Contract Value May Limit The Amount Of A Lien Claim

Just before trial, Webcor and Wilshire entered into a settlement agreement wherein it was agreed that a $32 million judgment would be entered against Wilshire; the agreement also stipulated that the guaranteed maximum price of the work was increased from $81 million to $95.5 million. However, it was also agreed that because Wilshire was insolvent and not able to pay its debts (or the judgment), Webcor would still be able to pursue its mechanic's lien claim against the Owners.

Shortly before trial Webcor filed a Motion in Limine (which is a motion filed before trial to attempt to exclude exclude evidence to be offered in the trial) to prevent the Owners from introducing evidence regarding the final contract value because of the settlement between Webcor and Wilshire. The Civil Codesection in force when the work was argued to limit the amount of the lien claim to the lesser of the contract amount, or the value of the work performed. Webcor wanted to rely on the Settlement Agreement price as to the value of the work, as the value of the work was dispositive of the value of the mechanic's lien claims. Of course, the Owners opposed Webcor's Motion. The Owners argued that they should be able to determine the true value of the contract, which they believe is actually lower than the amount determined in the settlement agreement between Webcor and Wilshire.

The trial court relied upon language from the court of appeal decision in ECC Construction v. Ganson, and held that because the Owners were not parties to the contract, the contract value had no bearing and only the value of the work was relevant. Thus, the trial court ruled that the settlement agreement entered into by Webcor and Wilshire, which altered the contract valuation, was not relevant and only the reasonable value of services was to be used to determine the value of the lien claims.

The Owners filed a Petition for Writ of Mandate (another type of appeal basically asking the higher court to order the lower court to do something - in this case, allow them to introduce evidence related to the value of the construction contract). The Appellate Court agreed that the trial court erred in interpreting Civil Code section 3123(a), which can be summarized to provide:

"... liens provided for... shall be... for the reasonable value of the services, equipment, or materials furnished or for the price agreed upon by the claimant and the person with whom... contracted, whichever is less."

The trial court took this to mean that the amount is based solely on the reasonable value when one is trying to enforce a lien against a property owner who is not a party to the contract. The Appellate Court held this interpretation is inconsistent with the plain language of the statute which does not indicate that there is a limitation on the use of the contract price agreed upon by the claimant when the property owner is not a party to the contract. The plain language of Civil Code §3123(a) would mean that Webcor's mechanic's lien is (1) the lesser of the reasonable value of the work or (2) the value of the guaranteed maximum price contract. In essence, if the work was worth $90 Million but the contractor was entitled to $80 Million under its contract, the value of the lien is limited by the amount due under the contract and the Contractor is entitled to the unpaid balance on the $80 Million contract.

Therefore, the Appellate Court granted the Petition and matter was remanded (sent back) to the trial court to be reheard consistent with the decision of the Court.

Please note that since this case was heard that the Mechanic's Lien statutes have been reorganized, causing everything to be renumbered. The Mechanic's Lien statutes can now be found in Civil Code sections 8400-8494.

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Kenneth Grossbart is recognized as one of the foremost authorities in California construction law. Over the past 30 years, Ken has become a respected speaker on Mechanic's Liens and other construction related issues. Abdulaziz, Grossbart & Rudman provides this information as a service to its friends & clients and it does not establish an attorney-client relationship with the reader. This document is of a general nature and is not a substitute for legal advice. Since laws change frequently, contact an attorney before using this information. Ken Grossbart can be reached at Abdulaziz, Grossbart & Rudman: (818) 760-2000 or by E-Mail at ksg@agrlaw.com, or at www.agrlaw.com