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Before serving a preliminary 20-day notice, should contractors research public records to verify that the owner or general contractor correctly identified the project's lender? For now, contractors don't need to always inspect public records, as was recently held by the Court of Appeal in Force Framing, Inc. v. Chinatrust Bank.
In September 2006, Andrew Carlton’s client, Force Framing, relied on a preliminary information sheet provided by a project's owner to serve its preliminary 20-day notice. It turned out the owner's preliminary information sheet identified the wrong lender, which, of course, resulted in Force Framing serving its preliminary 20-day notice on the wrong lender.
It was not until Force Framing had completed its work that it learned the identity of the actual lender - Chinatrust Bank. Because California Code requires that a contractor need merely serve the "reputed construction lender," and because Force Framing served the bank "reputed" to be the project's lender, Force believed its preliminary 20-day notice was proper. Thus, when the owner failed to pay Force Framing for its work on the project, Force sued Chinatrust Bank under a bonded stop notice claim.
In an attempt to capitalize on Force Framing's failure to serve the actual lender with a preliminary 20-day notice, Chinatrust filed a motion claiming Force Framing should have inspected the county recorder's public records, which would have revealed that Chinatrust was the actual lender. Chinatrust further argued that Force Framing could not rely on the information from the project's owner, which erroneously identified another bank. Chinatrust argued that in light of this, Force Framing should not be allowed to pursue its stop notice claim against it because it had not received the preliminary 20-day notice.
The trial court agreed with Chinatrust, holding that Force Framing could not rely on information from the project's owner, as to the identity of the project's lender. The trial court held that a contractor is required to verify the identity of a project's lender by searching the county records before serving a preliminary 20-day notice. The trial court dismissed Force Framing's stop notice claims against Chinatrust - apparently more concerned with protecting banks than protecting a contractor's right to payment.
Believing that the trial court's ruling in favor of Chinatrust was wrong, Andrew Carlton, on behalf of Force Framing, appealed the decision. The Court of Appeal reversed the lower court’s ruling, stating that if a contractor: “… has reasonably relied on an owner's and/or general contractor's statements identifying a lender, then … [that contractor] does not need to check county records to prove that he had a good faith belief that the lender was the actual lender.” Force Framing Inc. v. Chinatrust Bank (2010) 187 Cal.App.4th 1368, 1376. However, the appellate court noted that in order to show its good faith, a contractor should research public records "if a stop notice claimant has (1) no lender information, or (2) untrustworthy lender information...." Id. at 1378.
The Court of Appeal's opinion became law on September 30, 2010. Chinatrust petitioned the California Supreme Court to review the matter. The California Supreme Court denied Chinatrust’s petition. Thus, for the time being, so long as the information provided in a Preliminary 20-day Notice is obtained from a sufficiently reliable source, such as from the owner, a contractor need not investigate extraneous sources to verify said information. Before serving a preliminary 20-day notice, should contractors research public records to verify that the owner or general contractor correctly identified the project's lender? For now, contractors don't need to always inspect public records, as was recently held by the Court of Appeal in Force Framing, Inc. v. Chinatrust Bank.