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Monies Held from Stop Notices

This is a Public Project - a second tier subcontractor filed a Stop Notice against the first tier Subcontractor. ($200K) The first tier Subcontractor filed a Stop Notice against the General Contractor. ($400K) Half of the first tiers Stop Notice amount includes the second tiers Stop Notice amount. However, because both Stop Notices were sent to the Owner, the Owner is holding $600K, plus 25%. We tried to explain to the Owner they are 'double dipping' but they told us by law they must hold this money and if we want to get it released, we must file affidavits with the courts under Civil Code Section 9400 - for excessive monies held. It's an obvious administrative error. We've never seen this on any of our other projects before. Do we (1)have to accept this error (2) file the affidavits as the Owner and law states or (3) is there some legal explanation showing that a second tier is part of a first tier and not their own separate charges? Thanks!!!

1 reply

Jun 15, 2018

That's a tough one. Under § 9352(c) of the CA Civil Code, "The amount claimed in the notice may include only the amount due the claimant for work provided through the date of the notice." In a situation where both a first and second tier contractor have submitted a Stop Payment Notice, it's entirely possible for both parties to claim amounts that overlap. Regarding what must be withheld, under § 9358(a), "The public entity shall, on receipt of a stop payment notice, withhold from the direct contractor sufficient funds due or to become due to the direct contractor to pay the claim stated in the stop payment notice and to provide for the public entity’s reasonable cost of any litigation pursuant to the stop payment notice. When an amount being withheld may be excessive, a direct contractor can attempt to have the funds released on the following grounds: "(a) The claim on which the notice is based is not a type for which a stop payment notice is authorized under this chapter. (b) The claimant is not a person authorized under Section 9100 to give a stop payment notice. (c) The amount of the claim stated in the stop payment notice is excessive. (d) There is no basis for the claim stated in the stop payment notice." To begin that process, as alluded to above, the direct contractor requesting release must provide the public entity with an affidavit (and an extra copy) containing the following information: "(a) An allegation of the grounds for release of the funds and a statement of the facts supporting the allegation. (b) A demand for the release of all or the portion of the funds that are alleged to be withheld improperly or in an excessive amount. (c) A statement of the address of the contractor within the state for the purpose of permitting service by mail on the contractor of any notice or document." From there, the claimant(s) who submitted the Stop Payment Notice(s) will have an opportunity to counter the direct contractor's affidavit for release. If they fail to do so, funds will be immediately released. Finally, regarding the consolidation of two separate Stop Payment Notices - this is possible, but not mandatory, under the California Civil Code. Under § 9506, multiple claimants can join in the same enforcement action, the court may order the actions consolidated, or they may be consolidated at the request of the public entity. But claimants are not required to consolidate their claims at the start - even when one of the claims is made by a sub-tier of another.

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