Mechanic’s lien rights
A recent decision of California’s Fourth District Court of Appeal has held that the mechanic’s lien rights of a general contractor may be contractually subordinated to a lender’s deed of trust on a property, and may thus be terminated as a result of the foreclosure of the lender’s senior lien rights. The court found this subordination to be valid despite California public policy in support of protecting the mechanic’s lien rights of laborers and materialmen as security for their claims of payment; as a consequence, the contractor’s right to security for approximately $2.2 million in unpaid wages for work performed was extinguished.
Acquired by an LLC
The property at issue was acquired by an LLC with a purchase money loan for the purpose of developing a medical complex project. The LLC then entered into an agreement with a general contractor to build the project. Subsequently, the LLC took out a secured construction loan for the project from two other lenders. As a condition of making that secured construction loan, the two other lenders required the general contractor to agree that all payments to be made to it under its agreement with the LLC would be subordinate to the construction loan, and that all of its lien rights securing such payments would be subordinate to the deed of trust securing the construction loan.
Contractor submitted numerous requests for payment
As the project progressed, the general contractor submitted numerous requests for payment that were allowed and paid by the LLC. The general contractor then submitted two final requests for payment, totaling approximately $2.2 million, but the LLC defaulted under the terms of the construction loan agreement. As a result, the general contractor recorded a mechanic’s lien against the property for those two final requests and filed suit to foreclose on its liens.
General contractor’s mechanic’s lien was valid
At trial, the superior court found that the general contractor’s mechanic’s lien was valid and had priority over the construction lenders’ deed of trust securing their loan, because, in the court’s view, the subordination provision violated California public policy. In particular, the trial court held that the subordination provision would deprive the general contractor of its mechanic’s lien rights guaranteed under the California Constitution. The construction lenders then appealed.
Relying on the language of California Civil Code Section 3262(a) (subsequently renumbered as Civil Code Section 8122), the court of appeal set aside the trial court’s ruling and held the subordination clause to be enforceable by the construction lenders against the general contractor. That Section reads as follows:
“Neither the owner nor original contractor by any term of a contract, or otherwise, shall waive, affect, or impair the claims and liens of other persons whether with or without notice except by their written consent, and any term of the contract to that effect shall be null and void.”
While the language of that Section would prevent the general contractor from subordinating the mechanic’s lien rights of other parties, the court of appeal concluded that it would not prevent a general contractor from agreeing to subordinate its own mechanic’s lien rights. In rejecting the general contractor’s argument that this view of the statutory language negated the public policy underlying the protection of mechanic’s lien rights, the court of appeals concluded that those general protections could not prevail over the plain language of the statute in question.
For general contractors and other holders of mechanic’s lien rights in California, this case is a stark reminder that agreeing to modify their statutory mechanic’s lien rights can have potentially disastrous consequences. Any request seeking to alter one’s mechanic’s lien rights should thus be carefully evaluated with an eye towards potential negative results.
The case is Moorefield Construction, Inc., v. Intervest-Mortgage Investment Company, et al., Case No. D065464.