Abdulaziz, Grossbart & Rudman - Mechanics' Liens and the Law

UPDATE AND PAST HISTORY OF MECHANIC'S LIENS

Mechanic's Liens and the Law Revision Commission -- Short History

The Legislature had assigned the Law Revision Commission the task of reviewing the entire mechanic's lien process. In this instance, Mechanic's Liens refers to a bundle of rights such as liens, Stop Notices and Bond rights. This is because there have been measures dealing with mechanic's liens introduced for legislative action every year. In 1999 there were a couple of proposals dealing with the mechanic's lien process and some were very substantial, involving more than just minor changes. As an example, one dealt with substituting a recovery fund in lieu of the mechanic's lien in owner occupied single-family residences. Because of that, the judiciary committee passed this task on to the Law Revision Commission. The Commission typically studies areas of law that are rather complex and renders a report to the Legislature. The Legislature told the Commission that it was to respond not only to the bills currently before the Legislature but the entire Mechanic's Lien process including the constitutional right to a lien.

Due to the fact that all the cases up to that time had stated that Mechanic's Liens were constitutionally protected, prior legislative action had only dealt with the process of the Mechanic's Liens. This included such things as the Preliminary Notice, the Waiver and Release forms, the Notice to Owner, etc. However, the Law Revision Commission’s staff member, stated that the Commission could suggest substantial changes in the Mechanic's Lien on certain areas such as owner-occupied single family residences (home improvement). Our office was involved in each and every meeting of the Law Revision Commission during this entire process. See Sam's Letter to Howard Wayne of January 3, 2000.

In 2002, the Law Revision Commission made its recommendation to the Legislature. The Commission’s recommendation essentially stated that it thought it would be appropriate to limit Mechanic's Liens in home improvement projects. Essentially, if the owner had paid the prime contractor in full on projects under $15,000, then no Mechanic's Liens or Stop Notices would be allowed. Assemblymember Dutra had a spot bill awaiting the Commission’s recommendation. Assemblymember Dutra then took the Law Revision Commission’s recommendation, modified it somewhat, and then put that in his bill (AB 568) in the year 2002.

The bill went through so many modifications even up to and during the first week of August, 2002, that Assemblymember Dutra decided there was not sufficient time to clean up the Legislation and deal with all of the various interests. Our office was involved in all of the negotiations at that time. Importantly, Sam Abdulaziz wrote a letter to Assemblymember Dutra’s consultant, the consultant to the Senate Judiciary Committee and other interested parties dated August 2, 2002. That letter raised some eleven questions to the draft proposed by Assemblymember Dutra. See Sam's letter to Dutra's office of August 2, 2002.

As a result, Assemblymember Dutra re-introduced his bill in the year 2003. He waited forever to get it set for hearing. It was finally set to be heard in July. However, it had significant problems. Even the staff of the Senate Judiciary Committee had pointed out some of the deficiencies. Our office responded to that bill. Our letter was sent to all the members of the Judiciary Committee, Assemblymember Dutra's office, as well as others. See Sam's response to AB 286. The Bill was not heard.

During a short period of time, it appeared that the Law Revision Commission did not have the funds to study this issue any longer and had put that in writing. However, sometime later, the Law Revision Commission found the time and money and started re-studying the area in January of 2005. The theory of the Commission's new task was to make things easier to understand, more consistent, without any substantive changes in law.

There have been a number of meetings to date and a number of proposals. Although the theory was to not make any substantive changes, substantive changes have been discussed. The statement was made that if there were going to be substantive changes, they should be even handed, i.e., not just in favor of industry. As usual, we have attended each and every meeting.

One of the Law Revision Commission members asked what the Commission's time frame is with respect to the Mechanic's Lien study. The response was that the California Law Revision Commission will study and discuss portions of the law at their meetings. It will then prepare a draft proposal of what is theoretically supposed to be only clarifications of the Mechanic’s Lien, Stop Notice and Bond issues. However, I believe it will then go beyond mere clarification. The proposed draft will be circulated for comment. The California Law Revision Commission will then review the comments and prepare a report to the Legislature with its recommendations.

Following is a synopsis of what we believe are some important issues discussed to date:

• Adding the Prompt Pay Laws as part of the study;
• Making it easier to get rid of stale liens;
• Dealing with other liens that are a cloud on title that are not stale, but made out incorrectly. As an example, substantially overstated. This is a very touchy area;
• Requiring a Notice of Recording Liens since at times, owners are not aware of the lien;
• Service of the Preliminary Notice;
• Mechanic's Liens on tenant improvement;
• Redefining "Original Contractor" to "Prime Contractor";
• Changing the words "Stop Notice" to "Notice to Withhold Funds"; and
• Question of creating a rebuttable presumption that materials that were delivered were in fact incorporated into the structure.

As always, we will be actively involved.

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