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California Court Expands and Clarifies Rule That Mechanic's Liens Cannot Be Placed Upon Public Property That Is Subject to Private Development

By: Stanley S. Taylor
10/12/06

In North Bay Construction v. City of Petaluma, Case No. A111591 (September 28, 2006)1 the Court of Appeal for California's First Appellate District affirmed the conclusion of a trial court in refusing to enforce a construction company's mechanic's lien against the City of Petaluma, even though the improvements had been contracted for by a private developer in connection with a private project on city-owned land. Petaluma owned property that it had leased to a developer for the purpose of constructing a sports complex to be operated and maintained by the developer. The construction company alleged that it had never been paid for performing grading work for the project, and attempted to enforce a mechanic's lien against the property. Faced with the general rule that public property cannot be liened by a contractor, the construction company asserted that the general rule was inapplicable on the grounds that the project was, in effect, a private enterprise. In rejecting the construction company's argument, the appellate court concluded not only that the City's property could not be subjected to a mechanic's lien, but also that under applicable law, Petaluma could not be held responsible for the value of material and labor provided to the project.

BACKGROUND

As anyone who has contracted for construction work on his or her property should be aware, California's mechanic's lien laws are commonly used by those who perform work on real property to ensure that they are paid. In fact, the mechanic's lien laws provide an inexpensive and efficient alternative to bringing a contract action against a property owner, provided the relevant statutory procedure, contained at California Civil Code §§ 3109 et. seq., is strictly followed. It is less well-known, however, that mechanic's lien laws are generally inapplicable to government-owned property, as the Petaluma case demonstrates.

Only Statutes Can Provide For Mechanic's Liens on Public Property

In its opinion, the court first noted that mechanic's liens in general are authorized by Article 14, Section III of the California Constitution. However, California Civil Code § 3109 provides that the mechanic's lien laws do not apply to any "public work," defined as a work of improvement "contracted for by a public entity." The construction company argued that Petaluma never contracted for the grading work in question, and thus a lien could be placed on the property. Notwithstanding this argument, the court relied for its ruling on prior law indicating that the principle of sovereign immunity—that is, the notion that the government may not be sued without its consent—requires that any right to impress a mechanic's lien on public property must be expressly provided for by statute, regardless of whether the lien arises out of a public works project. The court noted that no statute imposes liability on a public entity for debts incurred by a tenant for improving property owned by the public entity.

The "Governmental / Proprietary" Distinction Is Not Good Law

The construction company also asserted the common law distinction between municipality-owned property used for "governmental" purposes and property used for "proprietary" purposes. That is, the company claimed that because the property was being developed for private as opposed to public purposes (generally recognized to be the responsibility of government), the public agency allegedly waived its shield of sovereign immunity. The court rejected this argument, calling this distinction, formerly drawn by California courts, "elusive, if not illusory," and warning that "uncertainty and inevitable litigation" would result from its adoption. The court further noted that the California Tort Claims Act, contained in California Government Code §§ 810 et seq., eliminated the distinction between "proprietary" and "governmental" purposes of a public agency under California law.

Contractors Cannot Recover Against Cities In Quantum Meruit

Finally, the court rejected the construction company's argument that it should recover from the City the value of its services under a theory of "quasi-contract"—a remedy used by courts to allow a plaintiff to recover a benefit conferred upon a defendant where there is no enforceable contract between them. The court noted that such a theory cannot be asserted against a municipality in a public works context because contracts made with disregard of the prescribed procurement mode are unenforceable. In fact, public works contracts typically require a formal, competitive bidding process, which, according to the court, is founded upon "sound public policy intended to protect taxpayers from fraud, corruption, and carelessness on the part of public officials and the waste and dissipation of public funds." The court found that if a contractor cannot recover against a city that has contracted for the work in question without following the proper procedure, a fortiori, a contractor cannot recover under a contract to which the city was never a party.

COMMENT

In light of the growing importance of public private partnerships as a method to finance and deliver public and quasi-public infrastructure, this decision resolves and clarifies an important issue of law related to a subcontractor's remedy in the case of the failure of the prime to pay, and should be a caution to subcontractors and those representing them that although a project may look like a private enterprise, the courts may take a different view.


1 2006 Cal. App. LEXIS 1510.


Stanley
S. Taylor specializes in public agency, business transactions and regulatory law and is the head of the firm's Northern California Infrastructure practice. He can be reached at (415) 438-7224 or at staylor@nossaman.com.

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