Constitutional Default Interest Rate of 7% Rather Than 10% Default for Breach of Contract, Applies to Prejudgment Interest on a Mechanic's Lien as Applied to Noncontracting, Innocent Owners

October 28, 2014 | Bulletin No. 1153207.1

Addressing an issue of first impression, the Fourth Appellate District has determined that in a mechanic's lien foreclosure action against an innocent property owner who did not contract with the mechanic's lien claimant, the proper prejudgment default interest rate is seven percent (7%) for "things in action" under Article XV, section 1, of the California Constitution not the ten percent (10%) prejudgment default interest rate for breach of contract under Civil Code section 3289.

(Palomar Grading v. Wells Fargo (October 14, 2014) ___Cal.App..4th___ [2014 Daily Journal D.A.R. 13,975]).

Facts

In 2007, a developer named Inland, engaged a general contractor named 361, to develop a Kohl’s department store on a three parcel tract of land in Beaumont, California. The construction lender was Wachovia Bank. 361 contracted with plaintiffs, among others, to perform infrastructural work benefitting the tract. When the development project encountered financial problems, Kohl's acquired from Inland one parcel of the tract on which its store was located and Wachovia Bank, Wells Fargo Bank's predecessor, acquired the other two parcels of the tract at a foreclosure sale.  After serving preliminary notices and recording mechanic's liens on the tract, the plaintiffs filed lawsuits to foreclose their mechanic's liens on the tract and eventually added Kohl's and Wells Fargo Bank, as the owners of tract, to the lawsuit.  The lawsuits were consolidated into one action.  The trial court entered judgment in favor of the plaintiffs and against Kohl's and Wells Fargo Bank ordering the tract to be sold  with the plaintiffs to receive from the sales proceeds specific dollar amounts that included prejudgment interest calculated at ten percent (10%).

Discussion

The Fourth Appellate District identified and decided ten discrete issues in the appeal of the trial court's judgment.  However, it certified for publication only its decision on the issue of the proper prejudgment default interest rate.  Regarding the interest rate issue, it held that a right to foreclose on a mechanics lien is a "thing in action." Under Article XV, section 1, of the California Constitution, a thing in action accrues prejudgment interest at the rate of seven percent (7%). Because the mechanic's lien claimants had not contracted with the landowners and the landowners were innocent owners, the ten percent prejudgment default interest rate for breach of contract under Civil Code section 3289 did not apply.

The lesson for mechanic's lien claimants is that if you have a direct contract with the property owner, the default prejudgment interest rate, if your contract does not provide otherwise, is ten percent.  However, if you do not have a direct contract with the property owner, the prejudgment interest rate is seven percent.

Questions

If you have any questions concerning this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.

Bruce A. Emard or Garret D. Murai | 916.321.4500