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Stop Payment Notices – An Intentional Decision or a Mistake? Golden State Boring & Pipe Jacking, Inc. v. Eastern Municipal Water District

Posted October 7, 2014 --> • Recent Cases

A stop notice (SN) is a fairly standard and simple device that has been available for many decades to California contractors who provide labor and/or materials on projects within the state.  Basically, the SN is intended to compel the owner/lender to freeze a sufficient amount of contract funds to eventually satisfy a rightful claimant’s demand for payment for labor and/or materials actually furnished or installed on a project.  The statutes governing the “effectiveness” of a SN are California Civil Code sections 9356 and 9558 (formerly 3184 and 3249, respectively).  These statutes and the courts interpreting them have always permitted a rightful claimant to file a proper SN at any time during the project so long as all other administrative and legal procedures have been satisfied.  Recently, however, the California Court of Appeals in a case titled Golden State Boring & Pipe Jacking, Inc. v. Eastern Municipal Water District tossed a sizeable rock into the proverbial calm pond – and, predictably, the waves are starting to hit shore.

In Golden State, the Court held that a claimant’s stop notice was unenforceable because it was time barred.  The Court found the stop notice time barred because it was filed prior to recordation of a notice of completion or a notice of cessation.  Thus, the Court held that a claimant must wait until the recordation of either notice occurs before it seeks to freeze the contract funds through the filing of a SN.  Critics of Golden State are up in arms, claiming that the Court’s decision is plainly counterintuitive and essentially neuters the value of the SN.  At a minimum, the decision raises eyebrows – in all quarters – because everyone in the industry knows the majority of contract funds are usually depleted at the latter stages of a project – when a notice of completion is most often recorded.

We suspect that the California Supreme Court will take up a review of the Golden State decision, and de-publication of the decision is a possibility.  It is also likely that the decision has caught the eye of the historically claimant-friendly California legislature, and we expect that one of its members will want to ensure clarity and a uniformity of interpretation within the SN statutes.   RNG will keep its eye on the matter and post updates on this blog if and as warranted.