California’s Summary Proceeding For Release of Funds (or) Fun With Civil Code § 9400

By Josh Genser, Esq.

California has a “Summary Proceeding” for dealing with Stop Notice Claims on public works, that is supposed to be a faster, more efficient means of determining the merits of a Stop Notice Claim than would be litigating the claimant’s lawsuit to enforce the Stop Notice.  Although the procedure has been a feature of California law for several years, it has been, in my experience and in that of several experienced construction law attorneys to whom I have spoken, rarely, if ever used.  So, I decided to try it.

A Stop Notice Claim is a claim, usually by a subcontractor or supplier, but sometimes by an employee of a subcontractor, that he or she or it has not been paid.  Upon receipt of the Stop Notice Claim, the public owner of the project is required to withhold from payment to the prime contractor sums sufficient to satisfy the claimant’s claim.  The claimant, then, must file a lawsuit against the prime contractor to establish its entitlement to the funds.

The deadline for the filing of the claimant’s lawsuit is 90 days after the last day upon which a Stop Notice Claim could have been filed on the project (Civil Code section 8550), and that last day is 30 days after the filing of a Notice of Completion or Notice of Cessation of work on the project, or, if no such notice is filed, 90 days after cessation or completion of work on the project (Civil Code sections 8508(b) & 8414).  Thus, the prime contractor could be forced to wait until 180 days after the project is finished before the contractor even finds out whether the claimant is going to take the next step to enforce the Stop Notice Claim, and then the resolution of that next step, the lawsuit, could take years. 

The prime contractor could also provide a Stop Notice Release Bond (Civil Code section 8510), which would get the withheld funds released, but the prime contractor remains potentially liable to the claimant or to the surety who issued the bond, and incurs the cost of the bond premium.  Also, there are contractors who do not have the credit wherewithal to obtain a Stop Notice Release Bond.

Presumably in response to the unfairness of having the prime contractor’s money tied up for so long, the California Legislature created an alternative procedure by which the prime contractor could obtain release of the funds being withheld by the owner pursuant to the Stop Notice Claim, found in Civil Code section 9400, et seq.  That procedure is as follows:

• The prime contractor files an affidavit with the owner, explaining why the Stop Notice Claim is invalid and/or why the underlying claim has no merit (Civil Code section 9402).
• The claimant then files a counter-affidavit, arguing that the claim is valid and has merit (Civil Code section 9406).
• Either party may next “commence an action for a declaration of the rights of the parties” (Civil Code section 9408(a)).
• After the action is filed, either party may bring a motion to determine the rights of the parties (Civil Code section 9408(b)).
• The public entity project owner then files the affidavit and counter-affidavit with the Court, and they “shall constitute the pleadings, subject to the power of the court to permit an amendment in the interest of justice” (Civil Code section 9410(a)).

Overaa Construction, of which I am General Counsel, was just about to complete the construction of the City of San Pablo’s new City Hall when we were served with a Stop Notice by one Manuel Garcia.  The Stop Notice said that the claimant was owed money for “Grade & Pave Parking Lot,” and that the total value of the services agreed to be furnished was $49,800, of which the amount paid to claimant was $24,160, so the amount of the claim was $25,640, which the City of San Pablo withheld from Overaa’s final payment.

No one knew who Mr. Garcia was, but he certainly was not a subcontractor to Overaa on the project, so someone from the City of San Pablo called him to ask.  In response, Mr. Garcia sent copies of several documents showing that he was the foreman of a company called OBS Engineering, which was a sub-subcontractor to Overaa’s grading subcontractor, Wimmer Engineering.

Wimmer Engineering did not respond to our efforts to get them to defend and indemnify us against this stop notice claim.  We could have filed, at modest cost, a Stop Notice Release Bond, but I decided that this was a perfect opportunity to test California’s statutory Summary Proceeding for Release of Funds.

So, we served upon the City an affidavit showing that the stop notice was invalid and that the stop notice claimant was not entitled to use that remedy.  We pointed out that:

• Mr. Garcia was not a subcontractor on the project,
• Mr. Garcia did not have a contractor’s license,
• Mr. Garcia had not served a preliminary 20-day notice, which is a prerequisite to the filing of a stop notice (Civil Code section 8508(a)), and
• OBS Engineering had not filed a preliminary 20-day notice until more than 20 days after its work was complete.

Mr. Garcia filed a counter-affidavit stating that he was an employee of Wimmer Engineering and, as a laborer on the project, was not required to have filed a preliminary 20-day notice as a prerequisite for the filing of a stop notice.  Mr. Garcia did not, in the counter-affidavit, elaborate on the nature of his claim, and did not state that his claim was for unpaid wages.

The City of San Pablo declined to render a decision on the merit of Mr. Garcia’s stop notice, pointing out that there was no statutory obligation on the part of the City to even read the affidavits, and that the City wouldn’t take the risk of releasing the funds only later to be liable if it turned out that Mr. Garcia’s stop notice was, after all, proper.  So, the entire affidavit-counter-affidavit process turned out to be a complete waste of time, except that it’s a prerequisite to the filing of the Summary Proceeding.

The next step, then, was to “commence an action for a declaration of the rights of the parties”.  The statute does not say what form the action should take; that is, is it a lawsuit or some sort of petition?  The statute also does not have any provisions for filing responsive pleadings nor for the resolution of the action.  In fact, given that the determination of the merits of the case is to be made in a motion filed after the action is filed, it appears that the action serves no purpose other than as a vehicle within which to bring the motion.

So, under the principle of “when in doubt take the statute literally”, I prepared a document which I entitled “Action for the Declaration of the Rights of the Parties to a Stop Notice Pursuant to Civil Code Section 9408”.  The document read more like a petition for some sort of writ than it did like a complaint, and I named Overaa Construction as the “Petitioner”, and the City of San Pablo, OBS Engineering and Mr. Garcia as “Respondents”.

I also prepared, for filing contemporaneously with the “Action”, the papers for a motion for release of the stop notice.  Those documents included:

• a Notice of Motion,
• a Memorandum of Points and Authorities,
• a Declaration of Overaa’s project manager setting forth the identities of the parties and the facts about the project, and attaching the documents Mr. Garcia had provided showing he was foreman for OBS Engineering,
• a Declaration of the owner of OBS Engineering stating that OBS Engineering had been paid in full, had no claim and no longer employed Mr. Garcia, who had no right to file a stop notice on its behalf, and
• a request for Judicial Notice that Mr. Garcia had no contractor’s license and that Mr. Garcia was neither the Responsible Managing Owner nor Responsible Managing Employee for OBS Engineering.

Knowing that the Contra Costa County Clerk had probably never before seen an action filed under these statutes, and that, therefore, the Clerk would insist that the filing also include a Summons, I prepared and had issued by the Clerk at the time of filing a Summons on the ordinary Judicial Council form.  Ironically, the Clerk lost the Summons so, when my process server later tried to file proofs of service on Mr. Garcia and the City, the Clerk refused to file them because no summons had been issued.  I sent a letter to the Clerk with a copy of the issued Summons, but also pointing out that no summons ought to have been required since the information on the summons, giving the defendants 30 days to respond, was not applicable to this action.  Everything at the Clerk’s office was moving in slow motion because of Covid-19 precautions, so I never did hear back, but both parties appeared so the filing of the proofs of service was moot.

At the filing window, the Clerk wanted to give me a hearing date three months out, but I pointed out Civil Code section 9408(d), which provides that the hearing on the motion shall be “within 15 days after the date of the motion”, and the Clerk gave me a date exactly 15 days away.

Unfortunately, the first process server I hired had a meltdown, so I had to ask the Court to continue the hearing, and then the owner of OBS Engineering had to leave town to care for a sick relative, so I was unable to get him served, requiring another continuance, and then the Court continued the hearing on its own initiative for unexplained reasons.  Thus, I ended up with a hearing date pretty close to the date the Clerk had offered me initially.

Mr. Garcia retained legal counsel, who filed in opposition to the motion:

• An objection to the documents I had filed in support of the motion on the grounds that Civil Code section 9410(a) says that the affidavit and counter-affidavit “shall constitute the pleadings”, and, thus, all of those other documents were impermissible additional pleadings.
• A request by Mr. Garcia to amend his counter-affidavit to include copies of several documents purporting to be certified payroll records of Wimmer Engineering showing Mr. Garcia’s name among those of Wimmer’s employees on the project.

To the objection on the grounds that the affidavit and counter-affidavit “constitute the pleadings” I argued:

• It’s not clear of what the affidavit and counter-affidavit are to “constitute the pleadings”.  That is, are they to constitute the pleadings of the action or the motion?  It’s also not clear that the words that they “constitute the pleadings” means that they are the only pleadings permitted.
• The California Rules of Court require the filing of a Memorandum of Points and Authorities in support of any motion.
• Civil Code section 9412(b) begins, “If at the hearing no evidence other than the affidavit and counter-affidavit is offered…”. This clearly implies that other evidence may be received.

In response to Mr. Garcia’s attempt to add the Wimmer Engineering documents to his counter-affidavit I said:

• The code permits the Court to allow an amendment to a party’s affidavit “in the interests of justice”, but Mr. Garcia presented no argument why it would be in the interest of justice to permit this amendment.
• I had no objection to Mr. Garcia introducing evidence that was not included in his original counter-affidavit, but the documents he sought to present to the Court were not authenticated.

The tentative ruling was to grant the motion, but Mr. Garcia’s counsel asked for an argument.  We, thus, had a hearing on the motion, by telephone.  At that hearing, Mr. Garcia’s counsel argued that Mr. Garcia was claiming unpaid wages owed to him by Wimmer Engineering, and pointed out that, under section 9410, the contractor has the burden of proof at the hearing on the motion, so it was our burden to prove that Mr. Garcia had been paid.  I replied that there was nothing in the Stop Notice, in Mr. Garcia’s counteraffidavit, nor in any of the documents filed by Mr. Garcia in opposition to the motion in which Mr. Garcia had ever stated that he was an unpaid laborer.  There was nothing in the record to put any of the parties on notice that unpaid wages was the basis of his claim, and the contractor could hardly have the burden to disprove a claim of which it had never before been made aware or about which it had not been provided any information.

The judge granted the motion, and about a week later we received an order in the mail, and the day after that the City released the funds.

The entire process took about 90 days, and if I hadn’t done it myself would certainly have cost more than $25,000 in attorneys’ fees.  Although it has been, as far as I’m concerned, resolved in our favor, the “Action” remains on file and unresolved, and I don’t know whether someday the Court will issue an Order to Show Cause why it has remained on file for so long without any progress.

If I had to do it over again, now that I’ve already made all the mistakes, I might, if the amounts at stake were large enough and the Stop Notice Release Bond premium were also large.  Otherwise, I wouldn’t bother.  I’d file a stop notice release bond or, if the amounts at stake were small, I might just wait until the claimant’s time to file an action to enforce the stop notice had expired.  In this case, the filing and process serving fees, alone, exceeded what would have been the premium for the stop notice release bond.

If the California legislature really wants to craft an expedited procedure for the determination of the merits of stop notices, the system should be more like an unlawful detainer proceeding, where the action is the forum in which the merits of the case are determined, the defendant has only five days to respond to the complaint and the trial must be scheduled within 20 days of the plaintiff’s request.  And dispense with the silly affidavit and counteraffidavit.