Monday, June 4, 2012

FYI: Cal App Ct Rules Lenders Not Entitled to File "Lambert Motions" as to Mechanics Liens and Stop Notices

The California Court of Appeal, Third District, recently held that lenders were not entitled to file a so-called "Lambert motion" to release a mechanics lien and stop notice, ruling that the lenders were sufficiently protected by a trust deed and had no protectable interest in funds committed to a construction project for work already performed.
A copy of the opinion is available at: 
Plaintiff construction firm performed construction services for developers engaged in a commercial development project for which a number of banks (collectively, the "Defendant Banks") provided a loan secured by a deed of trust on the property.  Later, the property developers defaulted on the construction loan and allegedly ordered the Plaintiff to stop all work on the project.  Plaintiff immediately recorded a mechanics lien against the developers' real and personal property for over $2 million in construction services already provided.  The Plaintiff also served the Defendant Banks with a "stop notice" for the same amount. 
In Plaintiff's subsequent suit to enforce its mechanics lien and stop notice, the Defendant Banks filed a cross-complaint against the Plaintiff, seeking a declaration that their deed of trust was superior to the Plaintiff's mechanics lien.  The Defendant Banks also filed a so-called "Lambert motion" (an expedited procedure whereby a landowner may obtain relief from having its construction project suspended indefinitely by an unjustified lien) to set aside the mechanics lien and stop notice.  
In support of their motion, the Defendant Banks filed declarations explaining that the Plaintiff had already been reimbursed through insurance proceeds for most of what it claimed to be owed.  In opposition, the Plaintiff asserted in part that because it had assigned its rights under the mechanics lien and stop notice to the insurer, the full amount claimed was still subject to the stop notice.
The trial court granted the Defendant Banks' "Lambert motion" for release of the mechanics lien and stop notice, concluding that the Plaintiff had failed to present evidence as to the validity of its claims. 
The Defendant Banks then moved for attorneys' fees, and Plaintiff moved for a new trial.  Plaintiff argued that the trial court had overlooked evidence supporting its claim and further that the court improperly granted the "Lambert motion," as such a motion was intended to protect property owners, not lenders.
Explaining that it had not overlooked any evidence, the trial court denied the Plaintiff's motion for a new trial, but did not address whether a Lambert motion was a proper method for resolving the mechanics lien and stop notice claims.  The trial court also denied the Defendant Banks' motion for attorneys' fees.
The Plaintiff appealed the order granting the Defendant Banks' Lambert motion, and the Defendant Banks appealed the order denying their motion for attorneys' fees.  The Court of Appeal reversed the order granting the Lambert motion.
As you may recall, California law provides in part that a recorded mechanics lien constitutes a direct lien on the real property improved to the extent of the interests of the owner or the person who caused the improvement to be constructed.  See Cal. Civ. Code §§ 3128, 3129.  In addition, a "stop notice" establishes a lien on the unexpended balance of construction loan funds, but does not attach to the land itself, thereby surviving foreclosure of a trust deed.  See Cal. Civ. Code §§ 3156.  
The appellate court began its analysis by noting various remedies available to contractors stemming from California's constitutional mandate to enact lien statutes protecting contractors for work performed.  In so doing, the Court pointed out that, although the recording of a mechanics lien or a stop notice constitutes a Fourteenth Amendment taking of an owner's property, the procedures available to the owner afford sufficient due process protections against any unjustified mechanics liens.   See Connolly Development, Inc. v. Superior Court, 17 Cal. 3d 803, 809, 827-28 (1976). 
The Court observed, however, that where a lien claimant has already filed suit to foreclose its lien, a property owner may file a Lambert motion, an expedited procedure whereby a landowner may obtain relief from having its construction project suspended indefinitely by an unjustified lien.   See Lambert v. Superior Court, 228 Cal. App. 3d 383, 387 (1991). 
Turning to the circumstances presented in this case, the Appellate Court noted the California Supreme Court's emphasis that "[n]either the recording of a mechanics' lien nor the filing of a stop notice constitutes a taking of the lender's property.  The mechanics' liens attaches to the landowner's realty; the stop notice garnishes the landowner's credit; neither encumber property of the lender."  Connolly, supra, 17 Cal.3d at 814. 
Accordingly, the Appellate Court rejected the Defendant Banks' assertion that their interests were at stake because the property owner defaulted on the construction loan and the loan funds had thus reverted to them.  The Court ruled that, although "any remaining loan funds after payment for work completed before default" may revert to a lender, the Defendant Banks had no protectable interest in the funds in this case.  The Court explained that "since the banks had already committed the funds to the construction project, and their interests were protected by their security interest in the property, the same concerns do not apply to them."  
Consequently, the Appellate Court ruled that the trial court had deprived the Plaintiff of its due process right to trial in granting the Lambert motion where the Defendant Banks' property interests were not at stake.  The Court thus reversed the lower court's order granting the motion to set aside the lien and stop notice, and remanded with directions to deny the motion.
In light of its ruling, there was no need for the Court to address the Plaintiff's arguments for a new trial, the Defendant Banks' appeal of the denial of their motion for attorneys' fees, or any issues relating to the insurance payments.   

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
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