One of the most effective collection procedures available to subcontractors and suppliers to California Construction projects is the “stop payment notice” procedure found under California Civil Code sections 9350 – 9364. Under this procedure, the unpaid subcontractor or supplier may serve the stop payment notice on the public entity and the direct or “prime” contractor and cause the public entity to withhold from the direct contractor 125% of the funds identified in the stop payment notice. Thereafter, funds will not generally be released unless the parties reach a settlement agreement or the issue is decided through litigation, arbitration or mediation. There is however an alternative procedure available to direct contractors to expedite the determination of whether a stop payment notice is valid and to possibly obtain an early release of the funds withheld by the public entity. This “summary proceeding” process could result in release of funds to the direct contractor in less than 30 days. The summary proceeding can also be challenged by the unpaid subcontractor or supplier. All public works contractors, subcontractors and suppliers should be aware of the process. The process for direct contractors to release a stop payment notice and for subcontractors and suppliers to challenge the process works as follows:
After a California stop payment notice has been served and the public entity has withheld funds accordingly, the direct contractor may challenge the stop payment notice by serving an “affidavit” (basically a sworn statement showing why the stop notice is not valid) on the public entity, demanding that the public entity release all funds withheld. Upon receipt of such an affidavit, the public entity will serve the subcontractor or supplier who served the stop payment notice with a copy of the affidavit, along with a “demand for release of funds”. If the stop payment notice claimant does not respond with a “counter-affidavit” by the date stated on the notice sent by the public entity (“not less than 10 days nor more than 20 days after service on the claimant of a copy of the affidavit”), then the public entity will be within its rights to release the withheld funds to the direct contractor, and the stop payment notice claimant will relinquish its stop payment notice rights.
The unpaid subcontractor or supplier who served the stop payment notice and received the affidavit demanding release of funds is entitled to challenge the affidavit and can in most cases do so easily and effectively with the simple step of drafting and serving a “counter-affidavit” within the requisite time period. Specifically, if the stop payment notice claimant is served with such an affidavit and demand for release of funds, it is recommended that the claimant fill out a “counter-affidavit” form (available at www.porterlaw.com/forms.htm) and serve it on the public entity and the direct contractor within the 10-20 day time limit set by the Civil Code. This should, at least temporarily, stop release of the funds by the public entity and preserve the stop payment notice remedy (See Civ. Code §§ 9400-9414.) For those challenging the affidavit with a counter-affidavit it is important to provide a succinct and factually accurate counter-affidavit statement and to not miss the relatively short 20-day deadline for serving the counter-affidavit.
The relevant sections of the California Civil Code are as follows:
9400. A direct contractor may obtain release of funds withheld pursuant to a stop payment notice under the summary proceeding provided in this article on any of 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.
9402. The direct contractor shall serve on the public entity an affidavit, together with a copy of the affidavit, in compliance with the requirements of Chapter 2 (commencing with Section 8100) of Title 1, that includes all of 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.
9404. The public entity shall serve on the claimant a copy of the direct contractor’s affidavit, together with a notice stating that the public entity will release the funds withheld, or the portion of the funds demanded, unless the claimant serves on the public entity a counteraffidavit on or before the time stated in the notice. The time stated in the notice shall be not less than 10 days nor more than 20 days after service on the claimant of the copy of the affidavit. The notice shall comply with the requirements of Chapter 2 (commencing with Section 8100) of Title 1.
9406. (a) A claimant that contests the direct contractor’s affidavit shall serve on the public entity a counteraffidavit alleging the details of the claim and describing the specific basis on which the claimant contests or rebuts the allegations of the contractor’s affidavit. The counteraffidavit shall be served within the time stated in the public entity’s notice, together with proof of service of a copy of the counteraffidavit on the direct contractor. The service of the counteraffidavit on the public entity and the copy of the affidavit on the direct contractor shall comply with the requirements of Chapter 2 (commencing with Section 8100) of Title 1.
b) If no counteraffidavit with proof of service is served on the public entity within the time stated in the public entity’s notice, the public entity shall immediately release the funds, or the portion of the funds demanded by the affidavit, without further notice to the claimant, and the public entity is not liable in any manner for their release.
(c) The public entity is not responsible for the validity of an affidavit or counteraffidavit under this article.
9408. (a) If a counteraffidavit, together with proof of service, is served under Section 9406, either the direct contractor or the claimant may commence an action for a declaration of the rights of the parties.
(b) After commencement of the action, either the direct contractor or the claimant may move the court for a determination of rights under the affidavit and counteraffidavit. The party making the motion shall give not less than five days’ notice of the hearing to the public entity and to the other party.
(c) The notice of hearing shall comply with the requirements of Chapter 2 (commencing with Section 8100) of Title 1. Notwithstanding Section 8116, when notice of the hearing is made by mail, the notice is complete on the fifth day following deposit of the notice in the mail.
(d) The court shall hear the motion within 15 days after the date of the motion, unless the court continues the hearing for good cause.
9410. (a) The affidavit and counteraffidavit shall be filed with the court by the public entity and shall constitute the pleadings, subject to the power of the court to permit an amendment in the interest of justice. The affidavit of the direct contractor shall be deemed controverted by the counteraffidavit of the claimant, and both shall be received in evidence.
(b) At the hearing, the direct contractor has the burden of proof.
9412. (a) No findings are required in a summary proceeding under this article.
(b) If at the hearing no evidence other than the affidavit and counter-affidavit is offered, the court may, if satisfied that sufficient facts are shown, make a determination on the basis of the affidavit and counteraffidavit. If the court is not satisfied that sufficient facts are shown, the court shall order the hearing continued for production of other evidence, oral or documentary, or the filing of other affidavits and counteraffidavits.
(c) At the conclusion of the hearing, the court shall make an order determining whether the demand for release is allowed. The court’s order is determinative of the right of the claimant to have funds further withheld by the public entity.
(d) The direct contractor shall serve a copy of the court’s order on the public entity in compliance with the requirements of Chapter 2 (commencing with Section 8100) of Title 1.
9414. A determination in a summary proceeding under this article is not res judicata with respect to a right of action by the claimant against either the principal or surety on a payment bond or with respect to a right of action against a party personally liable to the claimant.
Article written by William L. Porter, Esq. Mr. Porter is a principal in The Porter Law Group, Inc. in Sacramento, California. Visit the firm’s website at www.porterlaw.com. Video instruction from Mr. Porter can be found at www.AppliedLegal.com.