It is no secret that in today’s economy, an increasing number of subcontractors and material suppliers are not being paid for work performed or materials supplied on construction projects. If a preliminary notice was properly served, the unpaid subcontractor or material supplier may serve a Stop Payment Notice on the property owner or lender. The stop payment notice may create a claim on the undisbursed construction funds and obligate the owner or lender to withhold the funds for the benefit of the subcontractor or supplier. It often depends upon whether the Stop Payment Notice was bonded.
A bonded Stop Payment Notice is a stop payment notice that is accompanied by a bond with a value equal to 1.25 percent of the amount claimed in the stop payment notice. A bond is not required for Stop Payment Notices on public works projects. Likewise, a bond is not required when the Stop Payment Notice is served on the owner of a private project. However, a bonded Stop Payment Notice is absolutely required when a Stop Payment Notice is directed to the lender on a private project. A lender served with an unbonded Stop Payment Notice is permitted to ignore the Notice. But a lender who fails to withhold undisbursed loan proceeds following proper service of a bonded Stop Payment Notice will be liable for the full amount due to the lien claimant plus attorney’s fees and costs of suit if the matter is litigated.
It should be noted that pursuant to California Civil Code §8506 (b), the Stop Payment Notice must be served on the particular branch of the lender actually administering or holding the funds. Therefore, it is important that a claimant ensure that its bonded stop payment notice is served on the lender’s administering office.