FLOWING DOWN LIABILITY IN CONSTRUCTION DEFECT LAWSUITS

unknownIn construction defect lawsuits, third-party (or fourth-party) claims are routine to flow-down liability downstream.  Right, a general contractor sued by an owner will want to flow-down its liability to the subcontractors.  And, subcontractors will want to flow down their liability to sub-subcontractors and suppliers.   Common, and appropriate, flow-down claims are indemnification and contribution claims

 

In an appellate opinion with little factual discussion, Gozzo Development, Inc. v. Esker, 2016 WL 2908442 (Fla. 4th DCA 2016), the trial court entered summary judgment in favor of subcontractors dismissing the contractor’s indemnification and contribution claims.  The owner sued the contractor for a violation of building code (and corresponding defects and damage) and the contractor, in turn, sued subcontractors for indemnification and contribution.  The contractor was seeking indemnity for the statutory building code violations as well as contractual breaches that caused the construction defects and damage. 

 

On appeal, the Fourth District reversed the trial court’s summary judgment as to the indemnification claim, but affirmed the trial court’s dismissal of the contribution claim (as Florida abolished joint and several liability in negligence-based actions):

 

Further, as appellant [contractor] sought indemnity for violations of both statutory and non-statutory building standards, it was error to grant summary judgment on the indemnity claim under a provision that applies only to statutory liability. The statutory building code does not preclude liability for violating a contractual duty to adhere to local building standards.

However, we affirm the trial court’s summary judgment on the contribution claim, as appellant’s right to contribution had not arisen by the effective date of the revised statute barring joint and several liability.

Gozzo Development, 2016 WL at *1. 

  

It is important to understand the manner in which liability is flowed downstream (passed-through) in construction defect lawsuits.  It is generally this reason why construction defect lawsuits contain many parties, from the general contractor hired by the owner to the subcontractors, sub-subcontractors, and suppliers implicated by the defective work.   These articles on indemnification (common law and contractual) and contribution explain these very important flow-down claims in more detail. 

 

Please contact David Adelstein at dma@kirwinnorris.com or (954) 759-0026 or (407) 740-6600 if you have questions or would like more information regarding construction defects.  You can follow David Adelstein on Twitter @DavidAdelstein1 and Facebook at Florida Construction Legal Updates.

 

BREACH OF A CONSTRUCTION CONTRACT & AN EQUITABLE REMEDY?

UnknownIn payment or collection-type lawsuits, the party suing for money sometimes asserts a claim for unjust enrichment or quantum meruit as an alternative equitable remedy to a breach of contract claim.   Frankly, sometimes a party will do this as a means to throw everything against the wall hoping something, just something, sticks.   However, if there is a contract by and between the parties, equitable claims such as unjust enrichment or quantum meruit will invariably fail.   They will fail because a party cannot circumvent a contract simply because their recourse may prove better under an equitable theory.  It doesn’t work like that! And, it should not!

 

For example, in Daake v. Decks N Such Marine, Inc., 41 Fla. L. Weekly D1992e (Fla. 1st DCA 2016),  a contractor was hired to construct a seawall and a beach house on two lots.  One lot was owned by the homeowners in a personal capacity and the other lot was owned by them in the name of a family trust. The contractor was unpaid and sued the owners for breach of contract and sued the family trust for quantum meruit.  The problem was that the family trust was deemed a party to the contract.  Because the family trust was a party to the contract, the contractor could NOT recover any damages under an equitable theory such as quantum meruit or unjust enrichment.   This was a harsh ruling, but the correct ruling since the contractor was deemed a party to the contract.  The contractor was owed money but did not sue the family trust for breach of contract.  As a result, the contractor could not recover money by bypassing a breach of contract claim for an equitable quantum meruit claim.  A court cannot award damages under an equitable theory when the contractor has an adequate remedy of law—a breach of contract claim. See Daake, supra, (“Quantum meruit is premised upon the absence of an express and enforceable agreement; accordingly, the existence of a valid, written contract between the parties necessarily precludes the doctrine’s application.”).

 

There are times where pleading alternative theories of liability is important.  This includes pleading a breach of contract claim and an alternative equitable claim such as unjust enrichment or quantum meruit.  This becomes important if you do NOT know whether a certain party will actually be bound by and deemed a party to the contract, which was the situation in Daake.    With that said, in your typical payment / collection-type lawsuit, there is a contract between the parties and the equitable claim will fail and should fail.  If parties could bypass the harsh remedy of contractual provisions by suing for unjust enrichment or quantum meruit, believe me, they would.   When parties are owed money or lost money on a contract, they typically want to avoid risks they agreed to by virtue of the contract.

 

Please contact David Adelstein at dma@kirwinnorris.com or (954) 759-0026 or (407) 740-6600 if you have questions or would like more information regarding breach of contracts. You can follow David Adelstein on Twitter @DavidAdelstein1 and Facebook at Florida Construction Legal Updates.

 

 

 

 

 

 

 

 

 

 

 

 

CONSTRUCTION DEFECT INDEMNITY OBLIGATIONS – COVERED VS. NON-COVERED CGL CLAIMS

If you are a contractor or subcontractor and a construction defect claim is asserted against you, then you have tendered such claim to your commercial general liability (CGL) insurer.  No doubt about it.  In doing so, you have wondered whether your CGL insurer will indemnify you for the damages asserted against you by the third-party.  You have wondered whether the damages asserted against you are covered by your CGL policy.   If you have not wondered and asked these questions, then you should!  Below is a portion of a presentation I recently put on regarding construction defect indemnity obligations under CGL policies and, particularly, covered claims versus non-covered claims.  

 

Download (PDF, 195KB)

 

Please contact David Adelstein at dma@kirwinnorris.com or (954) 759-0026 or (407) 740-6600 if you have questions or would like more information regarding CGL insurance. You can follow David Adelstein on Twitter @DavidAdelstein1 and Facebook at Florida Construction Legal Updates.

 

IMPACT OF LIS PENDENS ON UNRECORDED INTERESTS / LIENS

Foreclosure-1In a previous article, I discussed the importance of recording a lis pendens in a construction lien foreclosure action.

 

There is another noteworthy point relating to the impact of lis pendens that can provide quite a bit of consternation.

 

Florida Statute 48.23(1)(d) provides:

 

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. If the notice of lis pendens expires or is withdrawn or discharged, the expiration, withdrawal, or discharge of the notice does not affect the validity of any unrecorded interest or lien.

 

The language in this statute requires persons with unrecorded interests / liens to intervene in a lawsuit subject to a lis pendens within 30 days or else they are barred from proceeding against the property (unless the property subject to the lis pendens is not foreclosed on or the lis pendens is discharged).  This is a harsh outcome because such a person’s (unrecorded) interest may not accrue until it is already too late—beyond the 30 days of the recording of the lis pendens.

 

The best way to explain the potentially harsh application of this statute is to examine its application in a few cases.

 

In Adhin v. First Horizon Home Loans, 44 So.3d 1245 (Fla. 5th DCA 2010), a lender recorded mortgages associated with a construction loan.  The borrower entered into an agreement to sell parcels and any homes currently built on the parcels.  The parcels were sold, however, the closing agent failed to record the deeds and mortgages associated with the closing, and failed to secure any release from the construction lender as to the parcels that had been sold.   Subsequently, the construction lender foreclosed on its mortgage which included a foreclosure that applied to the parcels that had been sold.  A lis pendens had been recorded.   Approximately two months after the lis pendens was recorded, the purchasers of the parcels recorded their deeds and corresponding mortgages and moved to intervene in the construction lender’s foreclosure lawsuit.   The construction lender opposed the motion to intervene arguing that the purchasers of the parcels failed to timely intervene pursuant to s. 48.23(1)(d) since the lender’s foreclosure action impacted their rights to the parcels they purchased.  The appellate court agreed with the lender finding that the language operates as a nonclaim statute that bars enforcement against the property by a holder of an unrecorded interest (such as the purchasers of the parcels in this case) after the prescribed statutory period (30 days), provided the litigation proceeds to a final judgment and judicial sale of the foreclosed property.  This meant the purchasers of the parcels could not intervene and their rights as it related to their parcels were entirely dependent on whether the construction lender’s foreclosure action proceeded to a final foreclosure judgment and judicial sale of the property (inclusive of their property).  Ouch!!!

 

In Jallali v. Knightsbridge Village Homeowners Ass’n, Inc., 2016 WL 3548843 (Fla. 4th DCA 2016), a homeowner’s lender filed a mortgage foreclosure action and recorded a lis pendens.   While the mortgage foreclosure action was pending, the homeowner’s association recorded a lien for unpaid assessments and moved to foreclose its assessment lien.  The issue was whether the lender’s notice of lis pendens barred the homeowner’s association’s subsequent foreclosure action based on its lien for unpaid assessments.   The appellate court held it did not because the lien was based on a recorded Declaration of Covenants that was recorded prior to the filing of the lis pendens—thus, s. 48.23(1)(d) did not apply because the Declaration was an interest recoded prior to the lis pendens.

 

In Ober v. Town of Lauderdale-by-the-Sea, 2016 WL 4468134 (Fla. 4th DCA 2016), a lender filed a foreclosure action and recorded a lis pendens.  The lender obtained a final judgment in foreclosure.  Subsequent to the final judgment in foreclosure, but before any foreclosure sale, the Town of Lauderdale-by-the-Sea recorded liens against the property for code violations that occurred post-final judgment.  The property was sold at a foreclosure sale and the new owner filed suit to quiet title and remove the Town’s liens.  The appellate court held that s. 48.23(1)(d) does not operate to bar liens that accrue and are recorded AFTER the final judgment.  Hence, recording a lis pendens does not operate to bar liens that occur (accrue) and are recorded post-final judgment but before a foreclosure sale.

 

When it comes to construction projects, sometimes there are multiple construction lien foreclosure actions relating to the same property. All of these foreclosure actions are routinely accompanied by a lis pendens.  Some of these actions could arguably be barred under s. 48.23 since they may be based on liens recorded outside of the 30-day window of the first lis pendens that was recorded.  So, if the initial foreclosure action results in a judicial sale of the property, the subsequently recorded liens on the property whose holder’s failed to timely intervene may be out of luck – they would not be able to foreclose on the same property that was already sold at a judicial sale.  On the other hand, under Jallali, liens relate to a notice of commencement, and similar to a Declaration of Covenants (or Condominium), could be considered a recorded interest.  The notice of commencement would be recorded prior to any construction lien, meaning that any construction lien is not based on an unrecorded interest at the time a lis pendens is recorded.  If this is true, than s. 48.23(1)(d) arguably would not apply to bar any liens that accrue and/or are recorded after 30 days from the initial lis pendens.  To preserve this argument, it is important that liens are recorded within the effective period of a notice of commencement so that the liens can relate back to the date the notice of commencement is recorded. 

 

Please contact David Adelstein at dma@kirwinnorris.com or (954) 759-0026 or (407) 740-6600 if you have questions or would like more information regarding construction liens and lis pendens. You can follow David Adelstein on Twitter @DavidAdelstein1 and Facebook at Florida Construction Legal Updates.