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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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