Stop Payment Notice – Is It Subject To A Constitutional Attack?

  1. 1. Lien Claimants Have a Right to be Paid Directly from the Construction Loan on Private Projects.  This process is commonly referred to as a “Stop Payment Notice.”

Generally, anyone who can claim a lien on property may serve notice on the construction lender that the lien claimant is unpaid on the job.  This notice does not mean that the lender will pay the claimant, but it creates a risk for the lender if it continues to make advances on the loan without being sure that the claimant has been paid.  This procedure, however, is not applicable if a payment bond of at least 50% of the construction financing has been posted by the general contractor or owner.

The potential lien claimant must maintain its rights to a mechanic’s lien and properly file the “Notice to Real Property Lender.”  The lender is not precluded from foreclosing on the property by the filing of this Stop Payment Notice when the owner is in default on the loan.  Thus, when faced with such a Stop Payment Notice, the lender may very well exercise its rights to foreclose against the property and, depending on the amount of equity in the property, the lien claimant may find itself without protection.

  1. 2. Procedure and Time Limits.  Any lien claimant that has not received payment within five days of the date required by the contract, may, within 35 days after payment is due, give the lender notice of the sum due and unpaid.
  2. 3. Contents of the Notice to Real Property Lender.  A form of Notice is available here.  The form is included in RCW 60.04.221 and is the one that should be used in Washington.  The law allows the use of forms “substantially” in this form, but the better practice would be to use the exact form provided.  The form must be signed under penalty of perjury (see appended form).
  3. 4. Filing Requirements.  The Notice to Real Property Lender must be sent to the lender at that office which is administering the construction loan, with copies sent to the owner and the general contractor by certified or registered mail, return receipt requested, or by personal delivery.
  4. 5. Effects of a Valid Notice to Real Property Lender.  If the lender fails to withhold the full amount of the claim from the next and all subsequent loan disbursements, then the lien will be given priority over the lender’s security interest in the property to the full extent of the lien amount (including interest and attorneys’ fees), or the funds left in the account at the time of the Notice, whichever is less.

Comment:  On October 10, 2013, the Fifth Circuit Court of Appeals, citing a lack of procedural safeguards, affirmed a Mississippi District Court’s determination that Mississippi’s “Stop Notice” statute is unconstitutional because it deprives contractors of their property rights without due process.[i] Noatex Corp. v. King Const. of Houston, L.L.C., 732 F.3d 479 (5th Cir. 2013). This holding raises the question as to whether Washington’s “Stop Notice” statute might also be subject to a constitutional attack.

In Washington, a subcontractor or supplier with lien rights meeting the requirements can file a Notice to Real Property Lender (Stop Payment Notice), thereby effectively halting all further payments to a general contractor on a construction project.  In effect, a subcontractor or supplier lien claimant can tie up the general contractor’s funds without any due process of law, which could be construed as insufficient pre-deprivation procedural safeguards, as was found with the Mississippi statute.  Generally, before a claimant can deprive someone of funds that are due, the claimant must show some exigent circumstances for attachment or sign an affidavit setting out the facts of the dispute and the legal rationale for the attachment.  Washington’s Stop Payment Notice statute contains none of these procedural safeguards.  On its face, Washington’s statute might be construed, due to the lack of procedural safeguards, to amount to an unconstitutional deprivation of property without due process, and thus, subject to the same invalidation as occurred with Mississippi’s Stop Notice statute.

[i] Cable M. Frost, Advise and Consult, Inc., Mississippi’s “Stop-Notice” Statute Declared An Unconstitutional Deprivation of Property, October 16, 2013.

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