Stop Payment Notices: The Lesser Known Construction Payment Remedy

by Wendel, Rosen, Black & Dean LLP
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My kid sister was popular in high school, unlike me. She was an officer on the student council, a member of Yearbook photonumerous campus organizations, and someone whose name made it in the yearbook polls (in a good way). I, on the other hand, spent my four years of high school in relative obscurity, hanging out behind the school library talking about Dungeons & Dragons and why the Silver Surfer was the most kick ass comic book character of all time. Yup, I was one of THOSE kids.

That’s why, I suppose, in an odd way, I feel somewhat of a kinship with that lesser known construction payment remedy – the stop payment notice. Stop payment notices are unique to California and a select few states, and create a lien on undisbursed construction funds by stopping the release of those funds to those who have not paid a stop payment notice claimant.

Because stop payment notices (me), unlike the far more popular mechanics liens (my sister), are not secured by the property in which work is being furnished, they are a less favored (read: less popular) statutory payment remedy in California. However, stop payment notices should not be overlooked, discounted, or otherwise brushed off like they don’t even exist (Note to self: address repressed high school anxieties) and are particularly effective (read: great, wonderful, unsurpassed, etc.) in two situations in particular: (1) On public works projects, in which mechanics liens are not an available remedy; and (2) Where there is concern that the non-paying party may be unable to perform its payment obligations.

What is a stop payment notice?

A stop payment notice creates a lien on undisbursed construction funds held by an owner or construction lender. If a stop payment notice claimant has not been paid, the claimant can serve a stop payment notice on an owner which requires the owner to withhold funds from a direct contractor or, on lender financed projects, serve a stop payment notice on a construction lender which requires the construction lender to withhold funds from an owner.

On what types of projects can a stop payment notice be served?

Both public and private projects.

Who can serve a stop payment notice?

Direct contractors can serve a stop payment notice on a construction lender only. Subcontractors, material suppliers, laborers and trust funds can serve a stop payment notice on an owner or construction lender.

Do I need to serve a preliminary notice in order to serve a stop payment notice?

It depends on whether it is a private work of improvement or public work of improvement:

  • Private Work of Improvement: Subcontractors and material suppliers of all tiers. And, on lender financed projects, direct contractors.
  • Public Work of Improvement: Second-tier and lower subcontractors and material suppliers.

Is there a deadline to serve a stop payment notice?

Yes, but it depends on whether you are a direct contractor, subcontractor or material supplier.

  • Direct Contractors: No later than the earlier of:

(1) 90 days after completion of the project; or

(2) 60 days after the owner records a notice of completion or cessation.

  • Subcontractors and Material Suppliers: No later than the earlier of:

(1) 90 days after completion of the project; or

(2) 30 days after the owner records a notice of completion or cessation.

What information is required to be included in a stop payment notice?

You can find a stop payment notice forms under the “Toolbox” menu. But here’s what information is required:

  • The name of the owner or reputed owner;
  • The name and address of the direct contractor;
  • The name and address of the construction lender, if any;
  • A general description of the work furnished by the stop payment notice claimant;
  • The location of the project;
  • The name of the person or entity who contracted for the work furnished by the stop payment notice claimant;
  • An estimate of the total price of the work furnished by the stop payment notice claimant;
  • The amount demanded by the stop payment notice claimant through the date of the stop payment notice after deducting all just credits and offsets.

How do you serve a stop payment notice?

A stop payment notice must be served by registered, certified, or express mail; by overnight delivery; or by personal delivery. On private works projects, a stop payment notice must be served on the owner, if you are seeking to have the owner withhold funds, or on the construction lender, if you are seeking to have the construction lender withhold funds. However, I also suggest serving the stop notice on all parties identified in the stop payment notice – the owner, the direct contractor, the construction lender (if any), and the party who contracted for the work furnished by the stop payment notice claimant.

On state public works projects, a stop payment notice must be served on the director of the department awarding the contract. On all other public works projects, a stop payment notice must be served on either: (1) the office of the controller, auditor, or other public disbursing officer whose duty it is to make payment pursuant to the contract; or (2) on governing body (i.e., commissioners, managers, trustees, officers, board of supervisors, board of trustees, common council, or other body) which awarded the contract.

What happens after you serve a stop payment notice?

It depends on whether the stop payment notice is bonded or not. A “bonded” stop payment notice is accompanied by a bond issued a surety in an amount equal to 125% of the amount of the claim.

  • Public and Private Owners: Public and private owners must withhold an amount sufficient to satisfy the amount demanded in the stop payment notice whether the stop payment notice is bonded, or not.
  • Construction Lenders: Construction lenders are only required to withhold an amount sufficient to satisfy the amount demanded in the stop payment notice if it receives a bonded stop payment notice. Moreover, even if a construction lender receives an unbonded stop payment notice, a construction lender may object to the sufficiency of the surety (if the surety is not an admitted surety insurer in California) by giving notice to the stop payment notice claimant within 20 days after receiving the bonded stop payment notice. If the stop payment notice claimant receives an objection from a construction lender, the stop payment notice claimant must provide a substitute bond from an admitted surety insurer in California within 10 days after receiving the objection. Obviously, the best practice is to ensure that if you serve a bonded stop payment notice, that it be bonded by an admitted surety insurer in California to begin with.

Do you need to do anything after you serve a stop payment notice?

Yes. If you are not paid, you must file a lawsuit to enforce the stop payment notice. The deadline for filing suit depend on whether you are a direct contractor or subcontractor or material supplier.

  • Direct Contractors: No earlier than 10 days after service of the stop payment notice but no later than the earlier of:

(1) 180 days after completion of the project; or

(2) 150 days after the owner records a notice of completion or cessation.

  • Subcontractors and Material Suppliers:

(1) 180 days after completion of the project; or

(2) 120 days after the owner records a notice of completion or cessation.

In addition, you must serve a notice of commencement of action to all persons to whom you served the stop payment notice within 5 days after filing suit to enforce the stop payment notice. And, finally, a lawsuit to enforce a stop payment notice must be brought to trial within 2 years after the suit is filed.

If you are a property owner or construction lender is there anything you can do if a stop payment notice is served?

Yes. On private works projects, if an owner records a payment bond before a stop payment notice is served, the owner may require the stop payment notice claimant to proceed against the payment bond only. If an owner requires a stop payment notice claimant to proceed against a recorded payment bond, the owner must give notice to the stop payment notice claimant that: (1) a payment bond has been recorded; and (2) provide the stop payment notice claimant with a copy of bond, within 30 days after receiving the stop payment notice.

In addition, a construction lender on a private works project, in which a payment bond has been recorded before a stop payment notice is served, may require the stop payment notice claimant other than a direct contractor to proceed against the payment bond only. The construction lender may require that the stop payment notice claimant proceed against the payment bond only even if the stop payment notice claimant served the construction lender with a bonded stop payment notice.

Public owners do not have these options.

If you are a direct contractor or property owner is there anything you can do if a stop payment notice is served?

Yes. On private works projects, a direct contractor can obtain release of funds withheld pursuant to a stop payment notice, by giving the person withholding funds a stop notice release bond equal to 125% of the amount claimed in stop payment notice. Similarly, on private works projects, an owner can obtain release of funds withheld by a construction lender, by giving the construction lender a stop notice release bond equal to 125% of the amount claimed in stop payment notice.

In addition, on public works projects, a direct contractor may challenge the validity of a stop payment notice by serving an affidavit on the public entity which includes the following information: (1) an allegation of the grounds for release of the funds and a statement of the facts supporting the allegation; (2) a demand for release of all or a portion of the funds that are alleged to be withheld improperly or in an excessive amount; and (3) a statement fo the address of the direct contractor within the state for purpose of permitting service of any notice or document.

Upon receipt of the affidavit, the public entity is required to serve on the stop payment notice claimant, a copy of the affidavit, together with a notice stating that the funds will be released in whole or in part unless a counteraffidavit is served within 10 to 20 days after service of the notice. A stop payment notice claimant may then serve a counteraffidavit which alleges the details of the claim and describes the specific basis in which the claimant contests or rebuts the allegations of the direct contractor’s affidavit.

If a counteraffidavit is served, either the direct contractor or the stop payment notice claimant may file a lawsuit seeking a declaration of their rights, followed by a motion seeking a determination of their rights under the affidavit and counteraffidavit. The court is required to hear the motion within 15 days after the motion is filed unless the court continues the hearing for good cause.

Are attorneys fees recoverable in a lawsuit seeking to enforce a stop payment notice?

Yes.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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