New Legislation Addresses The Use of Statutory Lien Releases To Release Stop Notices
William C. Last, Jr.
Attorney at Law
Senate Bill 130, which concerns the release of stop notices, was signed into law by the Governor and will go into effect on January 1, 2006. This section has been modified to resolve an issue that arisen relative to public entities refusing to release money that is being held by them pursuant to the demand in a stop notice. This article will discuss some basic stop notice requirements, how a stop notice is released, the new law and other alternatives available to a general contractor that disputes a stop notice
When someone provides labor, services, equipment or materials to a California public works construction project and is not fully paid, he can file suit against the person who failed to pay him. However, even if he were to win such a suit, his ability to collect may be limited by the other party's bankruptcy or lack of assets, or even the disappearance of the other party.
In order to help alleviate these problems, California Law provides two procedures whereby one who provides services to a constructing project can obtain a more secure position. A properly served and perfected Stop Notice gives the claimant a lien against undisbursed construction funds in the possession of either the public owner. The second alternative is a claim on the payment bond that the public entity requires the general contractor to procure. The two remedies are cumulative remedies which can be simultaneously pursued along with a suit for breach of contract on the underlying debt.
The Stop Notice on a state or local public work must be served within thirty (30) days after the recording of a Notice of Completion, Notice of Acceptance, or Notice of Cessation. (Civil Code '3184). Where no Notice of Completion, Acceptance or Cessation has been recorded, the Stop Notice must be served within ninety (90) days after actual completion or cessation of work. (Civil Code '3184).
As most contractors know, it is not uncommon for a contractor, subcontractor or supplier to serve a stop notice before a project is completed. Once the stop notice is received by the public entity it will withhold claimed amount plus any reasonable costs of any litigation association with the stop notice claim. If the stop notice claimant and the general contractor reach some sort agreement regarding payment in full of the amount sought in the stop notice or a partial payment the public entity will demand a written release from the stop notice claimant before it will release any withheld funds.
In order to obtain a valid and enforceable mechanic=s lien, stop notice or payment bond release, the lien claimant must sign a document that Asubstantially@ contains language that is set forth in California Civil Code section 3262. That section proscribes the mandatory language that must be included in four types of releases: (1) a conditional waiver and release upon progress payment; (2) a conditional waiver and release upon final payment; (3) an unconditional waiver and release upon progress payment; and (4) an unconditional waiver and release upon final payment.
Thus, no oral or written statement purporting to waive, release, impair or otherwise adversely affect a claim is enforceable or creates any estoppel or impairment of a claim unless it is pursuant to a waiver and release form provided by existing law, or the claimant had actually received payment in full for the claim.
Over the past few years public entities have been reluctant to accept certain forms of stop notice releases. Many have demanded unconditional lien releases that essentially release any stop claim that the stop notice claimant may have against the general contractor. The unconditional lien release also precludes the claimant from any future stop notice claim against the subject project. If the stop notice claimant has not been paid in full, the claimant refused to sign such releases. That lead to impasse where by the funds were impounded due to the stop notice claim with no means of releasing them from the public entity.
The change in the law that will go into effective on January 1, 2005 resolves the impasse. The new law provides that nothing in the Civil Code section that sets forth the requirement for statutory lien releases precludes a stop notice claimant from reducing the amount of, or releasing in its entirety, a stop notice that has been served upon an owner. The new law also states that the reduction or release of a stop notice shall be in writing and may be served in a form other than in the form of a statutory lien release as set forth in the applicable Civil Code section. Finally, the new law provides that the reduction or release of a stop notice shall not preclude the service of a subsequent stop notice that is timely and proper.
The new language that has been added to Civil Code section 3262 states: ANothing in this section precludes a stop notice claimant from reducing the amount of, or releasing in its entirety, a stop notice that has been served upon an owner. The reduction or release of a stop notice, which shall be in writing, may be served in a form other than the forms of release set forth in this section. Any reduction or release of a stop notice: (1) shall not preclude the service of a subsequent stop notice that is timely and proper; (2) shall release the owner from any obligation to withhold money on account of the stop notice, to the extent of the reduction or release; (3) shall be effective to release the claimant=s right to enforce the stop notice, to the extent of the reduction or release; and (4) shall not operate as a release of any right that the claimant may have, other than the claimant=s right to enforce the stop notice, to the extent of the reduction or release.@
In passing, if the stop notice claimant and the general contractor cannot reach an agreement on how to resolve the disputed stop notice there are other remedies available to the general contractor. When the prime contractor disputes the validity of any or all of the Stop Notice claims, there are two procedures which it may use to attempt to have the withheld funds released in an expedited manner.
1. Bond: The public entity may, in its discretion, allow the contractor to file a proper bond to obtain release of the withheld amounts. The bond must be issued by a corporate surety, and be in an amount equal to 125 percent (125%) of the claim stated in the Stop Notice. The bond must provide that if the claimant eventually recovers, he may also recover the costs of bringing the action. (Civil Code '3196).
2. Affidavit: If the prime contractor claims that the Stop Notice is invalid due to one of the four following reasons, he may attempt to obtain release of the money by a different method. The four grounds are: (a) That the claim upon which the Stop Notice is based is not one which is a proper ground for a Stop Notice on a public work; (b) That the person claiming the Stop Notice is not a person who is entitled to a Stop Notice on a public work; (c) That the amount of the claim in the Stop Notice is excessive; or (d) That the claim as set out in the Stop Notice has no proper basis in law. (Civil Code '3197). This affidavit, and one copy, is served on the public entity. (Civil Code '3198).
The public entity then served a copy of the affidavit and demand for release and a written notice on the Stop Notice claimant, stating that it will release the money as demanded unless the claimant files a counter affidavit within a designated period of time (10-20 days hence). (Civil Code '3199). If the claimant desires to contest the contractor's affidavit, he must, within the time specified in the public entity's notice, serve upon the public entity a counter-affidavit and serve a copy on the prime contractor. This counter-affidavit must contain, in detail, the facts which support the claim in his Stop Notice, as well as facts which rebut the allegations of the prime contractor's affidavit. The claimant must also include proof that he has served a copy of the counter-affidavit upon the prime contractor. If the claimant fails to file the counter-affidavit and proof of service within the proper time, the public entity may immediately release the funds to the contractor as demanded in the original affidavit. (Civil Code '3200).
If a proper counter-affidavit is filed within the proper amount of time, either the prime contractor or the claimant may file an action in Superior Court for an expedited hearing on the validity of the Stop Notice.
If the prime contractor does not wish to use the affidavit process to obtain an expedited hearing, the Stop Notice claimant must file a lawsuit within the prescribed period to enforce its Stop Notice.
The new changes to Civil Code section 3262 should speed the release of stop notice funds when the public owner demands an unconditional release. Unless the stop notice claimant is willing to release all lien releases and acknowledge payment in full, the claimant should refuse to sign such an unconditional lien release on final payment. If the public owner refuses to release the funds when provided with an alternative partial release, the parties who are seeking the release should ask the public owner to review the revisions to Civil Code section 3262.
This article, 82005, was written by William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for over 27 years.. In addition to belonging to a number of construction trade associations, Mr. Last holds a California AA@ and AB@ license. He can be contacted at 415-764-1990 or 650-425-7679. His e-mail address is email@example.com. A number of his past articles can be found on his website (lhfconstructlaw.com). This bulletin is published periodically to provide general information about current legal issues. The articles are not intended to be a substitute for the advice of an attorney as to a specific problem. If you have a specific legal question or need legal advice, you should contact an attorney.