Articles Posted in Construction lien

A recent ruling by the Fifth District Court of Appeal which reversed the trial court’s decision serves as a reminder that the Florida courts can find liens to be fraudulent even when they are filed based on a good faith belief that money is owed. The court’s ruling is a reminder to contractors to carefully review the amounts included in a claim of lien so as not to include amounts which are not lienable (or which may not be lienable) under Florida law, as they will not necessarily avoid a fraudulent lien based upon a “good faith belief” that amounts were lienable.

The appellate ruling came in the appeal by Daniel Medellin and Susan Medellin of a ruling that contractor UBuildIt had not filed a fraudulent lien against their property because the company had reason to believe that it was entitled to more than $28,000 under the terms of its construction consulting contract with the Medellins. In its initial ruling, the trial court interpreted that under chapter 713 of the Florida Statutes, it was precluded from finding UBuildIt’s claim of lien to be fraudulent because the company had a good faith belief that it was owed money by the Medellins.

The appellate panel found that in section 713.31(2)(b), the statute provides “that neither a good faith dispute as to the amount owed nor a minor mistake is sufficient to support a finding that a lien is fraudulent. This is quite different from the trial court’s ruling that a good faith dispute as to the amount owed, or a minor mistake, necessarily requires a finding that the lien is not fraudulent.”

In its ruling, the appellate judges agreed with the appellants that UBuildIt did not perform labor or services constituting an improvement on their property that would give it the right to file a lien. Instead, its lien was based on breach of contract and lost profits, which are not a proper basis for a lien. The panel agreed with the Medellins that the trial court could conclude that the lien was willfully exaggerated because the lienor included claims that were not lienable, notwithstanding the lienor’s good faith belief that it was entitled to payment. The court reversed the parts of the final judgment denying the Medellins’ claims for fraudulent lien, slander of title, and attorney’s fees. It directed the trial court to reevaluate, on remand, its ruling on the slander of title claim in light of the fact that the lien was not based on lienable services, and to determine the amount of attorney’s fees to award to the Medellins.

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In today’s real estate market, contractors must be very cautious and proactive in order to effectively assert and assure their lien rights. There are several potential loopholes in Florida law between the state’s Lis Pendens Statute and Construction Lien Law, and the South Florida construction law attorneys at our firm believe that there is one specific discrepancy between the statutes that has the potential to be particularly troublesome for contractors.

Here’s a common example that illustrates this problematic grey area for construction firms:

Under Florida’s lien law, a contractor must record its claim of lien within 90 days of its last day of work, and it has one year in which to file suit to enforce that claim of lien. Let’s say a contractor is performing work on a project where the lender files a foreclosure suit and lis pendens. If the contractor has not recorded its claim of lien as of the date of the recording of the notice of lis pendens and does not intervene in the foreclosure suit to enforce its claim of lien within 30 days of the bank’s recording of the lis pendens, the contractor, potentially, could be forever barred from enforcing its claim of lien based on Section 48.23, Florida Statutes. Since it is entirely possible that a lender could file a lawsuit to foreclose its mortgage and record a lis pendens without any actual notice to the contractors working on the property, this has the potential to be a very serious legal challenge for contractors performing work in the current market. Section 48.23, Florida Statutes states in pertinent part:

Except for the interest of persons in possession or easements of use, the recording of such notice of lis pendens, provided that during the pendency of the proceeding it has not expired pursuant to subsection (2) or been withdrawn or discharged, constitutes a bar to the enforcement against the property described in the notice of all interests and liens, including, but not limited to, federal tax liens and levies, unrecorded at the time of recording the notice unless the holder of any such unrecorded interest or lien intervenes in such proceedings within 30 days after the recording of the notice. If the holder of any such unrecorded interest or lien does not intervene in the proceedings and if such proceedings are prosecuted to a judicial sale of the property described in the notice, the property shall be forever discharged from all such unrecorded interests and liens.

Generally, a lienor recording a claim of lien will not do a title search of the property until it files its foreclosure action. The lienor has one year from the date of recording its claim of lien to file its foreclosure action. Consequently, a lender can file a foreclosure action and record a lis pendens, and the lienor will have no actual knowledge of the lis pendens until a title search is performed at the time of the filing of the lawsuit. If the lis pendens was recorded more than 30 days before, it appears that Section 48.23 of the Florida Statutes could bar the enforcement of the lienor’s claim of lien.

This application of Section 48.23, Florida Statutes can be detrimental to contractors, subcontractors and other lienors as defined in Chapter 713 who are working to improve the property that is secured by the mortgage, which, arguably, benefits the lender. The lienors may not have reason to know that the lender has started foreclosure proceedings and, pursuant to the Construction Lien Law, the lienors may still be within their rights to record a claim of lien even after a lis pendens is recorded.

There is little case law dealing with the interplay between these two important statutes. Accordingly, lienors working on projects in this uncertain economic climate should make every effort to keep a close and careful eye on the financial and legal status of the project, and they should act quickly to record their claim of lien as soon as appropriate after non-payment. In addition, it is vital for the lienors to work with a qualified and experienced construction industry attorney and perform title searches on the property in order to determine whether a lender (or other lienor) has recorded a lis pendens that could impact their ability to foreclose their claim of lien.

Our lawyers who focus on construction law matters in South Florida will continue to write about important legal and financial issues for the industry in the state, and we encourage industry members to submit their e-mail address using the box on the right in order to automatically receive all of our future blog posts.

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.