Recent Court of Appeals Decision Suggests a Stop Notice Served Before a Notice of Completion or Notice of Cessation is Recorded is Premature and thus Ineffectual

Recently, the California Court of Appeals, Fourth District, Division Two, issued its decision in Golden State Boring & Pipe Jacking, Inc. v. Eastern Municipal Water District, Safeco Insurance Company (2014 WL 3615942) with important implications regarding, among other things, when a stop notice may be deemed premature and ineffectual.

The Eastern Municipal Water District (“EMWD”) hired S.J. and Burkhardt, Inc. (“SJB”) for a public works construction project in 2006.  SJB subsequently entered into a subcontract with Golden State Boring & Pipe Jacking, Inc. (“GSB”) to perform the tunneling portion of the project.  GSB completed its portion of the work in September 2006.  Prior to the completion of the project, there were three cessations of labor which exceeded 30 days.  On March 24, 2008, SJB sent a voluntary default letter to its surety, Safeco.

In July 2008, GSB filed suit, alleging, in addition to other claims against SJB and EMWD, a claim on the stop notice release bond, and a claim against the surety.   In October 2008, EMWD recorded a notice of acceptance, which is what a notice of completion is sometimes referred to in public works, signifying completion of the project.  The trial court found GSB’s action on the payment bond was untimely and entered judgment in favor of Safeco.

On appeal, GSB argued that its action on the payment bond was timely because the limitations period began to run from the date the notice of acceptance was recorded.  The Court disagreed.  Relying on private works cases regarding premature mechanic’s liens and interpreting former Civil Code section 3184 (now Civil Code section 9356) to mean that a stop notice must be served after the notice of acceptance, the Court found GSB served its stop notice prematurely; therefore, it was ineffectual because it was served before the notice of acceptance was recorded.  Based on its determination that the stop notice was premature, the Court focused on the timeliness of the lawsuit and when the project was “completed.”  Relying almost exclusively on W.F. Hayward Co. v. Transamerica Ins. Co. (1993) 16 Cal.App.4th 1101, a case where neither a notice of completion nor a notice of cessation was recorded, the Court held the three separate cessations constituted “completion” under the statute, triggering GSB’s time limit within which to serve a stop notice or bring its lawsuit.  Thus, GSB’s stop notice payment action was untimely.

This decision is important because the Court’s analysis suggests that, in the context of a public works project, a stop notice served before a notice of acceptance or notice of cessation is premature and ineffectual.  Despite the holding in this case, upon receipt of a stop notice, we urge school districts, community college districts, and other public entities to continue adhering to their statutory obligations under Civil Code section 9358 by withholding sufficient funds due or to become due to the prime contractor to pay the claim stated in the stop notice, and to provide for the public entity’s reasonable cost of any litigation pursuant to the stop payment notice (i.e., withhold 125% of the stop notice amount).

 

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