On November 11, 2014, the California Supreme Court rejected the recent California Court of Appeals decision Golden State Boring & Pipe Jacking, Inc. v Eastern Municipal Water District, 228 Cal.App.4th 273 (2014) which we wrote about earlier by “decertifying” it (meaning that lawyers cannot cite to the case as legal precedent) The decertification removed a decision that added substantially to the confusion as to when an action on a payment bond is timely filed. Even though the decision was determined in accordance with pre-2014 statutes, the case was relevant precedent for construction attorneys when determining time deadlines for filing a claim on a bond.
In July of this year, the California Court of Appeals for the Fourth Appellate District upheld a trial court’s granting of summary judgment against a project subcontractor Golden State Boring & Pipe Jacking, Inc. (GSB) who sued Safeco Insurance Company (Safeco) for unpaid contract amounts on a project payment bond issued by Safeco. Both at the trial level and on appeal Safeco successfully argued that GSB’s action on its payment bond claim was time barred by former California Civil Code Sections 3249 (now Section 9558), because it was filed more than six month after the period in which stop notices may be filed as provided by California’s Civil Code Section 3184 (now Section 9558).
It behooves every potential claimant on a payment bond to take notice of this decision as it raised difficult questions not easily resolved with respect to cessations of labor that occur during the course of a project. Also, the decision runs counter to common sense and a reasonable reading of the relevant statutes.
In the GSB decision, the Fourth Appellate District tackled the difficult question of what happens to a subcontractor’s stop notice lien rights and its contract rights against a payment bond surety when there has been a succession of work stoppages and a subsequent notice of completion. The majority describes the factual setting as follows:
GSB filed a stop notice with owner of the project on January 2, 2008, in the amount of $577,038.37. On March 24, 2008, the prime contractor SJB informed Safeco by letter that it could not meet its obligations. In July 2008, GSB filed suit against SJB for nonpayment under the contract, as well as in common counts. The fourth cause of action included EMWD as a defendant for Enforcement of a Stop Notice, and the fifth cause of action named Safeco in a claim on the Stop Notice Release Bond and Payment Bond.
It is our opinion, however, that the court went badly off track on the payment bond issue. Old Civil Code section 3249 (now Section 9558) is the starting point:
…a suit against a surety on a payment bond may be brought 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. (now Section 9356)
Got it? Good. Simple Right? Not so Fast
Civil Code Section 3249 controls when suit may be brought against the surety on a payment bond. And Section 3249 states that any action on a payment bond may be commenced before the expiration of six months after the period in which stop notices may filed as provided in in Section 3184 (Now Section 9356). So, we begin our discussion with Section 3184 which reads in part:
…To be effective, any stop notice…must be filed before the expiration of: (a) Thirty days after the recording of a notice of completion…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.
Here is the rub that seems to reveal that the author knew the opinion was based upon shaky ground. Though very precise in detailing three periods of cessation of labor on the project, when it comes to the completion date, the majority tells us only that, “[t]he overall Project was completed in 2008.” The majority’s cavalier regard for the actual completion date stems from its conclusion that the three “cessations of labor” occurring during the project triggered the time for filing deadlines for a stop notice. But the Court then leapt to the conclusion that the deadline for the filing of a stop notice necessarily triggered the time for filing of an action of the bond as well.
This is every lawyers nightmare because the lien statutes are not at all clear as to what happens under such circumstances. The majority relied upon what it admits to be an “old line of cases” holding that claims of lien filed before a notice of completion (or acceptance) has been recorded are premature and are therefore ineffective. It is disappointing that the majority dismisses this question without discussing the only modern case that reached a contrary conclusion, Central Industrial Engineering Co., Inc. v. Strauss Construction Co., Inc. (1979) 98 Cal.App.3d 460, 464-465. But even so, the Court does not explain how its determination of the deadline for an action on a bond, necessarily triggered to time for an action against the bond.
So, What About the Bond?
Remember, the only relevance of the Section 3184 stop notice provisions to an action on the bond is to determine the last day that an action could have been brought on the bond. We are told in former Section 3249 (now 9558) that the claim on “the payment bond may be brought by any claimant…at any time after the claimant has furnished the last of the labor or materials, or both, but must be commence before the expiration of six months after the period in which stop notices may be filed as provided in Section 3184.” There is nothing in this provision that ties the time for a stop notice action on the time for an action on a bond. Whether an action on a stop notice was timely filed, or even if a stop notice was never filed is irrelevant to the determination of whether the an action on the bond was timely filed. The sole purpose of Section 3249 is to establish the time period for filing an action on the bond, and that time period is six months after “…(a) Thirty days after the recording of a notice of completion…or notice of cessation… (b) If no notice of completion or notice of cessation is recorded, 90 days after completion or cessation. ” (Civil Code Section 3184) The minority did not get confused with this issue:
The action against the bond was timely filed. A simple reading of the relevant statutes shows that the present matter was timely filed and that the beginning of the limitation period was the date of the recordation of the notice of completion, which was October 9, 2008 (followed by quotations of Section 3249 and 3184 as set forth above) . (Page 1 of the Dissent) .
The close of the time period is, of course, as provided in Section 3184, “Time Limit for Effective Service of Stop Notice”… (a)… “six months after the period in which stop notices may be filed as provided in Section 3184”, which is “thirty days after the recording of a notice of completion…”. So, to simplify, 30 days plus six months.
Fixated on the stop notice provisions, the majority decision does not tell us whether a notice of completion was even filed. The minority argued that GSB’s lawsuit on the payment bond was timely because it served its Stop Notice on January 2, 2008 and filed its claim within 6 months and 30 days after the recording of the notice of acceptance, October 9, 2008. The minority got it right.
The Golden State majority appears to have gotten off track by viewing Section 3249 as doing more than just trueing up the time deadline for an action on a payment bond. Rather, the majority appears to have viewed Section 3249 as somehow incorporating all of the substantive requirements for the filing of an “effective” stop notice claim as embodied in Section 3086, into the requirements for an effective payment bond claim. The majority got it wrong.
The California Civil Code has gone through substantial changes since the events that lead to the GSB decision took place and the Supreme Court did construction lawyers a huge favor in decertifying the Golden State decision. Hopefully, the next court to tackle the question will look a little closer.