In Force Framing Inc. v. Chinatrust Bank, (2010) the Appellate Court addressed the issue of the reasonable reliance of a contractor on the preliminary information given it by the owner as to who the construction lender was for the project.

Force Framing was given a preliminary information sheet by Magnolia, the owner of the project which listed the lender as East West Bank, in Diamond Bar, California. However, the actual construction lender was Chinatrust Bank. Force Framing served its preliminary 20-day notice on East West Bank based upon the preliminary information sheet provided by Magnolia.

Subsequently, when Force Framing was still owed $1,398,882 it served a stop notice on Chinatrust Bank but Chinatrust did not withhold the funds and when sued filed a motion for summary judgment claiming that it recorded a deed of trust against the property and Force Framing had constructive notice that Chinatrust was the actual construction lender and it had never received the 20-day preliminary notice required by law. The trial court found that the subcontractor who seeks to enforce a stop notice has a duty to investigate who owns the construction loan and serve the 20-day preliminary notice on them. Thus, the trial court granted the motion for summary judgment in favor of Chinatrust.

The Appellate Court examined the statute, Civil Code § 3097, which states that the stop notice claimant must give 20-day preliminary notice to the construction lender or the reputed construction lender. It examined what “reputed” construction lender was under the case law and determined that a “reputed construction lender” is a person or entity reasonably and in good faith believed by the claimant to be the actual construction lender. Examining the record the Appellate Court found no evidence that would cause Force Framing to doubt that the information as to the lender given it by the owner was incorrect, therefore, it reversed the trial court and remanded the case for trial because there was a triable issue of fact regarding the reasonableness of Force Framing’s belief that East West was the lender for the project.

Many contractors misplace their reliance on the information initially provided by the owner or general contractor without doing an independent search through a title company to determine who the actual owner and construction lender are on a project. It is essential when starting a project that you consult with an attorney who understands construction law and is current on the recent cases and developments so that your company is protected and does not end up spending hundreds of thousands of dollars on litigation only to end up with no recovery because of a fatal error that occurred at the inception of the project.