Mississippi’s “Stop Notice” Statute Declared an Unconstitutional Deprivation of Property

Cable M. Frost – October 16, 2013

On October 10, 2013, the Fifth Circuit Court of Appeals, citing lack of procedural safeguards, affirmed a district court’s determination that Mississippi’s “Stop Notice” statute is unconstitutional because it deprives contractors of their property without due process. This holding effectively abrogates “lien rights” for first-tier subcontractors. Absent a challenge to this decision or a significant re-work of Mississippi’s stop-payment law, only contractors with a direct contractual relationship with an owner will have lien rights.

Traditionally, upon a payment dispute with a prime contractor, first-tier subcontractors could provide written notice to an owner and claim the benefit of Miss. Code Ann. §85-7-181 as a mechanism to bind funds due the prime in the hands of the owner. Upon receipt of a notice under §85-7-181, assuming the owner was still holding funds due the prime, the owner was statutorily required to withhold payment of funds in an amount sufficient to satisfy the amount alleged to be due and payable to the first-tier subcontractor. This holding of funds due a prime based on statutory notice provided by a subcontractor has now been determined to be unconstitutional.

The constitutionality of Miss. Code Ann. §85-7-181 arose in a case filed in the Northern District of Mississippi when King Construction of Houston, LLC (King) sent a stop-payment notice to the owner of an auto parts manufacturing facility claiming that it was owed over $260,000 by a prime contractor from California, Noatex Corporation (Noatex). Noatex challenged the stop-payment notice statute as facially invalid. Despite arguments presented by King and the state of Mississippi, as an intervening party, the district court determined that the “Stop Notice” statute was facially unconstitutional and violated the due process rights of Noatex.

The Fifth Circuit affirmed the district court’s determination that binding the funds due Noatex in the hands of the owner is an unconstitutional deprivation of property without due process and that Mississippi’s “Stop Notice” statute is facially unconstitutional. Specifically, the court noted that the “Stop Notice” statute is “profound” in its lack or procedural safeguards as it provides for no pre-deprivation notice or hearing and requires no posting of a bond or showing of exigent circumstances. The Fifth Circuit opinion is a short and interesting read and can be accessed here.

Given this development, subcontractors should seek legal assistance in determining how to proceed with existing and future payment disputes with prime contractors.

via Mississippi’s “Stop Notice” statute declared an unconstitutional deprivation of property – Lexology.

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.