Appellate Court Rules Lenders Are Required to Notify Contractor of Decision to Terminate Future Payments

A recent decision by the First District Court of Appeals represents a potentially significant boon for the scores of contractors and other lienors that turn to the courts to seek payment for their work under the terms of a construction contract. In the case of Whitehead v. Tyndall Federal Credit Union the appellate court reversed the lower court’s decision and found that Florida law required the credit union to notify the contractor of its decision to stop advancing funds while the contractor continued work on a construction project.

In Whitehead, the contractor (Whitehead) entered into a contract with a developer for the construction of a home. Disputes arose between the contractor and the developer. Consequently, the developer advised the contractor that no further draws would be disbursed to the contractor. However, having not been formally terminated, the contractor continued to work.

The contractor was terminated approximately one month after being advised by the developer that it would not receive further disbursement. It was not compensated for the work it performed between informal and formal termination, and the bank did not disburse any money for its benefit. Approximately one month after termination, the developer hired a completion contractor. Upon the completion contractor completing its work, the bank disbursed the remaining construction loan funds to the completion contractor.

In Whitehead’s lawsuit seeking payment for its work on the project, it named the credit union as a party defendant, alleging violation of Fla. Stat. 713.3471 based upon the lender’s failure to notify the company of its decision to cease disbursing funds. In the case, the lower court entered final summary judgment in favor of the lender, finding that the credit union had not decided to discontinue disbursement of the construction loan, as it eventually disbursed the entire construction loan when it issued payments to the contractor that was hired to complete the project. The appellate court reversed the ruling and stated in its judgment that Florida statutes required that once a construction lender “knows that it will stop advancing funds to a contractor or any other lienor, the lender has a duty to notify the contractor of its decision.” In reaching its decision, the court concluded that “the obvious purpose of [Fla. Stat. 713.3471] is to prevent exactly what occurred here: the unjust termination of payments to a contractor who continues work, without any notice from the lender that payments will be terminated.”

The construction law attorneys in South Florida at our firm and throughout the state will certainly reference this decision in other cases involving lenders which terminated payments to contractors and other lienors without advance notice. We will continue to write about court decisions such as this that have important implications for the construction industry in Florida, and we encourage industry members to subscribe to our blog by adding their e-mail address in the box on the right in order to automatically receive all of our future posts.