On behalf of my client CDC Builders, Inc., I was very pleased to have served as the company's lead trial court counsel and appellate co-counsel (special thank you to John K. Shubin and Deana D. Falce with Shubin & Bass, P.A.for all of their hard work on this case) in its recent successful appeal before the Third District Court of Appeal. CDC appealed a trial court's decision that could have had significant negative implications for Florida's construction industry. Indeed, we were assisted on the appeal by the South Florida Chapter of the Associated General Contractors in an Amicus Curiae brief, as this case was of critical importance to the construction industry.
In the case of CDC Builders, Inc., v. Biltmore-Sevilla Debt Investors, LLC, the Third District Court of Appeal reversed the lower court's summary judgment, which allowed a developer (through a newly created, developer controlled entity) to purchase its own construction loan from its lender and foreclose on the loan expressly for the purpose of:
- eliminating the construction liens filed against it by CDC, and
- transferring the developers' only assets (the real property) to the newly created, developer controlled entity.
This had the effect of extinguishing CDC's construction liens and rendering the developer entities judgment-proof, leaving CDC with no ability to get paid for work performed, while allowing the original developer to obtain ownership of the real property (through the newly created, developer controlled entity) with the benefits of CDC's unpaid hard work. The trial court found that the developers' brazen maneuver was legal and allowed for the foreclosure to proceed.
Fortunately for CDC as well as other members of Florida's construction industry, the Third District Court of Appeal reversed the lower court's decision and, in so doing, prevented the creation of a new formula for unscrupulous Florida developers to cheat their contractors, subcontractors or material suppliers out of payment for work performed or materials provided.
In this case, Riviera Biltmore, Riviera Sevilla and Riviera Almeria (all mostly owned and controlled by Brian McBride of Riviera Development, www.rivieradevelopment.com) retained CDC to build 25 luxury homes and townhomes on several parcels in the Biltmore Hotel area of Coral Gables. The developers then borrowed $20 million from SunTrust to finance the construction. To initiate the construction loan, SunTrust required that Brian McBride and McBride Family Properties provide personal guarantees. The McBride family (original owners of the NFL's Cleveland Browns) is a wealthy and successful family with deep roots in Cleveland and Coral Gables.
Consistent with the construction loan documents which limited the number of spec homes that could be built at any one time, the developers directed CDC to begin construction on 8 of the 25 homes. When the economy soured, the developers exercised their contractual right to terminate the contracts for convenience but requested that CDC complete the eight homes under construction. CDC continued working and also presented the developers with a claim for lost profit on the 17 homes that were terminated for convenience, per the terms of the written contracts. To hedge their exposure, the developers began withholding payments from CDC for work being performed on the eight homes under construction. The developers asserted improper billings as a basis for withholding payments. Despite reduced payments and eventual non-payment of its monthly draws, CDC completed the eight homes and obtained certificates of occupancy from the City of Coral Gables.
CDC recorded claims of lien for the unpaid work performed on the constructed homes, and it filed suit seeking money for the work performed and unpaid, money for the lost profits on the homes not constructed, and foreclosure of its construction liens. The construction liens covered the work performed and unpaid on the homes, but they did not cover the claims for lost profits on work not performed, as those items are non-lienable under Florida law.
When the construction loan matured, McBride (as the personal guarantor of the loan) paid curtailment fees from his other companies to SunTrust to extend the loan several times. Then, rather than extending the loan further (which would have had the effect of reducing the loan and increasing equity in the property for the benefit of CDC), the developers took an extremely untoward and questionable next step. McBride created a new LLC owned by other LLCs made up of him and his family members, acquired a new loan from another lender and used the funds to have this new LLC acquire an assignment of the SunTrust construction loan and mortgages for the full amount owed to SunTrust. In internal documents, SunTrust stated that the loan was paid off by the borrower.
McBride's new LLC then held a first priority interest because it had "purchased" the original SunTrust construction loan. McBride's new LLC then filed a foreclosure action against the developers (McBride's other developer entities) and CDC in order to eliminate CDC's liens as subordinate liens, and to transfer the real property (developers' only assets) to McBride's new LLC. The trial court found the crafty maneuver to be legal, and thankfully for CDC as well as many other participants in Florida's construction industry, the appellate court disagreed.
In a lengthy 16-page opinion, the Third DCA stated in relevant part as follows:
"The law does not permit a person to borrow money from a bank, give the bank a mortgage, incur additional liens and junior mortgages on the property, purchase the mortgage back from the bank, and then foreclose on the mortgage for the primary purpose of eliminating the additional liens and junior mortgages . . . [I]nvestors cannot grant mortgages, contract for the improvement of the property mortgaged, and then use a network of companies to purchase and foreclose the mortgage for the primary purpose of extinguishing the construction liens that increased the value of the property. To hold otherwise would undermine the long-standing principle . . . persons cannot do indirectly what they are not permitted to do directly."
Unquestionably, fairness and justice prevailed in this case. Unfortunately, the developers delayed payment to CDC by years and caused CDC to incur significant attorney's fees and costs, at great sacrifice, to right this wrong.
A contrary decision at the appellate level could have proven to be particularly problematic for Florida's construction industry, as it would have surely led to other developers applying this same scheme in order to terminate construction liens and avoid paying their contractors, subcontractors and material suppliers. Thankfully for CDC as well as for the health of the construction industry in Florida, that will not be the case.