COAST REBAR SERVICES INC v. HOLLYWOOD 180 HOLDCO LLC

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Court of Appeal, Second District, California.

COAST REBAR SERVICES, INC., Plaintiff and Appellant, v. HOLLYWOOD 180 HOLDCO, LLC, Defendant and Respondent.

B223663

Decided: April 18, 2011

Crawford & Bangs and Shaaron A. Bangs for Plaintiff and Appellant. Marcus, Watanabe & Dave, David M. Marcus and Eric Chomsky for Defendant and Respondent.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

Coast Rebar Services, Inc. (Coast Rebar) appeals from the order of dismissal entered after the trial court sustained without leave to amend the demurrer of Hollywood 180 Holdco, LLC (Holdco) to Coast Rebar's complaint seeking to enforce its mechanic's lien and recover more than $500,000 for materials and labor provided on a residential development project near the corner of Hollywood Boulevard and La Brea Avenue (La Brea property).   We reverse.

FACTUAL AND PROCEDURAL BACKGROUND

1. The Complaint and Lis Pendens;  the First Amended Complaint and Amended Lis Pendens;  the Trustee Sale of the La Brea Property

Coast Rebar entered into a contract with general contractor Scrimsher Construction effective January 15, 2007 to provide improvements for the La Brea property.   Shortly after commencing work, Coast Rebar served a 20–day preliminary notice on WL Hollywood Associates, LLC (WL Hollywood), the property owner, Wachovia Bank, N.A., the construction lender, and Scrimsher Construction.

After Coast Rebar completed its work in February 2009, Scrimsher Construction refused to pay the balance due of $501,995.   Coast Rebar timely recorded a mechanic's lien and on May 7, 2009 filed a complaint for foreclosure, erroneously naming WL Hollywood Associates, Inc., not WL Hollywood Associates, LLC. It also named 500 Doe defendants.   According to declarations by Shaaron Bangs, counsel for Coast Rebar, and Ellen Wilshire, its controller, submitted in opposition to Holdco's demurrer, although Coast Rebar had served Wachovia with the 20–day preliminary notice in early 2007, Wachovia was not named as a defendant because Bangs and Wilshire did not have “actual knowledge” when the complaint was filed that Wachovia had recorded a deed of trust against the La Brea property on December 29, 2006.   Coast Rebar also asserts in its opening brief on appeal, which is not contested by Holdco, labor and material had been furnished to the project prior to the recording of Wachovia's construction deed of trust, which, if true, would make all mechanics' liens senior to Wachovia's recorded security interest.

On May 8, 2009 Coast Rebar served WL Hollywood with a notice of lis pendens, which also erroneously identified it as “Inc.,” not “LLC.” The lis pendens was recorded on May 12, 2009.   A corrected notice of lis pendens properly identifying the owner of the La Brea property as WL Hollywood Associates, LLC was served on WL Hollywood on June 23, 2009 and recorded a few days later.

Also on May 8, 2009 Wachovia filed suit against WL Hollywood seeking judicial foreclosure of the La Brea property;  it later commenced nonjudicial foreclosure proceedings pursuant to the power of sale in its deed of trust.   On June 30, 2009 Wachovia assigned its interest under the loan agreement and construction deed of trust to Holdco;  the assignment was recorded that day.   On July 10, 2009 Holdco was substituted for Wachovia as plaintiff in Wachovia's foreclosure action.

On July 16, 2009 Coast Rebar filed a first amended complaint correctly naming WL Hollywood, adding Scrimsher Construction as a defendant and alleging causes of action for breach of contract and common counts.   Additionally, Coast Rebar filed a separate, form amendment to complaint, substituting Wachovia as Doe defendant one.   Wachovia was personally served with the summons and first amended complaint on July 24, 2009.   Coast Rebar, however, did not serve or file a new lis pendens.

On July 24, 2009 Bangs received a notice of trustee sale of the La Brea property.   Holdco purchased the property at the sale, and a trustee's deed of sale was recorded on August 14, 2009.   On September 8, 2009 Coast Rebar amended the first amended complaint to substitute Holdco as Doe defendant two and dismissed Wachovia.

2. The Trial Court's Order Sustaining Holdco's Demurrer and Granting Its Motion To Expunge the Lis Pendens

On October 8, 2009 Holdco demurred to the first amended complaint and moved to expunge the lis pendens.   Holdco contended the lis pendens was invalid because, among other reasons, it failed to name Wachovia as an adverse party and was not served on Wachovia after Wachovia had been named as a defendant in the amended complaint.  (See Code Civ. Proc., §§ 405.22, 405.23.)   Because the lis pendens was invalid and therefore should be expunged, Holdco argued, it acquired the La Brea property free and clear of the mechanic's lien claim.

Although Holdco had not argued the lien claim was barred by the statute of limitations as ground for its demurrer, in its opposition papers Coast Rebar argued its claim was not time barred even though it had failed to name Wachovia as a defendant within 90 days of recording the mechanic's lien (see Civil Code, § 3144) 1 because it had no actual knowledge of Wachovia's recorded deed of trust when the complaint was filed.   At the hearing on demurrer Coast Rebar's counsel conceded that Coast Rebar had served Wachovia as the construction lender with the 20–day preliminary notice in 2007.   Holdco argued this was sufficient evidence Coast Rebar had actual knowledge that the lender had an interest in the property.

Relying on Westfour Corporation v. California First Bank (1992) 3 Cal.App.4th 1554 (Westfour ), Coast Rebar argued whether a mechanic's lien claimant knows the identity of the lender when it files the complaint is not dispositive and does not preclude it from substituting the lender for a Doe defendant after the 90–day limitations period has passed.   Rather, Coast Rebar insisted, the claimant must have actual knowledge of the recording of the deed of trust.   In response to the court's question why Coast Rebar had served Wachovia with the 20–day notice if Coast Rebar did not know it had a deed of trust, Coast Rebar explained, “Typically in the industry, Your Honor, what happens is you serve the preliminary notice as early into the—it's usually after you get the contract awarded.   The parties are not clearly certain as to all of the parties in the action.   You just put these people on notice that you are a potential lien claimant․  And, again, I go back to the Westfour case—so that's the purpose of serving it, just to put them on notice that not only may you have a potential mechanic's lien case, but for the purposes of the lender, they need to know that there may be a stop notice that may be filed against the construction company.”

On December 14, 2009 the trial court sustained Holdco's demurrer without leave to amend and granted its motion to expunge the lis pendens.   The court stated, “Plaintiff had actual knowledge that Wachovia Bank was the construction lender before it filed this action or its notices of lis pendens.[2 ]  Plaintiff on May 24, 2007 served on Wachovia as the construction lender a California 20–day Preliminary Notice.  [Citation.]  Plaintiff filed this action May 7, 2009 and recorded lis pendens on May 12 and June 25, 2009 without naming Wachovia.   In addition, plaintiff failed to comply with the lis pendens statute by naming and serving Wachovia with its lis pendens.  (Civ.Code, § 3146;  Code Civ. Proc., § 405.22.)”

DISCUSSION

1. Standard of Review

On appeal from an order dismissing an action after the sustaining of a demurrer, we independently review the pleading to determine whether the facts alleged state a cause of action under any possible legal theory.  (McCall v. PacifiCare of Cal., Inc. (2001) 25 Cal.4th 412, 415;  Aubry v. Tri–City Hospital Dist. (1992) 2 Cal.4th 962, 967.)   We give the complaint a reasonable interpretation, “treat[ing] the demurrer as admitting all material facts properly pleaded,” but do not “assume the truth of contentions, deductions or conclusions of law.”  (Aubry, at p. 967;  accord, Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112, 1126.)   We liberally construe the pleading with a view to substantial justice between the parties (Code Civ. Proc., § 452;  Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081;  see Kotlar v. Hartford Fire Ins. Co. (2000) 83 Cal.App.4th 1116, 1120.)

“ ‘Where the complaint is defective, “[i]n the furtherance of justice great liberality should be exercised in permitting a plaintiff to amend his [or her] complaint.” ’ ”  (Aubry v. Tri–City Hospital Dist., supra, 2 Cal.4th at pp. 970–971.)   Leave to amend may be granted on appeal even in the absence of a request by the plaintiff to amend the complaint.  (Id. at p. 971;  see Code Civ. Proc., § 472c, subd. (a).)  We determine whether the plaintiff has shown “in what manner he [or she] can amend [the] complaint and how that amendment will change the legal effect of [the] pleading.”  (Goodman v. Kennedy (1976) 18 Cal.3d 335, 349.)  “[L]eave to amend should not be granted where ․ amendment would be futile.”  (Vaillette v. Fireman's Fund Ins. Co. (1993) 18 Cal.App.4th 680, 685;  see generally Caliber Bodyworks, Inc. v. Superior Court (2005) 134 Cal.App.4th 365, 373–374.)

2. Law Governing Mechanics' Liens

Contractors, subcontractors, materialmen and other specified persons performing labor on, or furnishing materials to, a private work of improvement are entitled to a lien on the improved property for the value of the labor or materials. (§ 3110.)  “[A] mechanic's lien attaches to the improved property when the first labor or construction material is furnished for the construction work.”  (Forsgreen Associates, Inc. v. Pacific Golf Community Development LLC (2010) 182 Cal.App.4th 135, 146–147.)   Because the liens of all mechanics relate back to the date the first visible work began on a project, a mechanic's lien has priority over any interest recorded after the work commenced even if a particular mechanic's work was not started until after the interest was recorded.  (See id. at p. 146 [“lien relates back to the date the first labor or material was furnished for the work of improvement, and transferees who take in interest in the property after work has begun, and before the claim of lien is recorded, take subject to the lien”];  Tesco Controls, Inc. v. Monterey Mechanical Co. (2004) 124 Cal.App.4th 780, 793 [“The relation back feature of mechanics' liens is of particular importance to construction lenders.   Lenders who have made loans after the commencement of work on a jobsite have found their loans subordinate to mechanics' liens arising out of work performed or material delivered after trust deeds securing those loans were recorded because some work was performed or materials delivered before recordation.”];   § 3134.)

As a prerequisite to the enforcement of a mechanic's lien, a subcontractor without a direct contract with the property owner must have served the owner, the original contractor, and the construction lender or reputed construction lender, if any, with a notice of lien rights within 20 days of first providing services or materials to the project. (§ 3097, subds.(a) & (d);  see § 3114 [“claimant shall be entitled to enforce a lien only if he has given the preliminary 20–day notice ․ in accordance with the provisions of Section 3097, if required by that section”];  Grinnell Fire Protection Systems Co. v. American Sav. & Loan Assn. (1986) 183 Cal.App.3d 352, 355 (Grinnell ).)   The notice must contain a general description of the labor or materials furnished, an estimate of the total price and the names and addresses of the claimant and the party with whom he or she contracted. (§ 3097, subd. (c).)

To enforce a mechanic's lien, a subcontractor must file a complaint to foreclose within 90 days after a claim of lien is timely recorded. (§§ 3116 [providing time for subcontractors to record lien];  3144 [specifying 90–day duration of lien].) 3  The complaint must name all persons who claim an interest in the property, including the property owner and all beneficiaries under deeds of trust, within the 90–day limitations period specified in section 3144.  (See Monterey S.P. Partnership v. W.L. Bangham (1989) 49 Cal.3d 454, 459 [“all persons with an interest in the subject real property at the time suit is brought to enforce a mechanic's lien on that property must be made parties to the suit”];  Grinnell, supra, 183 Cal.App.3d at p. 354 [“materialman must name all parties intended to be bound by an action to foreclose a mechanic's lien within the time specified in Civil Code section 3144”].)  “Where the plaintiff does not have actual knowledge of another party's interest in the subject property, however, he can satisfy the requirements of section 3144 by naming that party as a Doe defendant [pursuant to Code of Civil Procedure section 474] until he gains actual knowledge of its interest in the property.”  (Westfour, supra, 3 Cal.App.4th at p. 1558;  accord, Grinnell, at pp. 354, 358–359 [“Section 474 ․ is liberally construed to prevent the running of the statute of limitations where the plaintiff does not have actual knowledge of the name of the defendant.   [Citation.]  The ignorance of which Code of Civil Procedure section 474 speaks is actual ignorance, and a plaintiff will not be refused the right to use a Doe pleading even where the plaintiff's lack of actual knowledge is attributable to plaintiff's own negligence.”].)

“The mechanic's lien statutes are uniformly classified ‘as remedial legislation, to be liberally construed for the protection of laborers and materialmen.’  [Citations.]  Generally, doubts about their meaning are resolved in favor of the contractor or laborer.”  (T.O. IX, LLC v. Superior Court (2008) 165 Cal.App.4th 140, 146.)

3. The Trial Court Erred in Sustaining Holdco's Demurrer Without Leave To Amend

a. Coast Rebar's mechanic's lien claim is not necessarily barred by the statute of limitations

The trial court erred in concluding Coast Rebar's service of the 20–day preliminary notice on Wachovia in 2007 established, as a matter of law, it had actual knowledge of Wachovia's interest in the La Brea property when it filed the complaint in May 2009, thus making the claim against Wachovia untimely.   Pursuant to Westfour, supra, 3 Cal.App.4th 1554, if Coast Rebar can allege in an amended complaint that it did not have actual knowledge of Wachovia's recorded deed of trust in May 2009, its subsequent amendment to substitute Wachovia as Doe number one would relate back to the filing of the original complaint.

In Westfour the trial court found the mechanic's lien claim against the construction lender initially named as a Doe defendant was barred by the statute of limitations because “Westfour had actual knowledge of the identity of the Bank and its probable position as the construction lender” even though it did not have “ ‘actual knowledge of the Bank Deed of Trust against the Property.’ ”  (Westfour, supra, 3 Cal.App.4th at p. 1559.)   The Court of Appeal reversed, holding, “[T]he proper focus in determining whether the designation of [the construction lender] as a Doe defendant was proper is whether Westfour had actual knowledge of [the construction lender's] interest in the Property at the time it filed its complaint.   A plaintiff is ‘ “ignorant of the name” ’ of a defendant within the meaning of the fictitious name statute not only when he is ignorant of the defendant's identity, but also when he knows the defendant's identity but is ignorant of facts giving rise to a cause of action against that defendant.  [Citations.]  Even where a plaintiff could have discovered such facts, he or she is still entitled to the benefit of the fictitious name statute.”  (Id. at pp. 1559–1560.)

To be sure, unlike Coast Rebar, Westfour did not serve the construction lender with a 20–day preliminary notice (Westfour, supra, 3 Cal.App.4th at p. 1561)—a distinction the trial court believed rendered Westfour inapplicable to the case at bar.   The filing of a 20–day preliminary notice, however, does not conclusively establish a claimant has actual knowledge the construction lender is the beneficiary under a deed of trust because the statutory scheme encourages the naming of parties reasonably believed to be the construction lender and the consequence of failing to name the construction lender is more dire than the consequence of naming an incorrect party.   Section 3097, subdivision (a), requires the lien claimant to serve the owner, original contractor and construction lender, if any, or the “reputed” owner, contractor and construction lender with the 20–day preliminary notice as a prerequisite to, among other things, the enforcement of a lien claim.   As early as 1895 the Supreme Court noted the phrase “reputed owner” “was included to protect a lien claimant from forfeiting his lien if in good faith and based on ‘external information’ he names one person as owner and ascertains only later some other person in fact was the owner.”  (Kodiak Industries, Inc. v. Ellis (1986) 185 Cal.App.3d 75, 85.)   The phrase “reputed construction lender” has been construed consistent with “reputed owner” to mean “a person or entity reasonably and in good faith believed by the claimant to be the actual construction lender.”  (Id. at p. 87.)   If a “claimant fails to give notice to the reputed lender, he bears the risk that the reputed lender is in fact the true lender.   In that case, the failure to give notice will defeat any claim of lien.”  (Id. at p. 87, fn. 6.)

Indeed, the pressure to serve the construction lender at this preliminary stage is great:  “If the lien claimant has no actual knowledge of the identity of the construction lender, he is nevertheless charged with constructive notice of the lender's identity when it is revealed either by the recorded construction deed of trust or by the public building permit on file” on the first day of work.  (Kodiak Industries, Inc. v. Ellis, supra, 185 Cal.App.3d at p. 78.)   Thus, because the statutory scheme encourages the lien claimant to serve a construction lender with the 20–day preliminary notice even if it turns out the actual construction lender is a different entity, it cannot be inferred from the mere serving of the notice that the lien claimant has actual knowledge of the served entity's interest in the property.4

Holdco contends the trial court's inference Coast Rebar knew Wachovia had an interest in the property is supported by substantial evidence and thus should be upheld.   This case, however, is at the demurrer stage.   The trial court is not permitted to make factual findings or inferences, nor is substantial evidence the appropriate standard of review on appeal.  (See Committee on Children's Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 213–214 [factual allegations of unverified complaint must be assumed to be true for purpose of ruling on demurrer].)   Nonetheless, the assertion Coast Rebar did not have actual knowledge of Wachovia's secured interest in the La Brea property was made in declarations filed in opposition to Holdco's demurrer, not set forth in its amended complaint, and, as noted by the trial court, was based on statements only by Coast Rebar's controller and outside counsel.   Under these circumstances the demurrer was properly sustained, but Coast Rebar should be given an opportunity to further amend the complaint, if it can in good faith, to allege no one authorized to act on behalf of Coast Rebar, not just Bangs and Wilshire, had actual knowledge of Wachovia's interest.5  The accuracy of those allegations can thereafter be tested during the course of the litigation.

b. Coast Rebar's failure to name Wachovia in the lis pendens does not bar Coast Rebar from proceeding against Holdco as Wachovia's Successor-in-interest

A mechanic's lien claimant may give constructive notice of the foreclosure proceedings to parties not named in the action by recording a notice of the pendency of the proceedings, a lis pendens, in the county in which the property is located. (§ 3146.) 6  “Only from the time of recording such notice shall a purchaser or encumbrancer of the property affected thereby be deemed to have constructive notice of the pendency of the action, and in that event only of its pendency against parties designated by their real names.”  (Ibid.) “The purpose of a lis pendens is to furnish a means of notifying all persons of the pendency of an action and thereby bind any person who may acquire an interest in property, subsequent to the institution of the action, by any judgment which may be secured in the action affecting the property.”  (Knapp Development & Design v. Pal–Mal Properties, Ltd. (1987) 195 Cal.App.3d 786, 791 (Knapp Development ).)

Disclaiming any standing as a bona fide purchaser of the property (see Knapp Development, supra, 195 Cal.App.3d at p. 791 [purchaser of property after lis pendens expunged presumed to be bona fide purchaser;  such a purchaser takes property free of mechanic's lien] ) and asserting only rights based on its status as Wachovia's assignee or successor-in-interest, Holdco claims section 3146 restricts prosecution of a foreclosure claim to those parties properly named in the lis pendens.   Because Coast Rebar never named Wachovia in the lis pendens, Holdco argues, Coast Rebar could not have pursued its real property action against Wachovia and cannot proceed against it either.

Holdco's argument is premised on a fundamental misunderstanding of the role of a lis pendens, which concerns the nature and timing of constructive notice of the pendency of an action to nonparties to the litigation.  (See Packard Bell Electronics Corp. v. Theseus, Inc. (1966) 244 Cal.App.2d 355, 363 [“[a]ctual knowledge can take the place of constructive notice imparted by the filing of a notice of lis pendens”].)   A mechanic's lien claimant who fails to record a lis pendens may nonetheless prosecute the foreclosure action against all properly named defendants, including a party brought into the proceeding through the proper use of the Doe defendant procedure.  (See Grinnell, supra, 183 Cal.App.3d at pp. 358, 361–363;  Patten–Blinn Lumber Co. v. Francis (1958) 166 Cal.App.2d 196, 202–203;  see generally 10 Miller & Starr, Cal. Real Estate (3d ed.2001) § 28.70, p. 224.)

As discussed in the preceding section, if Coast Rebar can allege it lacked actual notice of Wachovia's status as a secured lender with a recorded deed of trust at the time it filed its complaint in this action, its claim against Wachovia could properly proceed.   Had it not transferred its interest to Holdco, Wachovia would be bound by any judgment entered in the action notwithstanding the omission of Wachovia's name in the lis pendens.   Because Holdco's challenge to Coast Rebar's complaint based on the defective lis pendens is predicated only on its status as Wachovia's successor-in-interest, it too is subject to suit and will be bound by any judgment in Coast Rebar's favor.

DISPOSITION

The order dismissing the action is reversed.   On remand the trial court is directed to vacate its order sustaining the demurrer without leave to amend, to enter a new order sustaining the demurrer with leave to amend and to conduct further proceedings not inconsistent with this opinion.   Coast Rebar Services is to recover its costs on appeal.

We concur:

FOOTNOTES

FN1. Statutory references are to the Civil Code unless otherwise indicated..  FN1. Statutory references are to the Civil Code unless otherwise indicated.

FN2. The court explained Wilshire's statement “she did not know” Wachovia had a recorded deed of trust “is irrelevant.”   At oral argument the court had commented Wilshire was only “one person” at Coast Rebar..  FN2. The court explained Wilshire's statement “she did not know” Wachovia had a recorded deed of trust “is irrelevant.”   At oral argument the court had commented Wilshire was only “one person” at Coast Rebar.

FN3. Section 3144 provides, “(a) No lien provided for in this chapter binds any property for a longer period of time than 90 days after the recording of the claim of lien, unless within that time an action to foreclose the lien is commenced in a proper court ․ [¶] (b) If the claimant fails to commence an action to foreclose the lien within the time limitation provided in this section, the lien automatically shall be null and void and of no further force and effect.”.  FN3. Section 3144 provides, “(a) No lien provided for in this chapter binds any property for a longer period of time than 90 days after the recording of the claim of lien, unless within that time an action to foreclose the lien is commenced in a proper court ․ [¶] (b) If the claimant fails to commence an action to foreclose the lien within the time limitation provided in this section, the lien automatically shall be null and void and of no further force and effect.”

FN4. Moreover, the statutory definition of construction lender is broad enough to include parties who do not hold an interest in the property and thus would not be properly named in a foreclosure action.   Section 3087, defines construction lender as “any mortgagee or beneficiary under a deed of trust lending funds with which the cost of the work of improvement is, wholly or in part, to be defrayed, or any assignee or successor in interest of either, or any escrow holder or other party holding any funds furnished or to be furnished by the owner or lender or any other person as a fund from which to pay construction costs.”.  FN4. Moreover, the statutory definition of construction lender is broad enough to include parties who do not hold an interest in the property and thus would not be properly named in a foreclosure action.   Section 3087, defines construction lender as “any mortgagee or beneficiary under a deed of trust lending funds with which the cost of the work of improvement is, wholly or in part, to be defrayed, or any assignee or successor in interest of either, or any escrow holder or other party holding any funds furnished or to be furnished by the owner or lender or any other person as a fund from which to pay construction costs.”

FN5. Coast Rebar should also allege, if it has a reasonable basis to do so, work commenced on the project prior to Wachovia recording its construction deed of trust, which is necessary for Coast Rebar's mechanic's lien to have priority..  FN5. Coast Rebar should also allege, if it has a reasonable basis to do so, work commenced on the project prior to Wachovia recording its construction deed of trust, which is necessary for Coast Rebar's mechanic's lien to have priority.

FN6. When this case was filed, section 3146 provided the filing of a lis pendens was discretionary.  Section 3146 was amended effective January 1, 2011 to make the filing of a lis pendens mandatory.   (Stats.2009, ch. 109, § 2.).  FN6. When this case was filed, section 3146 provided the filing of a lis pendens was discretionary.  Section 3146 was amended effective January 1, 2011 to make the filing of a lis pendens mandatory.   (Stats.2009, ch. 109, § 2.)

WOODS, J. ZELON, J.

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