Stop Payment Notices: The Lesser Known Construction Payment Remedy

By Garret Murai, May 15, 2013

My kid sister was popular in high school.

Student body council. Check.

Member of nearly every campus organization except the Latin and Chess clubs. Check.

Always got a seat in the cafeteria and was never unceremoniously dumped into a trash can. Check.

My friends and I, on the other hand, spent our days hanging out behind the school library talking about Dungeons & Dragons and engaging in heated debate over who would win in a fight (Examples: My paladin v. your cavalier, Thor v. the Silver Surfer, John McClane v. Martin Riggs etc.) (Answers: My paladin, the Silver Surfer and John McClane, of course).*

In the world of California Construction Payment Remedies High, it’s the mechanics lien that would win the popularity contest hands down. But there’s another construction payment remedy that shouldn’t be overlooked. And, that is, the stop payment notice. While far less popular than mechanics liens, stop payment notices, as discussed below, are particularly useful in two situations: (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. So here’s the skinny.

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?

It depends on who you are. Direct contractors can serve stop payment notices on construction lenders only. Subcontractors, material suppliers, laborers and trust funds can serve stop payment notices on both owners and construction lenders.

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: On private works projects, subcontractors and material suppliers of all tiers are required to serve a preliminary notice in order to serve a stop payment notice. And, on private works projects that are lender financed, direct contractors are required to serve a preliminary notice in order to serve a stop payment notice.

Public Work of Improvement: On public works projects, only second-tier and lower subcontractors and material suppliers are required to serve a preliminary notice in order to serve a stop payment notice.

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.

How early can I serve a stop payment notice?

Unlike a mechanics lien, a direct contractor, subcontractor or supplier can serve a stop payment notice at any time after it has performed all or a portion of its work.

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.

Are there restriction on the amount I can demand in a stop payment notice?

Yes, the amount demanded in a stop payment notice is limited to the amount due for work provided through the date of the stop payment notice. Although the law is not particularly clear, this arguably includes retention.

How and to whom do you serve a stop payment notice?

Method of Service: A stop payment notice must be served by registered, certified, or express mail; by overnight delivery; or by personal delivery.

Private Works of Improvement –

(1) If Seeking that Owner Withhold Funds: If you are seeking to have the owner withhold funds, a stop payment notice must be served on either the owner or the owner’s architect.

(2) If Seeking that Construction Lender Withhold Funds: If you are seeking to have a construction lender withhold funds, a stop payment notice must be served on the manager or other responsible officer or person at the office or branch of the lender administering or holding the construction funds.

Public Works of Improvement –

(1) State Public Works Projects: If you are seeking to have a state entity withhold funds, a stop payment notice must be served on the director of the department awarding the contract.

(2) All Other Public Works Projects (Except Federal): If you are seeking to have a local or regional entity withhold funds, 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.

Note: I suggest serving a stop payment notice on all parties identified in the stop payment notice – the owner, direct contractor, construction lender (if any), and the party who contracted for the work furnished by the stop payment notice claimant.

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 stop payment notice accompanied by a bond issued by a surety in an amount equal to 125% of the amount of the claimed in the stop payment notice.

Public and Private Owners: Public and private owners must withhold an amount sufficient to satisfy the amount claimed in a stop payment notice whether the stop payment notice is bonded or not.

Construction Lenders: However, construction lenders are only required to withhold an amount sufficient to satisfy the amount claimed in a stop payment notice if it receives a bonded stop payment notice. Moreover, even if a construction lender receives a bonded stop payment notice, it 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 such a notice 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 notice. 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 the stop payment notice does not result in your getting 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: 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) 120 days after the owner records a notice of completion or cessation.

In addition, within 5 days after filing suit, you must serve a notice of commencement of action to all persons to whom you served 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 that the stop payment notice claimant 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.

Similarly, on private works project that are lender financed, if a payment bond was recorded before a stop payment notice is served, a construction lender may require that the stop payment notice claimant (other than a direct contractor) proceed against the payment bond only. A construction lender may require that a stop payment notice claimant proceed against a recorded payment bond 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.

Public and Private Works of Improvement – Stop Notice Release Bonds: On public and private works projects, a direct contractor can release funds withheld pursuant to a stop payment notice, by giving the person withholding the 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 release funds withheld by a construction lender pursuant to a stop payment notice, by giving the construction lender a stop notice release bond equal to 125% of the amount claimed in stop payment notice.

Public Works of Improvement – Challenging Validity of Stop Payment Notice: On public works projects, a direct contractor may also challenge the validity of a stop payment notice. A direct contractor may challenge the validity of a stop payment notice by serving the public entity withholding funds with an affidavit 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 of 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?