Being a Contractor Just Got a Whole Lot Scarier

If you’re fortunate enough to live and work in California you have a lot to be thankful for. Temperate weather, beautiful beaches, rugged mountains and an array of attractions whether you’re an urbanite, outdoorsman or thrill seeker. And, if you’re a contractor or material supplier, statutory construction payment remedies such as mechanics liens, stop payment notices and payment bonds to help ensure you get paid.

But things just got a lot tougher for contractors and material suppliers in the Golden State.

In Golden State Boring & Pipe Jacking, Inc. v. Eastern Municipal Water District, Case No. E054618 (July 23, 2014), the California Court of Appeals for the Fourth Appellate District found that a subcontractor’s public works payment bond claim was time barred because its stop payment notice was served “before” a notice of completion was recorded.

If you’re involved in this kinda stuff like I am, you know this is a big deal. Whereas before, it was commonly understood that you could serve a stop payment notice “during” construction (after all, that was the point wasn’t it, to stop construction funds before they are paid out), now you may only have a 30 day window (probably less) to serve a stop notice “after” a notice of completion or notice of cessation is recorded.

Background

In 2006, the Eastern Municipal Water District (“District”) hired S.J. and Burkhardt, Inc. (“Burkhardt”) for a pipeline project in Perris, California. Burkhardt in turn subcontracted the tunneling portion of the project to Golden State Boring & Pipe Jacking, Inc. (“Golden State”). As required on public works projects with a value in excess of $25,000, Burkhardt furnished a payment bond, which was issued by Safeco Insurance Company (“Safeco”).

Prior to completion of the project there were three cessations of labor which exceeded 30 days:

• November 11, 2006 through December 17, 2006;
• April 4, 2007 through May 20, 2007; and
• May 20, 2007 through October 4, 2007.

[Note: I’m not sure why the court counted the period from May 20, 2007 through October 4, 2007 as a separate cessation of labor rather than just a continuation of the cessation of labor which began April 4, 2007]

Golden State completed its work on the project in September 2006. On January 2, 2008, after Burkhardt failed to pay Golden State its contract balance of $577,038.37, Golden State served a stop payment notice on the District and later filed suit in July 2008. In October 2008, three months after Golden State filed its lawsuit, the District recorded a Notice of Acceptance signifying completion of the project.

In the trial court, the court granted a motion for summary judgment filed by Safeco, and when the matter went to trial, the court awarded Golden State $577,038.37 on its contract claim, $590,016.60 in prompt payment penalties for progress payments, $242,981.62 in interest on progress payments, $50,863.50 in prompt payment penalties for retention, and $6,834.39 in interest on retention, for a grand total of $1,467,734.38. Ouch.

Although the case doesn’t expressly state, it appears that Burkhardt may have been judgment proof, because Golden State appealed the judgment in favor of Safeco.

The Appeal

On appeal, the Court of Appeals held that Golden State’s suit to enforce its claim against the payment bond issued by Safeco was untimely and, in doing so, interpreted the construction payment statutes in a way that (I think) was never intended, with unintended consequences.

As pointed out by the Court of Appeal, three statutory sections were at issue:

• Civil Code section 3249 (now Civil Code section 9558) which provides:

Suit against the surety or sureties on the payment bond may be brought by any claimant, or his assigns, at any time after the claimant has furnished the last of the labor or materials, or both, but must be commenced before the expiration of six months after the period in which stop notices may be filed as provided in Section 3184.

[Note: The dissenting opinion incorrectly identifies the section as Civil Code section 3294]

• Civil Code section 3184 (now Civil Code section 9356) which provides:

To be effective, any stop notice pursuant to this chapter must be served before the expiration of:

(a) Thirty days after the recording of a notice of completion (sometimes referred to in public works as a notice of acceptance) or notice of cessation, if such notice is recorded.

(b) If no notice of completion or notice of cessation is recorded, 90 days after completion or cessation.

• Civil Code section 3086 (now Civil Code section 9200) which provides:

“Completion” means, in the case of any work of improvement other than a public work, actual completion of the work of improvement. Any of the following shall be deemed equivalent to a completion:

(a) The occupation or use of a work of improvement by the owner, or his agent, accompanied by cessation of labor thereon.

(b) The acceptance by the owner, or his agent, of the work of improvement.

(c) After the commencement of a work of improvement, a cessation of labor thereon for a continuous period of 60 days, or a cessation of labor thereon for a continuous period of 30 days or more if the owner files for record a notice of cessation.

If the work of improvement is subject to acceptance by any public entity, the completion of such work of improvement shall be deemed to be the date of such acceptance; provided, however, that, except as to contracts awarded under the State Contract Act, Chapter 3 (commencing with Section 14250), Part 5, Division 3, Title 2 of the Government Code, a cessation of labor on any public work for a continuous period of 30 days shall be a completion thereof.

Now, here’s where it gets interesting.

Under Section 3249, a payment bond claimant must file suit against a payment bond surety after the claimant has finished its work but before the expiration of six months after the prior in which stop notices may be filed.

Under Section 3184, a stop notice must be served before: (1) 30 days after the recording of a notice of completion or notice of cessation; or (2) 90 days after completion or cessation if no notice of completion or notice of cessation is recorded.

And, under Section 3086, on local public works projects, “completion” is deemed to occur where there has been a cessation of labor for a continuous period of 30 days.

But what happens, as it did in this case, when there is both a cessation of labor for 30 days but the local public agency also later records a notice of acceptance and the contractor files suit to enforce its claim against a payment bond but does so before the local public agency records a notice of acceptance?

The Majority Opinion

The Golden State Boring case involved a split decision, and I’ll discuss both the majority and dissenting opinions, as both are important.

The majority, as I mentioned above, held that Golden State’s suit to enforce its claim against the payment bond issued by Safeco was untimely.  Their rationale, broken down to it essence, was this:

1. Section 3184, which provides that a stop notice “must be served before the expiration of: (a) Thirty days after the recording of a notice of completion (sometimes referred to in public works as a notice of acceptance) or notice of cessation, if such notice is recorded,” means that a stop notice must be served “after” the recording of a notice of completion or notice of cessation but “before” the expiration of 30 days.
2. Because Golden State served its stop notice on January 2, 2008, three months before the District recorded its notice of acceptance in October 2008, Golden State’s stop notice was “premature and ineffectual.”
3. Moreover, because Section 3086 defines “completion” as the “cessation of labor on any [local] public work for a continuous period of 30 days,” and there were three periods in which there was a cessation of labor which exceeded 30 days, Golden State’s stop notice served on January 2, 2008 was not served within 90 days from completion.

The Dissenting Opinion

Justice King, who wrote the dissenting opinion, would have held that Golden State’s suit to enforce its claim against the payment bond issued by Safeco was timely. His rationale, again broken down to its essence, was this:

1. Contrary to the majority, Justice King did not believe that under Section 3184 a stop notice must be served after a notice of completion is recorded. Rather, so long as a stop notice is served before 30 days have elapsed after the recording of a notice of completion, a stop notice is timely, and so long as suit to enforce a claim against a payment bond is brought within 6 months after that, the suit is timely.
2. Because Golden State served its stop notice before the District recorded is noticed of acceptance in October 2008, and filed its suit to enforce its claim against the payment bond within 30 days + 6 months after the notice of acceptance was recorded as required under Section 3249, Golden State’s suit was timely.
3. Moreover, because the District recorded a notice of acceptance, whether or not there was a cessation of labor for a continuous period of 30 days under was irrelevant.

My Opinion

I may not don black robes, and no one calls me “Justice” or “Your Honor,” but I think Justice King got it right.

First, I don’t think that Section 3184 requires that a stop notice be served “after” the recording of a notice of completion but “before” the expiration of 30 days of such recording. Section 3184 says that “any stop notice pursuant to this chapter must be served before the expiration of: (1) thirty days after the recording of a notice of completion (sometimes referred to in public works as a notice of acceptance) or notice of cessation, if such is recorded.” If the state legislature had intended the meaning suggested by the majority, it could have just as easily and more clearly stated that ” any stop notice must be served after the recording of a notice of completion or notice of cessation, if one is recorded, but before the expiration of thirty days from the date of such recording.”

Second, I think that the majority’s focus on whether Golden State timely served its stop notice is irrelevant. Golden State, as the majority held, was appealing its claim against the payment bond issued by Safeco not the enforcement of its stop notice. The stop notice statutes are relevant only insofar as they are determinative of the deadline in which Golden State had to file suit on its claim against the payment bond issued by Safeco. Thus, whether Golden State’s stop notice was “premature” or “ineffectual” under Section 3184, and whether Golden Gate had served its stop notice within 90 days after a cessation of labor for a continuous period of 30 days under Section 3086, is irrelevant to the issue of whether Golden State time filed its suit to enforce its claim against payment bond issued by Safeco.

And, finally, although the case involved a claim against a public works payment bond, by interpreting Section 3184 to mean that a stop notice must be served “after” a notice of completion or notice of cessation is recorded but “before” the expiration of 30 days of such recording, the majority has created a new requirement for stop notice claimants. And, I don’t think it provides much comfort that the majority was interpreting a statutory section that has now been replaced, since the new section is substantially similar to the former section, and Civil Code section 8052 specifically provides that “[a] provision of this part, insofar as it is substantially the same as a previously existing provision relating to the same subject matter, shall be construed as a restatement and continuation thereof and not as a new enactment.”

Conclusion

As you can see, I have issues with this opinion. I think the holding is wrong and its rationale misdirected. But, most importantly, I have concerns with its unintended consequences on stop notice claimants. If a stop notice is required to be served “after” the recordation of a notice of completion or notice of cessation but “before” the expiration of 30 days of such recording, this is going to cause a number of problems:

• Subcontractors and Material Suppliers Are Going to Have to Monitor Recordings at the Recorder’s Office. Subcontractors and material suppliers are going to have to monitor when notices of completion or notices of cessation are recorded or risk missing the 30 day window to serve a stop payment notice by periodically checking what documents are recorded at the recorder’s office. Although Civil Code section 8214 allows subcontractors and material suppliers to “file” a preliminary notice with the county recorder and receive notice when a notice of completion or notice of cessation is recorded, most subcontractors and material suppliers don’t, and there is no penalty for a county recorder’s failure to send notice. Moreover, unlike on private works projects, a public owner who receives a preliminary notice is not required to give notice of the recording a notice of completion or notice of cessation to those persons from whom it has received a preliminary notice.
• Subcontractors and Material Suppliers Are Likely Going to Have Less than 30 Days to Serve a Stop Payment Notice. Subcontractors and material suppliers are likely going to have less than 30 days to serve a stop payment notice. Even if a subcontractor or material files a preliminary notice with the county recorder, and the county recorder sends notice of the recording of a notice of completion or notice of cessation, a county recorder only needs to make a good faith effort to mail notice within five days after the recording of a notice of completion or notice of cessation.
• First-Tier Subcontractors and Material Suppliers Are Going to Be Caught Off Guard. First-tier subcontractors and material suppliers are likely not going to know to serve and file a preliminary notice, since first-tier subcontractors and material suppliers are not required to serve preliminary notices as a precondition of serving a stop payment notice under Civil Code section 9300.
• Local Public Entities May Not Record a Notice of Completion or Notice of Cessation. If a local public entity does not record a notice of completion or notice of cessation, a subcontractor or material man is stuck having to guess when to serve a stop payment notice. Presumably, that deadline would be 90 days from completion or cessation, but can a local public entity frustrate a subcontractor or material supplier who serves a stop notice within 90 days from completion or cessation, by thereafter recording a notice of completion or notice of cessation?

Here’s my suggestion. It’s not elegant and it’s not fool proof but it’s about as good as you can get under the circumstances.

• All subcontractors and material suppliers on public works projects, even first-tier subcontractors and material suppliers, should serve a preliminary notice and “file” it with the recorder’s office in the county where the project is located and hope that they get notice of the recording of a notice of completion or notice of cessation.
• Subcontractors and material suppliers should also serve a stop payment notice if they are not paid during the course of the project irrespective of whether the project is complete to protect their stop payment notice rights since the Court of Appeal did not address whether a stop payment notice served before a project is completed, but where a notice of completion or notice of cessation is not recorded, would also be “premature and ineffectual.”
• And, finally, if a notice of completion or notice of cessation is recorded, serve another stop payment notice since under the Court of Appeal’s holding the previously served stop payment notice would then become “premature and ineffectual.”
• Also, since you can’t be sure that you will receive notice from the county recorder’s office of the recording of a notice of completion or notice of cessation it wouldn’t hurt to periodically check with the recorder’s office every 30 days after you serve your stop payment notice to see if a notice of completion or notice of cessation has been recorded.