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A private works bonded stop notice could be invalidated as a result of a clerical error in stating the claim amount

by | Nov 2, 2011 | Mechanics Liens, Stop Notices And Payment Bonds

In a unpublished decision filed October 27, 2011 the Court of Appeals confirmed that a private works bonded stop notice could be invalidated as a result of a clerical error in stating the claim amount.

A stop notice may be served on an owner or construction lender to demand that they withhold money from the intended recipient to ensure project funds are available to satisfy the claimant’s claim for payment. The notice state the claim amount so the recipient knows how much to withhold.

While stop notices are most commonly used on public works projects they may also be used on private jobs, whereupon they can be served on the construction lender, with the intention of freezing loan funds before they are disbursed to the project owner. To be enforceable, the private works stop notice must be accompanied by a surety bond equal to 125% of the stated claim amount. If the bond is not 125% of the claim amount (e.g. if it is only 100% of the claim amount) then the stop notice is invalid.

In North County Acoustic vs. Bank of America a subcontractor was owed $52,370.10 and served as stop notice on the construction lender. As it was required to do, the subcontractor secured a surety bond and served it along with the stop notice. The bond was in the correct amount: 125% of the claim, i.e. $65,462.63.

But, when the subcontractor filed out the stop notice form it made an apparent clerical error in identifying the claim amount. While one part of the form stated that the “Amount due after deducting all credits and offsets” was $52,370.10, another portion of the form stated, “YOU ARE HEREBY NOTIFIED to withhold sufficient monies held by you on the above described project to satisfy claimant’s demand in the amount of $65,462.63 and in addition thereto sums sufficient to cover interest, court costs, and reasonable cost of litigation, as provided by law.”

While the Court’s opinion does not provide insight as to exactly what happened, it is likely the person filing out the form mistakenly transcribed the wrong number into the “YOU ARE HEREBY NOTIFIED” portion of the form, inserting the bond amount ($65,462.63) instead of the claim amount ($52,370.10).

The lender challenged the stop notice, arguing that it was invalid because the accompanying bond was not 125% of the stated claim amount. This theory was predicated on the assertion that the claim sum stated on the face of the notice was the mistakenly inserted bond amount of $65,462.63, and not the less prominent citation of the correct $52,370.10 figure. Since the bond amount and the (mistakenly inserted) claim amount were the same, the bond was not actually 125% of the claim amount. The trial court agreed with this logic and entered judgment in favor of the lender. The contractor appealed.

On appeal the subcontractor argued that a reasonable recipient of the stop notice would understand that the actual claim was for $52,370.10 because this was the figure on the “Amount due” line. It cited law that stop notices must be interpreted by considering the “reasonable expectations” of the recipient lender. The court concluded that the reasonable expectations of the lender would have been guided by the language of the “YOUR ARE HEREBY NOTIFIED” provision and not the “Amount due” provision given that the former plainly requested that the larger amount be withheld. The court also concluded that nothing on the form made it apparent that a clerical error had been made.

The subcontractor also argued that it “substantially complied” with stop notice requirements, citing a section of the statute which states that stop notices are valid if they are “sufficient to substantially inform the owner” of the required information. This exception is typically applied when the claimant misstates the names of the project or parties. The court refused to extend this rule to improperly stated claim amounts.

The North County Acoustic opinion is unpublished and therefore may not be cited as law, but it does provide insight into the Court’s thinking on the subject, which it may apply to other cases.