Playing the Percentages
What’s the right prejudgement interest rate?
The California Court of Appeal in October considered the proper prejudgment interest rate allowed to claimants on a Mechanic’s Lien foreclosure action against a property owner in Palomar Grading & Paving, Inc. v. Wells Fargo Bank, N.A.
The lawsuit was one of a number of cases which made its way through the judicial system because of the “Great Recession” impacting the Southern California’s Inland Empire region, which includes Riverside and San Bernardino counties. The appeal arose from financial difficulties encountered in the construction of a Kohl’s department store in Beaumont, Calif. Some time during the construction, the money dried up and the general contractor refused to pay the subcontractors for work they had performed.
Four subcontractors recorded Mechanic’s Liens and filed lawsuits to foreclose upon those liens. Three of the subcontractors, including Palomar, obtained judgments foreclosing upon the Mechanic’s Liens. The property owners, Kohl’s and Wells Fargo (the successor to the construction lender Wachovia Bank), appealed the judgment to foreclose. The consolidated appeals addressed 10 separate legal issues related to Mechanic’s Liens, but the Appellate Court only authorized for publication the decision addressing the prejudgment interest rate.
In evaluating the proper interest rate for Mechanic’s Lien claims, the Court of Appeal distinguished between interest allowed pursuant to the California Constitution and that allowed by statute for breach of contract. The Court determined that under the California Constitution Article XV, Section 1, the interest rate for the “Forbearance of any money, goods, or things in action, or on accounts after demand shall be 7 percent per annum,” and “things in action” includes the right to foreclose on a Mechanic’s Lien.
The opinion finds the Constitutional default rate of 7 percent per annumshould apply to prejudgment interest on a Mechanic’s Lien against a non-contracting innocent owner. The Court reasoned that the owner of the property had no contract with Palomar and that the Mechanic’s Lien was a result of the imposition of the Mechanic’s Lien laws (Constitutional and statutory) and not one of contract. Therefore, the statutory default rate of 10 percent per annum, which is used for breach of contract cases pursuant to Civil Code §3289(b), if the contract does not stipulate a legal rate of interest, should not apply to innocent non-contracting owners.
However, the Court of Appeal clarified the decision applied only to “innocent” owners who, even though they did not breach their own contracts, nonetheless winded up with their property subject to a Mechanic’s Lien, and that the decision does not address culpable contract breaching owners.
Therefore, remember the determination of the proper prejudgment interest rate is a factual analysis contingent on the property owner’s actions and/or inactions, and requires a detailed evaluation. Sometimes a 7 percent interest rate will apply, other times a 10 percent rate might be appropriate. It depends on the unique circumstances of each project.