A prime contractor recently came to me with a problem involving a stop payment notice. It seemed that a supplier to a subcontractor on a project had a dispute with the subcontractor. As a result, the supplier filed a stop payment notice on the project. The problem was that the cumulative unpaid billings from the supplier amounted to no more than $65,000, while the stop notice filed was for approximately $75,000. In my subsequent conversation with the supplier, he acknowledged that there was only $65,000 in unpaid principal. He said he filed a stop notice in the higher amount because he wanted to be sure to cover anticipated interest, fees, costs and lost profits. I advised him that filing the stop notice in such an amount and for such a purpose was improper and requested he release the stop notice. He refused. I confirmed the conversation in writing and promptly took him to court.
The law on this subject is found in California Civil Code Section 9454, which states:
“A person that willfully gives a false stop payment notice to the public entity or that willfully includes in the notice work not provided for the public works contract for which the stop payment notice is given forfeits all right to participate in the distribution under Section 9450.”
The result of the court case was that rather than simply reducing the stop notice, the stop payment notice was ordered released in full by the court. The funds were then released in full by the owner and the prime contractor was paid in full. The supplier had no direct contract with the prime contractor and therefore no basis for a lawsuit against it. The supplier and the subcontractor were left to resolve their own differences.
The lesson from the case is that those who file false or inflated stop notices in an amount in excess of the value of the work performed and in order to coerce a payment from an owner for sums to which they are not entitled under the stop payment notice itself, often end up with nothing at all from the owner. Act honestly and others are more likely to treat you honestly. Act dishonestly and both the law and your opponent may exact a costly punishment in the form of the release of the entire stop payment notice and forfeiture of important rights.
Article written by William L. Porter, Esq. and revised in 2014. Mr. Porter is a principal in The Porter Law Group, Inc. in Sacramento, California. He can be reached by phone at (916) 381-7868.