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California Stop Payment Notices

Updated: Nov 11, 2023

Most contractors are probably familiar with the mechanic's lien process in their states. For California, I have a couple of posts: "California Mechanic's Lien Basics" and "Enforcing a California Mechanic's Lien" (and see here for Texas mechanic's lien information).


But foreclosing those liens is not the only remedy available to contractors in California. California has another, lesser-used option called the stop payment notice.


What is a stop payment notice?


A stop payment notice (sometimes called a stop notice) is another claim California contractors have, specifically against owners or construction lenders if the contractor is not paid. If you're a subcontractor who is not paid, you can tell the lender to stop paying the general contractor. Compare it to a mechanic's lien: a mechanic's lien is an interest in the property, while a stop payment notice is an interest in the funds being paid.


To illustrate a little more clearly, let's say you are a subcontractor on a work of improvement. The general contractor, who is responsible for paying you, has not paid you for your work. You serve a stop payment notice on construction lender (who is responsible for making payments). This requires lender to stop paying the general, and to hold onto those funds until you release the stop payment notice.


Why have a stop payment notice?


Unlike with a mechanic's lien or breach of contract action, a stop payment notice (with a bond) requires the lender to put aside funds until the dispute is resolved, whether by trial or settlement.

Moreover, a stop payment notice might be your only available option (such as for public contracts). See Cal. Civ. Code sections 9350 to 9510.


Can I still record a mechanics lien?


Yes, and you can still file a lawsuit to foreclose the lien (on private works of improvement; recall that on public works of improvement, you generally aren't entitled to a mechanics lien). You can still sue for all the same causes of action (for example, breach of contract).


What's the catch?


You need to post a bond for 125% of the amount owed. Cal. Civ. Code section 8510. This gets expensive, especially if you end up in litigation, which can drag on for months or years before the case resolves.


California law does recognize unbonded stop payment notices. If, for whatever reason, you are unable to obtain the bond, or cannot afford the bond, you can still pursue the stop payment notice. However, the owner or lender is not required to hold the funds. Cal. Civ. Code section 8536. That is, the funds may still be paid out.


What information do I need to include in the stop payment notice?


The stop payment notice needs to comply with the other notice requirements (see, especially, Cal. Civ. Code section 8102, etc.). But it must also be verified, include a general description of work to be provided, and an estimate of the total amount in value of the work to be provided. Cal. Civ. Code section 8502. The amount claimed in the notice can only the amount due the claimant for work provided through the date of the notice.


How do I enforce the stop payment notice?


As with a mechanic's lien, you'll have to file a lawsuit. You cannot file your lawsuit until 10 days after you served the stop payment notice. And you cannot file your lawsuit after 90 days have passed after the time to file a claim of lien expires. Cal. Civ. Code section 8550, section 8508.

Do other states allow stop payment notices?


California is one of only a handful of states that allow stop payment notices. I believe the only other states to allow them are Alaska, Arizona, and Washington.


Mississippi previously allowed stop payment notices, but their statute was held unconstitutional by the 5th Circuit Court of Appeals. Noatex Corp. v. King Construction of Houston, LLC (2013) 864 F. Supp. 2d 478. And Texas (which is also in the 5th Circuit) does not allow stop payment notices.


Conclusion


Stop payment notices are not always available, and they are a little more involved that mechanic's liens. However, more sophisticated contractors are beginning to use them more and more. They can be an invaluable resource for those contractors willing to take the time to understand them, and take the steps needed to protect their rights to payment.

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