Court Fells Claim of Tree Supplier That Failed to Serve Preliminary Notice on Lender

In a recent case, Shady Tree Farms v. Omni Financial, F062924 (May 22, 2012), the California Court of Appeals for the Fifth District held that a materialman in direct contract with an owner must give a 20-day preliminary notice to a construction lender.

In Shady Tree, Shady Tree Farms (“Shady Tree”) entered into a contract with JEG Ventures, LLC (“JEG”) for the delivery of 1,879 trees for approximately $3.2 million. JEG was one of several entities developing a sports complex, restaurants, and entertainment venues at property located in Fresno known as Granite Park. Omni Financial, LLC (“Omni”) was the construction lender on the project, and had loaned Zone Sports Center, LLC (“Zone”), one of the entities developing Granite Park, an $18 million construction loan secured by a deed of trust on the properties owned by the Zone.

Between August 12, 2008 and November 10, 2008, Shady Tree delivered 959 trees to the development. A landscaping company planted 47 of these trees, and the remaining trees were placed around the development for later planting. The Granite Park entities assumed ownership and responsibility for the trees, but failed to take proper care of them, and all the trees eventually died.

Except for a $25,000 deposit, Shady Tree was not paid for the trees. On February 3, 2009, Shady Tree recorded a mechanics lien against JEG, the Zone and Granite Park Kids’ Foundation, another one of the entities developing Granite Park, seeking to recover the balance due of $1,959,244.50 plus interest from September 1, 2008. On April 2, 2009, Shady Tree filed a lawsuit to foreclose on its mechanics lien.

Omni, who had foreclosed on the property, successfully argued in the trial court that Shady Tree was required to but did not serve a preliminary notice as a precondition of recording its lien. On appeal, the Court of Appeals affirmed.

Interpreting the preliminary notice provision of Civil Code section 3097 [which will be recodified to Civil Code section 8200 beginning July 1, 2012], the Court of Appeals explained that while 3097(a) provides that “except one under direct contract with the owner” must serve a preliminary notice, 3097(b) provides that “except the contractor” all persons who furnish labor, equipment and material on a project must give a preliminary notice to the construction lender.

“The contractor,” explained the Court, refers to “the prime or general contractor for the project, not multiple contractors, i.e., the subcontractors or others with direct contracts with the owner”, and because Shady Tree was not “the contractor” (i.e., the prime or general contractor) on the project, Shady Tree was required to serve a preliminary notice on the construction lender as a precondition of enforcing its mechanics lien.

For materialmen who provide materials directly to the owner, as well as contractors who may be one of multiple contractors in direct contract with an owner, the case is an important reminder that simply being in direct contract with the owner doesn’t mean that you do not need to serve a preliminary notice.

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