Stop Notice to Surety (Bond Claim); Mechanic's Lien; Lien Rights

This essay is published for informational purposes only.  It is not legal advice, nor is it intended as a substitute for the advice of your attorney.

The Stop Notice is often a more effective tool than the Mechanic's Lien in the collection of a particular type of debt.  It permits mechanics and materialmen to set aside portions of a construction loan fund in the possession of the owner, or a lender or both. When directed to the owner, it forces the owner to withhold from the general contractor sufficient money to pay the claimant.  In contrast, a Mechanic's Lien is a claim granted to suppliers of labor and/or material to building projects to secure priority of payment of the work performed or materials supplied in constructing, altering, or repairing a building.  The claim encumbers the land and the building and improvements thereon.

Once a portion of these funds are earmarked for the stop notice claimant, that claimant may perfect these rights by filing a suit against the fund itself and obtaining judgment to the effect that the hold of the construction loan fund must pay the claimantbefore paying anyone else. A stop notice goes to the construction fund directly while mechanic's lien goes against the property.

Although independent of the mechanic's lien, a stop notice can also be used in conjunction with the mechanic's lien. Therefore both a mechanic's lien may be recorded and a stop notice filed to obtain payment of the same money. Since the use of a stop notice is a garnishment of funds it will have instant effect on the prime contractor. Thus, the use of a stop notice may give security for eventual payment even though there may be no equity in the property foreclosed upon since the high loan-to-value ratio in construction financing may leave little equity available for the mechanic's lien claimant, the stop notice remedy is often most effective under these circumstances and the only source for payment. A stop notice may be utilized at any time during the project with the immediate effect of withholding those construction funds if due and unpaid.

A mechanic or materialman may not use a stop notice if payment is not yet due. This also applies to retentions money nor yet due. Things to remember:

• Generally everything that applied to mechanic's liens as regards to the preliminary notice requirements and time for filing applies also to Stop Notices;
• With the exception of the general contractor, everyone entitled to a mechanic's lien is also entitled to the Stop Notice;
• The Stop Notice is served on the owner, construction lender or any other person who holds construction funds. If there has been a payment bond recorded by the owner or construction lender pursuant to the Stop Notice, then withholding the funds by them becomes optional;
• To make the withholding of funds mandatory by the construction lender, the Stop Notice must be coded at 1.25% the amount of the claim;
• Service of a Stop Notice must be by:
  1. Personal services;
  2. Registered mail, or
  3. Certified mail, return receipt requested.

Note: It is essential that the Stop Notice be served at the branch of the construction lender where the funds are being administered. If a joint control agency is involved, a stop notice should be filed there as well because there will be funds at both locations.

As stated in the act (Civil Codes Sec 3101) the stop notice must contain the following:

1. Type of labor, services, equipment of material furnished;
2. Name of the person to or for whom labor, services, equipment or material furnished;

3. Amount already furnished and the total amount agreed to be furnished;
4. The name or and address of the claimant signed or verified by the claimant or his agent.

To ensure that all information required at the Civil Code Sections 3103 is included in the Stop Notice, a pre-printed Stop Notice form is recommended, such as Wolcott's Stop Notice form 894.

Suit and the Stop Notice:

If the creditor's service of the Stop Notice was timely, the construction funds have been garnished at that point. It is necessary to obtain a determination of the creditor's right to those garnished funds. To determine your right, a court action needs to be taken through a "Complaint to Enforce Stop Notice". Sometimes this action is called a "Foreclosure of Stop Notice."

1. Suit may be filed after 10 days from the date of service of Stop Notice, but it may not be brought to trial of judgment until expiration of the lien filing period plus 90 days. It must, however, be filed not later than 90 days after expiration of the lien period.
2. A notice of suit must be given within five days after commencement thereof to the same persons on which the Stop Notice was served and in the same manner.
3. Stop Notices may be consolidated in one action upon the motion of the owner or construction lender.
4. If the undisbursed construction loan fund is insufficient to pay all valid claims of Stop Notices claimants, Civil Code Sec 3167 (a) and (b) provides that there will be a pro rata distribution without regard to the date in time in which the stop notices were served or the respective actionsto enforce them were commenced. Forms can be obtained from many stationery and office supply stores as well as from associations like Associated General Contractors.

Edited by Michael C. Dennis