Contractors Get Relief with Construction Subcontractor Law after the US Appeals Court Strikes Down a Mississippi Law for “Stop Payment Notices” Issued by Subcontractors

Robert E. Kohn – October 28, 2013

While contractors are having a hard time getting paid for the work they’ve done out-of-state, a recent lawsuit won by Kohn Law Group provides relief from unfair construction subcontractor law practices. On October 10, 2013, a U.S. Court of Appeals struck down the “stop notice” scheme in Mississippi, which spells relief for contractors with customers there and in other states — like California — that have a similar scheme.

Stop payment notices, under the construction subcontractor laws in Mississippi, California, Arizona, New Mexico, and Washington, allow subcontractors to force a customer to withhold monies that a prime contractor has earned. According to court documents, a company called Noatex Corporation in Torrance, Calif. hired a subcontractor to install conveyor systems in Mississippi for a customer there. After the customer became dissatisfied with the subcontractor’s behavior on the job-site, and told Noatex that the subcontractor could no longer work there, the subcontractor issued a “stop notice” to the customer. The notice stopped the customer from paying Noatex.

Noatex turned for help to an experienced attorney in Los Angeles, its long-time outside counsel, Robert E. Kohn of Kohn Law Group, Inc., and enlisted Wise Carter Child & Caraway, P.A. in Mississippi for local representation. The legal team concluded that the stop notice procedure was unconstitutional, and the federal courts agreed. The U.S. Court of Appeals explained, the subcontractor’s notice — which operated to stop Noatex from receiving payment from its own customer — “deprives the contractor of a significant property interest, the right to receive payment and to be free from any interference with that right.” That violated Due Process under the 14th Amendment of the Constitution of the United States. As a result, the stop notice was vacated, and the judgment declares that the notice has no effect on the money that the customer had withheld from Noatex.

A stop notice lasts indefinitely unless challenged in court or withdrawn voluntarily by the subcontractor, which means that going to court can be the only practical way for a prime contractor to get paid. The court rulings that invalidated the Mississippi law are now published. See Noatex Corp. v. King Constr., LLC, 864 F. Supp. 2d 478 (N.D. Miss. 2012), affirmed, — F.3d —, 2013 WL 5575468 (5th Cir. 2013). The stop notice law in the Noatex case was Section 85-7-181 of the Mississippi Code. In California, Section 8522 of the Civil Code authorizes a similar procedure. And similar laws are on the books in Arizona, New Mexico and Washington State. Now, contractors on jobs in any of those states can attack a stop payment notice in the same way that Kohn attacked the stop notice for Noatex.

Contractors Get Relief with Construction Subcontractor Law after the US Appeals Court Strikes Down a Mississippi Law for “Stop Payment Notices” Issued by Subcontractors.

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