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Could 'actual knowledge' replace the preliminary notice
prerequisite for enforceable mechanic's lien?
By Douglas H. Barker
Tuesday, July 8, 2003
True or false: Any failure of a subcontractor or materials/equipment supplier to serve the project property owner with a preliminary notice (Civil Code Section 3097) results in the conclusive loss of mechanic's lien rights. Savvy construction claimants know that statement is false if the claimant (1) is under contract directly with the owner, or (2) is performing actual labor for wages. These are the only exceptions specifically prescribed by statute; but another exception, that of "actual knowledge," appears to have been created by judicial interpretation and expansion of the mechanic's lien statutes.
In a series of cases that include Halspar Inc. v. La Barthe (1965) 238 Cal. App. 2nd 897; Scott, Blake & Wynne v. Summit Ridge Estates Inc. (1967) 251 Cal. App. 2nd 347; Truestone Inc. v. Simi West Industrial Park II(1984) 163 Cal. App. 3rd 715; and Kim v. JF Enterprises (1996) 42 Cal. App. 4th 849, California appellate courts have periodically confirmed that, if an owner has "actual knowledge" that work is being done by a particular subcontractor or supplier on his property, that owner may be stopped from raising as a defense that he was never served with a preliminary notice. By way of simplified overview, the courts have reasoned as follows:
- The courts begin by acknowledging Civil Code Section 3129, which provides that "Every work of improvement ... and all work or labor performed or materials furnished ... with the knowledge of the owner ... shall be held to have been constructed, performed, or furnished at the instance of such owner ... and ... shall be subject to any lien recorded under this chapter unless such owner ... shall give a notice of nonresponsibility pursuant to Section 3094." In other words, if the owner has knowledge of the labor being performed or the materials being furnished, such actual knowledge equates to the owner having requested that labor and materials (absent a notice of nonresponsibility).
- When an owner knows that labor is being performed and materials supplied to his project, that owner effectively possesses the information that would be otherwise provided in a preliminary notice. Therefore, service of a preliminary notice would be 2 superfluous.
- To effectively replace information an owner would gain from a preliminary notice, the "knowledge" that the owner must have needs to be actual, as opposed to constructive (or imputed).
- Because "actual knowledge" of labor/materials/equipment being supplied is deemed under Civil Code Section 3129 as improvements being supplied at the instance (request) of the owner, the "direct contract" exception to the preliminary notice requirement is satisfied.
Thus we know from the judicial interpretation of the mechanic's lien statutes that a preliminary notice may not be necessary to support a mechanic's lien if the owner had actual knowledge of the claimant's contributions to the project. However, open questions remain as to at least the following issues:
- How much information must an owner possess before he is deemed to possess "actual knowledge"? For instance, would a simple telephone call (or fax or e-mail) from the claimant to the owner constitute "actual knowledge"? How about the owner visiting the project and seeing a sign or banner displaying the name of the claimant?
What if, at a social gathering, a third party casually mentions to the owner that she noticed the claimant's company working on the owner's project; would that rise to the dignity of "actual knowledge"?
The appellate cases cited above involve circumstances of clear and unambiguous notice to the owner of the claimant's contributions to the owner's project. Therefore, none of those cases undertake to discuss any threshold of basic information that will be required to constitute an "actual knowledge" exception to the preliminary notice requirement. Logically, if "actual knowledge" is deemed to replace the components otherwise contained in a preliminary notice, one might fairly surmise that the degree of "actual knowledge" possessed by the owner must effectively equate to the components of a preliminary lien set forth in CCP Section 3097 (c). Whether this standard is the one that will be applied by the courts is yet to be seen.
- For "actual knowledge" to replace the preliminary lien requirement, when must that "actual knowledge" be received by the owner? We know from CCP Section 3097 that a preliminary notice must be served within 20 days of the claimant beginning work or, if served later, only relates to the value of the claimant's improvement to the project measured 20 days before that notice is eventually served. The courts in the appellate cases above all involve "actual knowledge" possessed by the owners at or before the beginning of the claimant's work or supply of materials; so the timing of the receipt "actual knowledge" was not an issue. But what if "actual knowledge" is not acquired by the owner until the claimant is halfway through -- or all the way complete -- with his work? Might the claimant be permitted to recover for value of all benefit bestowed on the property?
Logically, once again, if "actual knowledge" is deemed to fulfill the purposes of the preliminary notice, then the timing on that "actual knowledge" ought to be held to the same standard as a preliminary notice. It seems inconceivable that a claimant who fails to serve a preliminary notice ought to benefit from such failure by being able to
claim the value of work and materials for more then 20 days before the owner acquired "actual knowledge."
- What if the claimant serves a late preliminary notice? Might the claimant be able to prove that the owner had "actual knowledge" from the beginning of the claimant's work, and that such knowledge enables the claimant to recover for the value of all work and materials from the beginning of the job? Logically, such argument should succeed for the claimant, though we do not, as yet, have that word from the courts.
In light of the current state of the law, a claimant who has failed to give a preliminary notice most certainly ought to investigate the potential for the owner's "actual knowledge" before surrendering on his lien rights. As for the yet-answered questions above, answers have been predicted, but the courts and/or the legislature are going to have to provide the definitive guidance.
Douglas H. Barker, Esq., is the managing partner of Barker Law Group APLC. He can be contacted at doug.barker@sddt.com. The information in this column is intended to be informational only and does not constitute legal advice.
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