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Media Alerts - Noatex Corp. v. King Construction of Houston, L.L.C. - Fifth Circuit
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October 11, 2013
  Noatex Corp. v. King Construction of Houston, L.L.C. - Fifth Circuit
Headline: Fifth Circuit Strikes Down Mississippi Pre-Judgment Remedy as Violative of Due Process.

Area of Law: Constitutional law, due process, construction law.

Issue Presented: Whether Mississippi's "Stop Notice" statute, which protects subcontractors by freezing funds held by a property owner before they are paid to the prime contractor, violates the due process rights of the prime contractor.

Brief Summary: Auto Parts Manufacturing Mississippi ("APMM") and Noatex Corporation ("Noatex") entered into a contract whereby Noatex agreed to construct an auto parts manufacturing facility for APMM. Noatex subsequently entered into a subcontract with King Construction of Houston, L.L.C. ("King") for the supply of additional materials and labor. Later, Noatex alleged that APMM owed it payments for goods and services rendered. Noatex also questioned several of the invoices that King had sent to Noatex. King sent a written notification to APMM, informing APMM of the amount Noatex allegedly owed King. Under Mississippi's "Stop Notice" statute, which aims to protect the rights of subcontractors, this notification had the effect of freezing funds in APMM's possession due to be paid to Noatex. Noatex filed suit seeking a declaration that this procedure deprived it of property without due process. The U.S. Court of Appeals for the Fifth Circuit affirmed the lower court's ruling that the Mississippi Stop Notice statute was unconstitutional because it "deprive[d] the contractor of a significant property interest, the right to receive payment and to be free from any interference with that right."

Extended Summary: Auto Parts Manufacturing Mississippi ("APMM") and Noatex Corporation ("Noatex") entered into a contract whereby Noatex agreed to construct an auto parts manufacturing facility for APMM. Noatex subsequently entered into a subcontract with King Construction of Houston, L.L.C. ("King") for the supply of additional materials and labor. Later, Noatex alleged that APMM owed it payments for goods and services rendered. Noatex also questioned several of the invoices that King had sent to Noatex. Pursuant to Mississippi's "Stop Notice" statute, King sent a written notification to APMM, informing APMM of the amount Noatex allegedly owed King, and that King would be filing a Laborer's and Materialman's Lien and Stop Notice in Mississippi's chancery court.

The relevant parts of the Mississippi Stop Notice statute, Miss. Code Ann. ยง 85-7-181, read that "[w]hen any contractor . . . shall not pay [a subcontractor] . . . any such [subcontractor] may give notice in writing to the [property owner] of the amount due him . . . ; and, thereupon the amount that may be due upon the date of the service of such notice by such owner to the contractor . . . shall be bound in the hands of such owner for the payment . . . of all sums due [to the subcontractor]." According to the statute, the funds in APMM's possession were frozen for the benefit of King, and as a result of King's filing of the stop notice in the lis pendens record of the chancery court, King's lien would carry priority over the property that was the subject of the dispute.

Several lawsuits resulted from this dispute. The relevant lawsuit here involved Noatex filing a declaratory judgment action against King and its principal to challenge the facial constitutionality and constitutionality as-applied of the state statute. The State intervened in the action to defend the statute's constitutionality. The United States District Court for the Northern District of Mississippi granted Noatex's motion for summary judgment in the declaratory judgment action and held the statute to be facially unconstitutional because it deprived contractors of property without due process of law.

On appeal, the State contended that the lower court erred in finding a significant property interest because the court equated the statute to an attachment as opposed to a mechanic's or supplier's lien, and also that the court misweighed the relevant public and private interests implicated by the statute and failed to consider procedural safeguards made available by Mississippi law.

The U.S. Court of Appeals for the Fifth Circuit affirmed the lower court's ruling and held that the Mississippi Stop Notice statute "deprives the contractor of a significant property interest, the right to receive payment and to be free from any interference with that right." The court emphasized the statute's lack of procedural safeguards, particularly the statute's failure to provide for any notice or hearing of any kind prior to deprivation. The statute did not require the posting of a bond on the part of the subcontractor prior to attachment, nor a showing of exigent circumstances for attachment, and even failed to require any affidavit or attestation setting out the facts of the dispute and the legal rationale for the attachment. The court held the safeguards identified by the State to be inadequate. More specifically, the civil penalty provision for "falsely and knowingly" filing a stop notice claim, as a post-deprivation remedy, did little to provide contractors with the right to a notice or hearing prior to deprivation. The court similarly found the State's "extraordinary situations" argument to be unpersuasive.

For the full opinion, please see: http://www.ca5.uscourts.gov/op...ub/12/12-60385-CV0.pdf.

Panel: Chief Judge Stewart and Circuit Judges Davis and Wiener

Argument Date: 8/7/2013

Date of Issued Opinion: 10/10/2013

Docket Number: No. 12-60385 c/w No. 12-60586

Decided: Affirmed

Case Alert Author: Yong Eoh

Counsel: Robert Espensen Kohn, Kohn Law Group, Inc., for Noatex Corp.; Douglas T. Miracle, Office of the Attorney General, for the State of Mississippi.

Author of Opinion: Chief Judge Stewart

Case Alert Circuit Supervisor: Aaron-Andrew P. Bruhl

    Posted By: Aaron Bruhl @ 10/11/2013 09:23 PM     5th Circuit  

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