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"No Liening on Public Property, Court Rules"

Daily Journal
By: Stanley S. Taylor
12/01/06

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 to ensure that those who perform work on real property are paid. The laws provide an inexpensive and efficient alternative to bringing a contract action against a property owner, provided the relevant statutory procedure, contained at Civil Code Sections 3109 et. seq, is strictly followed. But as confirmed by North Bay Construction v. City of Petaluma, 143 Cal.App.4th 552 (2006), mechanic's lien laws are generally inapplicable to government-owned property.

In Petaluma, the 1st District Court of Appeal refused 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. The city leased property it owned to a developer for the purpose of constructing a sports complex to be operated by the developer. The contractor attempted to enforce a mechanic's lien against the property, claiming it was not paid for grading work. The company tried to circumvent the rule that public property cannot be liened by a contractor by asserting that the project was, in effect, a private enterprise. The court did not agree and held not only that the city's property was not subject to a mechanic's lien but also that Petaluma could not be held responsible for the value of material and labor provided to the project.

California Civil Code Section 3109 provides that the mechanic's lien law does not apply to any "public work," defined as a work of improvement "contracted for by a public entity." The construction company argued that the city never contracted for the grading work and thus a lien could be placed on the property. The court noted that "there is no dispute that the express exemption for public work provided by section 3109 does not apply" but stated that impressing a mechanic's lien on public property does not necessarily follow. The court cited prior law indicating that the principle of sovereign immunity, which bars suits against the government without its consent, requires that any right to place a mechanic's lien on public property must be provided for expressly 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 construction company also asserted the common-law distinction between property owned by a municipality used for governmental purposes and property used for proprietary purposes, in which case the public agency allegedly waived its shield of sovereign immunity. The government responded that the sports complex had a general public purpose because it was "more similar ... to a public park or playground than a professional sports arena."

The court rejected the construction company's argument outright, stating that this common-law distinction between uses of property for governmental or proprietary purposes, formerly drawn by California courts, was "elusive, if not illusory" and that "uncertainty and inevitable litigation" would result from the adoption of such a distinction. The court further noted that the California Tort Claims Act, Government Code Sections 810 et seq., eliminated the distinction between proprietary and governmental purposes of a public agency under California law.

Government Code Section 815.2(a) provides, "A public entity is liable for injury proximately caused by an act or omission of an employee of the public entity within the scope of his employment if the act or omission would, apart from this section, have given rise to a cause of action against that employee or his personal representative." No mention is made of the distinction referenced above. The court stated that case law has confirmed this result. In Maxon Industries Inc. v. State Compensation Fund, 16 Cal.App.4th 1387 (1993), the court found that "the significance of a distinction between proprietary and governmental activities with respect to tort liability was essentially abrogated [by case law] and by subsequent enactment of the California Tort Claims Act."

Instead of a mechanic's lien, the court found that a writ of mandate was required under Government Code Section 970.2 to compel a local public entity to pay judgment creditors. The court found that the city can comply with this duty in the following ways, depending on its financial condition:
(1) Paying the judgment in the fiscal year in which it becomes final.
(2) Paying the judgment in the next fiscal year.
(3) Paying the judgment in not more than 10 annual installments.
(4) Paying the judgment with the proceeds of a bond issue.

The court noted that the policy behind this procedure is to "protect against the possibility of seizure and sale of public property to satisfy a judgment" and to avoid litigation to determine the status of public property. The court further noted that the construction company could have used the bonded stop notice procedure under Sections 3159 and 3162 of the Civil Code, which allows a contractor to require a construction lender to withhold funds from a construction loan account to pay for uncompensated work performed on the project. Similarly, a contractor may insist that a payment bond be secured for work performed under its contract.

Finally, the Petaluma court rejected the construction company's argument that it should recover the value of its services from the city under a theory of quasi-contract - a theory allowing a plaintiff to recover a benefit conferred on a defendant where there is no contract. The court said that such a theory cannot be asserted against a municipality in a public-works context because of the general rule that "contracts wholly beyond the powers of a municipality are void. They cannot be ratified; no estoppel to deny their validity can be invoked against the municipality; and ordinarily no recovery in quasi contract can be had for work performed under them." In fact, public-works contracts typically require a formal, competitive bidding process. The court found that, if a contractor cannot recover against a city that has contracted for the work in question without a proper procedure, a fortiori, a contractor cannot recover under a contract to which the city was never a party.

Finally, the court rejected the construction company's argument that undue hardship would result if it could not recover: "[P]ersons dealing with [a] public agency are presumed to know the law with respect to the requirement of competitive bidding and act at their peril." Further, the court noted that the construction company could have protected itself by following statutory stop notice procedures or obtaining a payment bond or other security to ensure payment, as indicated above.

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. It should be a caution to those representing subcontractors that although a project may look like a private enterprise, the courts may take a different view.

The case also affirms another potentially important principle, that the common-law proprietary-governmental distinction for sovereign immunity no longer prevails, confirming that public-private partnerships and public projects are subject to the same level of governmental immunity.

Stanley S. Taylor is a partner at Nossaman LLP's San Francisco office.

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