In several states, including Mississippi, California, Arizona, New Mexico, and Washington, subcontractors and suppliers are used to filing a “stop notice” or “stop payment notice” when they are not paid for work performed at a project. See also North Carolina (lien on funds). However, the recent holding in Noatex Corp. v. King Constr. of Houston, LLC, 2013 U.S. App. LEXIS 20656, 14-15 (5th Cir. Oct. 10, 2013), calls into question the constitutionality of stop notice statutes and the remedies they provide to lower-tier contractors and suppliers.
A stop notice is a notice to the party paying for a work of improvement, that is, the owner, the construction lender, or the disbursing officer of a public entity, stating that money is due the stop notice claimant. Generally speaking, when a claimant serves a stop notice on the owner, the owner must withhold the amount claimed in the stop notice from the general contractor until payment or settlement of the withheld amount, or the owner may be liable to the claimant for the amounts paid.
The more familiar mechanics’ lien is a claim against the property where work is performed, and is typically going to be inferior to the lender’s security interest on the improved property. A stop notice claim, on the other hand, is a claim against the construction funds. As a result, it seeks to ensure that any undisbursed funds will be used to pay the claim irrespective of any superior interest on the improved property.
The Fifth Circuit Court of Appeals recently held that Mississippi’s Stop Notice statute, which has been in effect for forty years, was unconstitutional because it violated prime contractors’ due process rights.
Mississippi’s Stop Notice statute provides:
“When any contractor [employed by an owner] . . . shall not pay . . . the amount due by him to any subcontractor therein, . . . [subcontractor] may give notice in writing to the owner thereof of the amount due [to subcontractor] and claim the benefit of this section; and . . . the amount that may be due upon the date of the service of such notice . . . shall be bound in the hands of such owner for the payment in full . . . of all sums due such . . . subcontractor . . . who might lawfully have given notice in writing to the owner hereunder.”
Miss. Code Ann. § 85-7-181. If after the subcontractor provides such notice, the contractor sues the owner for the funds, the owner “may pay into the court the amount due on the contract,” and all parties with an interest in the funds may be made parties to the suit and the matter adjudicated accordingly. Id. If judgment is entered against the owner, “such judgment shall be a lien from  the date of the original notice.” Id.
The Fifth Circuit Court of Appeals found that the Mississippi statute violated the contractor’s due process rights because it (1) did not provide for any notice or hearing prior to the binding of the funds, (2) did not require a posting of any bond by the subcontractor prior to attachment, (3) did not require any showing of exigent circumstances for attachment, and (4) did not require the subcontractor to submit an affidavit or other writing setting out the facts of the dispute and the legal rationale for the attachment.
The ruling is especially harsh considering that under Mississippi’s current law a claimant must have a direct contractual relationship with the owner of the property to have lien rights. Mississippi is currently the only state that does not allow subs and suppliers the right to record a lien. At present, the only apparent recourse at present for subs and suppliers in Mississippi that have not been paid for work completed is to sue the prime contractor.
Other states that have stop notice statutes, for example California, allow subcontractors to file stop notices and mechanics liens. It will be interesting to see if, and how, the Fifth Circuit’s ruling will affect Mississippi’s lien laws and the stop notice statutes in other states.
The Fifth Circuit’s decision can be accessed here.