BILL ANALYSIS SB 189 Page 1 Date of Hearing: June 15, 2010 ASSEMBLY COMMITTEE ON JUDICIARY Mike Feuer, Chair SB 189 (Lowenthal) - As Amended: June 2, 2010 PROPOSED CONSENT SENATE VOTE : 35-0 SUBJECT : MECHANICS LIENS KEY ISSUE : SHOULD THE MECHANICS LIEN STATUTES BE REORGANIZED AND RECAST TO MODERNIZE AND CLARIFY THE LAW FOR THE BENEFIT OF CONTRACTORS, OWNERS AND CONSUMERS? FISCAL EFFECT : As currently in print this bill is keyed fiscal. SYNOPSIS This non-controversial mechanics lien bill reflects the good work undertaken by the California Law Revision Commission at the request of this Committee some years ago to review and consider this venerable area of the law that according to many observers has become unduly complex and impenetrable as the result of piecemeal amendments over the years. This bill would among other notable achievements streamline, reorganize, clarify and re-codify these statutes; it would modernize terminology and eliminate inconsistencies in language; make provisions more readable and easier to use; place provisions that apply exclusively to private or public work in separate titles, and place jointly applicable provisions in a common third title. These revisions are largely technical. To the extent they are substantive they have been widely vetted by the Commission and are not controversial with any stakeholder group. SUMMARY : Updates the mechanics lien statutes. Specifically, this bill : 1)Reorganizes, restates, and modernizes the language of the existing mechanics lien statute. 2)Standardizes those requirements for all notices given under the mechanics lien statute, except as expressly otherwise noted.
SB 189Page 2 3)Increases that notice period to ten days, if the notice is given by mail. 4)Clarifies that a general contractor must give preliminary notice to a construction lender on a private work. 5)Deletes the vague term "acceptance by the owner" as an event deemed to constitute completion of a private work of improvement. 6)Requires continuous cessation of labor for 60 days or more to constitute completion of those public works. 7)Allows an owner or public entity 15 days after completion of a work of improvement to record a notice of completion. 8)Recasts the statutory forms for clarity, and would make those procedural requirements applicable to subcontractors as well. 9)Adds procedural rules relating to the proceeding, and would allow for an award of reasonable attorney's fees to the prevailing party. 10)Reduces the required amount of certain bonds to 125% of the recorded lien claim. 11)Requires public entities to provide notice of all specified events that trigger the commencement of the time period for enforcement. 12)Allows any person to post a release bond, requires those bonds to be issued by an admitted surety insurer, makes the expedited proceeding also available to the owner involved in the dispute, clarifies that the bond must be recorded prior to commencement, and clarifies that such persons may make a claim against the payment bond provided by the general contractor at the outset of the project. 13)Makes the limitation period also applicable to an action against the principal on the bond. 14)Clarifies that such persons are permitted to make a claim against the general contractor's payment bond. SB 189 Page 3 15)Expands that provision to also require notice of the nonpayment to the owner on the project. 16)Adds licensed landscape architects to the identified list of design professionals. EXISTING LAW : 1)Provides that mechanics, persons furnishing materials, artisans, and laborers of every class have a lien upon the property upon which they bestowed labor or furnished material for the value of such labor done and material furnished. (Cal. Const., art.14, Sec. 3.) 2)Sets forth obligations and rights of contributors, owners, construction lenders, and persons otherwise involved in an improvement to real property, in what is informally known as the mechanics lien statute. (Civ. Code Sec. 3082 et seq.) 3)Requires many different types of notices under the mechanics lien statute, with most notices subject to unique provisions governing content, manner of service, location of service, proof of service, and the like. (See, e.g., Civ. Code Sec. 3103.) 4)Requires the giving of five days notice of a hearing to summarily adjudicate a public work stop notice. (Civ. Code Sec. 3201.) 5)Contains an ambiguity relating to whether a general contractor must give preliminary notice to a construction lender on a private work. (Civ. Code Sec. 3097(b).) 6)Provides that "acceptance by the owner" of a private work of improvement is one of several events deemed to constitute completion of that work of improvement. (Civ. Code Sec. 3086(b).) 7)Provides that a continuous cessation of labor for 30 days or more on specified public works of improvement constitutes completion of that work. (Civ. Code Sec. 3086.) 8)Allows an owner or public entity to record a notice of completion within 10 days after completion of a work of improvement. (Civ. Code Sec. 3093.) SB 189 Page 4 9)Allows an owner to record a notice of completion of a portion of a private work of improvement governed by a separate contract within 10 days after that contract has been completed. (Civ. Code Sec. 3117.) 10)Provides procedural requirements, including the use of specified statutory forms, which must be followed by owners or general contractors to obtain a waiver and release of most claims under the mechanics lien law. (Civ. Code Sec. 3262.) 11)Allows a reduction or release of a stop notice given to an owner to be made on other than a statutory waiver form. (Civ. Code Sec. 3262(b)(2).) 12)Allows an owner to seek release of a recorded lien claim that has not been timely prosecuted in a summary proceeding, and allows an award of attorney's fees not to exceed $2,000 to the prevailing party in the proceeding. (Civ. Code Sec. 3154.) 13)Allows an owner, general contractor, or subcontractor to release a recorded lien claim by posting a release bond in the amount of 150% of the recorded lien claim. (Civ. Code Sec. 3143.) 14)Allows a stop notice claimant on a public work to pay $2.00 to the public entity in order to be notified when the latest of several specified events occur that trigger the commencement of the time period in which the claimant must file suit to enforce the stop notice. (Civ. Code Sec. 3185.) 15)Provides that only an owner, construction lender, or contractor on a work of improvement may post a stop notice release bond. (Civ. Code Sec. 3171.) 16)Allows a statutory payment bond on a private work and a stop notice release bond to be issued by a non-licensed surety. (Civ. Code Secs. 3096, 3143, 3171.) 17)Makes an expedited proceeding available to a general contractor to resolve a stop work notice dispute. (Civ. Code Sec. 3260.2(d).) 18)Contains an ambiguity relating to whether a private work payment bond must be recorded prior to commencement of a work SB 189 Page 5 of improvement in order to limit an owner's lien claim liability. (Civ. Code Sec. 3235.) 19)Contains an ambiguity relating to whether persons contributing to a public work pursuant to a supplemental contract may make a claim against the payment bond provided by the general contractor at the outset of the project. (Civ. Code Sec. 3247(b).) 20)Provides that an action against a surety to enforce a claim against a statutory private work payment bond recorded before commencement of the work of improvement must be commenced within six months after completion of the work of improvement. (Civ. Code Sec. 3240.) 21)Provides that an action against a surety on a public work payment bond must be commenced within six months after the period in which a stop payment notice may be given. (Civ. Code Sec. 3249.) 22)Contains an ambiguity relating to whether persons contributing work to a second tier or lower subcontractor on a work of improvement are permitted to make a claim against the general contractor's payment bond. (Civ. Code Sec. 3267.) 23)Requires a contractor that fails to timely pay wages to laborers employed by the contractor to provide notice of the nonpayment to the laborer, to the laborer's bargaining representative, and to the construction lender on the project, or face discipline. (Civ. Code Sec. 3097(k).) 24) Requires that an owner notify the general contractor and construction lender of a change in the original contract if the change increases the contract amount by five percent or more. (Civ. Code Sec. 3123(c).) 25) Allows licensed architects, engineers, and surveyors to claim a "design professionals lien" for pre-commencement design services provided for a work of improvement. Services that these design professionals provide are also governed by selected provisions of the mechanics lien statute. (Civ. Code Secs. 3081.1 to 3081.10.) COMMENTS : The California Constitution grants laborers and materials suppliers a mechanics lien on any property improved by SB 189 Page 6 their labor or material. The mechanics lien law in the Civil Code generally specifies the obligations, rights, and remedies of those involved in a construction project. Mechanics liens are not available on public works of improvement. However, the mechanics lien law provides claimants on public works projects with other statutory remedies, including stop notices and claims against payment bonds. In 1999, this Committee requested the California Law Revision Commission (CLRC) to provide a comprehensive review of mechanics lien law and make suggestions for possible areas of reform. Following initial efforts to substantively revise specific provisions of existing law, the CLRC began studying a general revision of mechanics lien law in 2004. The CLRC believed that the mechanics lien statute had "become increasingly difficult to use, generating litigation over confusing provisions, and often leaving participants unsure of their rights and obligations." Therefore, the CLRC decided that its primary objective would be to revise the statute in a way that would make it easier for all practitioners to use and understand. It placed its highest priority on drafting a "nonsubstantive reorganization of the existing mechanics lien statute that would modernize and clarify existing law." This bill is based upon the February 2008 recommendations of the CLRC resulting from its study of mechanics lien law. (California Law Revision Commission, Recommendation, Mechanics Lien Law, February 2008.) It is also based upon working group discussions with stakeholders and other interested parties. In general, the CLRC included substantive changes to existing law only if the proposed reform fell into one of two categories: 1) substantive reforms that were believed to bring about an overarching improvement to the statute as a whole, thereby benefiting all affected persons; and 2) substantive reforms that, although primarily benefiting one group of persons affected by the statute more than others, were perceived not to unduly burden any other group. (See California Law Revision Commission Memorandum 2009-45, October 13, 2009.) The CLRC writes: The existing mechanics lien statute contains archaic language dating back to 1872. Since the last recodification of the statute in 1969, individual provisions have been amended more SB 189 Page 7 than 70 times. Over time, the statute has become increasingly difficult to use, generating litigation over confusing provisions, and often leaving unsophisticated participants unsure of their rights and obligations. This bill would modernize terminology and make it more uniform; clarify or eliminate inconsistencies and ambiguities throughout the statute; divide longer provisions into shorter and more readable provisions; and organize all provisions in a functionally coherent order. This clarification of the law should reduce litigation and reduce the risk that important rights will be inadvertently lost through misunderstanding of the law. This bill would also make a small number of substantive improvements to existing law that would result in an overall benefit to practitioners and persons affected by the mechanics lien statute, with no significant detriment. Overview of the bill's provisions. The provisions of the bill that would recodify the mechanics lien law are contained in three sections of the bill, Sections 15, 16, and 20. Section 15 of the bill would repeal the existing law informally known as the design professionals lien statute (Civ. Code Secs. 3081.1 to 3081.10) in order to incorporate these sections into a new mechanics lien statute. Section 16 of the bill would repeal the existing body of law informally known as the mechanics lien statute (Civ. Code Secs. 3082 to 3267). Section 20 of the bill would enact a modernized, clarified, and better organized mechanics lien statute that would incorporate the existing design professionals lien statute as well as all provisions of the existing mechanics lien statute presently applicable to both private and public works of improvement. The new statute would appear in a new statutory Part within the Civil Code. The first title in this Part would contain provisions jointly applicable to both private and public work; the next two titles of the Part would contain provisions exclusively applicable to either private or public work, respectively. Of the remaining 106 sections of the bill, 102 make non-substantive conforming revisions to code sections that contain a cross-reference to the existing mechanics lien SB 189 Page 8 statute. The conforming revisions correct the cross-references, and in some cases, conform existing statutory language to language used in the new mechanics lien statute. For example, a reference to a "20 day Preliminary Notice" has been revised to read "Preliminary Notice." In some instances, purely non-substantive stylistic changes (unrelated to mechanics lien law), generated by the CLRC or by Legislative Counsel, are also made to these sections. Section 19.5 of the bill would renumber the heading of a Part in the Civil Code unrelated to mechanics lien law to allow the new mechanics lien statute to appear in the Civil Code in proper numerical sequence. Section 105, which would be uncodified, contains the bill's operative date provision. Section 106, which would be uncodified, provides that any amendment or repeal that the bill would make to any section is to be subordinate to any change made to that section by any other bill enacted this session, other than the annual Maintenance of the Codes bill. Section 107 is a statutorily required non-reimbursement section. Section 108, which would be uncodified, provides that the bill is intended by the Legislature to be nonsubstantive in effect, except as otherwise specified in Section 108. Proposed Substantive Changes To The Mechanics Lien Law. The bill's few substantive provisions appear to be modest, thoughtful and harmonizing. Notices. This bill would standardize the requirements for all notices given under the mechanics lien statute, except as expressly otherwise noted. The standardization would reduce the likelihood of confusion or inadvertent errors by unrepresented or occasional practitioners whose rights under the mechanics lien law often depend on compliance with these notice requirements. This bill would increase the notice period for a hearing to summarily adjudicate a public work stop notice from five to 10 days. This would correct an apparent oversight in the existing statute, as a notice of a hearing sent by mail five days before SB 189 Page 9 a hearing date may not be received until on or after the hearing date. Preliminary Notices. This bill would clarify that a general contractor must give preliminary notice to a construction lender on a private work. Giving of this notice would be consistent with a basic policy reason underlying the giving of all preliminary notice- identification of a contributor to a work of improvement whose identity may otherwise be unknown to the recipient of the notice. Completion of Private/Public Works of Improvement. This bill would delete "acceptance by the owner" as an event deemed to constitute completion of a private work of improvement. The existing mechanics lien statute does not define the term "acceptance by the owner," nor does it indicate how it must be manifested, or to whom it must be conveyed. The event does not appear to be significantly relied upon in the industry, and may be constitutionally suspect to the extent it serves to time bar a lien claim of a claimant who was reasonably unaware that the event had occurred. The bill does continue a provision of existing law (Civ. Code Sec. 3086(a)), which provides that occupation or use of the work of improvement by the owner, accompanied by cessation of labor, constitutes completion of the work of improvement. This bill would allow an owner to record a notice of completion corresponding to a portion of a private work of improvement governed by a separate contract up to 15 days after completion, rather than the 10 days allowed under existing law. This would standardize the deadline for recordation of all notices of completion, which should reduce confusion for both owners and claimants that do not have substantial familiarity with mechanics lien law. This bill would require continuous cessation of labor for 60 days or more to constitute completion of public works of improvement. On a modern public construction project, it is not uncommon for a 30-day work stoppage to occur when the project is far from complete. Requiring a continuous cessation of labor for 60 days or more would reflect the realities of modern public work projects. A 60-day requirement would also coincide with the period of cessation of labor deemed to constitute completion of a private work of improvement, thereby standardizing this requirement for both private and public works of improvement. SB 189 Page 10 This bill would allow an owner or public entity 15 days after completion of a work of improvement to record a notice of completion. On more complex projects, 10 days may not be a sufficient time to allow for an accurate determination of whether completion has occurred. Further, while the extra few days could make a significant difference to an owner or public entity, it would not significantly adversely affect a claimant, as the claimant's time to pursue a remedy would continue to run from the date of recordation of the notice of completion. Waiver and Release of Claims. This bill would recast the statutory forms relating to waivers and releases of claims for clarity, and would make certain procedural requirements applicable to subcontractors and construction lenders. Current statutory forms and procedural requirements already apply to owners and general contractors. The CLRC states that there does not appear to be any sound public policy reason why this protection of claimants intended by the Legislature should only apply to a subgroup of entities on a construction project that regularly seek waiver and release forms from claimants. Release of Lien. This bill would add procedural rules relating to the release of a recorded lien claim that has not been timely prosecuted in a summary proceeding, and would allow for an award of reasonable attorney's fees to the prevailing party. The inclusion in the statute of basic procedural guidelines for these proceedings would assist litigants by reducing ad hoc or inconsistent rulings on procedural issues by different trial courts. The CLRC and author also believe that it makes sense to allow the court to award reasonable attorney's fees. This bill would reduce the required amount of a bond that can be posted to release a recorded lien claim, from 150% of the amount of the lien claim to 125%. This change would reconcile the required amount of a lien release claim with the required amount of a stop notice release claim, and would appear to provide sufficient security for lien claimants while making release bonds more affordable to owners that need to rely on a release bond to obtain an unencumbered title. Stop Notices; Payment Bonds; Fees. This bill would increase a specified $2.00 notice from public entity fee to $10.00, and would require the public entity to provide notice of each SB 189 Page 11 specified event that triggers commencement of the time period in which a claimant must file suit to enforce a stop notice. The $2.00 fee was established in 1969, and represents approximately $10.00 of buying power today. The revised notice would reduce confusion as to deadlines on the part of occasional or unrepresented claimants that do not have substantial familiarity with the mechanics lien law. This bill would also allow any person to post a stop notice release bond. The CLRC and the author assert that it would be unreasonable to preclude any person that seeks to release funds withheld pursuant to a stop notice from posting an appropriate bond to do so. This bill would require a stop notice release bond and a statutory payment bond to be issued by an admitted surety insurer. This requirement would provide the bond recipient with greater assurance of the solvency of the surety. This bill would make an expedited (stop work notice) proceeding available, in addition to the general contractor, to the owner involved in the dispute. The CLRC and author do not believe there is any policy reason not to provide an owner aggrieved by a work stoppage the same procedural right to an expedited resolution of the dispute that is available to the contractor in the dispute. Clarifying Ambiguities Related to Bonds; Limitation Periods. This bill would clarify that a private work payment bond must be recorded prior to commencement in order to provide an owner with statutory protection against lien claims that exceed the price of the work of improvement. Pre-commencement recordation would allow all contributors to a work of improvement to learn prior to contributing work, whether a constitutional lien right attributable to the work may be restricted or precluded by statute. This bill would clarify that persons contributing to a public work of improvement pursuant to a supplemental contract may make a claim against the payment bond provided by the general contractor at the outset of the project. To the best of CLRC's and the author's knowledge there is not any legislative history suggesting an intent to preclude claimants providing work on supplemental public work contracts from a payment bond remedy. Such preclusion would severely limit the remedies available to SB 189 Page 12 such claimants for unpaid work, since lien claims are not allowed on a public work. (See Civ. Code Sec. 3109.) This bill would make the limitation period for an action against the principal on a private or public work payment bond the same as that against a surety on that bond. The principal on a bond typically provides for joint and several liability of the principal as to any claim made against the bond. Conforming the applicable limitation period for bringing such an action against either named defendant would facilitate the joint and several liability, and would standardize this procedural requirement. This bill would clarify that persons contributing work to a second tier or lower subcontractor on a work of improvement would be permitted to make a claim against the general contractor's payment bond. Neither the CLRC nor the author have uncovered any legislative history suggesting an intent to preclude claimants that provide work to subcontractors below the first tier from a payment bond. To the contrary, policy considerations suggest an intent to allow such claims, as an alternative lien claim is not available on a public work, and may be restricted on a private work. (See Civ. Code Sec. 3235.) This ambiguity was analyzed by the court in Union Asphalt v. Planet Ins. (1994) 27 Cal.Rptr. 2d 371, which reached the same conclusion. Labor Issues. This bill would expand the provision that requires a contractor who fails to timely pay wages to provide notice of nonpayment to not only the laborer, the laborer's bargaining representative, the construction lender, but also to the project owner. Such notice would provide advance warning to the owner that a lien claim from the unpaid laborer may be forthcoming. Notification of Contract Change of Five Percent or More. This notification in existing law does not indicate when the notification must be made, the manner of notification, or the consequences of failure to notify. Thus, the provision does not appear to have any practical utility, is often ignored in the industry, and appears more confusing than helpful. For those reasons the provision would be deleted in the bill. Licensed Landscape Architects. This bill would add licensed landscape architects to the current list of design professionals (licensed architects, engineers, and surveyors) who may claim a SB 189 Page 13 design professionals lien. All four types of professionals are licensed under the Business and Professions Code, and are the only types of licensed design professionals that frequently provide pre-commencement work on a work of improvement, often in conjunction with each other. Thus, it makes sense to afford the same lien rights to all four categories of design professionals. REGISTERED SUPPORT / OPPOSITION : Support American Society of Landscape Architects, California Council Opposition (as amended) None on file Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334