Just a few days ago, in Noatex Corp. v. King Constr. of Houston, L.L.C., 2013 U.S. App. LEXIS 20656, 14-15 (5th Cir. Miss. Oct. 10, 2013), the Fifth Circuit Court of Appeals affirmed a federal district court ruling that held Mississippi's Stop Notice statute unconstitutional.
A stop notice claim differs from a mechanic's lien in that the stop notice creates a claimholder's interest in construction funds (as opposed to an interest in the land being improved). Most stop notice statutes provide a mechanic's lienholder what amounts to a pre-judgment garnishment of such construction funds. Once notice is provided, the holder of the construction funds is required to set aside a sufficient amount to pay the stop notice claim.
Mississippi's stop notice statute (Miss. Code Ann. § 85-7-181) had been in force nearly forty years when the federal district court for the Northern District of Mississippi held that "Mississippi's stop notice statute violates due process by authorizing what is in practical effect the prejudgment attachment of funds without prior notice and a hearing, or an acceptable post-seizure remedy." Noatex Corp. v. King Constr. of Houston, LLC, 864 F. Supp. 2d 478, 490 (N.D. Miss. 2012).
The district court's decision in Noatex regarding the decades-old statute was treated with some degree of confusion in Mississippi when it first was entered. Subcontractors routinely continued the practice of serving and filing stop payment notices in Mississippi, and even the Mississippi Court of Appeals continued to enforce the statute after the district court order, noting only in a footnote by the dissent that a "Mississippi federal court recently held this statute unconstitutional." KGC Props. v. Triangle Maint. Servs. LLC, 2012 Miss. App. LEXIS 746, fn. 1 (Miss. Ct. App. Dec. 4, 2012).
But the Fifth Circuit Court of Appeals has left no doubt, stating emphatically as follows:
The Stop Notice statute is profound in its lack of procedural safeguards. It provides for no pre-deprivation notice or hearing of any kind. It requires no posting of a bond on the part of the subcontractor prior to attachment. The statute does not require a showing of exigent circumstances for attachment nor is it narrowly drawn to those circumstances. The statute even fails to require any affidavit or attestation setting out the facts of the dispute and the legal rationale for the attachment.
Noatex Corp. v. King Constr. of Houston, L.L.C., 2013 U.S. App. LEXIS 20656, 14-15 (5th Cir. Miss. Oct. 10, 2013) (internal citations omitted).
In addition to Mississippi, Arizona, California, New Mexico and Washington State also have statutory stop notice remedies. The constitutionality of these other statutes undoubtedly will be revisited in light of this new decision.
This article is for general information and does not include full legal analysis of the matters presented. It should not be construed or relied upon as legal advice or legal opinion on any specific facts or circumstances. The description of the results of any specific case or transaction contained herein does not mean or suggest that similar results can or could be obtained in any other matter. Each legal matter should be considered to be unique and subject to varying results. The invitation to contact the authors or attorneys in our firm is not a solicitation to provide professional services and should not be construed as a statement as to any availability to perform legal services in any jurisdiction in which such attorney is not permitted to practice.
Duane Morris LLP, a full-service law firm with more than 700 attorneys in 24 offices in the United States and internationally, offers innovative solutions to the legal and business challenges presented by today's evolving global markets. Duane Morris LLP, a full-service law firm with more than 700 attorneys in 24 offices in the United States and internationally, offers innovative solutions to the legal and business challenges presented by today's evolving global markets. The Duane Morris Institute provides training workshops for HR professionals, in-house counsel, benefits administrators and senior managers.