Get Paid on California Public Projects: Stop Notices and Bond Claims

Payment on public projects can be slow, but what are your options to speed things up when working with the government?

Join this webinar to learn:

• What’s required in CA to protect yourself?
• How best to use stop notices to speed up payments
• Are bond claims effective as a last resort?

Full Transcript

Seth: I’m Seth bloom. I’m the Senior Director of Attorney Services at Levelset down here in new Orleans. We’re really excited to put on these educational webinars. We have an excellent attorney that’s going to be we’re hosting for today. And that is Peter Ryan. Peter Ryan is from the greater Southern California area. It’s based in Pasadena with the law firm of Hunt Ortmann and he’ll tell you more about that and his focus is on, in the construction area. So I will turn it over to Peter today as he talks to us about how to get paid on California public projects, stop notices and bond claims. So Peter, thank you so much for being here today. Look forward to hearing what you have to say and if anyone out there wants to ask questions, feel free to ask a question through this webinar and we’ll try and get Peter to answer it. If not, we can post it on the expert center afterwards. So Peter, thank you so much.

Peter: Thanks Seth. Good morning everybody. Seth mentioned, my name is Peter Ryan. I’m an attorney. At the law firm hunt Ortmann located in Pasadena. We focus primarily on construction law, construction law claims. As just mentioned today, I’ll be going over the rules and requirements for payment remedies for public works projects in California. This primarily includes enforcing stop payment notices and making payment all in claims. And, let’s get started. So to be eligible to serve a stop payment notice or to make a bond claim on a public works project in California, you may need to serve or to send a preliminary notice. This is required for anyone other than a labor who does not have a direct contractual relationship with a prime contractor, direct contractor. If your contract is directly with the direct contractor, you don’t need to send preliminary notice on a public works project.

Peter: Otherwise you do like private work projects. The preliminary notice if required, must be sent within 20 days of commencing work and on large projects. If there are multiple contracts, even if it’s for the same project, you need to send preliminary notice for each contract you have on the project figuring out where to serve. Preliminary notice on public works projects can be a little confusing. The rules that preliminary notice should be served on either the department for whom the work is being performed or the disbursing officer of the department constructing the work. Generally, the best way to get this information is by looking at the bid documents, but you can also reach out to customer and most likely they’ll have a good idea of who the notice needs to be served upon when sending preliminary notice to contractors or subcontractors. You can send it to either their home residence or the address for their place of business.

Peter: Obviously an easy way to do this is just to look on the CSLB website to see what address their license is under. Preliminary notice must be given in writing and is generally sent by mail, which level second help you with it must be sent by other registered certified or express mail. Alternatively, you can send, you can personally serve preliminary notice or you can also leave a copy of the notice at the recipient’s place of business if nobody’s there and also mail a copy via regular mail. After sending preliminary notice, you should fill out a proof of service Declaration certifying how that preliminary notice was sent. You can use this later to prove that you properly served the notice. This is another step, that Levelset take care of for you. Assuming that you sent preliminary notice or that you have a direct contractual relationship with the direct contractor, you’re eligible for the statutory remedies for nonpayment when California public works projects.

Peter: The first is the Stop Payment Notice. A Stop Payment Notice is a notice sent to a party holding construction funds. Generally in public works context, the public entity and this notice mandates that the entity withhold sufficient funds to ensure that you can be paid the amount that you are owed. California public works projects with a value exceeding $25,000 are also required to have a payment bond which the direct contractor is required to secure. This provides another source of funds that you can pursue if you have not been paid. It’s important to note that mechanics liens are not permitted on California public works projects. So now I’d like to discuss the requirements for sending a stop payment notice on California public works projects. First you must keep in mind the deadlines to do so. They are the same deadlines as for mechanics liens on private works projects, you have 30 days from the date of the recording of a notice of completion or notice of cessation to send a stop payment notice.

Peter: If there is no notice of completion or cessation recorded, then the actual completion date of the project will govern and you’ll have 90 days from the actual project completion date to send your stop payment notice. But as a practical matter, you should send your stop payment notice as soon as possible to ensure that there’s still money left to withhold. If the public entity has already paid out all of the funds, then they are not required to withhold any money and the stop payment notice is not going to do you a whole lot of good. Stop payment notices are sent in the same manner as preliminary notice as that recovered above and again level second help you with that. You should include a check to the public entity for $10 along with your stop payment. Notice doing so requires the public entity to send you a notice within 10 days of the actual completion date or within 10 days of the recordation of a notice of completion or a notice of cessation.

Peter: This is important because it allows you to track the deadlines to go ahead and file an action to enforce your stop payment notice. A stop payment notice secures the money that you are owed by mandating that the holder of the construction funds, usually the public entity withhold that money from the general contractor. But to actually obtain that money, you may need to actually file a lawsuit. You may not do so until at least 10 days after sending your stop payment notice, but there’s also a final deadline to file this lawsuit. That deadline is 90 days from the deadline to send a stop payment notice. As we discussed above, as a practical matter, this will be 120 days from any notice of completion or notice of cessation, or if no notice of completion, notice of cessation. It’ll be 180 days from the project completion. The goal in bringing the lawsuit is generally to ensure that the stop payment notice does not expire.

Peter: If the stop payment notice expires, the funds will be released. In most cases, you will not bring this lawsuit all the way to trial. You’ll be able to settle and resolve the claim short of that, but it is important to note that you have two years to bring the action to trial. After bringing the lawsuit, most of the time on large public projects with payment issues, there ends up being many subcontractors and material suppliers that end up serving stock payment notices. Subcontractors can choose to file a single lawsuit to enforce all of these claims, but if there are separate lawsuits which are more common, the court in the first filed lawsuit discretion to consolidate that action with all others, which is very common. Alternatively, the public entity can also request that the court require all stop notice claimants to be implemented into one action, which effectively does the same thing and forces everybody to participate in the same lawsuit.

Peter: A direct contractor that believes a stop payment notice is improper, has two options to secure its release. The prime contractor can obtain a release bond or they can adjudicate the validity of the stop payment notice via a summary proceeding. If the direct contractor elects to obtain a release bond, the bond must be for 125% of the amount set forth in the stop payment. Notice it’s important to note that the public entity has discretion whether or not to accept the release bond. They can reject it and continue to withhold the money. But in most cases the public entity does go ahead and accept the release bond and release the funds. If the public entity accepts the release bond, the claim set forth in the stop payment notice shifts from the public entity to the bond itself. So the bond is standing as security for the claim instead of funds withheld by the public entity. If there’s also a payment bond on the project, both sureties, the surety for the payment bond and surety for this release bond are jointly liable for the claim. So that provides extra security, especially if an insufficient amount was initially withheld under the stop payment notice.

Peter: Okay. The other option that the direct contractor has is a summary proceeding which is an administrative process where the validity of the stop payment notice can be challenged with written sworn statements also referred to as affidavits, so this is basically a signed statement under oath provided by the direct contractor trying to justify why they believe the stop payment notice claim is invalid. The direct contractor can serve on the public entity an affidavit arguing the stop payment notice is invalid on one of the following grounds. The claim is not the type allowed by stop payment notice law. The claim is not that the claimant is not the person entitled to the stop payment. Notice that the amount of the claim is excessive or that there’s otherwise no basis in law for the claim. The public entity in turn will serve this affidavit on the stock. Notice upon receipt of affidavit by the stop notice claimant, the stop notice claimant has the opportunity to file a counter affidavit supporting the validity of their stop payment notice claim. The public entity.

Seth: Sorry Peter, I just, I wanted to jump in for a second. Jenny has a question so I wanted to send them one question going to get the people moving a little bit. So Jenny asks, is filing a stop notice the only way to be notified of completion?

Peter: That’s a good question, Jenny. And that is not the case. I mean generally if a, if you serve, send a preliminary notice and record that preliminary notice, then you must be provided notice if a, a notice of completion or notice of cessation is filed. But otherwise I guess it is correct to know whether or not a project is considered complete otherwise without sending a stop payment notice. I mean, obviously you can reach out to the public entity to confirm that information or reach out to whoever your customer is, but to require the public entity to send you notice it would be correct that you would need the stop payment notice and also forward them the payment of the $10. So they are required to provide you with that notice.

Seth: Okay. We have one question more from Joseph. He says, he asks, what is the best way to get an NOC? We have filed preliminary notices. We do not get a NOC return.

Peter: So if, if there is a notice of completion filed and you have sent a preliminary notice, it should be provided to you. But if it’s not the best way to get it would be to have a property profile run on the property. And any broker or title company can do that. It’s relatively inexpensive. And basically they will check title for any notices that have been recorded, which would include a notice of completion or notice of cessation. Okay. Let’s see, where were we? So again going over the summary proceeding process if an affidavit has been filed by the direct contractor, the stop notice claimant has the opportunity to file a counter affidavit. If they fail to do that, the stop payment notice will be released and the money will be released rendering the stop payment notice effective.

Peter: But as long as a counter affidavit is submitted to the public entity, the public entity will continue to withhold the stock payment notice funds at this point that affidavit, the counter affidavit will be provided to the general contractor and either party has an opportunity at that point to immediately bring legal action for declaratory relief to basically determine whether or not the stop payment notice is valid. And once that action brought either the general contractor or the stop payment notice, claimant can bring a motion with 15 days notice to request that the court make a ruling on the validity of the stop payment. Notice the direct contractor in this sort of lawsuit would have the burden of proof to demonstrate that the stop payment notice is not valid. And while the court may allow further evidence at some, sometimes the court will only consider the affidavits that have been provided in deciding the validity of the notice.

Peter: So it’s important to provide all pertinent information you have in these affidavits. A court or a jury can rule on this claim and you can request that a jury rule on it though that will increase costs. And it’s also important to note that even if the court rules that the stop payment notices invalidated, that is not Res judicata on a bond claim. So it doesn’t preclude you from after that make it still making a claim against the payment bond for the money you are owed. This would be relevant if the stop payment notice was invalid for some reason other than the validity of your claim. So it’s possible that the stop payment notice could be defeated, but you could still pursue your bond claim.

Peter: A few special things to consider with respect to stop payment notices on public projects. The stop payment notice is only effective as I mentioned earlier, if there is money left to withhold when the stop payment notice is given, this means that until a stop payment notice is actually submitted the public entity, you can pay the direct contractor at any time even and if the money’s been paid, there’s no further duty to withhold the money when no notice of completion or notice of cessation is reported. Actual completion is determined by acceptance of the work by the public entity or cessation of labor for 60 days. So the project is completely stalled out and never finished. The completion date will be determined by 60 days from the last day anybody did work on the project. I noticed that since cessation can be filed after a cessation of labor for 30 days, so if the public entity wants to accelerate the deadlines, what they can do if labor has stopped for 30 days is file a notice of cessation and that’s going to limit all the deadlines to 30 days after that notice instead of 90 days after the 60 days of labor, that has been stopped.

Peter: A notice of completion has to be recorded within 15 days of actual completion. If you sent a stop payment notice, and along with this notice provided the $10 is, as I referenced earlier, the public entity is required to give you notice within 10 days after project completion like acceptance or cessation. So this can be especially useful if the project is stopped for a substantial period of time because generally the public entity is not going to keep track of that and they’re going to fail to give you the notice that they’re required to give you. And that pretty much indefinitely can extend your deadlines because the deadlines don’t start if they don’t comply with the requirements. Alternatively, also within 10 days of recording of a notice of completion or cessation, by giving the $10, you are required to be provided notice from the public entity. If funds withheld are not sufficient to pay all claims, then the funds are distributed on a pro rata basis.

Peter: So if let’s say at the end of the project there was only retention left to be paid and a bunch of stop notice claims were served at that time and they exceeded the value, then you’re going to get, they’re going to add up all those claims, determine what percentage of the total claims your claim is and they’re going to give you that percentage of the remaining money. Hopefully if the project’s large enough to also be a payment bond, that’ll be a backup if there’s not enough stop payment money withheld. It’s also important to note though that false or otherwise improper stop payment notices forfeit any right to participate in the distribution of stock payment notice funds. So let’s say that you served a stop payment notice and then later you served another stop payment notice related to other funds, but one of the notices was excessive or couldn’t be supported.

Peter: You’re going to forfeit your right to claim any money based on either notice the other remedy beyond stop payment notices. Comment on most public works projects is the payment bond payment bonds, as I mentioned before, required on all California public works projects exceeding $25,000. The payment bond which is secured by the general contractor must be for at least for 100% of the contract amount, but the payment bond in the end can still end up being less than mounts claimed. If there are a lot of change orders, preliminary notices required, as I mentioned before, to make a claim. If you do not have the direct contractual relationship with the direct contractor, but if you fail to send preliminary notice, even though you’re required to, you may still be able to make a claim by providing notice to the principal, which is going to be the general contractor and the surety by one of the two deadlines.

Peter: If there is a notice of completion or notice of cessation, then you have this second shot to make your claim by giving notice to the principal and the surety within 15 days of this notice of completion or notice of cessation. If there is no notice of completion or notice of cessation, then you have 75 days from actual completion to send the, the, the surety and the principle notice of your claim. If you fail to give preliminary notice, but this exception to the preliminary notice requirement is not always effective. If the direct contractor has paid its subcontractor, which would be your customer or the customer of your customer all sums that are not in dispute or the direct contractor has terminated that subcontractor and made all payments not in dispute. Then the preliminary notice exception is not available to claimants who are furnished labor or materials to that subcontractor. So again, it’s always better to send the preliminary notice .

Seth: Um we have a question. We have a question out there from Rochelle and she says for contractors and subcontractors can you give us a couple examples of what, what are things they should look for that might be red flags for problems?

Peter: Uh I guess in, in what, what contexts? Look for as far as payment problems or…?

Seth: I don’t know. Rochelle left it a little open-ended, but maybe she’ll give me some more details in a second. Okay. If we want to come back to that.

Peter: Okay. Yeah, we can come back to that. And I’ll, I’ll just keep going here. I’m almost done with this and then we can focus on the questions.

Seth: She just responded. And then she said, she says as a sub, she has, she has two phases. So maybe Rochelle, give us a little bit more detail and we’ll have Peter try to answer that at the end.

Peter: Okay, perfect. Okay. Now I just want to talk about actions to enforce payment bond claims. So like the stop payment notice your claim on a payment bond. If the bond company doesn’t pay out and the bond company, generally, if the claim is disputed by the general contractor, the bond company’s not going to pay out until the dispute is resolved, which is going to necessitate most likely you bring legal action to enforce the bond claim. This must be done within six months of the last date to serve a stop payment notice. And as we discussed before, that was 90 days from project completion or 30 days from the notice of completion or notice of cessation. But that can end up being a substantial period of time and it can be a little tricky to keep track of the prevailing party in any action. To enforce a bond claim is entitled to an award of attorney’s fees. So that’s always a positive. If you are forced to move forward with legal action to enforce a bond claim, you can recover attorney’s fees and costs on that claim.

Peter: If a public entity fails to require a payment bond of the general contractor for a project that exceeds 25,000, then it is directly liable to subcontractors for claims that otherwise would have been made on that payment bond. This is uncommon but can happen, especially with smaller, less sophisticated entities such as a city or something like that, while the direct contractor is responsible for obtaining the ball and the public entity is responsible to ensure that the bond is sufficient. So again, if the direct contractor obtains a payment bond but is not for the total value of the original contract, well that bond is not sufficient in any difference. The public entity is going to be liable for that’s it for the slide presentation. Thank you everybody and open for any questions that you guys may have.

Seth: Yeah, I’m just going back to Rochelle I guess she had, she helped figure out what she was trying to ask and she said, how would I know that there is an issue with the project if I’m not on the site for months on end. So say I finished my first phase and sent the invoice, but I’m not getting paid. How long do I have for taking action?

Peter: Right. So, that’s a great question and the answer is that if your payment is overdue you should, I’m perhaps you can send a threat first saying that you’re going to make a claim. But I would recommend if if you’re not receiving payment and your payment is overdue, if you’re not 30 or whatever, you are reach out to your customer and if you’re still not receiving payment, I would go ahead and serve that stop payment notice and also send a claim to the bond company if there is a ball and all the project because there’s really no advantage to waiting. The longer you wait, the, the higher the probability that the money has already been distributed but not paid down to you. And if that’s the case, the stop payment notice all of a sudden won’t be effective anymore.

Peter: And while you can still make a bond claim, if there were a lot of claims on the project and a lot of change orders, there may be insufficient on money too. So I mean beyond that I mean obviously reaching out to other trades on the project or anybody else, you know you can do that. But the bottom line is, you know, there’s a problem if you’ve built for your work and you’re not being paid within the terms that you’re required to be paid by. And that’s, that’s the sign that really tells you that you need to start considering exercising these payment remedies.

Seth: Okay. And I’ve got a few more questions here. Anna asks for payment issues, is there any one re remedial options, stop payments, note, stop payment notice bond claim that is preferential as a first step or to be pursued over the or was one to be or to be pursued one over the other?

Peter: Generally I would recommend pursuing both because that’s going to provide you maximum protection. The bottom line is while the bond claim will protect you and it’s, if there is a bond on the project, it’s gotta be for the total contract amount. So there should be enough money, you’re going to have more leverage and actually you’re more likely to get payment sooner with a stop payment notice. Because what the stock payment notice does is it causes a, I can’t think in the payment pipeline by basically directing the public entity not to pay the general contractor, which is going to cause the general contractor problems and encourage them to figure out why you’re not being paid and pay you the bond claim. The money’s there and you want to put the surety on notice that you have the claim. But the bottom line is that’s going to be investigated by an adjuster. And if there’s any pushback from the general contractor regarding your claim, the bond isn’t going to make payment until they are sure that your claim is valid, which could not be until an actual lawsuit is filed. So the stop payment notice is generally going to apply more pressure to get payment sooner. I guess the one downside side of the stop payment notice as it can also delay things because you’re putting a kink in the payment pipeline. So nobody’s going to get paid until that is resolved.

Seth: Well it looks like that’s about all the questions we have coming in right now. And Anna, thanks to you. And I know we try to keep these at about 30 minutes, so we’re just a few minutes over right now. I know there’s some shy people out there, we’ve had a lot of participants. So please post your questions to the expert center. You certainly can contact Peter directly. But we’re happy to answer any of these questions and really provide you with a lot of the questions that you have, especially during a time like Kobe did where a lot of us, there’s a lot of uncertainty out there. So Peter, is there anything else you have to say? And again, thank you so much for doing this today. We look forward to more of these and we look forward to Peter hosting some more of these as well. Again, my name’s Seth bloom. I’m senior director of attorney services at Levelset down in New Orleans. So Peter, anything else you have to say? Just thank you so much.

Peter: Yeah, no problem. Happy to present and thank you everybody for coming and participating in the presentation. Great questions. And I guess that’s it for now.

Seth: Yeah, thanks a lot and I know a lot of you best. We’re going to make these slides available and Peter will be available to answer additional questions, so we’ll definitely want to get you all the information you need so everyone, have a nice day going forward. Stay safe, and thank you so much from Levelset. Bye. Bye.