California Appellate Court Holds Direct Contractors Must Comply With 20-Day Stop Payment Notice Requirement

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Brewer Corporation v. Point Center Financial, Inc.
Fourth Appellate District, Division 1 (San Diego County)
January 31, 2014
Direct contractors who fail to serve a preliminary 20-day stop payment notice on the project’s construction lender do so at their own peril. The California Court of Appeal (hereinafter, the “Court”) recently decided whether a direct contractor, who is not also a general or prime contractor, must serve a preliminary 20-day notice as a prerequisite to enforcing its stop notice claim against a construction lender. In Brewer Corporation v. Point Center Financial, Inc., Fourth Appellate District Division 1 (San Diego County), January 31, 2014, the Court held that the trial court erred as a matter of law when it concluded that respondent, direct contractor (“Direct Contractor”), was not required to serve the appellant, the project’s construction lender (“Lender”), with a preliminary notice for its stop notice claim. Full write up, after the jump.

In coming to this conclusion, the Court interpreted California Civil Code section 3097 (Former Civ. Code, §§ 3082-3267; Civ. Code, §§ 8000-9566, effective July 1, 2012 (Stats. 2010, ch. 697, § 16)), which required a preliminary notice be given under the following circumstances:

“(a) Except one under direct contract with the owner … every person who furnishes labor, service, equipment, or material [to a work of improvement] shall, as a necessary prerequisite to the validity of any … notice to withhold, cause to be given to the owner or reputed owner, to the original contractor, or reputed contractor, and to the construction lender, if any, or to the reputed construction lender, if any, a written preliminary notice as prescribed by this section.

(b) Except the contractor… all persons who have a direct contract with the owner and who furnish labor, service, equipment, or material [to a work of improvement] shall, as a necessary prerequisite to the validity … of a notice to withhold, cause to be given to the construction lender, if any, or to the reputed construction lender, if any, a written preliminary notice as prescribed by this section.”

(Italics added in Brewer).

The parties did not dispute that the Direct Contractor failed to provide preliminary notice to the Lender. Because section 3097(a) plainly stated that one under direct contract with the owner is exempt from the preliminary notice requirement, the Court turned to section 3097(b) as the only source which could potentially require the Direct Contractor to give written notice to the Lender. Reading the plain language of the statute, the Court observed that a direct contractor must give notice to the lender unless it qualified as “the contractor.”

The Court noted that the term “original contractor” as used in section 3097(a) was defined but the term “the contractor” as used in section 3097(b) had no express definition. Section 3095 defined the term “original contractor” as “any contractor who has a direct contractual relationship with the owner.” Without its own definition, the Court concluded that “the contractor” must have a different meaning than “original contractor.”

The Court relied on precedent to aid in its interpretation of the term “the contractor.” The Court looked to Korherr v. Bumb (9th Cir., 1958) 262 F.2d 157, 161 which observed that the term “the contractor” referred to “the general or prime contractor” in its interpretation of the predecessor to section 3097. The Court also looked to Shady Tree Farms v. Omni Financial (2012) 206 Cal.App.4th 131, 138 which stated the use of “the” indicated a single person, i.e., the general or prime contractor. As such, section 3097(b)’s carve out for “the contractor” meant that only the general or prime contractor was exempt from the section’s requirements.

Not satisfied, the Court also relied on the amendments to the mechanic’s lien laws to support its conclusion that “the contractor” could only mean the general or prime contractor. In deciding to amend the mechanic’s lien law in 2010, the Legislature sought to “modernize and clarify existing law.” The Legislature specifically noted that section 3097(b) was ambiguous as to whether a general contractor was required to give preliminary notice to a construction lender on a private work. The Legislature amended section 3097 to clarify that a “claimant with a direct contractual relationship with an owner or reputed owner is required to give preliminary notice only to the construction lender or reputed construction lender, if any.” (Current, Civ. Code § 8200, subd. (e)). This amendment resolved the ambiguity recognized by the Legislature by requiring any direct contractor to serve a preliminary notice on the lender.

Relying on previous interpretations of the predecessor to section 3097, and the recent amendments to the mechanic’s lien laws, the Court concluded that the exception to providing notice to the lender for “the contractor” in section 3097(b) only applied to general or prime contractors. Thus a direct contractor, who is also not the general or prime contractor, must comply with the 20-day preliminary notice provisions when seeking to enforce a stop payment notice claim against a construction lender.

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