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.

Florida Appellate Court Holds Anti-Concurrent Cause Provision in Exclusion Excludes Entire Loss When a Covered Cause Occurs Concurrently With an Excluded Cause

Derek R. Lenzen | Phelps Dunbar

A Florida appellate court held that where water damaged property through walls and windows (an excluded cause) and also through a door (a covered cause), the all-risk policy’s anti-concurrent cause provision controls, and coverage for the entire loss is excluded. Security First Ins. Co. v. Czelusniak, 45 Fla. L. Weekly D 1151, 2020 Fla. App. LEXIS 6494 (Fla 3d DCA May 13, 2020).

An insured reported that water entered the interior of the insured property and caused damage and mold growth. The insurer denied coverage, and the insured filed suit. It was undisputed that water entered the property through walls, windows and doors. The policy explicitly excluded loss caused by water entering through walls or windows. However, water entering through doors was not excluded. The trial court granted the insured’s motion for directed verdict pursuant to the concurrent clause doctrine outlined in the case Sebo v. American Home Assurance Co.,Inc., 208 So. 3d 694 (Fla. 2016) (when damage from an excluded cause occurs concurrently with a covered cause so that a fact-finder is unable to separate the two causes, the entire loss is covered).

The appellate court reversed, finding that the trial court erred in not considering the anti-concurrent cause wording in the exclusion. The policy excluded coverage for damage from water entering through walls or windows “regardless of any other cause or even contributing concurrently or in any sequence to the loss.” The court held that because that damage occurred concurrently with the damage from water through doors, coverage for the entire loss is excluded due to the anti-concurrent cause provision in the exclusion.

Uniformity in Florida’s Construction Bond Laws Brings About Fairness for the Industry

Gary L. Brown | Construction Executive

Before Florida updated its laws for construction bonds, there were some significant differences between how liens and bond claims were litigated. Forms and procedures lacked uniformity that created unnecessary challenges for the construction industry and legal practitioners serving the industry.

Now, more consistency among the laws should benefit contractors, as well as lower-tiered subcontractors and suppliers. Since the updates were instated in October 2019, some of the procedures and rules used for lien enforcement have been extended to bond claims, which may make it easier to resolve differences over payment and performance.

That should come as a relief to local contractors and law firms, as well as to the numerous developers and construction companies based outside of Florida that operate in the state or are considering doing so. Florida is now the number one destination for new residents, especially from high-tax states, according to IRS data. With them come new homes, retail centers, offices, industrial space, roads and other infrastructure in what is now the third-most-populous state in the nation.

Despite its economic advantages and good weather, Florida has been somewhat hampered by complex lien and bond laws. Inconsistencies between rules and procedures for lien enforcement and bond claims, both for public and private projects, have evolved with no clear reason. The amended laws have resolved some of the differences, which may, in turn, result in earlier resolution of bond claims. For example, some of the changes have added further requirements for presenting a bond claim, which should result in dubious claims—that previously may have lingered—being resolved, through outright rejection or withdrawal, earlier on in the process. On balance, other changes should protect bond claimants from having their claims barred as a result of an honest mistake in determining the amount due or other information contained in the forms used to make a bond claim.

NOTABLE CHANGES

Before the law was amended, notices of non-payment for bond claims, unlike liens, did not have to be signed under oath. Now, notices of non-payment must be sworn to. Further, while the proper form of a lien was spelled out in the lien law, applicable bond statutes did not set forth the acceptable form of notices of non-payment for bond claims. Now, the statutes set forth the required information in a notice of non-payment for both public and private projects.

One of the most significant changes is that the standard for “fraudulent lien” under the lien law has now been extended to bond claims. A notice of non-payment is now statutorily “fraudulent” if the claimant “has willfully exaggerated the amount unpaid, willfully included a claim for work not performed or materials not furnished for the subject improvement, or prepared the notice with such willful and gross negligence as to amount to a willful exaggeration.” And like a “fraudulent lien,” a finding that a notice of non-payment is “fraudulent” under the statutory definition above is a complete defense to a bond claim. 

Also similar to lien claims is the protection afforded to lienors who make an honest mistake in putting together their lien. Under the revised law, the “negligent inclusion or omission of any information in the notice of non-payment that has not prejudiced the contractor or surety does not constitute a default that operates to defeat an otherwise valid bond claim.” 

Further, similar to the lien law, “a minor mistake or error in a notice of non-payment, or a good faith dispute as to the amount unpaid does not constitute a willful exaggeration that operates to defeat an otherwise valid claim against the bond.” 

On balance, these changes level the playing field by, on the one hand, providing for more stringent requirements and penalties for a claimant’s failure to comply with the statutory obligations, but on the other hand, providing protection for claimants with legitimate bond claims who, in good faith, make an honest mistake in putting together their bond claim.  

To illustrate these changes in practice, if a subcontractor that is entitled to $100,000 for work performed makes a “fraudulent” bond claim for $150,000, that company will forfeit its entire claim. However, if the company can show it made an honest mistake in calculating the amount of its claim, and that instead of $150,000, it was only entitled to $100,000, the court may enforce the lesser amount.

Another change that will benefit contractors deals with attorney’s fees awarded to the “prevailing party” on a bond claim. With payment bond claims, a contractor defending them could recover its attorney’s fees if it prevailed. However, the same contractor pursuing a payment bond or performance bond claim against its subcontractor’s surety as an “obligee” under the bond, was not entitled to recover attorney’s fees if it prevailed. Under the amended law, contractors are now entitled to recover their attorney’s fees if they prevail in a bond claim action against a surety.

A few other less significant changes in the law that have brought about consistency in lien and payment bond claims include the following. The value of rental equipment may now expressly be the basis for a bond claim on private projects, as has been the case for lien claims on private projects and bond claims on public projects. Also, a company must specify the amount of retainage included in the notice of non-payment for private bond claims, just as it always was required to do with a lien claim and the notice of non-payment for a public bond claim.

To be sure, these changes will not put an end to bond claims or litigation over them. But they do bring about more consistency and fairness—to both contractors and subcontractors—in the process of pursuing or defending bond claims. As a result, these changes should be welcomed by national developers and contractors, along with local contractors, subcontractors and sureties. Many other states have lien laws, some similar to Florida, and would be wise to review their statutes for ways to emulate what Florida has accomplished.

Contract, Project, and Arbitration in Florida? State Has Personal Jurisdiction Over Action to Enforce Arbitration Award

E. Mabry Rogers, J. David Pugh and Amandeep S. Kahlon | Buildsmart

On June 24, 2020, in Sayers Constr., LLC v. Timberline Constr., Inc., et al., a Florida District Court of Appeal affirmed a trial court’s denial of a contractor’s motion to dismiss. The contractor moved to dismiss for lack of personal jurisdiction in a dispute with a subcontractor over confirmation of an arbitration award. The appellate court found the subcontractor sufficiently pled personal jurisdiction in accordance with Florida’s long-arm statute and that the contractor’s consent to arbitrate in Florida subjected it to personal jurisdiction in a lawsuit to enforce the award in Florida.

The contractor, Sayers Construction, a Texas corporation, entered into multiple contracts with Florida Power & Light to provide construction services in South Florida. Sayers subcontracted with Timberline, a South Dakota corporation, under a master agreement to perform much of this work. When Sayers defaulted on its payment obligations, Timberline initiated arbitration under the American Arbitration Association (AAA) Construction Rules pursuant to the parties’ agreement. The agreement did not specify a locale for the arbitration, so the locale was governed by the AAA Rules. Under such circumstances, the AAA Rules provided for arbitration in a locale agreed to by the parties or in the city nearest to the site of the project. The parties agreed to arbitrate in Coral Gables, which is located in Miami-Dade County, Florida.

The arbitrator entered an award in favor of Timberline, and Timberline filed a complaint to enforce the award in the circuit court of Miami-Dade County. Timberline’s complaint made a number of factual allegations to support personal jurisdiction over Sayers in Florida, including that Sayers was registered as a contractor in Florida, maintained an office in the state, entered into and breached a contract for services in the state, and consented to arbitration in the state. Sayers moved to dismiss for lack of personal jurisdiction. The trial court denied the motion “finding that personal jurisdiction was sufficiently factually alleged” and “that by consenting to arbitrate in Florida, Sayers agreed to jurisdiction in Florida for confirming an award.” Sayers appealed, and the District Court of Appeal affirmed the trial court’s ruling.

The appellate court used a two-part analysis to determine whether personal jurisdiction over Sayers was appropriate: (1) Did the complaint allege sufficient jurisdictional facts to bring the action within Florida’s long-arm statute, and (2) did Timberline demonstrate sufficient minimum contacts between Sayers and Florida to satisfy due process requirements? With respect to the first prong of this analysis, the appellate court determined that Timberline pled sufficient jurisdictional facts and that Sayers’ affidavit supporting its motion to dismiss “failed to specifically refute the allegations made by Timberline…or contest the trial court’s jurisdiction.”

Next, the appellate court concluded that the trial court’s findings that Sayers carried out business in the state, held a Florida contractor’s license, maintained an office in the state, employed personnel in the state, breached a Florida contract, and arbitrated the dispute in Florida created sufficient minimum contacts to satisfy due process. The appellate court also agreed with the trial court that, regardless of whether Timberline satisfied Florida’s two-prong inquiry for personal jurisdiction over Sayers, Sayers’ consent to arbitrate the dispute in Florida made Florida an appropriate jurisdiction to confirm the award.

Lessons from Sayers

Where arbitration is the dispute resolution mechanism in a contract, parties can specify the court (federal, state, or local) that has jurisdiction over actions to enforce any arbitration award. There are advantages and disadvantages to this approach. For Timberline, a contractual provision agreeing to jurisdiction in Florida — thereby eliminating the need to satisfy the long-arm statute requirements — may have helped it avoid the expense and time to litigate Sayers’ motion to dismiss.

Although not discussed in the present case, a prevailing party attorneys’ fees provision in the master agreement may also have helped Timberline avoid, or at least reduce the expense of, this personal jurisdiction dispute. The risk of an additional fee award on top of an already unfavorable arbitration award may have deterred Sayers’ determined pursuit of its motion to dismiss and subsequent appeal.

Homeowners Beware of Construction Liens

Michael P. Beltran | Ansa Assuncao

As many homeowners have decided to conduct overdue home improvement projects while they are spending more time at home, consumers need to be aware of Florida’s lien law. As a mandatory disclosure required in all contracts greater than $2,500 states:

ACCORDING TO FLORIDA’S CONSTRUCTION LIEN LAW (SECTIONS 713.001-713.37, FLORIDA STATUTES), THOSE WHO WORK ON YOUR PROPERTY OR PROVIDE MATERIALS AND SERVICES AND ARE NOT PAID IN FULL HAVE A RIGHT TO ENFORCE THEIR CLAIM FOR PAYMENT AGAINST YOUR PROPERTY. THIS CLAIM IS KNOWN AS A CONSTRUCTION LIEN. IF YOUR CONTRACTOR OR A SUBCONTRACTOR FAILS TO PAY SUBCONTRACTORS, SUB-SUBCONTRACTORS, OR MATERIAL SUPPLIERS, THOSE PEOPLE WHO ARE OWED MONEY MAY LOOK TO YOUR PROPERTY FOR PAYMENT, EVEN IF YOU HAVE ALREADY PAID YOUR CONTRACTOR IN FULL. IF YOU FAIL TO PAY YOUR CONTRACTOR, YOUR CONTRACTOR MAY ALSO HAVE A LIEN ON YOUR PROPERTY. THIS MEANS IF A LIEN IS FILED YOUR PROPERTY COULD BE SOLD AGAINST YOUR WILL TO PAY FOR LABOR, MATERIALS, OR OTHER SERVICES THAT YOUR CONTRACTOR OR A SUBCONTRACTOR MAY HAVE FAILED TO PAY.

Fla. Stat. 713.015. What this means is, for example, if a lumber company delivers lumber to your home for your contractor to use in completing a project, then you are liable to the lumber company for the cost of the lumber. If your contract calls for the contractor to pay suppliers, then you need to ensure that each supplier (and subcontractor) has been paid before you issue your final payment to your contractor. If you fail to do is, then the contractor may receive full payment and abscond without paying subcontractors and suppliers. These suppliers will then look to you for payment and you may be compelled to pay these suppliers and subcontractors even though the contractor was supposed to pay them from your final payment. Fortunately, the warning also tells consumers how to avoid this revolting development:

TO PROTECT YOURSELF, YOU SHOULD STIPULATE IN THIS CONTRACT THAT BEFORE ANY PAYMENT IS MADE, YOUR CONTRACTOR IS REQUIRED TO PROVIDE YOU WITH A WRITTEN RELEASE OF LIEN FROM ANY PERSON OR COMPANY THAT HAS PROVIDED TO YOU A “NOTICE TO OWNER.”

Id. A consumer can protect themselves by inserting the following language into the contract:

Owner not obligated to pay contractor [final payment] until 7 days after the latest of (1) satisfactory completion of the project, (2) [any needed approval or passed inspection], and (3) receipt of written releases of lien from any party providing a notice to owner.

By using this language, the homeowner can protect himself and ensure that he does not need to pay his contractor until he is satisfied with the quality of the work performed and that the contractor has paid all of the suppliers and subcontractors. Although it goes without saying, the mandatory disclosure concludes:

FLORIDA’S CONSTRUCTION LIEN LAW IS COMPLEX, AND IT IS RECOMMENDED THAT YOU CONSULT AN ATTORNEY.

Id.