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Palomar Grading & Paving, Inc. v. Wells Fargo Bank, N.A.

California Court of Appeals, Fourth District, Third Division

October 14, 2014

PALOMAR GRADING & PAVING, INC., Plaintiff and Respondents,
WELLS FARGO BANK, N.A., et al., Defendants and Appellants. [And eight other cases.[*]]


Appeal from a judgment of the Superior Court of Riverside County, RIC508520 John Vineyard, Judge.

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California Appellate Law Group, William N. Hancock, Ben Feuer; Fidelity National Law Group and James A. Moss for Defendant and Appellant Wells Fargo Bank.

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Manning & Kass, Ellrod, Ramirez, Trester, Darin L. Wessel and John D. Marino for Defendant and Appellant Kohl’s Department Stores.

Stuart D. Hirsch for Plaintiff and Respondent Palomar Grading & Paving.

Wheatley, Scott & Company and Raymond D. Scott for Plaintiff and Respondent R3 Contractors.

Law Offices of Gregory J. Hout and Gregory J. Hout for Plaintiff and Respondent Cass Construction.






J. Did the Trial Court Err in Awarding the Lien Claimants Prejudgment Interest at 10 Percent, as Distinct from 7 Percent, As Against The Non-Contracting, Innocent Owners? Yes.

This is the only part of this opinion certified for publication, so we set forth a brief précis of the relevant facts for the benefit of those readers who will not have access to the balance of the opinion: In 2007, a developer named Inland, engaged a general contractor called 361, to develop a Kohl’s department store and surrounding property on a tract in Beaumont. The construction lender was Wachovia Bank. General contractor 361 contracted with, among others, Palomar Grading & Paving, Inc. (Palomar Grading) and Cass to do infrastructural work benefitting the tract. As it turned out, both Kohl’s and Wachovia ended up owning parcels in the tract. Neither, however, ever entered a contract with the two subcontractors. Palomar Grading and Cass were not paid for substantial portions of their work, and brought

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successful actions to foreclose their mechanic’s liens.[24] The trial judge awarded them prejudgment interest at 10 percent, [25] and now Kohl’s and Wells Fargo Bank, N.A., as Wachovia’s successor, are challenging that decision. We write on a clean slate. No published case has considered the issue.[26]

There is a default rate of interest prescribed bye the Constitution in Article XV, section 1, for the “forbearance of any money, goods, or things in action, or on accounts after demand, shall be 7 percent per annum.” (Italics added.) Things in action obviously include the right to foreclose on a mechanic’s lien. The Legislature, however, has enacted Civil Code, section 3289, subdivision (b), specifying that the default for breach of contract is 10 percent.[27] The lien claimants in this case argue for the applicability of section 3289’s 10 percent, as distinct from the constitutional default rate of 7 percent.

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We determine it is the constitutional default rate that should apply to prejudgment interest on a mechanic’s lien as applied to noncontracting, innocent owners. Unlike section 3289, the prejudgment interest statute, section 3287, applies to both contract and tort actions. (See Marine Terminals Corp. v. Paceco, Inc. (1983) 145 Cal.App.3d 991, 995 [193 Cal.Rptr. 687].) Torts generally do not involve obligations incurred by contract.

The salient fact here is that the owners of the property had no contract with either Palomar Grading or Cass. The liens on the property are the result of the imposition of the mechanic’s lien laws, not contract. The comments of an appellate panel from the depths of the Great Depression summarize the essence of the legal relationship: “The right of a materialman to have declared and enforced his lien against specific property is a right provided to him by the organic law, and shall not be lightly considered. It is true perhaps, that changing conditions have, in some cases, permitted an apparent injustice to result through enforcement of liens against an innocent owner, or one defrauded through the machinations of a dishonest contractor.” (Bay Lumber Co. v. Pickering (1932) 120 Cal.App. 163, 167 [7 P.2d 371], italics added.)

We must not forget that, as explained by our Supreme Court in Connolly Development, Inc. v. Superior Court [(1976)] 17 Cal.3d 803, 811 [132 Cal.Rptr. 477, 553 P.2d 637], the operation of mechanic’s liens do constitute a “taking” of an owner’s interest in its property: “The owner whose property has been subjected to a mechanic’s lien has suffered at least as serious a deprivation as did the plaintiffs in [two United State Supreme Court cases], and thus cannot be denied the protection of the due process clause.” (Id. at p. 812.) But the taking is justified, in terms of an owner who is innocent of breaching a contract with an unpaid lien claimant, precisely because the owner’s property has been benefitted by the work or material of the lien claimant. “The purpose of a mechanics’ lien is to prevent unjust enrichment of a property owner at the expense of laborers or material suppliers.” (Basic Modular Facilities, Inc. v. Ehsanipour (1999) 70 Cal.App.4th 1480, 1483 [83 Cal.Rptr.2d 462].) But that benefit is not necessarily the result of an owner’s contract with the lien claimant. Just as prejudgment interest can be given in tort cases, an owner who didn’t contract with a lien claimant can be legally exposed to prejudgment interest. It follows, then, that the statutory default rate for contract breaches of 10 percent should not be applicable to innocent, noncontracting owners, who are analogous to tort defendants, not contract defendants.

The lien claimants here posit two theories against our conclusion. Palomar Grading’s is direct. It simply isn’t “fair, ” says Palomar Grading, to charge 10 percent against the

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“improver of land” – by which it appears Palomar Grading means a general contractor who breaches a contract with a subcontractor – and let an owner get away with only 7 percent. But it is fair, when one realizes the owner’s loss is a matter of operation of law, not voluntary choice. Unfortunately, general contractors sometimes stiff their subcontractors after taking money from the owner or the owner’s banker. In that situation the mechanic’s lien law in effect forces innocent owners to pay twice. To be sure, their paying twice may be justified by the special solicitude shown toward unpaid contractors and material suppliers by the mechanic’s lien law – that law is, after all, part of the California Constitution (Article XX, section 15) – but the justification for the loss of property in the case of innocent owners is certainly not that they agreed to it. Thus it is perfectly “fair” that the defaulting contractor who breached its contract should have to pay a higher rate than an innocent owner who didn’t.

Cass makes a different argument. It focuses on its right to recover the amount due according to its contract. For Cass, because it is “entitled to recover the amount due pursuant to its contract” it should receive 10 percent interest, period. But that logic ignores former section 3123. The statutory language was: “The liens provided for in this chapter shall be direct liens, and shall be for the reasonable value of the labor, services, equipment, or materials furnished or for the price agreed upon by the claimant and the person with whom he or she contracted, whichever is less." (Id., subd. (a), italics added.) Thus a lien claimant does not necessarily receive the amount due on its contract. Again, we see that insofar as the mechanic’s lien laws act on an innocent owner, the obligation is non-contractual – limited by statute to the reasonable value of work when it is less than the contract.

Cass’s brief also cites some language from a comment apparently in the 4th edition of the respected Marsh treatise on Mechanic’s Lien law, to the effect “it is safe to say only that the lien claimant’s right to interest is limited to the legal rate (now 10%).” There are two answers to the proffered quotation: One, the quotation only refers to a limit, not what is actually appropriate, and doesn’t – at least in the snippet Cass gives us – address prejudgment interest as such. And two, while the “safe to say” language might have been found in the 4th edition of Marsh, it is not to be found in section 4.75 of either the hard copy of the current 6th edition or the current online version. (See 1 Marsh, Cal. Mechanics’ Lien Law (6th ed. 2011) § 4.75, pp. 4-129 to 4-132.) Moreover, that particular section of Marsh is

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written as a practice guide from the point of view of an attorney for a lien claimant, and the thrust of the section is not “this is the law, ” but “there’s no harm in trying.”[28]

Obviously our brief decision in regard to the prejudgment interest issue does not address the question of prejudgment interest in the case of culpable, contract-breaching owners, that is, owners who breach their contracts with contractors or materials suppliers and for that reason have a mechanic’s lien slapped on their property. We also do not address the possibility (far-fetched to be sure) of a sham change in ownership (from say, a breaching owner to an ostensibly non-breaching one) done deliberately to try to gain a better interest rate. Our decision today only applies to “innocent” owners who, even though they did not breach their own contracts, nonetheless winded up with property subject to a mechanic’s lien.

Because this section is self-contained in the context of this partially published opinion, we state our disposition as to the prejudgment interest issue now: The judgment is reversed insofar as it provides for a rate of prejudgment interest at 10 percent and is remanded for a recalculation at the rate of 7 percent. The topic of appellate costs is covered in the unpublished disposition.


Rylaarsdam, Acting P. J., and Aronson, J., concurred.

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