The Lawletter Vol 38 No 12
Tim Snider, Senior Attorney, National Legal Research Group
Issues involving mechanic's liens are infrequently litigated in federal court, and rarely are the issues resolved on constitutional grounds. Yet that happened recently in a case decided by the Fifth Circuit. The case involved Mississippi's "Stop Notice" statute, Miss. Code Ann. § 85-7-181. In Noatex Corp. v. King Construction of Houston, L.L.C., 864 F. Supp. 2d 478 (N.D. Miss. 2012), aff'd, 732 F.3d 479 (5th Cir. 2013), a payment dispute arose between the owner of the project and the general contractor, on the one hand, and a materials and labor subcontractor, on the other hand, with respect to a construction project in Mississippi. The subcontractor claimed that it was owed about $260,000 by the contractor and had not been paid for the project. Pursuant to the Stop Notice statute, the subcontractor provided written notice to the owner that the contractor owed it $260,000 and stated its intention to file a "Laborer's and Materialman's Lien and Stop Notice" in Mississippi chancery court.
The effect of this notice was that funds in the amount of $260,410.15 were "bound in the hands" of the owner. See Miss. Code Ann. § 85-7-181 ("[T]he amount that may be due . . . shall be bound in the hands of such owner for the payment in full[.]"). Further, under a related section of the Mississippi Code, id. § 85-7-197, the subcontractor's filing of the Stop Notice in the lis pendens record of the chancery court had the effect of establishing its lien priority with respect to the property that was the subject of the dispute. The owner later deposited the $260,410.15 in the registry of the chancery court.
Stripped of some procedural complexity, the contractor filed a declaratory judgment action in federal district court. The district court held that section 85-7-181 was facially unconstitutional because it deprived contractors of property without due process. The court concluded that the Stop Notice statute deprived the contractor of a significant property interest—namely, the right to receive payment and to be free from any interference with that right. The court's principal objection to the Stop Notice statute was its absence of procedural safeguards. The statute does not provide for predeprivation notice or a hearing of any kind. It requires no posting of a bond on the part of the subcontractor prior to attachment, and it does not require a showing of exigent circumstances for attachment. It is not narrowly drawn to those circumstances where it should be applied, nor does it require any affidavit or attestation setting out the facts of the dispute and the legal rationale for the attachment. Because of these procedural shortcomings, the district court concluded, and the Fifth Circuit agreed, that the statute was facially unconstitutional, meaning that there are no circumstances that would render the operation of the statute constitutional.
Striking down statutes like Mississippi's Stop Notice statute can have profound implications for the construction industry. Contractors (and subcontractors) typically are cash-flow businesses, meaning that depriving them of contract revenues for any significant period of time can place their business at risk. Before interrupting their cash flow through legal mechanisms like Mississippi's Stop Notice statute, the Noatex court would require, at a minimum, procedural safeguards that would provide the affected contractor with an opportunity at the outset to oppose the imposition of the lien and consequent sequestration of the contract proceeds. Comparable statutes in other states might be vulnerable to the same kind of constitutional challenge. See Anne M. Payne, Annotation, Construction and Effect of Statutes Requiring Construction Fundholder to Withhold Payments upon "Stop Notice"s from Subcontractor, Materialman, or Other Person Entitled to Funds, 4 A.L.R.5th 772.
