July 19, 2018
Stop Payment Notices – Generally
A stop payment notice (commonly referred to as a “stop notice”) is a claimant’s written demand to the party holding construction funds (usually the owner or construction lender) to withhold a specified amount from the moneys otherwise due to the general contractor on a construction project.1 The stop notice remedy is a statutory remedy defined in California’s Civil Code and can be used in both private works and public works construction projects.
The stop payment notice remedy generally is considered part of California’s mechanics’ lien laws, now primarily found within Division 4, Part 6 of the Civil Code. Specifically, the stop payment notice remedy is defined in Civil Code section 8044, and the statutes governing the remedy in the context of private works are found at Civil Code sections 8500 through 8560, and at Civil Code sections 9350 through 9310 for public works.
The stop payment notice remedy serves important purposes. Primarily, the remedy protects subcontractors and other claimants who furnish labor and/or materials for a project. Thus, the remedy protects such claimants against a general contractor who fails to pay. The stop notice remedy also permits claimants to bring an action directly against an owner, contractor or lender to recover amounts due. In the private works context, the stop payment notice remedy provides an important and separate remedy protecting claimants who might otherwise not have viable mechanics’ lien security where, for example, there are senior lienholders with priority over mechanics’ lien claimants. Because the stop payment notice attaches unexpended construction loan funds, it is not wiped out by a foreclosure of the property by a lender. Finally, the stop payment notice remedy also can protect a general contractor who remains unpaid by an owner in that the contractor may enforce a stop payment notice against a construction lender in certain circumstances.
The various remedies provided under the mechanics’ lien laws are cumulative, meaning a claimant may concurrently assert any available remedy under the circumstances. In a private works context, therefore, a claimant may be able to simultaneously assert a mechanics’ lien, a stop payment notice, and a payment bond claim (assuming such a bond was issued). Similarly, on a public works project, a claimant may be able to simultaneously assert a stop payment notice and a payment bond claim.2 While a claimant will not be permitted to recover more than the amount it is due, the ability to pursue multiple remedies certainly gives a claimant better odds of recovering amounts due in that each remedy differs in application.
Unlike a mechanics’ lien that creates a lien against an owner’s real property and must be foreclosed upon before a claimant can recover, a stop payment notice attaches to the owner’s funds or to the lender’s construction loan proceeds. Upon service, the stop payment notice
requires the holder of the funds to withhold the sums claimed from any sums due the direct contractor, effectively acting as a garnishment of the funds otherwise due to the direct contractor. Thus, the stop payment notice creates a priority claim to money and, for that reason, can be a very effective remedy.
1 See Flintkote Co. v. Presley of N. Cal. (1984) 154 Cal. App. 3d 458, 462 (“a notice by one who has furnished materials or labor for the construction of improvements, given to the owner of the property, or to a lender of funds to be used for payment of claims against such property, for the purpose of withholding money in the hands of such owner or lender from the contractor so that the materialman or
laborer may be paid for his material or services.”); See also Sunlight Elec. Supply Co. v. McKee (1964) 226 Cal. App. 2d 47, 50 (a stop notice is used for “intercepting funds” due to the contractor).