Source: http://www.asacalif.com/landmarkdecisions.html
Timestamp: 2019-04-23 02:57:26+00:00

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Another Year, Another New Requirement by Bryan K. Lang, Mechanic's Liens: To Release Or Not To Release!
CA Appellate Court Holds General Contractor Responsible for Paying Unlicensed Subcontractors Employees Wages A California Appellate Court Holds That A Conditional Lien Release Is Enforceable Even If the Lien Claimant Is Not Paid.
from the owner or general contractor? Did you correctly serve your 20-day Preliminary Lien Notice? Is there still time to serve a Stop Notice or record a Mechanic’s Lien? In the financial mess that has ruled the construction industry for the last several years, these preliminary steps have been critical in deciding who gets paid and who doesn’t. The construction industry standard for service of the 20-day Preliminary Lien Notice (“Preliminary Notice”) was critiqued by the California Appellate Court in the case of Force Framing v. Chinatrust Bank (114 Cal. Rptr.3d 855). Thankfully, the California Appellate Court recognized that reasonable due diligence on the part of a contractor in serving its Preliminary Notice did not include performing a full title search.
It seems that with every new year, a new set of regulations and requirements affecting the construction industry takes effect. For 2010, it is the United States Environmental Protection Agency’s (“EPA”) turn. Effective April 22, 2010, the EPA will require certain training, certification and work practice standards as part of their Lead-Based Paint Renovation, Repair and Painting Program (“RRP Program”).
or less on the exterior of a house or building.
The RRP Program’s lead-safe work practice requirements are numerous and range from pre-work notice and owner-education to post-work cleaning and record keeping. Under the new RRP rules, employers must assign a minimum of one “certified renovator” to each job where a painted surface will be disturbed. To become a certified renovator, an individual must successfully complete an eight-hour training course offered by an accredited training provider. In addition, all other non-certified employees performing work that will disturb a painted surface must have received certain training by the certified renovator.
For a firm to become certified, it must complete and submit an application directly to the EPA and pay a fee. Fees range from $300.00 for basic renovation certification to more than $500.00 for firms that will perform more intensive lead-based paint activities such as abatement, inspection and risk assessment. To maintain certification, firms and renovators must re-certify every five years, a process which includes another application and another fee.
The EPA will use a number of methods in determining RRP Program compliance, including inspecting project sites, reviewing project records, and responding to and investigating citizen tips and complaints. Penalties for violations of the RRP Program will depend on many factors, including the number of violations, and the length and severity of each. At the maximum, penalties can be assessed up to $32,500.00 per violation, per day.
RRP Program Certification classes must be administered by an accredited EPA Training Provider. More information on the EPA’s RRP Program, including EPA Accredited RRP Training Providers, can be found on the EPA’s website (http://www.epa.gov/lead/pubs/renovation.htm).
This article was provided by Crawford & Bangs, LLP (www.builderslaw.com) and is intended to provide the reader with general information regarding current legal issues. It is not to be construed as specific legal advice or as a substitute for the need to seek competent legal advice on specific legal matters.
A California Appellate Court Holds That A Conditional Lien Release Is Enforceable Even If the Lien Claimant Is Not Paid.
On October 12, 2004, a California Appellate Court published an opinion, Tesco Controls v. Monterey Mechanical Company, that held that a statutory conditional lien release waives the claimant’s lien rights through the date set forth on the release, whether or not the lien claimant actually receives compensation for the services and materials provided through that date. The lawsuit sought to have the general contractor, Monterey Mechanical, pay a subcontractor’s supplier the sum that it had already paid the subcontractor.
This decision is important since no prior appellate court had published an opinion that interpreted the conditional lien release language that is found at Civil Code section 3262.
The Tesco Court also enforced a joint check agreement between a general contractor and subcontractor which was made for the benefit of a supplier. This article will discuss the Tesco holding, statutory lien releases and the court’s holding relative to the joint check agreement.
In order to obtain a valid and enforceable mechanic’s lien, stop notice or payment bond release, the lien claimant must sign a document that “substantially” contains language that is set forth in California Civil Code section 3262. That section proscribes the mandatory language that must be included in four types of releases: (1) a conditional waiver and release upon progress payment; (2) a conditional waiver and release upon final payment; (3) an unconditional waiver and release upon progress payment; and (4) an unconditional waiver and release upon final payment.
The statutory language was created in 1983 as a result of a holding in a 1982 California appellate court case, Bentz Plumbing & Heating v. Favaloro, which invalidated all lien releases. The scope of the statutory releases came under review by the appellate court in a case entitled Halbert’s Lumber v. Lucky Stores. The Halbert court concluded that the scope of a conditional lien release was determined by the date listed on the release, not by the amount actually paid. As a result of the Halbert court’s decision, the Legislature modified the lien release language.
On March 15, 1999, Tesco gave Monterey a lien waiver and release conditioned upon receiving a progress payment of $50,000 (the balance of that date less the Stratton check Tesco was holding.) The release "cover [ed] a progress payment for labor, services, equipment or material furnished to Stratton Electric through 01/31/99 only.” The release included the statutory release and waiver language.
After receiving the checks, Tesco continued providing product and services. By July 1, 1999, Tesco completed shipping and invoicing its work and was owed $412,024.98. Tesco continued processing and completing change orders through June 2000. Tesco ultimately filed a Stop Notice and then filed a lawsuit to foreclose on the stop notice. Stratton filed for Chapter 11 bankruptcy protection. In June 2001, Monterey issued a check directly to Tesco in the amount of $217,262.98. Upon receipt of that payment Tesco was still owed $194,762, the amount of Stratton's bounced check.
In rendering their decision the Tesco appellate court panel first reviewed the Bentz decision and the legislation that resulted from that decision. The purpose of that review was to determine the Legislature’s intent when the lien release and waiver statute was created. The court then reviewed the Halbert decision and the resulting changes to the lien release and waiver statute.
The Tesco court held that Monterey breached the joint check agreement by not paying Tesco by issuing a joint checks. The Tesco court reached that conclusion because the joint check agreement provided that Monterey and Stratton agreed that Monterey would pay Tesco’s invoices on presentation and to pay those invoices in full at the same time normal progress payments were due. The joint check agreement also stated that it was for the express benefit of Tesco.
The Tesco court required the general contractor to comply with the terms of the joint check agreement. If you are an owner or general contractor who has entered into a joint check agreement to ensure that a subcontractor’s supplier has been paid, you must comply with the terms and conditions of that agreement. If you fail to do so and the supplier is not paid, you may be forced to pay the supplier even if the subcontractor has been paid for the materials.
Clearly, the lien release is not effective if the amount that is to be paid pursuant to the release is not paid. As the conditional release states:” Before any recipient of this document relies on it, said party should verify evidence of payment to the undersigned.” Thus, if you intend to rely on a release you should verify that the amount set forth in the release was in fact paid. If you issue a joint check you should verify that both payees endorsed the check. If you have entered into a joint check agreement you should also verify that entity for which the agreement was intended to benefit actually received the payment.
This article, copyrighted 2004, was written by William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for over 25 years. In addition to belonging to a number of construction trade associations, including the Bay Area Chapter of ASA, Mr. Last holds a California “A” and “B” license. He can be contacted at 415-764-1990 or 650-696-8350 (e-mail: wclast@lastlawfirm.com). A number of his past articles can be found on his website (lhfconstructlaw.com).
Mechanic's Liens: To Release or Not to Release!
What exactly does a Release of Mechanic's Lien release? Does it release just the Mechanic's Lien on file with the County Recorder or the entire right to file a Mechanic's lien in relation to the project? This issue has plagued construction practitioners for years. Fortunately, a recent case has resulted in a practical answer which is workable for all concerned parties.
In the recent case of Solit v Tokai Bank, (1-7-99) 81 Cal.Rptr.2d 243, the court held that a Release of Mechanic's Lien only extinguished the referenced Mechanic's Lien and not the entire right to lien the project. This case involved the construction of the Santa Monica Beach Hotel owned by the Steins and financed by Tokai Bank. A dispute arose between the Steins and the project construction manager, Mark Solit. The first Mechanic's Lien was recorded by Mr. Solit on March 7, 1990; however, no action to foreclose the Mechanic's Lien was brought within the 90 day statutory period and thus the lien became void and unenforceable.
In August, 1990, the Steins' attorney demanded that Mr. Solit release his lien voluntarily or be subject to a petition under Civil Code section 3154 ordering the release of the lien. After the demand, Mr. Solit voluntarily executed a Release of Mechanic's Lien referencing the March 7, 1990 lien, but subsequently recorded a second Mechanic's Lien on October 22, 1990.
An action was filed between the Steins, Tokai and Solit. In the action, Solit sought to enforce his lien of October 22, 1990 (although there was some confusion in the complaint which made it appear that Solit was attempting to foreclose on the March 7, 1990 lien). The trial Court ruled that as a matter of law "Solit's release of the March 7, 1990 lien extinguished all of Solit's lien rights against the property, thus making any subsequent liens, including the October 22, 1990 lien unenforceable." Based on this ruling, the Court dismissed Solit's complaint to foreclose the Mechanic's Lien, and Solit appealed this decision.
The Appellate Court concluded that Solit's voluntary release of the stale lien affected only the recorded lien and not his right to record a subsequent lien. The right to record a lien, for the same work and materials released in the original lien, is still limited by the time constraints which control the recording of any lien. The Court balanced the rights of owners verses those of contractors in making its decision. The Court commented that in allowing a Release of Mechanic's Lien to only release the particular recorded lien, and not the constitutional rights of the contractor, provided a fair balance between claimants and owners. To hold otherwise the Court noted, would unfairly favor the owners in that they would receive a windfall if a contractor filed a lien early and was forced to release that lien or have it removed by the court upon the owner's petition.
To explain why the Solit case was necessary and the confusion that previously existed in the construction industry, we have to look back at the case of Maris Management Corp. v. Assured Drywall & Textures, (1984) 152 Cal.App.3d 268. In that case, the court held that if a stale Mechanic's Lien was released by the court after a petition brought by the owner, then not only was the recorded lien released, but also the claimant's right to file a lien for that same work and materials was also released. Thus, the holding of the Maris court lead many practitioners to believe that if a contractor had its lien released through a petition of the owner and/or voluntarily recorded a release of lien, then it was releasing all right to a lien for that project. The Court in Solit addressed the Maris decision and concluded that it was wrongly decided. Upon reconsidering this important issue the Court held that a release of a particular lien is simply just that, a release of that lien.
This decision is important for all contractors as it provides clear guidance regarding the use of Release of Mechanic's Lien forms. The Solit decision allows the early contractor some time to negotiate with the owner after the lien is filed, and if the statutory time period for filing of a new lien is still open, the original lien may be allowed to lapse or be released without waiving the right to lien the project. The Solit case provides a greater opportunity for negotiation and settlement rather than forcing early litigation on a project. Based on the Solit case, to release or not to release is an easier question to answer and is now based solely on the statutory time frames which have always governed the Mechanic's Lien rights.
This article was provided by Theresa Crawford Tate of Crawford & Bangs, West Covina, California, an ASAC member. This article is intended to provide the reader with general information regarding current legal issues. It is not to be construed as specific legal advice or as a substitute for the need to seek competent legal advice on specific legal matters.
What do you do with a check marked "payment-in-full"? This is a quandary faced by all businesses including those in the construction industry. Do you return the check to the debtor? Do you strike the "payment-in-full" notation and cash the check? Unfortunately, there is no easy answer. Currently, there are two inconsistent statutes on the books in California, which have created a great amount of uncertainty for creditors and debtors relating to "payment-in-full" notations. In short, cashing a check with a "payment-in-full" notation, even crossing out that notation before the check is deposited, may very well lead to a waiver of your claim for additional funds.
The uncertainty arises out of a conflict between Civil Code section 1526 (enacted 1987) and Commercial Code section 3311 (enacted 1992). Civil Code Section 1526 provides that cashing a check with the "payment-in-full" notation (or similar words), does not result in an accord and satisfaction (an acceptance of that sum as payment for the entire disputed claim), "if the creditor protests against accepting the tender in full payment by striking out or otherwise deleting" the notation.
This section was specifically enacted in 1987 to change the common law rule in California which provided that even if the check was cashed under protest (by crossing out the notation and/or sending a letter of protest), an accord and satisfaction did result and the creditor had waived any further claim to seek additional sums from the debtor. If section 1526 was the only statute in California dealing with this issue, the answer would be simple -- cross out the notation and cash the check. However, in 1992 the California legislative revised the entire Commercial Code relating to negotiable instruments (checks) and adopted section 3311 (exactly as that section was drafted by the National Conference of Commissioners on Uniform State Laws).
Unfortunately, it appears that at the time section 3311 was adopted, none of the Legislators realized the conflict which would result between existing Civil Code section 1526 and the new Commercial Code section 3311. As adopted in 1992, Commercial Code section 3311 provides that when a claim is unliquidated or subject to dispute and the person against whom the claim is asserted tenders a check in good faith as payment in full with a written communication indicating (by a conspicuous statement) that it is intended as full satisfaction of the claim, then the claim is discharged when the check is negotiated. Section 3311 basically reinstated the common law rule that the check from the debtor is an offer, and the creditor has two choices: (1) to either reject the check and continue to pursue its claim; or (2) to accept the check and waive any claimed balance.
No published California case has addressed the conflict between the two statutes. Recently, a Federal Court decision interpreting the California statutes upheld one statue over the other, but this decisions is not binding on the California Courts and there is no concrete answer on how the California Courts will decide this issue. The Federal Court in Directors Guild of America v. Harmon Pictures, Inc. (CD Cal. 1998) 32 F.Supp.2d 1184, reasoned that the two statutes were inconsistent and that they could not be interpreted so that both could be upheld. Therefore, relying on standard procedures used by the courts in interpreting statues, the Federal Court rejected the older statute (1562) and applied the more recent statute (3311) to the facts of the case. Based on this application, the Federal Court concluded that an accord and satisfaction had been obtained by the debtor when the creditor cashed the check with the "full and final settlement" notation, even though the creditor had crossed out this language on the check. A big loss for the creditor who was seeking thousands of dollars in additional damages.
Based on the conflicting statutes and the recent Federal Court decision, all checks with "payment-in-full" language of any type should be scrutinized and only deposited after careful consideration. Cashing a check with any type of notation indicating that the check was issued as a final settlement or as a full payment, could very well mean a waiver of your claim to additional funds.
Indemnity clauses are a hot topic in negotiation any contract. Many general contractors propose contracts with Type I, broad form or express indemnity clauses. This type of clause generally provides that the subcontractor must indemnify unless the general contractor is solely at fault for the injury. Thus, if the subcontractor is only 1% at fault and the general contractor is 99% at fault, the subcontractor must still indemnify the general contractor for the entire injury.
In a recent case, this type of indemnity clause did not provide the general contractor with the intended protection. In a very unusual move, an arbitrator found 100% liability by the general contractor and 0% liability by the subcontractor (this is rare!). In the case of National Union Fire Insurance Company of Pittsburg v. Nationwide Insurance Company, (January 28, 1999), an employee of a plumbing subcontractor slipped and fell during a punch list inspection of a high-rise project. This inspection was performed after the subcontractor's work had been completed on this particular floor and not in the normal course of its plumbing duties for the project. The arbitrator concluded the employee fell because the general contractor, Tutor-Saliba, let water pond on the floor after a rainstorm. After walking through this water, the plumbing employee slipped on the dry marble flooring upon entering the restroom area. The employee was injured from the fall.
After a lawsuit by the employee, the general contractor tendered its defense to the plumbing subcontractor and its insurance company, Nationwide, but received no response. After the general contractor's insurance company, National Union, paid the underlying claim to the injured employee, it brought suit against the subcontractor and its insurance carrier. The two insurance carriers submitted their dispute to an arbitrator who concluded that the fault of the general contractor was obvious due to its inadequate remedial action to address the hazards caused by the ponded rain water. After the arbitration decision shifted complete liability to the general contractor, National Union filed an appeal.
The Appellate Court refused to overturn the findings of the arbitrator, and concluded that there was sufficient evidence that the general contractor had caused the injury and that no liability should be attributed to the subcontractor or its employee. The general contractor attempted to argue that because the supervisor of the injured employee was aware of the ponded water some liability should automatically be attributed to the subcontractor as it had a co-equal duty to provide a safe workplace. The Appellate Court refused to draw such an inference.
"It is against California public policy for a general contractor to use its economic clout to pre-emptively transfer the risk of its own sole negligence to fault-free subcontractors. Such an indemnity, the reasoning goes, would increase the risk of accidents by removing the general contractor's incentive to undertake accident prevention measures involving its own negligence to avoid a risk of harm to third parties."
further, the Court concluded that the general contractor's negligence did not arise out of its supervision of the subcontractor's work. Since the subcontractor's additional insured endorsement (Form G116) required a finding that the negligence had arisen out of the supervision of the subcontractor's work, the general contractor was not allowed to recover in any manner from the subcontractor's insurance carrier.
"Indeed, Tutor-Saliba, a sophisticated and highly knowledgeable litigant raised no objections to the 'held liable' coverage actually obtained by [subcontractor]. Under all the circumstances, the court did not err in denying any indemnity obligations based on the additional insured endorsement either promised or provided."
The battle over Type I or express indemnity provisions will no doubt continue. However, the Appellate Court has affirmed that in situations to those presented in this case, if the general contractor is found solely negligent, that neither the subcontractor nor its insurance carrier will be obligated to pay for the injury. As a cautionary note, a 100% liability finding against any party is not easy accomplishment nor an occurrence which happens frequently. So, read and negotiate your contracts as if your business depends on it (because it just may)!
By William C. Last, Jr. Attorney at Law Last & Faoro In a case entitled Sanders Construction Co. Inc. v. Cerda (June 2009), a California Appellate Court held that the employees of an unlicensed subcontractor are “statutory employees” of the general contractor. As a result, the general contractor was liable for the unpaid wages that were due to the unlicensed subcontractors employees.
subcontract scope of work. Martin Cerda was an employee of Drywall who was not paid his wages. Cerda and five other employees of Humberto filed claims against Sanders with the state Labor Commissioner, seeking wages, interest, and waitingtime penalties.
The hearing officer found that Humberto had told the claimants they would be paid by Sanders while Sanders considered Humberto, who was being paid for labor and materials, responsible for paying the claimants. The hearing officer ruled that under section 2750.5 of the Labor Code, Humberto and the six employees were deemed to be employees of Sanders. The Labor Commissioner awarded the employees their wages and interest but denied waiting time penalties. The Labor Commission denied Humberto’s claim on the grounds that he was acting as an independent contractor and was barred from recovery by Business and Professions Code section 7031.
Sanders filed appeals in the superior court, challenging the six awards by the Labor Commissioner for wages and interest. The superior court found in favor of the employees adopting the reasoning of the Labor Commissioner. The superior court awarded respondents their wages, interest, and waiting-time penalties. Sanders then appealed to the appellate division of the Superior Court which modified the judgment to eliminate the waiting time penalties. The case was then reviewed by the Court of Appeals.
“... any person performing any function or activity for which a [contractors'] license is required ... shall hold a valid contractors' license as a condition of having independent contractor status.
This case makes a general contractor responsible for the wages of his unlicensed subcontractors. Earlier cases imposed liability for workers’ compensation coverage and unemployment insurance for such employees on the general contractor.
Clearly, a general contractor must review the license status of every prospective subcontractor and of their subcontractors. Subcontracts should include the subcontractor’s license number. If a subcontractor’s license is terminated or suspended, the subcontractor and its employees must be immediately barred from the job.
Doing so is particularly important if the general or upper-tier contractor does not carry workers compensation insurance.
Recent California appellate and Supreme Court cases have rendered decisions that make it clear that the current public policy is that unlicensed contractors will not be compensated for their work. Under Business and Professions Code section 7125.2 a contractor’s license is automatically suspended if he is required to but does not have workers’ compensation insurance. Wright v.Isaak (2007) 149 Cal.App.4th 1116, 58 Cal.Rptr.3d 1. Arguably at least, this statute can be triggered by having an unlicensed subcontractor.
While the Labor Commission rejected Humberto’s claim for wages as a statutory employee, that rejection was based on a finding that he had held himself out as a licensed contractor. If he had never made that representation, he might well have recovered wages. In State Compensation Insurance Fund v.Workers Compensation Appeals Board (1985) 40 Cal.3d, 219 Cal.Rptr 13, the California Supreme Court held that an unlicensed subcontractor was deemed an employee and entitled to workers’ compensation coverage from the person who engaged him at least so long as the subcontractor had not represented that he was licensed.
This article, ©2009, was written by William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for over 30 years.. In addition to belonging to a number of construction trade associations, Mr. Last holds a California “A” and “B” license. He can be contacted at 415-764-1990 or 650-696-8350. A number of his past articles can be found on his website (lhfconstructlaw.com). This bulletin is published periodically to provide general information about current legal issues. The articles are not intended to be a substitute for the advice of an attorney as to a specific problem. If you have a specific legal question or need legal advice, you should contact an attorney.
In our current economic climate, dissatisfied homeowners and developers will likely become more aggressive in seeking recovery for payments made to their contractors for the performance of construction work that is now in dispute. The California Court of Appeals, recently held that a claim brought under the Contractor’s State License Law against an unlicensed contractor may appropriately form the basis for a Right to Attach Order. A Right to Attach Order is a prejudgment remedy that allows a creditor to have a lien on the debtor’s assets until the claim sued upon has been resolved. In the scenario of a dispute between a homeowner and a contractor, an attachment order gives a homeowner the security of knowing that he would ultimately be able to collect on a judgment rendered against the contractor.
Keep in mind that a court will issue a prejudgment attachment order only when the claim sued upon is: (1) a claim for money based upon a contract, express or implied; (2) of a fixed or readily ascertainable amount not less than $500; (3) either unsecured or secured by personal property, not real property; and (4) the claim is commercial in nature. Since home improvement contracts generally involve a contractual agreement for work that exceeds $500, and are commercial in nature due to the type of services rendered, most home improvement contracts will satisfy the requirements needed for a homeowner to seek an attachment order.
In the trial court’s decision in Goldstein, et al. v. Barak Construction, et al., the homeowners were granted the writ of attachment against the assets of the contractor’s company, Barak Construction, in the amount of $385,388.00. While the trial court denied the homeowner’s attachment order to place a lien against the personal assets of the owner of Barak Construction, the trial court found there was a basis in alter ego (“Alter Ego” is defined as: A corporation used by an individual in conducting personal business, the result being that a court may impose liability on the individual by piercing the corporate veil when fraud has been perpetrated on someone dealing with the corporation.) for granting an order against the owner preventing him from selling, encumbering, or diminishing the value of his residence until the court orders otherwise. The alter ego theory allowed the homeowner to attribute liability onto the contractor personally.
On appeal, the contractor sought review of the trial court’s orders granting the attachment order against Barak Construction and in enjoining him from selling, encumbering, or diminishing the value of his personal property until further notice. Among the arguments asserted by the owner was that the homeowners failed to establish the probable validity of their claim. The contractor believed that since he became licensed during the construction of the project, he was at least entitled to payment for the work performed when he was properly licensed. As you might have already guessed, the Court of Appeals did not accept this argument.
homeowner knew that the contractor was unlicensed at the time the work began. Further, the homeowner is entitled to recover from the unlicensed contractor all payments made under the contract, even if those payments were used to pay others for labor and materials for the project. Thus, in this case, the homeowner was seeking to recover all sums paid to the contractor for the construction at the residence. The contractor’s appeal was ultimately denied and the Court determined that the contractor was unlicensed and found there was a sufficient showing of alter ego so that the corporation and individual owner were considered by the Court to be one legal entity.
Contractors should be aware of this ruling and a trend that may follow based on this Court allowing a homeowner to obtain a writ of attachment against the assets of the unlicensed corporation for recovery of payments made under the construction contract, and also allowing the homeowner to pierce the corporate veil and seek an order from the court to enjoin the contractor’s personal property. The best way to protect against an attempt at piercing the corporate veil is to insure that all corporate formalities are followed and that the corporation is properly licensed at all times during construction. In this economic climate, contractors must be diligent in completing and maintaining proper documentation to protect their business and personal assets.
This article is intended to provide the reader with general information regarding current legal issues. It is not to be construed as specific legal advice or as a substitute for the need to seek competent legal advice on specific legal matters. Contact the authors at 626-915-1641.

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