The Devil is in the Details – Preliminary Notice Filing

March 30th, 2016

When it comes to construction payment remedies, it’s very important to pay attention to the required details of the process, as they can make all the difference in whether you get paid.

One of these, preliminary notices, are a precondition of recording a mechanics lien, serving a stop payment notice, and, often, making a payment bond claim. If you don’t serve a preliminary notice or don’t do it right, you may be precluded from asserting critical construction payment remedies available to California contractors and material suppliers.

Here’s a memorable example of a situation that had to be resolved in court: Material supplier Hub Construction Specialties, Inc. (Hub), supplied rebar and other materials to a general contractor on a construction project owned by Esperanza Charities, Inc. (Esperanza). The general contractor ultimately became insolvent and, as a result, failed to pay for the materials.

Fortunately, Hub had served a preliminary notice, and when Esperanza recorded a notice of completion, Hub recorded a mechanics lien for the amount it was owed – $81,857.55. However, while Hub had served its preliminary notice by certified mail as required by Code, it failed to pay the nominal $2.35 fee for a return receipt.

At the time, Civil Code section 3097.1 required, as proof of service of a preliminary notice, an affidavit accompanied by either: (1) a return receipt or a photocopy of the record of delivery; or (2) a receipt maintained by the post office showing the date of delivery and to whom the preliminary notice was delivered.

Hub could show neither, and Esperanza argued to the trial court that Hub’s mechanics lien was invalid due to its failure to strictly follow the requirements of Section 3097. The trial court agreed, and dismissed the case. Hub argued on appeal that Esperanza admitted to having received the preliminary notice by certified mail, so although past California cases have held that statutes governing the manner or form of serving notice are strictly construed, its failure to pay for a return receipt should not bar its mechanics lien claim. The California Court of Appeals agreed with Hub, noting that past cases had not specifically addressed whether strict compliance is necessary with regard to return receipts, so it would not do so here.

The material supplier won, but it was at the cost of thousands of dollars in attorney’s fees and other expenses incurred during more than three years of litigation. And it’s not over. Hub will need to pursue the judicial sale of the property at further expense and time, all for a $2.35 mistake. The lesson is this: Make sure you attend to the details, or you could have a Devil of time getting paid.  

Philip E. Vega, President

Contractors & Developers Bonding