Don’t do this When it Comes to Construction Liens

David Adelstein | Florida Construction Legal Updates

When it comes to preparing and recording a construction lien, this case is an example of what NOT TO DO!   I mean it — this exemplifies what NOT TO DO!  It is also a case study of why a party should always work with counsel in preparing a construction lien so that you can avoid the outcome in this case–your lien being deemed fraudulent.

In Witters Contracting Company v. West, 2020 WL 4030845 (Fla. 2d DCA 2020), homeowners hired a contractor to renovate their home under a cost-plus arrangement where the contractor was entitled to a 10% fee on construction costs.  The contract also required extra work to be agreed in writing between the owner and contractor.

During construction a dispute arose.  The contractor texted the owner that it will cancel the permit and record a $100,000 construction lien if the owner did not pay it $30,000.   Shortly thereafter, the contractor’s counsel sent the homeowners a demand for $59,706 with back-up documentation.  Less than a week later, the contractor recorded a construction lien for $75,000.  The owners initiated a lawsuit against the contractor that included a claim for fraudulent lien.  The contractor then amended its construction lien for $87,239.

The trial court found that the contractor’s claim of lien was fraudulent because it was compiled “with such gross negligence as to the amount claims therein to constitute willful exaggerations.”   A trial was held on damages and $87,239 was awarded as punitive damages against the contractor, plus attorney’s fees and costs, all of which were permissible when a lien is deemed to be a fraudulent lien.

Think about it.  The contractor asked for $30,000 under the threat it will record a $100,000 lien.  It then sent a demand letter for $59,706.  Then it recorded a construction lien for $75,000.  Then it amended the construction lien to $87,239.  This was all in a very short time period.  And, this is likely why the lien was deemed to have been compiled with such gross negligence as the contractor, evidently, had no clue what he was owed under the cost-plus contract or, if he did, he went about it incorrectly.  It is possible the contractor was owed something, but the manner in which he went about it created the wrong perception.  It is unclear whether his counsel was involved in preparing the lien or why the lien was different from the amount in the demand letter sent by counsel.  Nevertheless, clearly, this is the perception you want to avoid and why working with counsel in preparing a lien is vital.

Michigan Court of Appeals: Construction Lien Can’t Exceed Contract Value

Scott R. Murphy | Barnes & Thornburg | September 27, 2019

The Michigan Court of Appeals held that an arbitrator’s decision to award a contractor consequential damages on a construction lien claim warranted reversal even under the extremely narrow standard of review for arbitration awards. In reaching its decision, the court made the definitive ruling that a contractor may not assert a construction lien for consequential damages beyond the monetary value of the parties’ contract.

In TSP Services, Inc. v. National-Standard, LLC, the contractor’s scope of work included asbestos abatement, demolition of steel structures and disposal of scrap steel as well as other site restoration work for an abandoned industrial facility. The parties’ contract required payment in installments with an aggregate contract price of $414,950, due upon completion of the asbestos abatement. Notably, the contract did not mention the sale of scrap steel or TSP’s potential profits therefrom as compensation under the contract. This fact was significant in the eyes of the appeals court because the arbitration proceeding focused on the profits from the sale of scrap steel as a major component of the contractor’s scope of work.

Because the project experienced significant delays in permitting, the contractor was unable to begin the steel reclamation work. During the delay, the market price for steel declined dramatically and as a result, the value of the contract was diminished significantly. In response to the declining steel prices, the contractor requested an equitable adjustment to the parties’ contract. At the time the contractor requested the equitable adjustment, only 9 percent of the available steel had been removed from the project site. When the parties could not reach an agreement to adjust the contract price, the owner terminated the contractor for cause.

However, the arbitrator ultimately concluded that the owner improperly terminated the parties’ contract and committed the first material breach of the parties’ contract. The arbitrator awarded the contractor a construction lien for $782,496.05 and broke that amount out as follows:

  • $141,083 on the unpaid invoices under the contract
  • $46,557.39 for interest and unpaid invoices
  • $391,809 for lost profits on steel inventory
  • $33,793 for interest on those profits
  • $169,226 in attorneys’ fees

The arbitrator determined that the contractor’s construction lien was valid, and was enforceable against the entire award, including the award for consequential damages for lost profits on steel inventory. Notably, the arbitrator awarded the contractor the full value of all the steel even though the contractor never actually removed the steel from the project site.

Despite the extremely narrow standard of review for arbitration awards under Michigan law, the Michigan Court of Appeals reversed the arbitrator’s award of consequential damages in connection with the lien claim because the value of the lien was nearly double the value of the parties’ contract. In reaching this decision, the appeals court emphasized that under the Michigan Construction Lien Act, the amount of any construction lien cannot exceed the remaining unpaid balance under the contract. See MCL 570.1103(4).

Because the arbitrator approved a construction lien well in excess of the contract value, the award violated the Construction Lien Act. Specifically, the arbitrator approved a lien for $782,469, which is $641,386 greater than the unpaid balance under the contract. According to the appeals court, the arbitrator’s award constituted a clear legal error that would reduce the value of the lien by over $500,000.

In reversing the arbitration award, the appeals court relied upon the Michigan Supreme Court’s decision in Detroit Auto Inter-Insurance Exch v Gavin, which held that judicial interference with an arbitration award is appropriate where the arbitration award contains a clear error of law that if corrected would substantially change the award. The Michigan Court of Appeals granted interlocutory relief because further proceedings on the lien claim would have only further complicated the issues and lead to multifarious litigation.

In summary, the decision in TSP Services, Inc v National-Standard makes it clear that consequential damages are not available under the Michigan Construction Lien Act when they exceed the balance of the parties’ contract.

Alabama Supreme Court Clarifies Construction Lien Priority

Madeline Hughes and Stephen Pudner | Baker Donelson | September 17, 2019

The Alabama Supreme Court recently reinforced its policy of giving priority to construction lenders over materialmen in its holding in GHB Construction and Development Co., Inc. v. West Alabama Bank and Trust, 2019 WL 1416893 (Ala. 2019). GHB, a contractor, challenged the priority of its materialman’s lien against a future-advance mortgage under which no funds had been extended to the borrower at the time work commenced. The Court held that because the future-advance mortgage was recorded prior to GHB’s commencement of work, the future-advance mortgage is given priority over GHB’s lien regardless of whether proceeds had been disbursed prior to the commencement of work.

The Court explained that the equitable validity of a future-advance mortgage cannot be attacked by a non-party to the transaction. Because GHB could not challenge the validity of the mortgage, the Court relied on the language of Ala. Code § 35-11-211 (a), which instructs that a materialman’s lien will take priority over all other liens, mortgages, or encumbrances created subsequent to the commencement of work. Because GHB commenced work after the future-advance mortgage was recorded, its lien did not take priority over the future-advance mortgage.

This holding emphasizes Alabama’s policy of ensuring that construction projects continue to be funded. This case tells contractors that: 1) contractors should not assume their work will take priority over future-advance mortgages even when the work is performed before the loan proceeds are extended; and 2) a contractor’s commencement date is crucial and will control priority against other lenders, and therefore, it is imperative that contractors memorialize that date and that they know whether any mortgages have been entered into and recorded before that date. In Alabama, it does not seem to matter whether that mortgage is a future advance or traditional mortgage.

Oregon Court of Appeals Clarifies Timing Rule for Construction Liens

Blake Robinson | Davis Wright Tremaine | August 8, 2019

Under Oregon law, a contractor or subcontractor must file a construction lien within 75 days “after the person has ceased to provide labor, rent equipment or furnish materials or 75 days after completion of construction, whichever is earlier.” ORS 87.035(1). But when does the 75-day period run when a subcontractor fully completes its work on a project, but is called back months later for additional work?

In a recent case, Bethlehem Construction, Inc. v Portland General Electric Company, the Oregon Court of Appeals determined that the 75-day period ran from completion of the additional work. 298 Or App 348, — P3d —- (2019). The court primarily based its conclusion on the fact that the subcontractor performed the additional work under a change order that specifically referenced the original contract.

Accordingly, contractors and subcontractors who are called back to a job to perform additional work and who have not already filed a construction lien should request a change order referring back to the original contract. Likewise, owners should recognize that even if a contractor or subcontractor fails to file a construction lien within 75 days of completion of the original work, the contractor or subcontractor’s lien rights can be revived if the contractor or subcontractor is called back to perform additional work under a change order that refers back to the original contract.

In Bethlehem Construction, PGE hired a general contractor, Abeinsa, for the construction of a power plant. Abeinsa, in turn, subcontracted with Bethlehem Construction. Under the subcontract, Bethlehem agreed to manufacture concrete panels for Abeinsa.

Bethlehem completed its work and issued a final invoice, but did not file a lien within the ensuing 75 days. Around eight months later, Abeinsa requested that Bethlehem return to the project to evaluate damage to the panels caused by a different subcontractor.

Bethlehem and Abeinsa signed a “Change Order Request” listing the original contract number and name in the “reference” field and describing a “scope of change” to the original contract. Bethlehem completed the work and, within 75 days of doing so, recorded a lien covering both the original and change order work.

The Oregon Court of Appeals concluded that Bethlehem’s lien was timely because all of the evidence (specifically, the language in the Change Order Request referring to the original contract) demonstrated that the parties intended the original and subsequent work to be “two parts of one single contract.”

The court also concluded that the later work was not “trivial or trifling”—which was significant because the 75-day deadline to record a lien is not extended by the contractor or subcontractor returning to the project to perform “some trifling work or a few odds and ends after apparently completing the job and removing its equipment.” Here, the later work was not trivial or trifling because the Change Order Request specifically required the work, and the work was “significant to the project.”

  1. A construction lien must be recorded within the earlier of 75 days of the contractor or subcontractor stopping its work on the project or completion of construction.
  2. If a contractor or subcontractor completes its work on a project but later is called back to do additional, related work, and it performs that work under a change order that specifically refers back to the original contract, the 75-day period will likely run from the date the later work is completed.
  3. If the later work is not required by the original contract or a change order, or is not significant to the project, the 75-day period will likely run from the date the original work was completed.

Doing Business in Florida, “Has the 90-Day Deadline to Record a Florida Construction Lien Started Ticking?”

Jeffrey S. Wertman | Berger Singerman LLP | May 10, 2016

Over the years, there has been considerable litigation over whether or not a construction lien in Florida has been timely filed. As construction projects increase in number, many expect there to be an escalation in construction lien filings. Construction participants, such as contractors, subcontractors, material suppliers, engineers and surveyors, have a short window of opportunity to perfect their construction lien rights. Florida’s Construction Lien Law requires a lienor to record a construction lien within 90 days from the last date that it furnishes labor, services or materials. This deadline is referred to in the lien law as the “final furnishing.”

Identifying when the 90-day deadline begins to tick seems simple, but it is often confusing. Issues regarding the 90-day deadline to record a construction lien may arise, for example, if a lien claimant returns to a job site or property to do additional work or furnish additional materials, or if additional work or materials is furnished in the nature of repair or warranty work.

The Construction Lien Law and Florida case law address many of these issues. Section 713.01(12), Florida Statutes, provides that “final furnishing is not to be measured by such standards as the issuance of a certificate of occupancy or certificate of final completion”, and does not include “correction of deficiencies in the lienor’s previously performed work or material supplied.”

Florida courts have further clarified the 90-day deadline by stating that the legal test to be applied in determining the date of last work is: (1) whether the work was done in good faith, (2) within a reasonable time, (3) pursuant to the terms of the contract, and (4) necessary for a finished job. Thus, courts have held that the 90-day period is not extended by the furnishing of additional, insubstantial work, or where the work is not needed to complete the contract or to make the project suitable for its intended purpose. Nor does remedial work in the nature of correction or repair, such as warranty or punch list work, extend the time for recording a lien.

It is important that lienors seeking to enforce…

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