MECHANICS LIEN RELEASE
by: Sam K. Abdulaziz

A materialman supplies hundreds of thousands of dollars of materials for a public works project only to end up in a lengthy litigation. The argument was based on whether the mechanic?s lien releases barred recovery entirely.

The recent California Court of Appeal ruling in Tesco Controls, Inc v. Monterey Mechanical Co. focuses on mechanic?s lien releases/stop notice releases and prompt payment statutes. It determined that a waiver is good for materials and services provided up through the date listed, even if the provider has not been fully compensated through that date. The uncompensated amount is recoverable under contract law or other theories in either law or equity (the idea of maintaining fairness). Less importantly, the court also clarified that the prompt payment statutes are triggered when the contractor receives a progress payment from the owner. Also, a discussion of who is considered a subcontractor was necessary to invoke the prompt payment statutes.

In February 1998, the city entered into a contract with Monterey Mechanical Co. (Monterey) to expand the wastewater treatment control plant. Monterey entered into a subcontract with Stratton for electrical work. Stratton was to provide releases before receiving progress payments and Tesco would provide materials to Stratton. A joint check policy would be used which meant that both Stratton and Tesco would be listed as the payees on a check by Monterey. In turn Stratton agreed to pay Tesco in monthly progress payments.

In March 1999, Stratton?s check to Tesco, for nearly $195,000, bounced. Thereafter, Tesco signed two conditional releases. This means that the document only releases or waives the lien rights of the materialman through the stated date and is subject to the progress payment being endorsed and clearing the bank. A condition is something that must happened before something else becomes legally effective. In this case, the condition is payment. By July 1999, Tesco was owed about $412,000, therefore Tesco completed shipping and invoicing before filing a Stop Notice with the city. Soon after Tesco filed this case, Stratton filed for bankruptcy. Monterey paid Tesco about $217,000 of that amount which left the $195,000 it was owed from Tesco?s bounced check.

In its defense, Monterey claimed that the subcontractor waived its mechanic's lien/stop notice right up through the date on the release including the work for which the bounced check was intended to compensate. However, the Court stated that although that is true, by executing the release, the subcontractor doesn?t waive his right to be paid for services and materials under the contract terms or otherwise. Therefore, although a mechanic?s lien/stop notice right has been waived, Tesco could still recover under the law. This is a caveat to executing a release.

The moral of this case is if you are issuing a lien or stop notice release through a particular date, make sure all of your accounting information is accurate. If you do not and the owner writes a joint check, or makes a payment in accordance with your lien release, you may have waived your rights under a mechanic's lien or stop notice, if you forget to include items delivered but NOT yet billed. It is important to spell out what you expect the release to cover.

Abdulaziz & Grossbart has been practicing construction law for 30 years. The ?California Construction Law? book is published and updated annually. They represent numerous construction trade associations and contractors. Abdulaziz & Grossbart appears at Contractors State License Board meetings and has argued a number of cases before the appellate courts, including the California Supreme Court dealing with the "Pay-If-Paid Clause." Abdulaziz & Grossbart provides this information as a service to its friends & clients. The documents are of a general nature and are intended to highlight areas of the subject matter and should not be used as a substitute for specific legal advice. You should seek the aid and advice of a competent attorney and/or accountant instead of relying on the presentation and/or documents. Sam Abdulaziz can be reached at Abdulaziz & Grossbart, P.O. Box 15458, North Hollywood, CA 91615-5458; (818) 760-2000, Facsimile (818) 760-3908; or by E-Mail at info@aglaw.net . On the Internet, visit our Website at www.aglaw.net

Law Offices of
Abdulaziz & Grossbart
P.O. Box 15458
North Hollywood, CA 91615-5458
(818)760-2000 FAX (818)760-3908
Please visit our website at http://www.aglaw.net
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