The California Court of Appeal issued a stern reminder last week: Contractors must be diligent to protect their arbitration rights when moving to foreclose a mechanic’s lien to avoid complete waiver of their (and other party’s) contractual right to arbitrate.
As most contractors are aware, the Civil Code requires a contractor to file a mechanic’s lien foreclosure action within 90 days of its recording date to enforce the lien. But in a rush to meet the 90-day deadline, it is all too easy to miss other important laws that can impact a contractor’s lien rights. In Von Becelaere Ventures, LLC v. Zenovic (Cal. Ct. App., June 6, 2018, No. D072620) 2018 WL 2714939, the court of appeal strictly interpreted Code of Civil Procedure §1281.5 in finding that the contractor waived its right to arbitration. Section 1281.5 provides that a contractor enforcing a lien waives its right to arbitrate unless it applies for a stay to the foreclosure action when filing its complaint or alleges its intention to do so in the complaint and then files the request within 30 days. In Zenovic, the contractor did not follow these procedures precisely and paid the price.
The facts in Zenovic are fairly typical. Von Becelaere Ventures, LLC (“VBV”) entered into a construction contract with Zenovic to construct a single-family residence in Laguna Beach, CA. In March 2017, Zenovic recorded a mechanic’s lien for money it claimed was owed under the contract. Within days, VBV responded by filing a construction defect complaint in San Diego County. Long before the deadline to foreclose, Zenovic filed its own action in Orange County for, among other things, breach of contract and foreclosure of mechanic’s lien. This action was not accompanied by a request to stay nor was a request for stay pled in the complaint. About a month later, Zenovic attempted to compel arbitration in the San Diego matter. The trial court denied Zenovic’s petition finding Zenovic waived the right to compel arbitration by failing to comply with §1281.5, subdivision (a), when filing its Orange County action.
On appeal, Zenovic argued that there was no waiver because the construction defect action is not an action to enforce a mechanic’s lien. Zenovic insisted that §1281.5 governs only actions to enforce mechanic’s liens, not other issues. The Court of Appeal disagreed noting that §1281.5, subd. (a) provides specifically for the waiver of “any right of arbitration the person may have.” The court of appeal supported its strict interpretation of §1281.5 advising that §1281.5 says what it means and “means what it says: A party who files an action to enforce a mechanic’s lien, but who does not at the same time request that the action be stayed pending arbitration, waives any right to arbitration.”
The court of appeal also affirmed the trial court’s ruling that Zenovic’s error cost its co-defendants their contractual right to arbitration, too. The court found that because the Zenovic action would proceed in court, there was the possibility of conflicting rulings on a common issue of law or fact. Therefore, all claims involving this project must be decided in court.
Mechanic’s liens are an incredible right for contractors, but the process to enforce them requires precision. This decision stands as a reminder of the importance of careful planning and strategy to ensure that your first step into court isn’t a misstep.
Peter J. Ryan is an associate attorney with Hunt Ortmann Palffy Nieves Darling & Mah, Inc. Before joining our team here at Hunt Ortmann, Mr. Ryan worked for a professional law corporation where he gained valuable experience in torts and general corporate issues. If you would like additional information about the subject matter of this bulletin, please contact Peter J. Ryan at email@example.com.