When The Owner Anticipatorily Breaches The Contract, And Therefore A Lien Recorded One Day After The Breach Is Not Premature

Howard S. Wright Construction Co. v. BBIC Investors, LLC, California Court of Appeal, First Appellate District, 2006 DJDAR 1339

By Robert T. Sturgeon

Cases concerning the timeliness of recording a mechanic’s lien generally concern the latest time a party may record its lien. In Howard S. Wright Construction Co. v. BBIC Investors, LLC, 2006 DJDAR 1339, the California Court of Appeal considered the reverse issue, i.e., when is the earliest time an original contractor may timely record a mechanic’s lien under California Civil Code Section 3115? Section 3115 provides that an original contractor may record a claim of lien “after he completes his contract . . . .” In Howard S. Wright, the California Court of Appeal held that a contractor “completes its contract” within the meaning of section 3115 not only when it substantially performs its obligations under the contract, but also when the contract is terminated prematurely by the owner, or the contractor is discharged from any further obligations under the contract by the owner’s material or anticipatory breach.

In this case, Howard S. Wright Construction Co. (“Wright”) and 360networks (USA) inc. had entered into a contract by which Wright was to design and build a tenant space for 360networks in a building owned by defendant BBIC Investors. In May 2001, while the project was still ongoing, 360networks apparently had financial difficulties, and notified Wright that it had to put the project on hold. Id. at 1339. In response, Wright prepared a punchlist of close-out items needed to “mothball” the site while the project was on hold. 360networks gave Wright approval to perform the close-out work, and Wright began the close-out work in late May 2001. On June 18, 2001, shortly before the scheduled June 26 inspection of the close-out work, 360networks “told Wright that it had no intent or ability to pay any more money to Wright.” Id. at 1346. On June 19, Wright’s workers and subcontractors left the project. The next day, June 20, Wright recorded a claim of mechanic’s lien. Subsequently, at BBIC’s request, Wright’s project superintendent and project manager moved some ductwork that was being stored on the second floor of the project to the first floor. This work was done between June 21 and June 26.

Wright then filed an action against BBIC to foreclose the mechanic’s lien. BBIC defended the case in part by asserting that Wright could not recover on the lien because it was recorded prematurely. BBIC contended that under Civil Code Section 3115, a mechanic’s lien may be recorded only after the contractor “completes his contract,” and that under Civil Code section 3086, “completion” occurs 60 days after cessation of work on the project. As Wright had recorded its lien on June 20, only one day after Wright claimed work had stopped, BBIC asserted the lien was premature. BBIC also asserted that the lien was premature because Wright had continued work on the project after June 20, as it had moved the ductwork between June 21 and June 26. The trial court entered judgment in favor of BBIC, and Wright appealed.

The Court of Appeal reversed the trial court’s ruling and held Wright’s lien was not premature. The Court of Appeal first noted that the provisions of Section 3086 regarding “completion” of a work of improvement were not applicable, as Section 3115 refers to completion of a “work of improvement” only in the context of the latest date a party may record a lien, while for the earliest date for recording, it refers to completion of the “contract.” The Court of Appeal further stated that, in general, a contractor is deemed to have completed its contract “upon substantial performance of its obligations.” Id. at 1342. The Court of Appeal held, however, that it would not make sense to require the contractor to substantially perform all work called for under the original contract before it could validly record a mechanic’s lien in cases where the owner terminated the contract prematurely, or where “by some event before full performance, [the contractor] no longer has any obligations under the contract.” Id. at 1342. The court reasoned that “[i]f a contract could never be deemed complete under section 3115 unless all of the work was performed, a contract cut short by mutual termination or the owner’s material breach would never be ‘complete[]’, the contractor could never timely record its claim of lien, and its lien could never be enforced.” Id. The Court of Appeal therefore held that “a contract is complete for purposes of commencing the recordation period under section 3115 when all work under the contract has been performed, excused, or otherwise discharged.” Id. at 1343.

Applying this rule to the facts of before it, the Court of Appeal ruled that 360networks had anticipatorily breached the contract with Wright on June 19, when it notified Wright that it would not pay it any more money. Because 360networks had anticipatorily breached the contract by June 19, the court held that Wright was discharged from any further obligations and had “completed its contract” within the meaning of Section 3115 as of that date. The Court of Appeal also rejected BBIC’s alternative contention that the lien was premature because Wright had moved the ductwork at some point between June 21 and June 26. The court stated that “[i]n determining whether the contract was completed before June 20, we must look for substantial completion, without regard to trivial items left undone.” Id. at 1346. The court held that the moving of the ductwork was trivial and did not affect the time when Wright “completed its contract,” noting that the work itself was not extensive, that moving the ductwork was not an item work called for under the agreed-upon punchlist, that the work was done at the request of BBIC (not 360networks), and that it was performed at no charge to BBIC.

The court concluded that because Wright was discharged from its obligations under the contract by June 19, and did not perform any non-trivial work after that time, the time period for recording of mechanics’ liens was triggered on June 19, and Wright’s June 20 claim of lien was therefore not recorded prematurely. The Court of Appeal remanded the case to the trial court for trial on the merits of the lien claim.

For more information please contact Robert Sturgeon. Robert Sturgeon is a senior attorney in the Construction, Environmental, Real Estate and Land Use Litigation practice group in the firm’s Los Angeles office.