The laws, rules, and regulations surrounding mechanics liens and notices are constantly fluctuating. More often than not, these changes are more modest in nature rather than broad and sweeping changes to the law. While significant in effect, something like a new requirement that a notice be sent to the general contractor and property owner rather than to just the property owner amounts to basically a minor procedural change (and minor procedural changes rarely get anybody too excited).
after an October 10th decision of the United States Court of Appeals for the Fifth Circuit, sweeping change may be headed to Mississippi Stop Notice law. Every change in the lien law is important, though, so The Construction Payment Blog tracks and discusses changes under the Lien Law Alerts tab. Sometimes, however, whether by legislative action or court decision, changes to the lien law can be enormous. The broad changes to the entire structure of North Carolina’s mechanics lien law is a relatively recent example. Now, after an October 10th decision of the United States Court of Appeals for the Fifth Circuit, sweeping change may be headed to Mississippi Stop Notice law.
Protection for Subcontractors – Structure of Mississippi Stop Notice Law
In Mississippi, a party that did not contract directly with the property owner does not have mechanics lien rights. Instead, parties that contracted with the general contractor, may deliver a “Stop Notice” to effectively “lien” the funds not yet paid to the general contractor by the property owner. Parties without a contract with either the property owner or the general contractor are not protected in Mississippi.
A Stop Notice works like a lien on funds, rather than a lien on the physical property improved like a mechanics lien. This can be both beneficial and detrimental to the stop notice claimant. In one sense, there may be some utility in the fact that if the dispute is ongoing, there would never be the need to force the sale of property in order to get paid. However, a stop notice is only effective as to the money still in the hands of the property owner. That is, the money that the property owner has already paid to the general contractor pursuant to the contract is out of reach to the sub, and cannot be held up by the stop notice.
So, in essence, the stop notice works to “place a hold” on money that the property owner owes to the general contractor, but has not yet paid. The owner is forbidden from paying the general contractor any of the money referenced on the stop notice, and the money is shielded from the general contractor.
Mississippi Stop Notice Unconstitutional?
A brand new decision from the 5th Circuit Court of Appeals has set the groundwork for some significant changes to the Mississippi stop notice scheme. In Noatex Corp. v. King Constr. of Houston, 2013 U.S. App. LEXIS 20656 (5th Cir. 2013), the court determined that the Mississippi stop notice law was facially unconstitutional. This will likely result in changes to Mississippi’s law, and perhaps to the protection afforded to subcontractors in that state.
The constitutional debate at issue in the Noatex case was whether the stop notice statute deprived Mississippi general contractors of their property without due process of law. And, upon examination of the statute, determined that it did. The court noted that the stop notice procedure deprives contractors of “a significant property interest, the right to receive payment and be free from any interference with that right.” The court further noted that there was a profound lack of procedural safeguards in place to protect the property of the contractor. In fact, the only “safeguard” in place as Mississippi law currently stands is a “post-deprivation” remedy – a civil penalty for knowingly filing a false stop notice. This post-deprivation remedy was determined insufficient, especially since there are no pre-deprivation safeguards at all. The court finally determined that the lack of due process before contractors in Mississippi can be deprived of their property is not excepted by any “important governmental or general public interest”.
So what does this mean?
Right now it is too early to tell. This decision was published yesterday, so the fall-out has not yet occurred. This decision may be appealed to the Supreme Court, or Mississippi may change the structure of the stop notice law, as applied to subcontractors. The fix may be as simple as requiring a description of the basis for claiming the benefit of the stop notice on the face of the notice itself rather than just being able to give the notice and benefit from it. Or, the change may be as significant as requiring a pre-stop notice hearing to determine if the funds should be held. Or, it could be something entirely different. One thing is for sure – there will be more developments in this area and The Construction Payment Blog will provide discussion on them.
Update: Legislature Passes Sweeping New Lien Laws
The Mississippi legislature quickly sprung into action to protect subcontractors and suppliers against this decision. New sweeping changes to the mechanics lien scheme in Mississippi were passed and went into effect on April 11, 2014. These are some of the most significant lien law changes that have occurred in years anywhere in the country. The new scheme offers even great protection to subs and suppliers than existed before this decision. levelset’s mechanics lien resources for Mississippi have been updated to reflect the changes.