In a recent case, Palomar Grading & Paving, Inc. v. Wells Fargo Bank, N.A. et al., Court of Appeal (2014 S.O.S. 4573) the appeal court held that “We determine it is the constitutional default rate that should apply to prejudgment interest on a mechanic’s lien as applied to noncontracting, innocent owners.”  California’s constitutional default rate for prejudgment interest is 7%. 

 

Simply put, the appellate court stated that the constitutional default rate of 7% applied because noncontracting, innocent owners do not enter into contracts with the subcontractors who foreclose on their liens.  Essentially, “The liens on the property are the result of the imposition of the mechanic’s lien laws, not contract.” 

 

The appellate court noted that its decision did not address prejudgment interest in the case of culpable, contract-breaching owners; however, going forward subcontractors should expect a lesser recovery of prejudgment interest against innocent real estate owners.