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Other Landmark Court Decisions:
The statutory language was created in 1983 as a result of a holding in a 1982 California appellate court case, Bentz Plumbing & Heating v. Favaloro, which invalidated all lien releases. The scope of the statutory releases came under review by the appellate court in a case entitled Halbert’s Lumber v. Lucky Stores. The Halbert court concluded that the scope of a conditional lien release was determined by the date listed on the release, not by the amount actually paid. As a result of the Halbert court’s decision, the Legislature modified the lien release language. The modified lien release language is the subject of the holding in the recent appellate court decision. In fact, the opinion in the Tesco case includes an in depth review of the history of the holdings in the Bentz and Halbert cases and the legislative changes to statutory lien releases. With that background, this article will now discuss the holding in the most recent appellate court case, Tesco, that concerns statutory lien releases.
The Tesco Decision The joint check agreement provided that any Tesco invoice sent to Stratton would be copied to Monterey who would pay Tesco by negotiable check "in the amount of such invoice " made payable to both Tesco and Stratton. Stratton was to endorse the check and make it payable to Tesco "as payment in full of the related invoice." Payments were be made when normal progress payments were due. The parties all agreed that Tesco had fully performed its obligations under the purchase order and that Tesco remained underpaid by $194,762. However, Monterey asserted that when Tesco signed a March 15th statutory release it released its claims as to that money. Tesco began shipping equipment to the project site in November 1998 and sent its first invoice, in the amount of $14,980, on November 10, 1998. Despite the terms of the joint check agreement, Stratton paid that invoice in full with its own check. Prior to receiving the first payment Tesco had invoiced additional shipments. As of January 31, 1999, $244,762.13, billed on invoices from December 1998 through January 1999, remained unpaid. Tesco continued shipping equipment in February 1999, but received no payments that month. By March 11, 1999, Tesco had sent invoices in the amount of $468,946.13. The next day Tesco received a Stratton check in the amount of $194,762.13. However, Stratton asked Tesco not to deposit the check for 30 days. When the check was finally deposited the bank would not honor it. On March 15, 1999, Tesco gave Monterey a lien waiver and release conditioned upon receiving a progress payment of $50,000 (the balance of that date less the Stratton check Tesco was holding.) The release "cover [ed] a progress payment for labor, services, equipment or material furnished to Stratton Electric through 01/31/99 only.” The release included the statutory release and waiver language.
During April and May, Monterey learned that Stratton's $194,762.13 check
to Tesco did not clear the bank and that Stratton had not paid Tesco that
amount. Monterey then agreed to pay Tesco $370,553.52 in exchange for
Tesco issuing a second conditional lien waiver and release form. The form
was dated May 11, 1999 and provided that Tesco agreed to release its
mechanic's lien rights upon payment from Monterey of $370,553.52. The
release covered equipment and services rendered through March 31, 1999,
and contained the statutory language release language. After receiving the checks, Tesco continued providing product and services. By July 1, 1999, Tesco completed shipping and invoicing its work and was owed $412,024.98. Tesco continued processing and completing change orders through June 2000. Tesco ultimately filed a Stop Notice and then filed a lawsuit to foreclose on the stop notice. Stratton filed for Chapter 11 bankruptcy protection. In June 2001, Monterey issued a check directly to Tesco in the amount of $217,262.98. Upon receipt of that payment Tesco was still owed $194,762, the amount of Stratton's bounced check.
Ultimately, Tesco argued that the March 15 lien release, in the amount of
$50,000, released Tesco's lien rights only to that amount. While Monterey
argued that when Tesco signed that statutory release, it waived all of its
rights to recover for services rendered through January 31, 1999, despite
having not been paid for them. The Tesco court concluded that Legislature “crafted a release that waived mechanic's lien rights, bond rights, and stop notice rights for services rendered and materials provided up to the date stated on the receipt, even if those services and materials were not compensated by the progress payment. However, waiver was limited only to those express lien rights. By executing the release, the subcontractor or materialman did not waive his rights to pursue compensation for unpaid services and materials under the terms of the contract or as otherwise provided by law or equity.” As to lien release statute’s language (section 3262(d)(1)) that can be construed to exclude from the release a subcontractor's right to recover compensation for services not compensated by the progress payment, the Tesco court found “that language refers to the subcontractor's right to pursue compensation by means of all available remedies other than the mechanic's lien laws.” It should be noted that the statute provides that a conditional lien release for a progress payment “does not cover any retentions retained before or after the release date; extras furnished before the release date for which payment has not been received; extras or items furnished after the release date.” The statutory release does affect “rights based upon work performed or items furnished under a written change order which has been fully executed by the parties prior to the release date ...unless specifically reserved by the claimant in this release.”
General Contractor Breached the Joint Check Agreement The Tesco court also held that Tesco did not breach the joint check agreement when it accepted and deposited a check it received a Stratton check. The Tesco court came to this conclusion since the joint check agreement also stated that it was for the express benefit of Tesco.
Conclusion While a conditional lien release for a progress payment does release a subcontractor or materialman mechanic's lien, stop notice or bond through the date specified in the release, whether or not he receives compensation for all of those services and materials, it does not release those rights for: (1) signed change orders that are expressly excluded; (2) extras furnished before the release date for which payment has not been paid; and (3) unpaid retention. In light of the Tesco decision, if you intend to assert contract rights based on breach of contact, recession or abandonment you should expressly state that in the release.
Clearly, the lien release is not effective if the amount that is to be
paid pursuant to the release is not paid. As the conditional release
states:” Before any recipient of this document relies on it, said party
should verify evidence of payment to the undersigned.” Thus, if you intend
to rely on a release you should verify that the amount set forth in the
release was in fact paid. If you issue a joint check you should verify
that both payees endorsed the check. If you have entered into a joint
check agreement you should also verify that entity for which the agreement
was intended to benefit actually received the payment. Mechanic's Liens: To Release or Not to Release! What exactly does a Release of Mechanic's Lien release? Does it release just the Mechanic's Lien on file with the County Recorder or the entire right to file a Mechanic's lien in relation to the project? This issue has plagued construction practitioners for years. Fortunately, a recent case has resulted in a practical answer which is workable for all concerned parties. In the recent case of Solit v Tokai Bank, (1-7-99) 81 Cal.Rptr.2d 243, the court held that a Release of Mechanic's Lien only extinguished the referenced Mechanic's Lien and not the entire right to lien the project. This case involved the construction of the Santa Monica Beach Hotel owned by the Steins and financed by Tokai Bank. A dispute arose between the Steins and the project construction manager, Mark Solit. The first Mechanic's Lien was recorded by Mr. Solit on March 7, 1990; however, no action to foreclose the Mechanic's Lien was brought within the 90 day statutory period and thus the lien became void and unenforceable. In August, 1990, the Steins' attorney demanded that Mr. Solit release his lien voluntarily or be subject to a petition under Civil Code section 3154 ordering the release of the lien. After the demand, Mr. Solit voluntarily executed a Release of Mechanic's Lien referencing the March 7, 1990 lien, but subsequently recorded a second Mechanic's Lien on October 22, 1990. An action was filed between the Steins, Tokai and Solit. In the action, Solit sought to enforce his lien of October 22, 1990 (although there was some confusion in the complaint which made it appear that Solit was attempting to foreclose on the March 7, 1990 lien). The trial Court ruled that as a matter of law "Solit's release of the March 7, 1990 lien extinguished all of Solit's lien rights against the property, thus making any subsequent liens, including the October 22, 1990 lien unenforceable." Based on this ruling, the Court dismissed Solit's complaint to foreclose the Mechanic's Lien, and Solit appealed this decision. The Appellate Court concluded that Solit's voluntary release of the stale lien affected only the recorded lien and not his right to record a subsequent lien. The right to record a lien, for the same work and materials released in the original lien, is still limited by the time constraints which control the recording of any lien. The Court balanced the rights of owners verses those of contractors in making its decision. The Court commented that in allowing a Release of Mechanic's Lien to only release the particular recorded lien, and not the constitutional rights of the contractor, provided a fair balance between claimants and owners. To hold otherwise the Court noted, would unfairly favor the owners in that they would receive a windfall if a contractor filed a lien early and was forced to release that lien or have it removed by the court upon the owner's petition. To explain why the Solit case was necessary and the confusion that previously existed in the construction industry, we have to look back at the case of Maris Management Corp. v. Assured Drywall & Textures, (1984) 152 Cal.App.3d 268. In that case, the court held that if a stale Mechanic's Lien was released by the court after a petition brought by the owner, then not only was the recorded lien released, but also the claimant's right to file a lien for that same work and materials was also released. Thus, the holding of the Maris court lead many practitioners to believe that if a contractor had its lien released through a petition of the owner and/or voluntarily recorded a release of lien, then it was releasing all right to a lien for that project. The Court in Solit addressed the Maris decision and concluded that it was wrongly decided. Upon reconsidering this important issue the Court held that a release of a particular lien is simply just that, a release of that lien. This decision is important for all contractors as it provides clear guidance regarding the use of Release of Mechanic's Lien forms. The Solit decision allows the early contractor some time to negotiate with the owner after the lien is filed, and if the statutory time period for filing of a new lien is still open, the original lien may be allowed to lapse or be released without waiving the right to lien the project. The Solit case provides a greater opportunity for negotiation and settlement rather than forcing early litigation on a project. Based on the Solit case, to release or not to release is an easier question to answer and is now based solely on the statutory time frames which have always governed the Mechanic's Lien rights. This article was provided by Theresa Crawford Tate of Crawford & Bangs, West Covina, California, an ASAC member. This article is intended to provide the reader with general information regarding current legal issues. It is not to be construed as specific legal advice or as a substitute for the need to seek competent legal advice on specific legal matters. Cash A Check - Waive A Claim What do you do with a check marked "payment-in-full"? This is a quandary faced by all businesses including those in the construction industry. Do you return the check to the debtor? Do you strike the "payment-in-full" notation and cash the check? Unfortunately, there is no easy answer. Currently, there are two inconsistent statutes on the books in California, which have created a great amount of uncertainty for creditors and debtors relating to "payment-in-full" notations. In short, cashing a check with a "payment-in-full" notation, even crossing out that notation before the check is deposited, may very well lead to a waiver of your claim for additional funds. The uncertainty arises out of a conflict between Civil Code section 1526 (enacted 1987) and Commercial Code section 3311 (enacted 1992). Civil Code Section 1526 provides that cashing a check with the "payment-in-full" notation (or similar words), does not result in an accord and satisfaction (an acceptance of that sum as payment for the entire disputed claim), "if the creditor protests against accepting the tender in full payment by striking out or otherwise deleting" the notation. This section was specifically enacted in 1987 to change the common law rule in California which provided that even if the check was cashed under protest (by crossing out the notation and/or sending a letter of protest), an accord and satisfaction did result and the creditor had waived any further claim to seek additional sums from the debtor. If section 1526 was the only statute in California dealing with this issue, the answer would be simple -- cross out the notation and cash the check. However, in 1992 the California legislative revised the entire Commercial Code relating to negotiable instruments (checks) and adopted section 3311 (exactly as that section was drafted by the National Conference of Commissioners on Uniform State Laws). Unfortunately, it appears that at the time section 3311 was adopted, none of the Legislators realized the conflict which would result between existing Civil Code section 1526 and the new Commercial Code section 3311. As adopted in 1992, Commercial Code section 3311 provides that when a claim is unliquidated or subject to dispute and the person against whom the claim is asserted tenders a check in good faith as payment in full with a written communication indicating (by a conspicuous statement) that it is intended as full satisfaction of the claim, then the claim is discharged when the check is negotiated. Section 3311 basically reinstated the common law rule that the check from the debtor is an offer, and the creditor has two choices: (1) to either reject the check and continue to pursue its claim; or (2) to accept the check and waive any claimed balance. No published California case has addressed the conflict between the two statutes. Recently, a Federal Court decision interpreting the California statutes upheld one statue over the other, but this decisions is not binding on the California Courts and there is no concrete answer on how the California Courts will decide this issue. The Federal Court in Directors Guild of America v. Harmon Pictures, Inc. (CD Cal. 1998) 32 F.Supp.2d 1184, reasoned that the two statutes were inconsistent and that they could not be interpreted so that both could be upheld. Therefore, relying on standard procedures used by the courts in interpreting statues, the Federal Court rejected the older statute (1562) and applied the more recent statute (3311) to the facts of the case. Based on this application, the Federal Court concluded that an accord and satisfaction had been obtained by the debtor when the creditor cashed the check with the "full and final settlement" notation, even though the creditor had crossed out this language on the check. A big loss for the creditor who was seeking thousands of dollars in additional damages. Based on the conflicting statutes and the recent Federal Court decision, all checks with "payment-in-full" language of any type should be scrutinized and only deposited after careful consideration. Cashing a check with any type of notation indicating that the check was issued as a final settlement or as a full payment, could very well mean a waiver of your claim to additional funds. This article was provided by Theresa Crawford Tate of Crawford & Bangs, West Covina, California, an ASAC member. This article is intended to provide the reader with general information regarding current legal issues. It is not to be construed as specific legal advice or as a substitute for the need to seek competent legal advice on specific legal matters. "Solely At Fault" Means No Liability For Subcontractor Indemnity clauses are a hot topic in negotiation any contract. Many general contractors propose contracts with Type I, broad form or express indemnity clauses. This type of clause generally provides that the subcontractor must indemnify unless the general contractor is solely at fault for the injury. Thus, if the subcontractor is only 1% at fault and the general contractor is 99% at fault, the subcontractor must still indemnify the general contractor for the entire injury. In a recent case, this type of indemnity clause did not provide the general contractor with the intended protection. In a very unusual move, an arbitrator found 100% liability by the general contractor and 0% liability by the subcontractor (this is rare!). In the case of National Union Fire Insurance Company of Pittsburg v. Nationwide Insurance Company, (January 28, 1999), an employee of a plumbing subcontractor slipped and fell during a punch list inspection of a high-rise project. This inspection was performed after the subcontractor's work had been completed on this particular floor and not in the normal course of its plumbing duties for the project. The arbitrator concluded the employee fell because the general contractor, Tutor-Saliba, let water pond on the floor after a rainstorm. After walking through this water, the plumbing employee slipped on the dry marble flooring upon entering the restroom area. The employee was injured from the fall. After a lawsuit by the employee, the general contractor tendered its defense to the plumbing subcontractor and its insurance company, Nationwide, but received no response. After the general contractor's insurance company, National Union, paid the underlying claim to the injured employee, it brought suit against the subcontractor and its insurance carrier. The two insurance carriers submitted their dispute to an arbitrator who concluded that the fault of the general contractor was obvious due to its inadequate remedial action to address the hazards caused by the ponded rain water. After the arbitration decision shifted complete liability to the general contractor, National Union filed an appeal. The Appellate Court refused to overturn the findings of the arbitrator, and concluded that there was sufficient evidence that the general contractor had caused the injury and that no liability should be attributed to the subcontractor or its employee. The general contractor attempted to argue that because the supervisor of the injured employee was aware of the ponded water some liability should automatically be attributed to the subcontractor as it had a co-equal duty to provide a safe workplace. The Appellate Court refused to draw such an inference. The Court in interpreting California's statutory scheme made the following observation:
further, the Court concluded that the general contractor's negligence did not arise out of its supervision of the subcontractor's work. Since the subcontractor's additional insured endorsement (Form G116) required a finding that the negligence had arisen out of the supervision of the subcontractor's work, the general contractor was not allowed to recover in any manner from the subcontractor's insurance carrier.
The battle over Type I or express indemnity provisions will no doubt continue. However, the Appellate Court has affirmed that in situations to those presented in this case, if the general contractor is found solely negligent, that neither the subcontractor nor its insurance carrier will be obligated to pay for the injury. As a cautionary note, a 100% liability finding against any party is not easy accomplishment nor an occurrence which happens frequently. So, read and negotiate your contracts as if your business depends on it (because it just may)! This article was provided by Theresa Crawford Tate of Crawford & Bangs, West Covina, California, an ASAC member. This article is intended to provide the reader with general information regarding current legal issues. It is not to be construed as specific legal advice or as a substitute for the need to seek competent legal advice on specific legal matters.
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