The California Court of Appeal clarified the law on a public entity's right to recover attorneys' fees in connection with its withholding of funds from a general contractor because of a stop notice filed by a subcontractor. In doing so, the Court of Appeal compared the Civil Code provisions regarding public and private works of improvement and addressed the statutory options available to a public owner. There are two ways for the public entity to proceed in response to a subcontractor stop notice. Depending on the choice made, a public entity may, or may not, have a right to recover attorneys' fees. If the recovery of attorneys' fees is sought, the choice should be carefully made.
In Tri-State, Inc. v. Long Beach Community College District, No. B231848, 2012 WL 764416, (Cal. Ct. App. Mar. 12, 2012) the public entity did not choose carefully. As a result, the Second Appellate District reversed a trial court's award of attorneys' fees to the public entity. The public entity withheld funds from the general contractor because a subcontractor filed a stop notice. The public entity agreed to accept a stop notice release bond from the general contractor in exchange for the subcontractor dismissing its action to enforce the stop notice. The parties stipulated to this and the court entered an order on the stipulation. In the words of the Court of Appeal, because the public entity made no claim on the funds, it was "merely a disinterested stakeholder in an action to enforce a stop notice, acting as a custodian of the disputed funds."
The public entity then moved for an award of attorneys' fees under Civil Code Section 3186. The judgment entered on the stipulated order included an award of attorneys' fees to the public entity. The subcontractor appealed the award of attorneys' fees, contending that Civil Code Section 3186 does not authorize the award of attorneys' fees. The Court of Appeal agreed, distinguishing Civil Code Section 3186, regarding stop notices on public works projects, and Civil Code Sections 3161, 3162 and 3176, regarding stop notices on private works of improvement.
Civil Code Section 3186, regarding stop notices on public works projects, requires a public owner to withhold an amount "sufficient to answer the claim stated in the stop notice and to provide for the public entity's reasonable cost of any litigation thereunder." Examining the legislative history of Section 3186, the Court of Appeal in Tri-State, Inc. concluded that the "reasonable cost of any litigation" was limited to the cost of verifying and recording the stop notice, exclusive of attorneys' fees. In contrast, the Court of Appeal observed that Civil Code Section 3176, regarding stop notices on private works of improvement, expressly entitles the prevailing party in an action against an owner or construction lender on a bonded stop notice to recover attorneys' fees.
Had the public owner chosen carefully, it would have pursued an interpleader action by which a stakeholder with no interest in disputed funds may deposit them with the court, obtain a discharge of liability and compel the competing claimants to litigate their claims without involving the stakeholder. The Court of Appeal in Tri-State, Inc. recognized that Code of Civil Procedure Section 386.6 provides for the award of attorneys' fees to the interpleading party.
The Tri-State, Inc. case provides a lesson for general contractors. Post a stop notice release bond early and avoid the potential interpleader of funds by the public entity and resulting exposure to attorneys' fees.
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