The Lesser of Two Evils? Court Holds that Statutory Measure of Recovery Under a Mechanic’s Liens Is the Lesser of Reasonable Value of Services and Materials Furnished or Contract Price

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In Appel v. Superior Court (No. B244590, 3/11/13), California’s Second District Court of Appeal held that the proper measure of a mechanic’s lien claim is the lesser of the reasonable value of the services and materials provided, or the contract price, even where the person defending against the mechanic’s lien claim was not a party to the contract. This decision helps clarify how mechanics lien claims are to be evaluated and quantified, which should be of interest to underwriters, claims counsel, and litigators handling construction cases.

Factual and Procedural Background

Wilshire Landmark, a developer, and Webcor Construction, a contractor, entered into an agreement to construct a condominium project in Los Angeles for a total of $65.5 million. As construction went forward, Wilshire and Webcor agreed to change orders increasing the contract price to $81 million. Upon completion of the project, however, Webcor claimed an additional $13.5 million for further approved changes and recorded a mechanic’s lien against the property.  Webcor then filed a lawsuit to foreclose on its lien. As the condominiums had been sold by that time, the unit owners were included as defendants to the action.

Wilshire and Webcor entered into a settlement agreement shortly before trial, including a $32 million stipulated judgment and change order increasing the final contract price to $95.5 million. However, as Wilshire was a single-asset entity, it was basically judgment proof after having sold the condominiums. Thus, Webcor proceeded against the unit owners, claiming that the settlement should establish the contract price for purposes of its mechanic’s lien claim under former Civil Code section 3123(a). Section 3123(a) establishes that a mechanic’s lien claimant may recover “the reasonable value of the services or materials furnished or for the price agreed upon by the claimant and the person with whom he or she contracted, whichever is less.” Webcor also argued that the unit owners should not be permitted to raise contract-based defenses to its claims because the unit owners were not parties to the construction agreement. Essentially, Webcor argued that the measure of damages for its claim either had to be established by the final change order under its settlement with Wilshire or should be based on the “reasonable value” of its improvements to the property, without regard to the terms of the construction agreement.

Relying on language in ECC Construction v. Ganson (2000) 82 Cal.App.4th 572, the trial court agreed with Webcor on the second point, issuing a pretrial in limine order to the effect that the contract and final change order were not relevant to the mechanic’s lien claim, which would be measured solely under the “reasonable value” standard.

Because this ruling appeared to depart from the language of section 3123(a) while depriving the unit owners of the ability to raise pertinent contract-based defenses to Webcor’s claim, they filed a petition for a writ of mandate with the Second District Court of Appeal. The Second District responded by issuing an order staying the proceedings in the trial court and an order to show cause, requiring Webcor to submit a brief in response to the owners’ arguments.

The Court of Appeal Issues Its Ruling Granting the Petition

The court of appeal issued its published opinion in the case on March 11. It ruled against Webcor, holding that the trial court had misinterpreted section 3123. The court relied primarily on the plain language of section 3123(a), noting, “The statutory language includes no limitation that renders the [contractual] measure of value inapplicable when the claimant is attempting to enforce the lien against a property owner who was not a party to the contract for work.” The court also discussed the fact that the trial court’s interpretation would conflict with former Civil Code section 3140, which limits a contractor’s recovery to “only such amount as may be due him according to the terms of his contract.” The court also carefully examined the language from the ECC Construction case upon which the trial court had founded its ruling, finding it to be unnecessary to that case’s disposition and thus dicta that need not be followed. The court concluded its decision by cautioning that the terms of the Webcor-Wilshire settlement should not automatically be applied to the contract price for purposes of determining the amount of Webcor’s recovery. While the court declined to issue a ruling on this question, it echoed the skepticism of the trial court that the settlement between the judgment proof Wilshire and Webcor could be insulated from attacks of collusion or lack of good faith.

The Takeaway

So what does Appel have to offer the title practitioner? The case touches on a number of issues for those litigating in this field. It is a good example of the strategic use of an extraordinary writ to challenge a highly prejudicial ruling in the trial court. The decision itself also offers a certain degree of stability and predictability in the litigation of mechanics’ lien claims, which will hopefully simplify litigation and make cases more amenable to settlement. It also demonstrates that those who are not party to a construction contract can still rely on its terms in establishing defenses to a mechanic’s lien claim.

For those in the title business, the case reaffirms how crucial the construction contract is in underwriting mechanics’ lien risks and in handling mechanics’ lien claims. The rule announced by Appel will hopefully make the jobs of underwriters and claims personnel a little easier. As messy as mechanic’s lien cases can get, gaining additional clarity in this field is always a welcome development.

As a final note, practitioners should be aware that the mechanic’s lien law has been revised and reorganized since Webcor recorded its liens, so the relevant statute is now Civil Code section 8430 rather than 3123.

Topics:  Construction Contracts, Contract Price, Mechanics Lien, Privity of Contract, Underwriting

Published In: Business Torts Updates, General Business Updates, Construction Updates, Residential Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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