• A Claimant May Recover Attorney Fees, Costs And Statutory Penalties Against A Stop Notice Release Bond
  • August 26, 2003
  • Law Firm: Atkinson, Andelson, Loya, Ruud & Romo, A Professional Corporation - Cerritos Office
  • In a ruling that will benefit claimants, a California Appellate Court ruled that a surety on a stop notice release bond is liable for attorney's fees, in addition to costs and statutory penalties, when the underlying construction contract provides for attorney's fees to the prevailing party, even though the terms of the bond do not specifically allow for attorney fees. In National Technical Systems v. Superior Court of Los Angeles (2002) 97 Cal.App.4th 415, Commercial Contractors, Inc. ("CCI") entered into a prime contract with the City of Long Beach to perform work in the Port of Long Beach. CCI subcontracted a portion of the work to National Technical Systems ("NTS"). The subcontract agreement between CCI and NTS included a provision for an award of reasonable attorney's fees to the prevailing party in a lawsuit related to the subcontract agreement.

    Stop Notice Remedy. NTS claimed that it was only partially paid for services rendered to CCI, and NTS served a stop notice to the City of Long Beach. A stop notice is a remedy to reach unexpended construction funds in the hands of the owner or lender. This remedy is available on both public and private works, and may be served by a claimant other than an original contractor. (Civ. Code § 3181; Department of Industrial Relations v. Fidelity Roof Co. (1997) 60 Cal.App.4th 411.)

    Stop Notice Release Bond. CCI obtained a stop notice release bond from UPIC to release money that the City of Long Beach withheld on the stop notice. The release bond did not contain a provision for the payment of attorney's fees. If a general contractor disputes a stop notice claim, the public entity may permit the general contractor to post a stop notice release bond. (Civ. Code § 3196.) After the bond is posted, the remedies of the claimant rest solely on the bond and the public entity may not withhold money due the general contractor on account of the stop notice. The statute does not include a provision for attorney's fees. (Civ. Code § 3196; Winick Corp. v. County Sanitation Dist. No. 2 (1986) 185 Cal.App.3d 1170.)

    Subcontractor's Judgment Against General Contractor Not Binding on Surety. NTS sued CCI and UPIC, the release bond surety, in separate lawsuits. NTS obtained a judgment against CCI, and the judgment awarded attorney's fees and statutory penalties. NTS tried to enforce the judgment against UPIC. However, the Court ruled that UPIC was not bound by NTS' judgment against CCI because UPIC was not named as defendant, and UPIC did not have an opportunity to assert its defenses and protect its rights.

    Furthermore, the Court made a distinction between a release bond given before a lawsuit is filed and a release bond issued after a lawsuit is filed. When a release bond is issued after a lawsuit is filed, the surety is deemed to have notice of the lawsuit and may intervene in the lawsuit. However, when a release bond is issued before a lawsuit is filed, the surety and the bond principal must be joined as defendants in the lawsuit to give the surety notice of the action. In this case, UPIC issued its release bond before the lawsuit was filed. Therefore, as a matter of law, UPIC did not have notice of the NTS' lawsuit against CCI.

    Statutory Penalty For Late Progress Payments. In NTS' lawsuit against UPIC on the stop notice release bond, NTS also claimed a penalty of 2 percent per month of amount due for late progress payment. Business and Professions Code Section 7108.5 requires a prime contractor to pay to any subcontractor, not later that 10 days after receipt of each progress payment, unless other agreed in writing, the respective amount allowed the contractor on account of the work performed by the subcontractor.

    Surety Liable for Attorney's Fees and Statutory Penalties. The Court ruled that NTS was entitled to recover the principal sum of its claim, attorney's fees costs and statutory penalties for late progress payments. The release bond did not contain an attorney's fees provision, and the stop notice release bond statute does not contain any language that allows attorney's fees. However, the Court reasoned that the surety on the release bond is liable to the same extent as the principal on the bond. The Court found that if CCI is liable to NTS for attorney's fees under its subcontract agreement and CCI is liable for statutory penalties, then UPIC is liable to NTS to the same extent.

    Impact and Significance of Ruling

    The most significant impact of the ruling in the National Technical Systems case is that the liability of a surety on a stop notice release bond has been expanded to include attorney's fees and statutory penalties. It provides another avenue for the recovery of attorney's fees when the underlying contract between the disputing parties contains an attorney's fees provision. It may encourage material supplies and sub-subcontractors, who often utilize the stop notice remedy, to insert attorney's fees provisions in their agreements.

    The Court's ruling may also impact claimants on private works projects. Claimants have been prevented from recovering attorney's fees on mechanic's liens or mechanic's lien release bonds. However, the stop notice remedy is also available on private works. Under some circumstances, a claimant may be able to recover attorney's fees and statutory penalties under a stop notice release bond, even though the claimant would be precluded from doing so on a mechanic's lien release bond.

    The case also emphasizes the importance of joining the release bond surety and the bond principal as defendants when the release bond is issued before a lawsuit on the stop notice has been filed. This is because the surety is not bound by a judgment against the bond principal if it has not had an opportunity to defend itself.