Failing to Release A Mechanics Lien Can Destroy Your Construction Business


William L. Porter Founder & President Specializing in Construction Law, Business Law and Labor Law
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Is the title to this article possibly true? Yes, absolutely! I have seen it happen. Let me tell you how it happens so you can avoid such a result.

When contractors, subcontractors or suppliers in California construction projects are not paid they often record a mechanics lien on the property on which they worked. This is a customary accepted legal process for the claimant to secure its right to payment. The mechanics lien enables the claimant to eventually sell the property and obtain payment from the proceeds to the extent they remain unpaid. California Civil Code Section 8460 generally requires that a lawsuit to foreclose on a mechanics’ lien must be filed in court within ninety (90) days after the mechanics’ lien is recorded. If no lawsuit has been filed in court within this 90-day period, then the lien generally becomes unenforceable. Because the mechanics lien remains a cloud on the title to the property if not released, the lien claimant usually releases the mechanics lien if they have failed to meet the lawsuit deadline. Lien claimants will also release a lien and/or dismiss the foreclosure lawsuit in exchange for payment. It is rare that the property is actually sold to obtain payment. This is a brief description of the pathway to payment through the use of a mechanics lien.

Sometimes however, even though a mechanics lien becomes unenforceable due to missing the lawsuit filing deadline, the claimant refuses to release the mechanics lien. This results in the mechanics lien remaining as a cloud on title to the property. As a consequence, it becomes difficult to sell the property or use it as security for credit or a loan. The ill-willed claimant instead prefers to leave the mechanics lien in place to serve as a thorn in the side of the property owner or prime contractor who has failed to pay them. Some hope that the owner will still pay them for releasing the mechanics lien even though it is no longer valid. The claimant who takes this path has effectively started down the path to their own demise as a California contractor. Here is what can happen next:

The claimant will receive a letter from the owner, contractor or their legal counsel asking that the claimant release the expired mechanics lien. The claimant often responds to say: “Pay me and I will release it.” When this happens, the Owner will file a petition before the court to release the lien under California Civil Code section 8482. The court will release the lien and impose a monetary judgment against the mechanics lien claimant for all the attorney fees and costs incurred in petitioning the court to release the lien. When faced with the court judgment, some claimants further their error by responding with silence or the equivalent of: “Ok, just try to get the money from me.”

The next step in the process is that the property owner will send the judgment to the California Contractors State License Board (“CSLB”). The CSLB, following the requirements of California Business and Professions Code 7071.17 will give the claimant 90 days to either pay the judgment, file bankruptcy or appeal the judgment. If they do not do so, then the claimant’s contractor’s license, required for a contractor to do business in California, is suspended by the CSLB. But there is more:

If the contractor whose license is suspended actually performs any work at all on any project while the contractor’s license is suspended, then the contractor is subject to “disgorgement” under Business and Professions Code section 7031. Section 7031 provides that any contractor or subcontractor who performs work on a construction project in California without a valid contractor’s license in place during the entire time they work on the project may be compelled by Court Order to refund every penny the contractor received for working on the entire project. For contractors working on multiple projects, this results in financial ruin as they are compelled to return every dollar they were paid on each of those projects from the beginning of the project until the end. Bankruptcy is the inevitable result. The contractor is thus completely destroyed. All this as the result of spitefully refusing to release a valueless mechanics lien that could not be enforced in the first place due to its expiration.

This is the very unfortunate but true story of a number of contractors and subcontractors in California, motivated by ill will, who refused to release an expired mechanics lien. In the end, ill will and spite was their undoing. They destroyed themselves. Sic semper tyrannis.

Article by William L. Porter, Esq. in 2023. Mr. Porter is a principal in The Porter Law Group, Inc. in Sacramento, California. He can be reached by phone at (916) 381-7868. Visit the firm’s website at www.porterlaw.com. Learn more at http://www.AppliedLegal.com/.

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