OWNERS DEFENDING A LIEN – ESPECIALLY A PATENTLY FRAUDULENT LIEN

Posted on October 2, 2011October 2, 2011 by Edward Garber

Owners are sometimes in a difficult position and predicament when an entity wrongly records a claim of lien on their real property and forecloses on the lien. The owner is forced to defend the lien foreclosure claim that it contends was improperly filed and fraudulent (or is simply forced to deal with an improperly filed lien encumbering their property). In this circumstance, an owner should not remain on the defensive, but should pursue his/her own affirmative fraudulent lien claim. Another affirmative claim the owner can assert, besides possibly a breach of contract claim, is a slander of title claim in furtherance of exerting some pressure against the entity and person that wrongly filed a lien. This is especially true if the lien is so patently wrong under Florida’s Lien Law and cases interpreting Florida’s Lien Law.

Medellin v. MLA Consulting, Inc. d/b/a UBuildIt, Fla. L. Weekly D2042a (Fla. 5th DCA 2011), is a new case discussing fraudulent liens, slander of title for recording a fraudulent lien, and the awarding of attorneys’ fees to an owner that successfully defends a lien. These are all important considerations for an owner that is confronted with a patently improper or fraudulent lien as appears to be the exact situation the owners confronted in this case.

In Medallin, owners hired a consultant (that was neither a licensed contractor nor architect) to provide consulting services to assist them with the process of constructing their home as their own general contractor. The consultant was to provide its services in two phases. The first phase was the planning phase which involved a site inspection, budget meeting, plans review, and estimation of construction costs. This phase was completed. The second phase was the construction phase whereby consultant would specifically assist owner in serving as their own general contractor. This phase was not completed. Instead, the owners terminated the contract with consultant per the terms of the contract before this construction phase began.

The consultant recorded a construction lien for the entire amount of the construction planning phase (despite this phase not having started or finished) and filed a lawsuit against the owners to foreclose the lien and for breach of contract. The owners, in turn, countersued consultant for filing a fraudulent lien and the consultant’s president, believed to be the person that signed the lien, for slander of title. The owners apparently (and correctly) argued that the consultant was not an entity that could properly record a construction lien under Florida law and included amounts which were not lienable under the law (such as lost profits).

The trial court ruled after a bench trial that the owners did not breach the contract and did not owe consultant any money because they terminated the contract prior to the construction phase and per the contract. The trial court, however, held that consultant did not record a fraudulent lien because it had a good faith reason to think it was owed the full amount of the construction phase fee under the contract. The trial court further held that the president of the consultant was not liable for slander of title and did not award the owners attorneys’ fees for successfully defeating consultant’s lien claim. The owners appealed these rulings to the Fifth District Court of Appeal.

Whether the Trial Court Should Have Declared the Lien Fraudulent

In a lengthy discussion on this issue, the Fifth District explained in relevant part:

“We agree with Appellants that a trial court is permitted to conclude that a lien was fraudulently filed where the lien is based on services that cannot support a lien under chapter 713, even if the lienor had a good faith belief that it was owed money by the property owner. Section 713.31(2) provides, in relevant part:

(a) Any lien asserted under this part in which the lienor has willfully exaggerated the amount for which such lien is claimed or in which the lienor has willfully included a claim for work not performed upon or materials not furnished for the property upon which he or she seeks to impress such lien or in which the lienor has compiled his or her claim with such willful and gross negligence as to amount to a willful exaggeration shall be deemed a fraudulent lien.

(b) [A] minor mistake or error in a claim of lien, or a good faith dispute as to the amount due does not constitute a willful exaggeration that operates to defeat an otherwise valid lien.

***

This court has held that a trial court can determine that a lien is fraudulent notwithstanding a good faith dispute as to the amount owed under a contract. In particular, a trial court can conclude that a lien is fraudulent where the underlying claim does not support a lien under chapter 713. In Onionskin, Inc. v. DeCiccio, 720 So. 2d 257, 257 (Fla. 5th DCA 1998), this court affirmed a trial court’s finding that a lien was willfully exaggerated and, therefore, fraudulent, where the lienor filed a lien based on claims of damages for breach of contract and lost profits because, as the trial court put it, these items are clearly not lienable by any stretch of the imagination.

***

The decisions in Onionskin and Stevens [another case the court relied on] clearly hold that a trial court may or may not find that a lienor willfully exaggerated a lien where the underlying claim does not support a lien under chapter 713. These decisions also make it clear that a good faith dispute as to the amount owed does not necessarily mean as a matter of law that a lien is not fraudulent. Here, UBuildIt [consultant] did not perform labor or services constituting an improvement on Appellants’ [owner] property that would give UBuildIt a right to file a lien on the property. Rather, its lien was based on breach of contract and lost profits, which are not a proper basis for a lien. Appellants correctly assert that a trial court can conclude that a lien was willfully exaggerated where the lienor included claims that were not lienable, notwithstanding the lienor’s good faith belief that he or she is entitled to payment.

***

Accordingly, the trial court misinterpreted section 713.31 when it determined that it could not address Appellants’ arguments that UBuildIt’s lien was willfully exaggerated given that UBuildIt included claims that were not lienable. We must, therefore, reverse that part of the final judgment denying Appellants’ claim for fraudulent lien and remand this case to the trial court to address that issue in a manner consistent with this opinion.”

Medellin (internal quotations and citations omitted) (emphasis added).

Although the Fifth District is remanding this case back to the trial court to determine whether the lien should be declared fraudulent, there are two prominent facts that should support this finding. First, the Fifth District pointed out that consultant really was not a proper liener under Florida’s Lien Law. Second, the lien included amounts that are not properly lienable, even if consultant was deemed a proper liener (such as lost profits). Considering both factors together should lead to the reasonable finding that the lien was fraudulent. Moreover, if consultant was not a proper liener and was never in a position to properly record a lien to begin with, then technically, all amounts included in the lien would be improper and not lienable amounts (because they are amounts coming from an improper lienor). Thus, by not declaring the lien fraudulent would not be punishing an entity from recording a lien when it did not have a proper legal basis to do so and for including amounts that are not proper amounts to include in a lien.

Could the President of Consultant be Liable for Slander of Title

The Fifth District found that the president of consultant could be found liable for slander of title in light of the fact that the the lien included amounts which were not properly lienable under the law.

While the elements of slander of title still needed to be established, providing owners an avenue to sue the entity and potentially the person that signed the lien for slander of title may give them some personal argument/claim when a lien is so grossly incorrect. The downside, however, is that by allowing owners to assert personal claims against the person that signed the lien could result in a chilling effect where certain lienors are afraid to lien because they don’t want to be sued personally. This fear makes sense because the person is not signing the lien in a personal capacity, but in the capacity as the representative of the lienor.

Should the Trial Court Have Awarded the Owners’ Attorney Fees for Defeating the Consultant’s Lien Claim

Lastly, the Fifth District maintained that the owners should have been awarded their attorneys’ fees as the prevailing parties for defeating the consultant’s lien claim.

This ruling is important and makes sense because if an owner is successful and defeats a lien claim, there really is no reason why they should not be deemed the prevailing party for purposes of attorneys’ fees. Otherwise, there is no repercussion to an entity that records a lien and forecloses , rightfully or wrongfully, if they are not going to be responsible for the owner’s attornesy’ fees if they lose their lien claim outright.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

DO NOT BANK ON RECOVERING YOUR ATTORNEYS’ FEES IN A CONSTRUCTION LIEN FORECLOSURE ACTION

Posted on August 7, 2011August 7, 2011 by Edward Garber

A party should never bank on recovering their attorneys’ fees when prosecuting or defending a construction lien foreclosure action.

In a construction lien action, the prevailing party has been statutorily entitled to recover their reasonable attorneys’ fees. Fla.Stat. §713.29. This is important since a party can only recover their attorneys’ fees if there is a statutory or contractual basis to do so.

The Florida Supreme Court in Trytek v. Gale Indus., Inc., 3 So.3d 1194 (Fla. 2009), analyzed what it meant to be a prevailing party for purposes of attorneys’ fees in a construction lien action and held that that the significant issues test is the test to determine the prevailing party. Under this test, the prevailing party is not necessarily the party that wins a sum of money at trial, but, rather, the party that wins the significant issues in the case. Hence, it is more than possible that the party that wins the significant issues based on the circumstances of the case is not the party that wins money. The Florida Supreme Court further held that a court can rule that no party is the prevailing party in this case.

The decision in Trytek has led to confusion, as well as consternation, because there is no objective or qualitative standard to determine the prevailing party for purposes of attorneys’ fees under the significant issues test. Instead, a pure subjective standard is used to determine the prevailing party that is not necessarily tied to the outcome of the case; and, importantly, this decision permits the trial court to find no prevailing party. This is noteworthy because the recovery of attorneys’ fees oftentimes drives the outcome of a case because the fees can be more than the amount in controversy. Now, with a subjective test used to determine whether a party can recover their attorneys’ fees, a party must consider that they may not be entitled to their attorneys’ fees when deciding how to pursue or defend a construction lien foreclosure action.

The recent case of Sheppard v. M&R Plumbing, Inc., 36 Fla. L. Weekly D1697b (Fla. 1st DCA 2011), elaborates on the confusion of the significant issues test and the reason why a party should not bank on recovering their attorneys’ fees in a construction lien foreclosure action. In this case, a plumber installed a water treatment system in a house. Apparently, there was no written contract and there was no meeting of minds with respect to the costs to install this water treatment system. The plumber recorded a construction lien and foreclosed the lien and, as an alternative cause of action, sued the owner for quantum meruit (unjust enrichment) for the reasonable value of labor, services, and materials it provided to the owner.

The reason the plumber sued the owner to foreclose a construction lien and for quantum meruit is because there was uncertainty as to whether a contract existed between the owner and the plumber. A construction lien, however, can only arise if there is a contract (oral or written)—no contract means no lien rights. Under a quantum meruit action, there is an acknowledgment that a contract does not exist, but because value was allegedly provided, the party should be entitled to the reasonable cost of that value.

Whether the plumber prevailed on its construction lien action or alternative quantum meruit action should have been crucial for a determination of which party should be deemed a prevailing party for purposes of recovering its attorney fees. The reason being that a party does not have any legal basis to recover their attorneys’ fees in a quantum meruit action since there is no statutory or contractual basis to recover fees in this type of action.

At trial, a jury decided that a contract did not exist between the plumber and the owner. Because a contract did not exist, the plumber could not prevail on its construction lien action. However, the jury did decide that the plumber did provide value to the owner of approximately $13,000 and ruled in favor of the plumber on its alternative quantum meruit action.

The issue on appeal to the First District was whether the owner or the plumber should be deemed the prevailing party for purposes of fees. From a practical standpoint, it would make sense that the owner prevailed on the significant issues test because the owner prevailed in entirety on the construction lien foreclosure action, importantly, the only count that entitled a party to recover attorneys’ fees. But, this rationale is not the rationale employed by the First District. Instead, the First District maintained:

“While we agree the Shephards [owner] must now be deemed the prevailing parties on the lien foreclosure count, entry of the money judgment in favor of M&R [plumber] on the quantum meruit count made M&R, not the Shephards, the prevailing party in the litigation, viewing the entire ‘action brought’ as a whole.”

Neither party was deemed the prevailing party for purposes of attorneys’ fees. This ruling, unfortunately, leads to further confusion and frustration on when a party will be deemed the prevailing party in a construction lien action. Here, the plumber lost in entirety its lien action despite being awarded some money in its quantum meruit action (again, an equity action that does not afford the prevailing party to attorneys’ fees). This was overlooked by the First District leaving an owner that prevailed on the significant issues of the lien action to bear all of its attorneys’ fees. The only conclusion that can be reached from this decision is that, again, there is no objective or qualitative way to determine the prevailing party in a construction lien foreclosure action, especially given the ruling in this case where a party can win the lien action but lose an alternative equity action and still not be deemed the prevailing party.

OWNERS DON’T FORGET ABOUT SERVING A REQUEST FOR SWORN STATEMENT OF ACCOUNT

Posted on July 17, 2011July 17, 2011 by Edward Garber

Owners undertaking a construction project are always concerned about construction liens from subcontractors, sub-subcontractors, and suppliers that preserved their lien rights by serving a notice to owner in accordance with Florida’s Lien Law (Florida Statutes Chapter 713) (“Lienors”). One way an owner alleviates this concern is by requiring the contractor to obtain a payment bond so that its property is exempt from construction liens from Lienors. See Fla. Stat. §713.23. However, payment bonds do not protect the owner’s property from the general contractor’s lien.

Unfortunately, payment bonds are not always feasible or economical. While the contractor procures the payment bond, it is the owner that pays the premium for the bond. Sometimes an owner does not want to or is not in a position to pay this premium, which could be substantial depending on the cost of the project. In these circumstances, the owner’s property is subject to construction liens from Lienors. Anyone involved in construction knows that it is very difficult to construct a project without there being some form of a payment dispute involving Lienors.

When an owner receives a lien, or if it presumes a lien could be forthcoming from a Lienor, the owner should serve a request for a sworn statement of account BEFORE the lienor forecloses on its lien. Florida Statute §713.16 provides in material part:

“(2) The owner may serve in writing a demand of any lienor for a written statement under oath of his or her account showing the nature of the labor or services performed and to be performed, if any, the materials furnished, the materials to be furnished, if known, the amount paid on account to date, the amount due, and the amount to become due, if known, as of the date of the statement by the lienor…The failure or refusal to furnish the statement under oath within 30 days after the demand, or the furnishing of a false or fraudulent statement, deprives the person so failing or refusing to furnish such statement of his or her lien….

(3) A request for sworn statement of account must be in substantially the following form:

REQUEST FOR SWORN STATEMENT OF ACCOUNT

WARNING: YOUR FAILURE TO FURNISH THE REQUESTED STATEMENT, SIGNED UNDER OATH, WITHIN 30 DAYS OR THE FURNISHING OF A FALSE STATEMENT WILL RESULT IN THE LOSS OF YOUR LIEN.

To: (Lienor’s name and address)

The undersigned hereby demands a written statement under oath of his or her account showing the nature of the labor or services performed and to be performed, if any, the materials furnished, the materials to be furnished, if known, the amount paid on account to date, the amount due, and the amount to become due, if known, as of the date of the statement for the improvement of real property identified as (property description) .”

Besides getting verification as to how much the Lienor swears they are owed as of the date of the sworn statement of account, importantly, a Lienor that does not timely provide this sworn statement of account within thirty days could be deprived of its lien. In other words, this tool allows an owner to catch an unsuspecting Lienor (or even the contractor if served on the contractor) off guard that neglects to treat this request for a sworn statement of account seriously. The loss of a construction lien to a Lienor is a huge loss!

The owner is not limited to serving only one request for a sworn statement of account. The law simply provides that if the owner serves more than one request on the same Lienor “and none of the information regarding the account has changed since the lienor’s last response to a demand, the failure or refusal to furnish such statement does not deprive the lienor of his or her lien.” Fla. Stat. 713.23. For this reason, there is nothing wrong with an owner serving a request for a sworn statement to those Lienors that served a notice to owner at some point or points during the course of the construction project, and in most cases, this is very good practice. While the owner could technically serve one upon its receipt of each of the contractor’s applications for payment, this could be an administrative burden and not always practical. (There are other methods an owner can utilize to ensure it is protected from liens from Lienors by requiring the contractor as a condition precedent to payment to provide releases of lien through the date of the application for payment from those entities that served a notice to owner.) With that said, an owner should certaintly take advantage of this tool by serving a request for sworn statement of account upon immediately receiving a lien and before the Lienor forecloses on the lien. Ideally, before the owner tenders final payment, it should serve the sworn statement of account to Lienors to best protect its interests.

THE FINAL FURNISHING DATE AND LIENABLE AMOUNTS FOR CONSTRUCTION LIENS: DECIDED ON A CASE-BY-CASE BASIS

Posted on June 10, 2011June 10, 2011 by Edward Garber

Most contractors are well aware that construction liens are creatures of statute and must be recorded no later than 90 days after their final furnishing (i.e., last day) of labor, services, or materials. Fla.Stat. §713.08(5). However, what constitutes final furnishing and what amounts should be or should not be included in the lien (“lienable amounts”) are factors that should require the assistance of an attorney as they are not as clear cut under the law as one may prefer. These are critical factors for the preservation of a lien claim that should not be lost or treated in a haphazard manner.

Recently, in April 2011, the Second District in Sam Rodgers, Inc. v. Chmura, 2011 WL 156546 (2d DCA 2011), examined these very factors in a dispute over an increase in price to a custom home. In this case, after the slab was poured and the roof dried in, the purchaser did not make the next two construction draw payments. This nonpayment prompted the contractor to stop work mid-construction and timely record a lien for the unpaid work. However, after the lien was recorded, the contractor performed additional work on the unfinished house that it argued was necessary to protect the structure of the house from the weather, vandals, and animals. The contractor then recorded an amended claim of lien more than 90 days after it originally stopped work to include these costs, which also included costs for property taxes and insurance for the property.

These facts raise three interesting issues that are considerations whenever a lien is recorded. First, when is the contractor’s final furnishing date—is it the date it originally stopped work due to nonpayment or the date it finished performing the added work to ensure the house was protected from the elements? If the final furnishing date is the date it originally stopped work, then the contractor’s amended lien was untimely filed and moot. Second, can the contractor lien for the added work as well as the costs of taxes and insurance on the property? If it could not, then does this rise up to the level of declaring the lien fraudulent and unenforceable?

Final Furnishing Date

The appellate court found that the added work extended the final furnishing date since the work was contemplated by the contract and necessary. In reaching this holding, the Court expressed: “The test for whether work constitutes a ‘final furnishing’ is whether the work was done in good faith, within a reasonable time, pursuant to the terms of the contract, and whether it was necessary to a finished job.” Sam Rodgers, Inc. at *4. With that being said, the court confirmed that repair work, warranty work, corrective or punchlist work, or work incidental to a completed contract do not extend the final furnishing date. Id. Because the added work extended the final furnishing date, the amended lien was timely recorded.

Whether the work was done in good faith, within a reasonable time, pursuant to the terms of the contract, and necessary to a finished job are all factors that are analyzed on a case-by-case basis. There is no easy brightline standard. Importantly, these are also the same factors to determine when to include change order or extra-contractual work in the lien amount. See In Re American Fabricators, Inc., 197 B.R. 987 (M.D.Fla. 1996).

The bottom line is that contractors should err on the side of being conservative when determining their final furnishing date. I generally prefer to arrive at that final furnishing date on the last date the contractor was doing base contract work, not change order, punchlist, or warranty-related work, and that there is documentation to support that date, whether a timesheet, daily report, manpower report, or application for payment.

In many situations, the final furnishing date can be readily determined and supported. In other circumstances, in requires more thought and strategy, such as this case where the contractor stopped work and then restarted work to preserve the property, or when the contractor is performing disputed change order work.

What Amounts to Include in the Lien (“Lienable Amounts”)

The appellate court held that the added work was properly included in the lien as it was done within the scope of the contract; however, the costs incurred for taxes and insurance were not properly included because they were either not required by the construction contract or related to maintenance and not the improvement of the property. See Parc Cent. Aventura E. Condo. V. Victoria Grp. Services, LLC, 54 So.3d 532 (3d DCA 2011) (cleaning and maintenance services were not lienable because purpose of Florida’s Lien Law is to protect those that have provided labor, services, or materials done for the improvement or permanent benefit of the property.)

What to include or exclude in the lien amount is a hot topic and important because a defense that an owner of the liened property will raise is that the lien is a fraudulent lienand, therefore, should be deemed unenforceable. A fraudulent lien is essentially one filed in bad faith. It is a lien that is willfully exaggerated, willfully includes amounts for work not performed, or was prepared with gross negligence. See Fla. Stat. 713.31(2).

What specific amounts or items that render the entire lien fraudulent and unenforceable are really decided on a case-by-case basis. The appellate court in this case found the taxes and insurance were minor items that were not included in bad faith. However, it is important to understand and know what amounts are being included in the lien. Similar to the final furnishing date, I always err on the side of being conservative and want to know the categories of items being included in the lien, specifically if the items do not fall under base contract work. Just because an item or cost is excluded in the lien amount does not mean there isn’t another legal theory or avenue to pursue to recover those costs.