Traub Lieberman Straus & Shrewsberry LLP | November 20, 2014
Under California Civil Code (CC) Section 3289, a mechanic’s lien claimant may obtain pre-judgment interest against contracting property owners calculated at 10 percent per annum from the date of breach. In Palomar Grading & Paving, Inc. v. Wells Fargo Bank, N.A., et al. (2014) 230 Cal. App. 4th 686, the California Court of Appeals considered whether a mechanic’s lien claimant may also obtain pre-judgment interest of 10 percent against non-contracting property owners, or whether such claimant is limited to the constitutional default rate of 7 percent per annum, as codified under Article XV, Section 1 of the California Constitution. The Court determined that the constitutional default rate of 7 percent applied to “innocent” non-contracting property owners.
Two subcontractors working on construction of a Kohl’s Department Store in Beaumont, California recorded mechanic’s liens and sued to foreclose on those liens after the general contractor, 361 Group Construction Services, Inc. (361) failed to pay them. Judgments of foreclosure were obtained against the current owners of the property, Kohl’s Department Store (Kohl’s) and Wells Fargo Bank, N.A. (Wells Fargo), neither of which contracted with nor breached an agreement with 361 or the subcontractors. The trial court awarded the subcontractors pre-judgment interest against Kohl’s and Wells Fargo at 10 percent under CC 3289.
On appeal, the California Court of Appeals considered whether the two subcontractors were entitled to pre-judgment interest at 10 percent under CC 3289 or the constitutional default rate of 7 percent. The Court first noted, based on the language in Article XV, the constitutional default rate applies to the “forbearance of any money, goods, or things in action,” and determined mechanic’s lien foreclosure actions qualify as “things in action.” The Court then recognized different interest rates can apply to different types of actions. While pre-judgment interest is recoverable at 10 percent under CC 3289 in contract actions, CC 3288 allows recovery of pre-judgment interest in tort actions at the constitutional default rate of 7 percent. Because Kohl’s and Wells Fargo had no written contracts with the subcontractors, the liens on the property were the result of mechanic’s lien laws, not contract.
Analogizing “innocent” non-contracting property owners to tort defendants, the Court of Appeals reversed the trial court, holding that CC 3289 did not provide the statutory basis for recovery of pre-judgment interest against Kohl’s and Wells Fargo. Instead, the Court of Appeals held that the constitutional pre-judgment interest rate of 7 percent should apply because CC 3289 only applies to contract defendants, which Kohl’s and Wells Fargo were not.