Fifth Circuit Expected to Soon Rule on Constitutionality of Mississippi’s Stop Notice Statute

This article appeared in June 2013 Construction News

By Dorsey R. Carson, Jr. and Christopher D. Meyer, Burr & Forman LLP

The constitutionality of the Mississippi Stop Notice statute, Miss. Code Ann. § 85-7-181, has now been challenged; leaving it possible that unpaid subcontractors and suppliers will be completely without any legal remedy against an owner in Mississippi.  Specifically, in Noatex Corporation v. King Construction of Houston, LLC, 884 F.Supp.2d 478 (N.D.Miss. 2012), Mississippi’s Stop Notice statute was ruled unconstitutional by a federal court.  That issue is now on appeal before the U.S. Court of Appeals for the Fifth Circuit sitting in New Orleans.  The Fifth Circuit is expected to soon rule on whether unpaid subcontractors and suppliers have any lien rights on construction projects in Mississippi.

Unlike most if not all other states, Mississippi limits lien rights on construction projects to prime contractors and others having a direct contract with the owner.  Therefore, subcontractors and suppliers who provide labor and materials to construction projects cannot “lien the project” to protect their payment rights.  Stated differently, except in certain limited situations, unpaid subcontractors and suppliers in Mississippi are not allowed to file a lien on real property.

Instead, the Mississippi Stop Notice statute, Miss. Code Ann. § 85-7-181, allows an unpaid subcontractor or supplier to “lien the funds.”  The Mississippi Stop Notice statute provides that if an unpaid subcontractor, laborer or materialman of the prime contractor provides written notice to the owner of the amount it is owned, from that date forward that amount is bound in the owner’s hands until the claim is resolved (or, if the amount in the owner’s hands is less than the amount owed, then the entire amount remaining in the owner’s hands is bound).  The statutory notice necessary to lien the funds is known as a “stop notice.”

In Noatex Corporation v. King Construction of Houston, LLC, 884 F.Supp.2d 478 (N.D.Miss. 2012), Noatex, a general contractor, brought a declaratory judgment action against King Construction, a subcontractor on a project to construct a manufacturing plant, seeking to have King Construction’s “stop notice” claim and the statute authorizing it declared unconstitutional.  Noatex and King Construction worked together from February through June 2011, but then, after Noatex began to question the validity of King Construction’s invoices, King Construction filed a stop notice with the project owner, binding just over a quarter of a million dollars. Noatex argued that the stop notice statute violated its due process rights by depriving it of property without proper procedures for notice and hearing.

The federal district court agreed and declared the statute unconstitutional, both facially and as applied, for violating due process. The federal district court compared the statutory scheme, which allowed an unpaid subcontractor to bind monies allegedly owed with the owner solely by simply filing a notice, to a prejudgment attachment of the type, which had previously been declared unconstitutional.  According to the federal district court, a traditional mechanic’s lien clouds title but does not alienate property, and other states’ comparable statutes that have been upheld all provide either notice and a hearing or other safeguards, such as affidavits and security bonds, to minimize the risk of wrongful withholding.

According to the federal district court, Mississippi’s alternative offered no immediate process by which to judge the validity of the stop notice or challenge it until a trial on the merits.  Although the federal district court acknowledged the beneficent aims of the statute, it also recognized that stop notices often had the effect of compounding nonpayment and stopping projects.

The federal district court’s decision is currently on appeal before the U.S. Court of Appeals for the Fifth Circuit.  The Mississippi State Board of Contractors and the Homebuilders Association of Mississippi filed amici (“friend of the court”) briefs, and briefing by all parties to the Fifth Circuit was completed on December 26, 2012.

An opinion from the Fifth Circuit is expected to come down in the near future.  Subcontractors and suppliers performing work and supplying material in Mississippi are cautiously awaiting the ruling in hopes that the federal court’s decision will be reversed.  Until then, the status of the Mississippi Stop Notice statute remains in limbo.  Subcontractors and suppliers doing business in Mississippi need to be aware of the unique difficulties in collecting payment in Mississippi, and should seek joint checks and other contractual provisions to protect against non-payment.