of the offending lien. Seeking damages, on the other hand, can backfire with an award of attorney fees in the contractor’s favor.

Given that California is often seen as the leading authority on one of the key issues in the case, it could have an effect in other states as well, including Oregon and Washington.

Case Background

In RGC Gaslamp, LLC v. Ehmcke Sheet Metal Co., Inc.,1 a subcontractor recorded a mechanic’s lien of over $250,000 for allegedly unpaid work, and the owner subsequently secured and recorded a bond to release the lien.

Two months later, the subcontractor recorded a second lien in the same amount as the first. Several months later, the subcontractor withdrew the second lien but recorded a third, again in the same amount. The owner responded by obtaining a bond to release the third lien. The subcontractor then withdrew the third lien and recorded a fourth lien, once again in the same amount.

After the fourth lien was filed, the owner filed a lawsuit for slander of title. (The owner asserted other claims, but they were mooted because the subcontractor released the fourth lien.) The subcontractor responded by filing what is known as an “anti-SLAPP” motion—a motion seeking early dismissal of a “Strategic Lawsuit against Public Participation.”

The trial court granted the motion, dismissed the owner’s slander of title lawsuit, and awarded the subcontractor its attorney fees.

The Court’s Ruling

On appeal, the Court of Appeal affirmed. The court’s ruling began by giving an overview of the mechanic’s lien and anti-SLAPP statutes:

  • With respect to mechanic’s liens, the court noted that, as a subcontractor on a private construction project, the subcontractor had a right to send a preliminary lien notice to the owner, record a mechanic’s lien, and file a lawsuit to foreclose the lien.
  • With respect to the anti-SLAPP statute, the court stated that the subcontractor (as the party that filed the anti-SLAPP motion) had to establish that the owner’s claim “arose from the [subcontractor’s] protected activity.” If the subcontractor succeeded in doing so, the owner then had the burden to prove that its claim had at least “minimal merit.”

Addressing the first step in the anti-SLAPP analysis, the court stated that “[s]tatements made in preparation for litigation or in anticipation of bringing an action” are protected statements. The court held that because recording a mechanic’s lien is a prerequisite to filing a foreclosure lawsuit, recording a lien is a “protected prelitigation statement.” Significantly, the court held this was true regardless whether the subcontractor had any right to file the liens or actually intended to foreclose them.

Moving to the second step in the anti-SLAPP analysis, the court concluded that the owner had not shown that its slander of title claim had even “minimal merit.” California Civil Code § 47(b) provides a “litigation privilege” for communications made in a “judicial proceeding.”

Because recording a mechanic’s lien is a prerequisite to filing a foreclosure action, the lien recording falls within the litigation privilege, absent evidence that the party recording the lien had no intention of actually foreclosing it. Because the owner produced no such evidence, the litigation privilege applied, the owner’s claim lacked even minimal merit, and the Court of Appeal affirmed the trial court’s ruling. This resulted not only in dismissal of the owner’s lawsuit but also an award of attorney fees to the subcontractor.

Although it rejected the owner’s slander of title claim, the Court of Appeal did provide guidance on steps an owner can take in the face of an invalid lien. The court noted several options:

  • After receiving a preliminary notice of the lien, an owner can “seek declaratory and injunctive relief challenging the validity of the lien.”
  • If a contractor files duplicative liens before the owner files a release bond, the owner can ask a court to order the contractor “to post a single bond to release all duplicative liens.”
  • If a contractor files a lawsuit to foreclose an invalid lien, the owner can file a motion in response, seeking a court order releasing the lien.

Conclusion

As RGC demonstrates, an owner must proceed carefully before suing a contractor over an invalid lien. Otherwise, the owner might face an anti-SLAPP motion, early dismissal of the lawsuit, and a money judgment awarding the contractor its legal fees.

Contractors faced with such a lawsuit, on the other hand, should consider whether to file an anti-SLAPP motion in response. Notably, while RGC is not binding outside of California, California decisions on anti-SLAPP matters are often considered persuasive authority in states (such as Oregon and Washington) that modeled their anti-SLAPP statutes after California’s.2

FOOTNOTES

1  56 Cal.App.5th 413, 270 Cal.Rptr.3d 425 (4th Dist., 2020).
2  See, e.g., Handy v. Lane County, 360 Or. 605, 618-19 n. 12, 385 P.3d 1016 (2016); Alaska Structures, Inc. v. Hedlund, 180 Wash. App. 591, 599, 323 P.3d 1082 (2014).

If I Released My California Mechanics Lien, Can I File a New Mechanics Lien on the Same Project? Will the New Mechanics Lien be Enforceable?

William L. Porter | Porter Law Group

In general, the answer to the above questions is “Yes”, but only if you meet the following requirements:

  1. You must only release the mechanics lien itself, but not the “right” to a mechanics lien:  There is an important distinction to be made between releasing a mechanics lien and releasing the right to a mechanics lien.  Whether you do one or the other will depend on the specific language used in your release.  In the case of Santa Clara Land Title Co. v. Nowack and Associates, Inc.  (1991) 226 Cal. App.3d, 1558 a “release of mechanics lien” document was recorded TO THE County Recorder’s office which included a statement that the mechanics lien was “fully satisfied, released and discharged”.  Based on this language, the court concluded that the mechanics lien claimant had waived its “right” to a further mechanics lien on the same property for the work in question.  The court concluded that since the release stated that the claim was “fully satisfied” the right to mechanics lien on the project had forever been waived.  The Nowak case can be distinguished from the case of Koudmani v. Ogle Enterprises, Inc., (1996) 47 Cal.App.4th 1650, where the release of mechanics lien only stated that the mechanics lien was “otherwise released and discharged” and not that it was “satisfied”.  Based on the distinction drawn from the two cases, a simple mechanics lien release that only releases the mechanics lien itself, but not the “right” to a mechanics lien should be used.  At the following link you will find a proper form to achieve this purpose: https://www.porterlaw.com/wp-content/uploads/2019/06/03PRI-Mechanics-Lien-Release.pdf
  2. You must still be within the proper time period to record an enforceable mechanics lien:  To determine if you are within the time period to record an enforceable mechanics lien, the claimant must consider a number of factors.  These include whether the claimant is a direct contractor (generally that you have a contract with the property owner), a subcontractor or a material supplier, whether the project has been completed or perhaps suspended without completion, whether a valid, timely “notice of completion” or “notice of cessation” has been recorded, and other factors.  For a discussion of many of these factors see California Civil Code 8412–8414 and the following article: https://www.porterlaw.com/understand-how-the-mechanics-lien-deadline-depends-on-the-validity-of-the-notice-of-completion/ .  Generally, though, yes, if you have released a mechanics lien without releasing the “right” to a mechanics lien on the same project, you can record a new enforceable mechanics lien on the same project if you are still within the time period for recording a mechanics lien.
  3. You must file a lawsuit to foreclose on the mechanics lien within ninety (90) days after the mechanics lien is recorded.  The general rules on the enforcement of a mechanics lien are found in California Civil Code sections 8460–8470.  The general rule is that unless a document called a “Notice of Credit” is recorded (see, Civil Code 8460(b)), a lawsuit to foreclose on the mechanics lien must be filed in superior court no later than 90 days after the mechanics lien was recorded (see, Civil Code 8460(a)).  For further information on extending the mechanics lien foreclosure lawsuit, see this article: https://www.porterlaw.com/how-to-extend-the-life-of-a-mechanics-lien/ .

Conclusion: There are many reasons why a claimant might release a mechanics lien and then record a new one.  For example, if a claimant worked on the project at an early stage and had reason to believe that payment would be forthcoming in the normal course of events, and it was still long before the project was scheduled to be completed, they might consider releasing their mechanics lien early and recording a new one later if payment does not arrive.  This would avoid having to file a lawsuit after 90 days on the first mechanics lien.  Another example might be if a contractor affirmatively promised payment in exchange for releasing a particular mechanics lien.  It might not be too risky to release such a mechanics lien in most cases if the project was still ongoing and the opportunity to record a new mechanics lien would remain open until the project was eventually completed.

California Precludes Surety From Asserting Pay-When-Paid Provision As Defense To Payment Bond Claim

Nicholas Korst | Ahlers Cressman & Sleight

In a recent case in California, the Court of Appeals held that a surety who had issued a public works payment bond cannot rely on the “Pay-When-Paid” provision in the subcontract as a defense against the subcontractor’s claim against the payment bond.[1]  The case was a public works project in Kern County, CA where the North Edwards Water District (the “District”) hired Clark Bros., Inc. (“Clark”) as the general contractor to build an arsenic removal water treatment plant.  Clark hired subcontractor Crosno Construction (“Crosno”) to build and coat two steel reservoir tanks.  The subcontract included the following “pay-when-paid” provision, which provided a definition of “reasonable time”:

If the Owner or other responsible party delays in making any payment to the Contractor from which payment to Subcontractor is made, Contractor and its sureties shall have a reasonable time to make payment. “Reasonable time” shall be determined according to the relevant circumstances, but in no event shall be less than the time Contractor and Subcontractor require to pursue to conclusion their legal remedies against the Owner or other responsible party to obtain payment, including (but not limited to) mechanics lien remedies. (emphasis added).

A dispute arose between the District and Clark prior to the completion of the Project and work stopped; at the time, Crosno had completed most of its scope of work.  Clark ultimately commenced a lawsuit against the District.  Crosno asserted a claim against Clark, along with a payment bond claim against Travelers Casualty and Surety Company of America (“Travelers”) seeking to recover payments owed under the payment bond.  After years of litigation, Crosno filed a motion for summary judgment on its claim against Travelers, arguing that Travelers’ use of the pay-when-paid provision as a defense was contrary to California’s anti-waiver statute.

The issue before the trial court was whether the pay-when-paid provision in the subcontract precluded Crosno from recovering under the payment bond while the Clark lawsuit against the District was still being litigated.  The trial court held the pay-when-paid provision was unenforceable as to Crosno’s claim against Travelers, relying on an appellate case[2] which found a “pay-if-paid” provision unenforceable in a private contract based on Civil Code Section 8122, which reads:

An owner, direct contractor, or subcontractor may not, by contract or otherwise, waive, affect, or impair any other claimant’s rights under this part, whether with or without notice, and any term of a contract that purports to do so is void and unenforceable unless and until the claimant executes and delivers a waiver and release under this article.

Notably, the court in that case distinguished the use of impermissible pay-if-paid clauses from permissible pay-when-paid clauses that did not condition a payment, but merely impacted its timing to subcontractors.  The same ruling was also applied to a public works contract in a subsequent case.[3] In the Crosno casethe Court used the same reasoning and applied it to the pay-when-paid provision in the Clark-Crosno subcontract, holding that the provision acted as a waiver to Crosno’s claims against Travelers because it unreasonably impacted Crosno’s ability to get paid.

On appeal, Travelers argued the trial court erred because the provision at issue was a “pay-when-paid” instead of a “pay-if-paid.”  Travelers argued Civil Code 8122 should not apply to a “pay-when-paid” provision because such a provision functions as an impairment, not a waiver.  The Court of Appeals disagreed with Travelers and upheld the trial court’s ruling and reasoning that the “pay-when-paid” provision applied here does NOT provide for payment in a reasonable amount of time. 

The Court also distinguished case law cited by Travelers[4] that involved a dispute as to whether the subcontractor was entitled to payment, which necessarily required the subcontractor to litigate the claim to determine whether it is entitled to payment.  The Court noted that Crosno’s right to payment is not in dispute.   

Comment:  Crosno is a favorable decision for subcontractors, further protecting subcontractors’ rights to recovery, but does not appear to be an absolute bar on pay-when-paid provisions.  If the payment will not be delayed for an unreasonable amount of time, the provision may still be found enforceable.  The facts specific to this case – “reasonable time” was defined as no less than the time to pursue claims against owner, the litigation had been ongoing for years, and the amount owing to Crosno was undisputed – set up well for Crosno to make its waiver argument.  While California is clearly shifting towards more protections for subcontractors in terms of these provisions, Washington courts still allow for Pay-If-Paid or Pay-When-Paid provisions.  Even still, clear and concise contract drafting of these provisions is important for enforceability.  Pay-If-Paid and Pay-When-Paid provisions have been the subject of a number of previous ACS blogs and can be found here.


[1] Crosno Construction, Inc. v. Travelers Casualty, 2020 WL 1899278 (Cal. Ct. App., Apr. 17, 2020, No. D075561).

[2] Wm. R. Clarke Corp v. Safeco Ins. Co., 15 Cal.4th 882 (1997).

[3] Capitol Steel Fabricators, Inc. v. Mega Construction Co.,58 Cal.App.4th 1029 (2010).

[4] Fed. Ins. Co. v. Superior Court, 60 Cal.App.4th 1370 (1998),

Do Not Lose Your Mechanics Lien Right Through a Subordination Agreement

William L. Porter | Porter Law Group

If you are a member of the California construction industry you might know that the right of a contractor, subcontractor or supplier to record a mechanics lien to protect the right to payment is well protected by state law.  In fact, our California Constitution, article XIV, Sec. 3 specifically elevates the right to a mechanics lien to “Constitutional right”.  The right to a mechanics lien is further protected by a statutory framework, including Civil Code sec. 8122 which states:

“An owner, direct contractor, or subcontractor may not, by contract or otherwise, waive, affect, or impair any other claimant’s rights under this part, whether with or without notice, and any term of a contract that purports to do so is void and unenforceable unless and until the claimant executes and delivers a waiver and release under this article.”

A casual reading of the above statute would seem to indicate that neither owners, nor contractors nor subcontractors may impose contract terms on those below them in the contracting hierarchy that would impair the right of that potential mechanics lien claimant to record a mechanics lien.  But not so fast!  In a more careful reading of the statute, note the use of the phrase “any other claimant’s rights”.  This phrase makes all the difference.

Since it is the owner on whom a mechanics lien is imposed, an owner cannot be a “claimant” on a mechanics lien.  Since an owner is not a mechanics lien “claimant” at all, an owner also cannot be an “other claimant”.  Therefore, as between an owner and a direct contractor there is no prohibition from an owner imposing a contract term on the direct contractor by which the direct contractor waives its mechanics lien rights.

The situation is different as between a direct contractor and a subcontractor.  Both have mechanics lien rights. As a potential mechanics lien claimant, the direct contractor is prohibited by the language of Civil Code 8122 from imposing contract terms on “any other claimant,” including of course its subcontractors, which would impair the subcontractor’s right to a mechanics lien.

While it may seem that only through mental gymnastics may such an intent be discerned from Civil Code 8122, this is exactly what the California Court of Appeal did in the case of Moorefield Construction, Inc. v. Invervest-Mortgage Investment Company, et al, 230 Cal. App. 4th 146 (4th Dist. 2014).

In Moorefield, the direct contractor attempted to claim the priority of its mechanics lien over the lender’s deed of trust.  If not for the subordination agreement which provided the lender with priority to payment over the direct contractor’s mechanics lien rights, the direct contractor would have been successful.  However, because the direct contractor had signed a subordination agreement and because the Court of Appeal held that a subordination agreement between the owner and the direct contractor was not prohibited by the successor statute, to Civil Code 8122 (Civil Code 3262), the Subordination Agreement was held to be effective and the direct contractor was ultimately unable to claim priority to available equity to the property over the lenders interest.  This entitled the lender to be paid in full before the claim of the direct contractor.

The lesson for direct contractors is that any agreement between you and the owner, lender or title insurer to subordinate your mechanics lien right is generally enforceable.  While it is enforceable against you, you cannot impose any similar restriction on your own subcontractors and suppliers.  Therefore, unless you wish to impair your right to enforce your right to payment through a mechanics lien, do not sign a subordination agreement.