Opinion
B313493
06-20-2022
HEIDI CORPORATION dba Donald J. Scheffler's Concrete Construction, Plaintiff and Appellant, v. TREE LANE LLC, et al., Defendant and Respondent.
Jerome M. Jackson, for Plaintiff and Appellant. Richard Weiss, for Defendant and Respondent.
NOT TO BE PUBLISHED
APPEAL from an order of the Superior Court of Los Angeles County No. 19SMCV01694, Mark H. Epstein, Judge. Affirmed.
Jerome M. Jackson, for Plaintiff and Appellant.
Richard Weiss, for Defendant and Respondent.
WISE, J.
INTRODUCTION
Heidi Corporation dba Donald J. Scheffler's Concrete Construction ("Heidi") appeals from an order granting Respondent Tree Lane LLC's ("Tree Lane") motion to release the mechanic's lien Heidi recorded on real property owned by Tree Lane. Heidi failed to serve the 20-day preliminary notice of the mechanic's lien on Tree Lane's construction lender, Skylark Capital Management ("Skylark"), as required by Civil Codesection 8200. Heidi asserts the trial court erred in failing to recognize it was excused from strictly complying with the preliminary notice requirements of section 8200 because Skylark's interest in the property was unaffected by Heidi's mechanic's lien.
Skylark is not a party to the underlying case or this appeal.
All statutory references are to the Civil Code unless otherwise indicated.
Section 8200 does not provide an exception to the requirement that a lien claimant must serve preliminary notice on the lender before the lien can be perfected. Heidi's failure to provide Skylark with preliminary notice therefore invalidated the lien. Further, even if we were to apply the "liberal" notice rule adopted by some courts, we would still affirm because the trial court correctly determined the mechanic's lien affected Skylark's interests and rejected the notion that Heidi could avoid the strict notice requirements of section 8200. We affirm the court's order granting Tree Lane's motion to release the mechanic's lien.
FACTUAL AND PROCEDURAL BACKGROUND
In 2018, Tree Lane owned real property on Summitridge Drive in Beverly Hills that it intended to develop into a single- family residence (the Property). In September 2018, Tree Lane entered into a construction loan agreement with Skylark for $31,300,000 to finance the development of the Property. Tree Lane and Skylark executed a promissory note and deed of trust secured against the Property. On October 4, 2018, Skylark recorded the construction loan deed of trust on the Property in the Los Angeles County Recorder's Office.
Paragraph 5.10 of the Security Instrument stated that Skylark had the option to declare immediately due and payable all sums secured by the security instrument upon a sale or transfer. The term "sale or transfer" included any encumbrance of the Property.
Later in October 2018, Tree Lane hired Heidi, a contractor specializing in installing concrete and foundations for commercial and residential projects, to perform construction work on the Property. According to Heidi, the parties agreed to a "place-holder" contract amount of $4.5 million, understanding that the contract amount would change during the construction as the scope of the work was increased and adjusted. From October 2018 to June 2019, Heidi performed work on the Property. Heidi alleges, beginning in early 2019, Tree Lane was "falling behind in its payments" for Heidi's work on the Property.
In the trial court proceedings Tree Lane disputed the existence of an agreement with Heidi as well as the scope and terms of any agreement governing the work Heidi performed on the Property. For the purposes of this appeal Tree Lane does not contest the existence (or the scope) of its contract with Heidi.
On February 26, 2019, Heidi served Tree Lane with a 20-day preliminary notice under section 8200 indicating its intent to record a mechanic's lien on the Property. The notice included Heidi's contact information and identified Tree Lane as the Property owner. The notice also indicated Heidi provided concrete work at the Property, and it estimated the value of labor, services, equipment and materials at $7 million. On the notice, Heidi listed the construction lender as "N/A." Heidi did not serve the preliminary notice on Skylark.
By May 2019 Tree Lane stopped making payments to Heidi. Tree Lane terminated Heidi in June 2019. On July 1, 2019, Heidi recorded a mechanic's lien on the Property for $1,924,573, the value Heidi estimated for its unpaid work. Heidi served Tree Lane with the mechanic's lien but did not serve Skylark.
On September 26, 2019, Heidi filed a complaint against Tree Lane asserting causes of action for breach of contract, quantum meruit, interference with contract and foreclosure on the mechanic's lien. Heidi did not name Skylark in the complaint.
Tree Lane filed a motion to release Heidi's mechanic's lien on December 2, 2020. Tree Lane argued the court should release the lien, pointing out that even though Heidi had notice of the construction loan deed of trust that Skylark recorded against the Property, Heidi failed to serve the 20-day preliminary notice on Skylark as required by section 8200, subdivision (e)(2). Tree Lane also asserted the mechanic's lien was invalid because Heidi's service, of both the 20-day preliminary notice and the mechanic's lien, was defective. Finally, Tree Lane alleged the mechanic's lien failed to appropriately credit Tree Lane for offsets and credits under section 8416, subdivision (a)(1). Tree Lane supported the motion with declarations from Tree Lane's managing partner, attesting that the mechanic's lien would impair its ability to obtain financing to finish the construction on the Property. Tree Lane also submitted a declaration from the manager of Skylark, who stated that the existence of the mechanic's lien resulted in a "failure of the conditions precedent" under the construction loan agreement between Skylark and Tree Lane and that the lien would preclude Tree Lane from obtaining further construction advances to pay for services performed or material furnished for the development of the Property.
On February 8, 2021, Heidi filed its opposition to Tree Lane's motion and objected to the evidence Tree Lane submitted in support of the motion. Among its arguments Heidi asserted that any defect in the service of the preliminary notice on Tree Lane did not invalidate the mechanic's lien because it had a direct contractual relationship with Tree Lane and was not required to serve Tree Lane with the preliminary notice. Heidi further argued that any defects in the method of service of the mechanic's lien were harmless because Tree Lane received actual notice of the lien. Heidi also claimed when it began work on the Property it was unaware that Skylark was Tree Lane's construction lender. In any event, Heidi maintained that under Industrial Asphalt, Inc. v. Garett Corp. (1986) 180 Cal.App.3d 1001, 1009 (Industrial Asphalt), it was not required to provide the section 8200 preliminary notice to Skylark because "'preliminary notice' of a Mechanic's Lien must be given 'only to those parties a [mechanic's] lien will affect.'" According to Heidi, it was not required to serve Skylark with the 20-day preliminary notice or name Skylark as a party in the action because Skylark's deed of trust secured by the Property was a lien that was "senior" to Heidi's mechanic's lien. And as a result, Skylark's deed of trust and its accompanying priority "is unaffected" by Heidi's mechanic's lien and its efforts to foreclose on the lien. Heidi also disputed Tree Lane's evidence concerning the prejudice Tree Lane claimed to have suffered as a result of the mechanic's lien. Heidi alleged that its evidence showed Tree Lane was able to secure additional financing for the project (from a party other than Skylark) after the mechanic's lien was recorded. In addition, Heidi claimed it had proof that Skylark continued to make progress payments to Tree Lane after the mechanic's lien was recorded.
Heidi objected that the declarations supporting the motion were vague, ambiguous and conclusory, contained speculation and the declarants lacked a foundation for their testimony.
In February 2021, at the hearing on Tree Lane's motion, the court asked the parties to provide further briefing on the effect of Industrial Asphalt, including whether it is valid precedent in light of the 2010 revisions to the mechanic's lien preliminary notice statute and if so, whether it disposed of the issues in the motion. In Tree Lane's supplemental brief, it asserted Industrial Asphalt did not create any exceptions to section 8200, subdivision (e)(2), that would excuse Heidi's failure to serve the construction lender, Skylark, with the 20-day preliminary notice. Tree Lane also argued that Industrial Asphalt was irrelevant because it is factually distinguishable, pointing out that Industrial Asphalt did not involve the failure to serve a preliminary notice on a party affected by the foreclosure of the lien. Heidi stated in its supplemental brief that Industrial Asphalt remained valid even after the Legislature amended the mechanic's lien statute in 2010. Heidi argued Industrial Asphalt holds that the strict notice requirements in section 8200 requiring preliminary notice apply only to parties a lien will affect. According to Heidi, Industrial Asphalt controls the outcome of Tree Lane's request because Skylark was unaffected by the mechanic's lien.
On May 28, 2021, the trial court granted Tree Lane's motion to release the mechanic's lien because Heidi failed to comply with the mechanic's lien statutes. The court overruled Heidi's objections to Tree Lane's evidence submitted in support of the motion on the issue of the effects of the mechanic's lien on Tree Lane and Skylark. The court ruled the declarants provided admissible evidence based on their personal knowledge of the facts and circumstances.
Next, the court concluded the evidence showed that Heidi and Tree Lane had a direct contractual relationship and Heidi was therefore not required to provide preliminary notice to Tree Lane under section 8200. However, the court determined Skylark's status as the construction lender was "known or reasonably knowable" to Heidi obligating Heidi to provide the 20-day preliminary notice to Skylark. The court also concluded that Industrial Asphalt did not dictate the outcome in this case because it was distinguishable. The court explained that in Industrial Asphalt, the general contractor (that did not receive the preliminary notice) had a direct contract with the subcontractor who had filed the mechanic's lien; the general contractor had already been paid and was aware of the subcontractor's work. Consequently, providing the general contractor with the preliminary notice served no purpose.
In contrast, the court observed that here Skylark had no contract with Heidi and there was no proof Skylark was aware of Heidi's work or was aware of whether Tree Lane had paid Heidi for its work. The court stated: "While it is true that Skylark's lien (as the construction lender) cannot be affected directly by this action (because of its position and because Skylark is not a party to this action), foreclosure of the lien could still affect the collateral and Skylark's rights. The general contractor in Industrial Asphalt could make no similar claim." The court granted Tree Lane's motion to release the mechanic's lien concluding that because Heidi failed to provide the preliminary notice to Skylark, Heidi's mechanic's lien was invalid.Heidi timely appealed.
The court's order also clarified that in granting Tree Lane's motion, the court had not considered or ruled upon any of Tree Lane's other arguments in the motion.
DISCUSSION
On appeal, Heidi argues the trial court erred in ordering the release of the mechanic's lien on the Property. Heidi asserts the trial court failed to recognize that Industrial Asphalt created an exception to the strict preliminary notice requirement in section 8200 that applied in this case. Heidi also challenges the trial court's conclusion that Skylark's interest in the Property was affected by the mechanic's lien. Heidi maintains it was not required to serve Skylark with the 20-day preliminary notice as a prerequisite to enforcing its mechanic's lien against Tree Lane. We disagree.
A. Applicable Legal Principles
When a lien claimant has filed suit to foreclose on a mechanic's lien, the property owner may file a motion to release the lien in the enforcement action to have the matter examined by the trial court. (Cal Sierra Construction, Inc. v. Comerica Bank (2012) 206 Cal.App.4th 841, 845 (Cal Sierra), citing Lambert v. Superior Court (1991) 228 Cal.App.3d 383, 387 (Lambert).) On the motion to release the lien, the claimant bears the burden of establishing the "probable validity" of the lien. (Cal Sierra, supra, 206 Cal.App.4th at p. 845, citing Lambert, at p. 387.) If the claimant fails to meet that burden, the lien may be released in whole or in part. (See Howard S. Wright Construction Co. v. Superior Court (2003) 106 Cal.App.4th 314, 318 (Howard) [acknowledging a lien claimant's failure to justify the validity of the lien, in response to a motion challenging it, results in an order releasing it].) Although the appellate court reviews questions of the interpretation of law de novo (Carmel Development Company, Inc. v. Anderson (2020) 48 Cal.App.5th 492, 503), if the trial court made factual determinations the reviewing court's task is "simply to ensure that the trial court's factual determinations are supported by substantial evidence." (Howard, at p. 320.)
California's mechanic's lien law, derived from a constitutional mandate to protect laborers and material suppliers (Cal. Const., art. XIV, § 3), permits a person, who furnishes labor or materials on a "work of improvement" and who is owed money on the project, to file a lien against the real property upon which the work was performed. (§ 8400; Connolly Development, Inc. v. Superior Court (1976) 17 Cal.3d 803, 808.) "[T]he mechanics' lien constitutes a direct lien [citation] on the improvement and the real property to the extent of the interests of the owner or the person who caused the improvement to be constructed [citations]. The lien is subordinate to recorded encumbrances antedating the commencement of the work of improvement [citation], but takes priority over all subsequent encumbrances [citation]." (Connolly, at p. 808.)
Under section 8200, subdivision (a), a lien claimant must serve preliminary notice on three parties, the owner, the contractor and the lender, before the lien can be perfected. Under section 8200, subdivision (c), "[c]ompliance with this section is a necessary prerequisite to the validity of a lien claim . . . under this title."
Section 8200, subdivision (e), contains two express exceptions to the preliminary notice requirement: "(1) A laborer is not required to give preliminary notice. [and] [¶] (2) A claimant with a direct contractual relationship with an owner or reputed owner is required to give preliminary notice only to the construction lender or reputed construction lender, if any."
"[T]he mechanic's lien law is 'remedial legislation, to be liberally construed for the protection of laborers and material[][suppliers].'" (Hub Construction Specialties, Inc. v. Esperanza Charities, Inc. (2016) 244 Cal.App.4th 855, 860, quoting Connolly, supra, 17 Cal.3d at pp. 826-827.) The Legislature "imposed the notice requirements for theconcurrently valid purpose of alerting owners and lenders to the fact that the property or funds involved might be subject to claims arising from contracts to which they were not parties and would otherwise have no knowledge." (Romak Iron Works v. Prudential Ins. Co. (1980) 104 Cal.App.3d 767, 778 (Romak); accord, Truestone, Inc. v. Simi West Industrial Park II (1984) 163 Cal.App.3d 715, 721.)
As the trial court here aptly acknowledged, courts have taken seemingly opposite approaches to the procedural aspects of the mechanic's lien law, including the strictness with which to apply the preliminary notice requirements of section 8200 (and its predecessor, the former section 3097). Some courts have concluded stringent compliance is required for perfection and enforcement of the lien against any party. (Kodiak Industries, Inc. v. Ellis (1986) 185 Cal.App.3d 76, 81 (Kodiak); Harold L. James, Inc. v. Five Points Ranch, Inc. (1984) 158 Cal.App.3d 1, 4-6 (Harold L. James) [surveying cases]; Truestone, Inc. v. Simi West Industrial Park II, supra, 163 Cal.App.3d at p.721 [holding strict compliance with the notice statute is required]; IGA Aluminum Products, Inc. v. Manufacturers Bank (1982) 130 Cal.App.3d 699, 704-705 [observing doctrine of liberal construction of mechanic's lien laws did not apply because the statute is unambiguous in its notice requirements]; Romak, supra, 104 Cal.App.3d at p. 778 [holding the liberal construction rule "may not be applied to frustrate the Legislature's manifested intent to exact strict compliance with the preliminary notice requirement"].)
In Kodiak, for example, a plumbing subcontractor sued to foreclose mechanic's liens against three defendants-the property owner, the purchase moneylender and the construction loan lender. (Kodiak, supra, 185 Cal.App.3d. at pp. 79-80.) The subcontractor, however, failed to serve preliminary notice on the construction loan lender. (Ibid.) Accordingly, the court determined that the validity of the lien as to all defendants hinged on the subcontractor's compliance with the notice requirements. (Id. at p. 81 [observing "validity of [the subcontractor's] liens depends on notice to the construction loan lender"].)
In contrast, in other cases, including Industrial Asphalt, courts have endorsed a more liberal construction of the notice law as promoting the policy favoring the worker or material supplier. (See, e.g., Industrial Asphalt, supra, 180 Cal.App.3d at p. 1007; accord, Blair Excavators, Inc. v. Paschen Contractors, Inc. (1992) 9 Cal.App.4th 1815, 1819-1820 [citing Industrial Asphalt as an example of cases holding that, in the absence of prejudice to the property owner, general contractor or lender, technical defects in conforming a claim to statutory requirements can be tolerated]; Wand Corp. v. San Gabriel Valley Lumber Co. (1965) 236 Cal.App.2d 855, 861-862 [adopting a flexible view regarding the statutory requirements and holding that so long as no one is prejudiced and the notice does not mislead the owner or third parties, mistakes are not necessarily fatal to the lien].)
For example, in Industrial Asphalt, the asphalt paving subcontractor attempted to foreclose a mechanic's lien against the property owner. (Industrial Asphalt, supra, 180 Cal.App.3d at p. 1003.) The subcontractor was in contractual privity with the general contractor on the project and therefore the general contractor was aware of potential lien claims brought by the subcontractor. (Id. at p. 1004.) On the other hand, the property owner did not have a contract with the subcontractor and was thus unaware of any potential lien claims of the subcontractor. (Id. at pp. 1007-1008.) The subcontractor provided the property owner with the statutorily required preliminary notice, but did not provide the general contractor, who had gone bankrupt, with notice of the lien. The owner sought to invalidate the lien because the subcontractor had failed to serve notice on the general contractor. (Id. at p. 1005.) The court upheld the lien because the bankrupt general contractor (who had not received notice) was unaffected by the lien, while the party affected by the lien (the owner) had been given notice. (Id. at p. 1007.) The court noted the statutory scheme protects owners and lenders from possible claims against property that arise from otherwise unknown contracts. (Id. at p. 1006.) The court held that the notice requirement should not be strictly applied to a party who has no property interests at stake and who is entirely unaffected by the lien. (Ibid.) The court concluded that "the party who needed notice in fact received it, while the one who did not need notice (because he knew plaintiff's identity and owned no real property against which plaintiff could file a lien) received none. [Citation.] The original contractor also accepted delivery of plaintiff's materials. For all these reasons statutory notice to the original contractor would have been a useless, even futile act which the law does not require." (Id. at p. 1008.) The court explained: "[S]trict notice requirements apply only to parties a lien will affect. In the case at bench, by contrast, defective notice concerned a party not affected by the lien, about whom the statute does not specifically manifest a legislative intent [to strictly construe the notice requirements.] [¶] To hold otherwise would come close to defeating the lien because of 'meaningless technicalities' [citation] where a property owner properly noticed is not prejudiced by lack of notice to some other party." (Id. at pp. 1009-1010.)
B. Analysis
Here, the undisputed evidence in the record shows that Skylark was the construction lender on the Property.
Substantial evidence supports the determination that Heidi had constructive knowledge that Skylark was the construction lender. Consistent with the plain language of section 8200 subdivisions (a) and (e), Heidi was required to provide the 20-day preliminary notice to Skylark.
In the trial court Heidi claimed it was unaware of Skylark's status as the lender when it commenced work. However, Heidi does not reassert, and has abandoned, that claim on appeal. In any event, the evidence in the record shows that Skylark recorded a deed of trust on the Property before Heidi began work. The trial court concluded, and we agree, the recorded deed of trust gave Heidi constructive notice of Skylark's status as the construction lender. (See Romak, supra, 104 Cal.App.3d at pp. 773, 778.) For example, in Romak, the plaintiff failed to give 20-day preliminary notice to the defendant construction lender, and the court held compliance with the notice requirement was not excused by lack of actual knowledge of the identity of the lender. (Id. at p. 775.) The court determined the claimant bore a onetime obligation to inspect two public records-the building permit and the construction trust deed-to determine, if possible, the identity of the construction lender, and if the claimant fails to do so, the claimant is charged with constructive notice of the information contained in those records. (Ibid.)
Even if we were to follow Industrial Asphalt and the other cases that adopt a liberal approach to the preliminary notice statutes, we agree with the trial court that Heidi was not excused from providing Skylark with the preliminary notice. As we explain, Skylark was an affected party and therefore even under Industrial Asphalt and its progeny, Skylark was entitled to receive the preliminary notice. (See Harold L. James, supra, 158 Cal.App.3d at p. 6 ["where the Legislature has provided a detailed and specific mandate as to the manner or form of serving notice upon an affected party that its property interests are at stake, any deviation from the statutory mandate will be viewed with extreme disfavor"].)
It is true that Skylark's deed of trust is senior to Heidi's mechanic's lien. It is also true that because Heidi's mechanic's lien would not extinguish Skylark's deed of trust, and because Skylark was not made a party to the case, Skylark would not be bound by any judgment against Tree Lane for foreclosure of the mechanic's lien. Thus, as the trial court observed, the lien did not directly affect Skylark's deed of trust. However, Heidi has cited no authority, nor has our research revealed any authority, that suggests that "affect" is limited to the consequences that may befall a senior lien holder during a foreclosure of a mechanic's lien.
The lack of a foreclosure or the fact that Skylark is senior among lien holders does not mean Skylark is unaffected by the lien. When a lender provides financing for the development of real property, the lender takes a calculated risk that the property, which is the lender's security, will maintain or increase in value over the course of the project and the term of the loan. Notice of a mechanic's lien may inform a lender regarding the status of work that is progressing at the property and potential disputes regarding payment of services. That information could trigger a lender to seek additional information regarding construction and/or may cause a lender to stop making periodic payments to the developer (or condition those payments). If a contractor, such as Heidi, fails to provide a senior lienholder, such as Skylark, with notice regarding a mechanic's lien, it may thwart that lienholder's ability to protect its security, regardless of whether a foreclosure is imminent.
If the holder of a mechanic's lien forecloses on that lien, there may be additional impacts on the senior lien holder. Had Heidi foreclosed on its lien, Skylark had the potential to experience financial loss (which may be more significant when a development project is incomplete), inconvenience and the hardship of attempting to recover its investment in the form of either cash or collateral. This idea that a lender or reputed lender would be affected by a mechanic's lien is manifest in section 8200 subdivision (e)(2), requiring preliminary notice to construction lenders or reputed lenders even where the claimant is not required to provide such a notice to the property owner. (§ 8200, subd. (e)(2) ["A claimant with a direct contractual relationship with an owner or reputed owner is required to give preliminary notice only to the construction lender or reputed construction lender, if any.")
Secured creditors generally have three remedies from which to choose upon the debtor's default: repossess and resell the collateral; seek to obtain a deficiency judgment against the collateral; or seek judgment against the debtor without regard to the collateral. (Secured Transactions in California Commercial Law (1986) CEB, § 5:10, p. 259.)
Had Heidi given Skylark preliminary notice, Skylark would have been clearly alerted to the contract between Heidi and Tree Lane before Skylark released any additional advances to Tree Lane. And if it had been given the preliminary notice in February 2019, Skylark would have had the opportunity to investigate the progress of payments and may have taken steps to ensure Heidi was paid and would not resort to enforcing a lien against the Property (affecting Tree Lane as well). As a result, we conclude the substantial evidence in the record supported the trial court's decision that, notwithstanding the priority of Skylark's interest in the Property, it was affected by the lien and was prejudiced by lack of notice.
Heidi complains that the trial court's determinations were based on "speculation." However, the court's order is based on the evidence in the declarations Tree Lane submitted in support of its motion. Although Heidi objected to Tree Lane's evidence, the court overruled those objections, and Heidi has not asked this court to review the merits of the trial court's ruling on the admissibility of that evidence.
For these reasons, Heidi's failure to provide the statutorily mandated preliminary notice rendered Heidi's mechanic's lien invalid and precluded it from proceeding with the foreclosure claim on the lien. Although we recognize the longstanding statutory protection of material suppliers and laborers, we are compelled to enforce the requirement to provide notice to affected parties. Accordingly, the trial court did not err in granting the motion to release the mechanic's lien.
DISPOSITION
The order is affirmed. Tree Lane is entitled to its costs on appeal. [*]
We concur PERLUSS, P. J., SEGAL, J.
[*] Judge of the Alameda County Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.