October 2019 Update
Book Enhancements. Sometimes in an action to enforce statutory remedies, such as mechanics liens, stop notices, or bond claims, for unpaid work, labor, equipment, or materials, the defendant will raise defective work or other issues that require expert testimony regarding the sufficiency or quality of the work. A new section was added to discuss the advantages of designating expert witnesses promptly. See §3.97A.
The checklist for claimants, “Prerequisites for and Defenses to Actions to Enforce Mechanics Liens, Stop Notices, and Bond Rights” was amended. See §3.121A.
The bankruptcy chapter, chapter 6, was substantially enhanced with additional discussion of the scope of the automatic stay (§6.3), penalties and consequences for repeat bankruptcy filers (§6.3), determining the priority of a mortgage lien versus a mechanics lien (§6.23), the ability of the debtor to reduce (or “strip down”) the amount of an undersecured claim (newly added §6.23A), preserving claims held by the debtor against other parties, including setoff claims against creditors (newly added §6.23B), objecting to creditors’ claims (§6.33), perfecting mechanics lien claims after the bankruptcy petition was filed (§6.42), annulling the automatic stay retroactively to validate otherwise void past actions of creditors (§6.46B), whether mechanics liens are avoidable as a preference under 11 USC §545 (§6.78), and fraudulent transfer litigation occurring in connection with foreclosure and tax sales (§6.78A).
In chapter 7, discussion of the Contractors’ State License Law (Bus & P C §§7000–7191) was enhanced, because a license violation may arise from construction work or conduct that does comply with state or local building laws, California labor laws, or health and safety laws. See §7.2A. The discussion of cyber insurance in §7.18D was greatly expanded to describe not only protective legislation but also in greater detail the types of insurance policies available for purchase by owners and contractors. There is a new section (§7.37A) describing California Lab C §218.7, which expands the potential liability of general contractors for unpaid wage and benefit claims owed to employees of their subcontractors or lower tier subcontractors who perform work on a private construction project. The law became effective January 1, 2018, and applies to all private construction contracts entered into on or after January 1, 2018; it was further amended effective January 1, 2019. Additional subcontract form clauses for use in response to Lab C §218.7 were added to §§7.37B–7.37C.
In chapter 11, a new section (§11.40A) was added that summarizes four basic kinds of construction loan consensual workouts, which are designed to resolve issues between parties raised by a nonperforming construction loan. The parties’ willingness to attempt such workouts will depend on how each assesses and appraises a variety of legal and economic factors and conditions.
Supreme Court Cases. The California Supreme Court in Heimlich v Shivji (2019) 7 C5th 350 reviewed the proper procedure for claiming and awarding costs arising from CCP §998 offers to compromise in arbitration proceedings. A request for costs under §998 must be filed with the arbitrator within 15 days of a final award. In response, the arbitrator has authority to award costs to the offering party. But if the arbitrator refuses to award costs, the court noted, judicial review is limited. In Heimlich, the arbitrator had refused to hear any evidence concerning the §998 offer because he viewed the underlying arbitrable controversy as an attorney fee dispute; after hearing and resolving that dispute, the arbitrator concluded he no longer had jurisdiction to take any further action in the matter. The court noted that an arbitrator’s ordinary errors in ruling on costs are not subject to correction, nor do they serve as a basis for vacating an award on appeal. 7 C5th at 367. See §§3.117, 7.62.
When an attorney signs a settlement agreement under the words “approved as to form” or “approved as to form and content,” the attorney may be bound by the settlement if it includes provisions requiring the parties’ attorneys to maintain confidentiality regarding the settlement terms or any part of the case. Monster Energy Co. v Schechter (2019) 7 C5th ___, 2019 Cal Lexis 5526 (concluding that attorney’s signature on document with notation that it is “approved as to form and content” does not, as matter of law, preclude factual finding that attorney intended to be bound by agreement). See §§5.109, 8.87.
The U.S. Supreme Court ruled that a bankruptcy court may hold a creditor in civil contempt for violating a discharge order when there is not a “fair ground of doubt” about whether the creditor’s conduct might be lawful under the discharge order. Taggart v Lorenzen (2019) 587 US ___, 139 S Ct 1795. See §6.46C.
Miscellaneous Remedies in Construction. To enforce a provision requiring contractual arbitration of disputes arising from construction work on residential property with four or fewer units, the contract must comply with requirements specified in Bus & P C §7191, including the warning that the owner has forfeited the right to a jury trial. See §§1.7, 7.61.
The definition of “construction” in prevailing wage law for public works was amended. See Lab C §1720(a). But the “construction” language limiting the definition of “public works” in §1720(a)(1) does not so limit the definition of “public works” in §1720(a)(2), which must be “read independently.” Kaanaana v Barrett Bus. Servs., Inc. (2018) 29 CA5th 778. See §1.16.
The Ninth Circuit certified a question of state law to the California Supreme Court in the case of Busker v Wabtec Corp. (9th Cir 2018) 903 F3d 881, 883, regarding whether “installing electrical equipment on locomotives and rail cars” falls within the definition of “public works” under Lab C §1720. See §1.16.
Initially effective January 1, 2018, and amended effective January 1, 2019, joint employer liability of construction contractors and subcontractors applies when certain wages and benefits owed to workers hired by a subcontractor remain unsatisfied, for all private construction contracts entered into on or after January 1, 2018. Lab C §218.7. See §§1.30A, 7.37A.
Although the contractors’ licensing law provides strong protections for project owners, there are risks for owners who hire unlicensed contractors as well. See Jones v Sorenson (2018) 25 CA5th 933 (homeowner potentially liable as “employer” for injuries sustained by laborer of unlicensed contractor under Lab C §2750.5). See §§2.26, 8.38.
The courts have been uneven at times in applying the contractors’ licensing law. But one area in which the courts have been consistent is that the law, as a consumer protection statute, can be used both as a sword (e.g., disgorgement) and as a shield (e.g., claim preclusion) by a property owner, but not by a contractor. See Design Built Sys. v Sorokine (2018) 32 CA5th 676 (court did not allow licensed contractor to prevent project owner from introducing cost of repair damages to correct licensed contractor’s work in construction defect action when repairs were performed by unlicensed contractor). See §§2.28A, 8.95.
In an arbitration, there is authority that if the claim arises from a contract containing an attorney fee clause, a fee award must be given to the party expressly designated by the arbitrator to be the prevailing party on any contract cause of action. But see Cohen v TNP 2008 Participating Notes Program, LLC (2019) 31 CA5th 840 (arbitrator did not exceed its authority in denying attorney fees to prevailing party, despite contractual attorney fee provision, based on finding that attorney, whose firm advanced fees and costs, was partially culpable for plaintiffs’ injury). See §3.117.
The legislature’s use of the term “willful” in Bus & P C §7110 requires only a showing of general intent, meaning that when a corporate manager makes “an affirmative decision not to inquire about the permitting requirements” and then proceeds with the work without a permit, such conduct is imputed to the corporation and constitutes the corporate licensee’s “willful disregard of the building laws.” ACCO Engineered Sys., Inc. v Contractors’ State License Bd. (2018) 30 CA5th 80, 94. See §7.2A.
In disciplinary proceedings arising from the license law, a contractor must exhaust administrative remedies before filing any court action arising from the proceedings, even if the action only seeks a declaration on issues of statutory interpretation. Contractors’ State License Bd. v Superior Court (2018) 28 CA5th 771. See §7.2A.
The extensive use of various technologies by construction participants creates cyber risks, including system failures, data breaches, and cyber attacks. The California legislature enacted manufacturing protections for technology devices, effective January 1, 2020. See CC §§1798.91.04–1798.91.06, which require a manufacturer of an Internet-connected device, as defined, to equip the device with reasonable security features that are appropriate to the nature and function of the device and to the information it may collect, contain, or transmit. See §7.18D.
Under CCP §1281.5, a contractor’s filing of a mechanics lien foreclosure action does not waive contractual arbitration rights if the contractor follows statutory procedures to preserve its rights. The contractor’s failure to do so operates to waive the contractor’s right to arbitrate the mechanics lien, as well as any right to arbitrate the owner’s separate, related claims. See Von Becelaere Ventures, LLC v Zenovic (2018) 24 CA5th 243. See §8.37.
The mediation procedure for claims on public works projects in Pub Cont C §9204 might sunset on January 1, 2020, but there is pending legislation to make the law permanent. See §9.6A.
Withheld Retentions & Remedies. The California Department of Transportation is temporarily prohibited from withholding retention proceeds on any progress payment to a contractor for work performed on a transportation project. See Pub Cont C §7202(a) (scheduled to sunset on January 1, 2020, but legislation is pending to make the prohibition permanent (see SB 197 (2019)), discussed in §4.158).
There is a temporary exception in Pub Cont C §10261(b) to the cap on the percentage of retention proceeds that a public entity may withhold under Pub Cont C §10261(a). The exception applies when the director of the department has determined that a project is substantially complex and therefore requires a higher retention amount than 5 percent, and the department includes in the bid documents details explaining the basis for the finding and the actual retention amount. Pub Cont C §10261(b). The exception provisions in §10261(b) will expire on January 1, 2023, unless extended. See §4.158.
Similarly in public works, under Pub Cont C §7201(b)(1), there is a temporary cap on the percentage of retention proceeds that may be withheld from any payment by the original contractor from any subcontractor and by a subcontractor from any sub-subcontractor. Until January 1, 2023, retention proceeds may not exceed 5 percent of the payment, and the total retention proceeds withheld may not exceed 5 percent of the contract price. See §4.159.
Miller Act Bond Remedies. A district court allowed a subcontractor’s claim against a Miller Act bonding company for idle equipment costs. In U.S. ex rel American Civil Constr., LLC v Hirami Eng’g & Land Surveying P.C. (D DC 2018) 345 F Supp 3d 11, the court noted that although the Miller Act did not bar all claims for all equipment costs, recovery for such costs was limited. The court further held that the extent of recovery for idle equipment costs depends on the factual circumstances of each case, and it described the factors to be considered. See §5.45.
Federal courts have exercised discretion to stay Miller Act actions pending arbitration under certain circumstances. But in U.S. ex rel Harbor Constr. Co. v T.H.R. Enters. (ED Va 2018) 311 F Supp 3d 797, the trial court limited the stay to a period of only 6 months so that the arbitration could not be used to delay resolution of the Miller Act claim. See §5.91.
Bankruptcy Issues. Under 11 USC §362(c), which addresses the consequences of a debtor’s filing multiple unsuccessful cases in a short period of time, the consequences may be severe, because a debtor may receive only limited protection from the stay or no protection. See In re Wood (Bankr D Md 2018) 590 BR 120. Some courts interpret §362(c)(3) to revoke the stay in its entirety if the court does not enter an order extending the stay within 30 days of the filing of the petition (the minority approach). Other courts take a more narrow approach, reading §362(c)(3) as terminating the stay only as to the debtor and the debtor’s property but not as to property of estate (the majority approach). See new authorities added to §6.3.
A court can also vacate a prior discharge order that was improperly entered because of clerical mistake, oversight, or omission if the debtor was ineligible for the discharge by virtue of an illegal repeated bankruptcy filing. Filice v United States (In re Filice) (Bankr ED Cal 2018) 580 BR 259. See §6.3.
In addition to confirming a plan of reorganization, a bankruptcy court has authority in an adversary proceeding to adjudicate disputes arising from a creditor’s postpetition actions that violate an executory contract between the debtor and the creditor. See Charleston Assocs. v RA Southeast Land Co. (In re Charleston Assocs.) (Bankr D Nev 2018) 592 BR 709 (although secured creditor completed prepetition foreclosure sale of real property, court adjudicated issues arising from prepetition settlement agreement involving same property). See §6.14.
For discussion of a nondischargeability action arising from a construction agreement and the availability of attorney fees to the owner-debtor for successfully defending the action, see Asphalt Profs., Inc. v Davis (In re Davis) (Bankr CD Cal 2019) 595 BR 818. See §6.35.
When a bankruptcy court has granted a creditor’s motion for retroactive annulment of the automatic stay regarding an action against property of the estate, the Ninth Circuit held that other creditors holding liens on the same property have no independent standing to appeal that decision. Petrone v SFR Invs. Pool 1, LLC (In re Petrone) (9th Cir 2019) 754 Fed Appx 590 (unpublished opinion). See §6.46B.
The Ninth Circuit ruled that attorney fees incurred by the debtor in actions to remedy stay violations, including attorney fees incurred on a successful appeal, are recoverable in addition to damages. Easley v Collection Serv. of Nevada (9th Cir 2018) 910 F3d 1286. See §6.46C.
In a contractor’s bankruptcy case, the court concluded that payment to the debtor’s subcontractors and suppliers, by a joint-payee check issued by the owner seeking to avoid mechanics liens, was a transfer of property in which the debtor had an interest and thus avoidable under 11 USC §547(b). Davis v Kice Indus. (In re WB Servs., LLC) (Bankr D Kan 2018) 587 BR 548. See §6.58.
In a subcontractor’s bankruptcy case, when a prime contractor issued checks payable jointly to the debtor (its subcontractor) and a sub-subcontractor, and the debtor then endorsed the checks to the sub-subcontractor, the transfers to the sub-subcontractor were held to be avoidable preferences under 11 USC §547(b) because the sub-subcontractor gave no preliminary notice under CC §8200. In re Applegate Johnston, Inc. (Bankr ED Cal, Mar. 7, 2017, No. 13-91315-E-07, Adv Proc No. 15-9047) 2017 Bankr Lexis 635. See §6.58.