Construction Lenders Beware: Unbonded Stop-Payment Notices May Be Worth More Than The Paper They Are Written On


A common perception in the construction industry is that the most valuable part of an unbonded stop payment notice is the paper it is written on, at least when it is served on a construction lender. While an unbonded stop payment notice may be effective against the project owner holding construction funds, it is understood to be ineffective against a construction lender. This understanding stems from the language of the stop payment notice statute, which provides that a construction lender may, but is not obligated to, withhold construction loan funds if it is served with an unbonded stop payment notice. Stop payment notice claimants construe the optional nature of a construction lender’s withholding obligation as a rule of law barring enforcement of unbonded stop payment notices.

However, the notion that an unbonded stop payment notice is unenforceable against a construction lender appears to conflate the obligation to withhold construction loan funds in response to a stop payment notice and its enforceability. The language of Civil Code, §8536, subd. (b)(1) (and its predecessor, Civil Code, §3162) only provides that a construction lender may refuse to withhold construction loan funds in response to a stop payment notice; it does not provide that an unbonded stop payment notice is, per se, unenforceable to the extent construction loan funds remain undisbursed or otherwise available following service of a stop payment notice.

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