Two Paths for Security in California

Organization is key for credit departments whether there's a pandemic or not. Having a system in place can help with issues down the line especially when paperwork is now scattered at the office and at the home office—two locations for problems. Trying to find that one piece of paper with the name of the surety company at the last minute to keep bond claim rights is a headache that no credit department wants or needs.

Despite the impacts of the COVID-19 pandemic, credit departments in the construction industry still have guidelines, rules and regulations to follow. Being organized is only part of the solution; having the correct information, such as the project's location, is also part of the puzzle.

In a recent webinar on California's mechanic's lien, bond claim and stop notice provisions, presenter Chris Ring of NACM's Secured Transaction Services said potential claimants can take two bites of the apple on privately owned pieces of property. The two ways claimants can secure an interest are in the property with a mechanic's lien, and "the second bite of the apple" is the private stop notice also known as public improvement liens in other states. While the lien on the property makes the owner accountable, the stop notice, which halts funds between the owner and general contractor, makes the general contractor accountable.

So, with two avenues to security, which one makes the most sense to follow? Unfortunately, Ring said, at the start of a project, it might not be known what carries more weight to push money down stream. He recommended following both paths. Both require sending the preliminary notice within 20 days of first furnishing; however, there are some speed bumps, such as unlicensed contractors being barred from enforcing mechanic's lien. Those supplying material to an unlicensed party still have lien rights.

Other speed bumps to consider in California are, if the value stated on the original preliminary notice is exceeded by 10% or more, a new notice must be served. Construction lenders, if any, must also receive a copy of the preliminary notice, and the lack of knowledge of the construction lender does not relieve this responsibility. More than one lien can be filed—a second lien can be filed if the first lien was voluntarily released, and the second lien met the statutory deadline. A cessation of labor for a continuous 60 days can trigger the need to file a mechanic's lien.

Another important item to remember is things move quickly in California. Lien claimants have 90 days once a lien is served to file suit, and a failure to file a lawsuit to enforce lien rights can cause the lien to be invalid. This can get complicated, and it might depend on how much a company is owed. Is it worth filing a lawsuit for $5,000 in unpaid bills, asked Ring. Maybe, maybe not.

On the public side, claimants will be serving a notice to claim against the payment bond—also 20 days from first furnishing—rather than the piece of property. This holds the bonding company and general contractor accountable. Public stop payment notices work similar to the private side.

If a preliminary notice is not sent within the 20-day time period, all is not lost. A claim can still be sent, but the bond claim will only be against unpaid balances between the owner and general contractor. Again, the question is, which path should be taken—bond claim or stop payment?

"The stop payment notice attaches to undispersed construction funds, directly impacting the funding for a general contractor on public or private jobs," said a California attorney. Most companies don't know about or feel comfortable using the stop payment notice—losing out on a path to payment.

—Michael Miller, managing editor