The Third District Court of Appeal in Cal Sierra Construction, Inc. v. Comerica Bank (Cal. App., May 31, 2012, No. C060707) 2012 Cal. App. LEXIS 641 (Cal Sierra), determined that lenders were precluded from enforcing property owner rights though a motion to release the mechanic’s lien and stop notice. The court distinguished the California Supreme Court’s concerns in Connolly Development, Inc. v. Superior Court (1976) 17 Cal.3d 803 [132 Cal. Rptr. 477, 553 P.2d 637] for the due process rights of property owners, not lenders, and further noted that the subsequent decision in Lambert v. Superior Court (1991) 228 Cal.App.3d 383 [279 Cal. Rptr. 32] was to provide "additional procedural safeguards" for those property owners that had not been identified in Connolly. In short, the lenders could not use a shortcut procedure against a contractor for work that had been completed and enhanced the property on which the banks still retained a security interest.
In Cal Sierra, the contractor was required to file suit in 2007 to enforce its mechanic’s lien and bonded stop notice after the homebuilder ordered the contractor to stop all work. Although the contractor was paid a partial sum by the surety and assigned the mechanic’s lien rights up to payment to the surety, the bonded stop notice remained. The lenders filed a motion to expunge ("Lambert" motion) the lien and stop notice, and the trial court determined that the contractor had provided insufficient evidence to oppose the motion. Neither the contractor nor the trial court addressed the question of whether the Lambert motion was the proper procedure for the lender.
On appeal, the court set forth the governing law providing protections to the property owners, while balancing the deprivation of rights of the property owner and the contractors, noting in part: "But where the lien claimant has already filed suit to foreclose the lien, a more expeditious remedy would be for the owner to file a motion in that action.(Lambert, supra, 228 Cal.App.3d at p. 387.) In such motion, the question presented is not the ultimate merit of the contractor’s claim but whether the contractor should be entitled to retain the security of the mechanic’s lien or stop notice pending resolution of the matter." (Cal Sierra, supra, 2012 Cal. App. LEXIS 641 at *12.)
The appellate court further relayed the underpinning of Connolly, emphasizing the focus on "the owner’s rights" and pointing out that any deprivation to a lender when mechanic’s liens or stop notices are filed is not the same: "Regarding the interests of lenders, the high court noted: ‘When a stop notice is filed, the lender, threatened with personal liability if it disregards the notice, may divert credit needed to pay for future construction to comply with the stop notice claim. Thereby denied the money on which he relied to complete the project, the owner may be forced into default on the loan, and consequently lose his property.’ (Connolly, supra, 17 Cal.3d at p. 813, fn. omitted.)But because the lender has already committed the funds to the owner’s use on the construction project, it is not the lender’s funds that are at stake and not the lender’s interests that are in jeopardy."(Cal Sierra, supra, 2012 Cal. App. LEXIS 641 at *17.)
Critically in this market and economy, the appellate court stated in response to the banks’ argument that their interests were at stake since the property owner was in default that “[a]t the time plaintiff allegedly performed the work, the loan funds were committed to the construction project and represented property owners’ credit and the security on which plaintiff relied. This is not changed by the fact the owner may later have defaulted on the loan. The banks retain their security through the real property, security that has allegedly been enhanced by plaintiff’s work. While it is certainly arguable that any remaining loan funds after payment for work completed before default reverts to the banks and is no longer committed to the construction project, the same cannot be said of funds for work already performed. The banks retained no protectable interest in those funds.” (Cal Sierra, supra, 2012 Cal. App. LEXIS 641 at *17-18.)