Monthly Archives: June 2011

PERSPECTIVES ON THE COMPETITIVE (OR NOT SO COMPETITIVE) PUBLIC PROCUREMENT PROCESS

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images-1In most circumstances, public entities are required to competitively bid the construction of their projects. Sometimes, competitive bidding is as simple as the public entity publishing an Invitation To Bid (“ITB”) seeking to solicit the lowest, responsible, and responsive bidder. In this solicitation, assuming the bidder is responsible (qualified) and responsive (complies with the invitation to bid in all material respects), the public entity is seeking the lowest cost to perform the construction. The ITB process is commonly referred to as the hard bid process because the public entity knows exactly what it wants and seeks the lowest cost to construct per the plans and specifications.

 

However, seeking an ITB is not the only way a public entity selects a contractor to construct its project. Another common method is the public entity publishing a Request For Proposals ( “RFP”) whereby cost is a factor, but not the only factor in selecting the contractor. A RFP is typically the solicitation when the public entity wants to utilize the experience and sophistication of the contractor to help it determine what specifically it wants. In other words, the public entity wants to resolve a problem and relies on the contractor to submit proposals with the solution and the costs to implement the solution. The public entity then ranks the proposals based on scoring criteria and selects the contractor that has the preferred or highest ranking.

 

Contractors that participate in the public procurement process, whether through the ITB, RFP, or another approved method of procurement, can often feel frustrated with the process based on the wide latitude and discretion that are afforded to public entities in the process. This frustration is exemplified in Pensacola Builders, Inc. v. King, 36 Fla. L. Weekly D1304c (1st DCA 2011), which involved a 13 year old dispute over a public project that was not awarded to the plaintiff contractor. In this case, a public entity was soliciting a contractor to build and operate a concession stand on a pier through the RFP process. The plaintiff was the highest ranked contractor in the process and was in the process of negotiating the contract with the public entity. However, the defendant contractor that also participated in the RFP process wrote letters to the public entity threatening litigation (after apparently missing the deadline to file a bid protest) regarding the manner in which the public entity conducted the RFP. Due to the public entities apparent fear of the threatened litigation, it ceased negotiations with its highest ranked contractor, readvertised for proposals, and then ranked the defendant as its preferred contractor. This naturally was perceived as an injustice to the plaintiff.

 

The plaintiff filed suit against the public entity for breach of an implied covenant of fair dealing based on the public entity readvertising the proposals and selecting the defendant contractor as its preferred contractor. See Santa Rosa Island Authority v. Pensacola Beach Pier, Inc., 834 So.2d 261 (Fla. 1st DCA 2002). The plaintiff’s objective was to force the public entity to reengage in contract negotiations with it. The First District Court of Appeal shot down plaintiff’s lawsuit and objective holding, “Absent evidence of illegality, fraud, oppression, or misconduct, Appellee [plaintiff] is without a remedy for Authority’s [public entity] readvertising for proposals and rearranging the preference order of the parties.” Santa Rosa Island Authority, 834 So.2d at 263. Stated simpler, the plaintiff was out of luck as it is hard to establish the government committed a wrong, even though the public entity readvertised proposals due to threatened litigation from a bidder that apparently failed to timely protest!

 

The plaintiff, however, did not end its pursuit of seeking redress for what it perceived as injustice in the competitive bidding process. The plaintiff creatively asserted claims against the defendant contractor for, among other things, tortious interference with a business relationship and defamation. The plaintiff’s arguments were premised on letters that the defendant sent to the public entity when plaintiff was in the process of negotiating its contract threatening litigation due to the illegality of the RFP process and accusing plaintiff of certain illegal actions. The trial court ruled in favor of defendant on plaintiff’s claims and, unfortunately, because plaintiff did not properly preserve these issues on appeal, the First District Court of Appeal was not in a position to reverse the trial court’s ruling. (Notably, this case demonstrates the importance of preserving all issues and arguments for appeal.) However, had plaintiff preserved these issues for appeal, there may have likely been meat on the bone as to its arguments against the defendant that ultimately got the public entity not to award the contract to the plaintiff, but, instead, to defendant.

 

In an economy where private projects are not as booming as they once were and public projects being a main source of revenue for many contractors, bid protests and/or the threat of litigation are measures that are being strongly considered when a perceived injustice occurs in the public procurement process. Although this case did not work out well for the plaintiff, plaintiff’s arguments are still creative and worthy of merit against another bidder in a similar context that overtly hinders a contractor’s efforts in contracting with the public entity.

 

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.

 

THE IMPORTANCE OF PROPER CONSTRUCTION CONTRACTING LICENSES

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imagesFlorida law requires general contractors (and certain specialty subcontractors) to be licensed with the state of Florida. See Florida Statutes Chapter 489, Part I. This is because construction contracting, similar to other professions, is regulated. The law treats the licensure of contractors very seriously in that, “[C]ontracts entered into on or after October 1, 1990, by an unlicensed contractor shall be unenforceable in law or in equity by the unlicensed contractor.” Fla.Stat. §489.128(1). Therefore, an unlicensed contractor that performs work will be unable to enforce nonpayment, which would include not properly being able to lien or foreclose on a lien. This could financially ruin a contractor that did a great job on a project but cannot secure final payment because it was not properly licensed.

 

Contractors need to ensure they are properly licensed prior to entering into a contract with an owner. Likewise, owners need to ensure that the contractor they are hiring is properly licensed. The construction contracting licensure law can be difficult navigating; therefore, having an attorney assist with any licensure questions is important to save both contractors and owners the heartache that may ensue if proper licenses are not in place.

 

In determining whether a contractor is unlicensed, the law provides:

 

“[A]n individual is unlicensed if the individual does not have a license required by this part concerning the scope of the work to be performed under the contract. A business organization is unlicensed if the business organization does not have a primary or secondary qualifying agent in accordance with this part concerning the scope of work to be performed under the contract. For purposes of this section, if a state license is not required for the scope of work to be performed under the contract, the individual performing that work is not considered unlicensed.
***
[A] contractor shall be considered unlicensed only if the contractor was [a] unlicensed on the effective date of the original contract for the work, if stated therein, or if not stated, [b] the date the last party the contract executed it, if stated therein. [c] If the contract does not establish such a date, the contractor shall be considered unlicensed only if the contractor was unlicensed on the first date upon which the contractor provided labor, services, or materials under the contract.” Fla.Stat. §489.128(1)(a), (c).

 

Recently, in Austin Building Company v. Rago, Ltd., 2011 WL 1563797 (Fla. 3d DCA 2011), the Third District dealt with the issue of whether a general contractor and subcontractor where properly licensed. In this case, an owner entered into a contract with the properly licensed general contractor (“GC”) in March 2005 for the construction of a condominium in Miami. The contract provided that once the GC’s affiliate (“Affiliate”) became a licensed general contractor in Florida, the GC would assign the contract and related documents to the Affiliate.

 

After the execution of the contract, GC engaged a structural concrete subcontractor (“Subcontractor”) that immediately commenced work in April 2005 without a formal contract in place. Months later, the Affiliate became licensed and formally executed the subcontract with the Subcontractor. The Affiliate, however, terminated the Subcontractor due to the Subcontractor’s defective work and, as a result, the Subcontractor sued the GC, the Affiliate, and their payment bond for nonpayment, and the Affiliate countersued the Subcontractor. Both parties moved for summary judgment arguing that the other was not a properly licensed contractor and, therefore, should not be entitled to enforce the subcontract.

 

The Third District Court of Appeal found that there remained a question of fact as to whether the GC or the Affiliate served as the general contractor when the Subcontractor started performing work. Notably, at the time the Subcontractor started performing construction activities without a contract, the Affiliate was not a licensed contractor. However, the GC was licensed. If the GC was the contractor at the start of the Subcontractor’s performance, the GC and/or the Affiliate should be in a position to enforce the Subcontract (which would seem to be the case given that it was contemplated when the owner hired the GC that the GC would eventually assign the contract and related documents to the Affiliate when the Affiliate became licensed). However, if the Affiliate is deemed to be the contractor at the start of the Subcontractor’s performance, then the Affiliate should not be able to enforce the subcontract to recover sums associated with the Subcontractor’s defective work because it was admittedly not a licensed contractor when the Subcontractor commenced performance.

 

The Third District further found that the Subcontractor did not need to be licensed and could enforce the subcontract. Although the case does not fully explain, it remains uncertain as to what activities the concrete Subcontractor performed that would have required a state license.

 

This case reveals the importance of proper construction contracting licenses. If the Subcontractor was not properly licensed with the state, then it would have no avenue to recover for nonpayment. This is difficult for many under capitalized subcontractors that rely on timely payments to fund their operations. On the other hand, if the contractor was not properly licensed, then it would have no avenue to recover against the Subcontractor for defective work. This would then make the contractor directly responsible for the Subcontractor’s work without any true avenue to recoup its costs against the Subcontractor.

 

For more on contractor licensing, please see: https://floridaconstru.wpengine.com/more-on-the-harsh-realities-of-contractors-not-being-properly-licensed/

and

https://floridaconstru.wpengine.com/the-harsh-realities-of-a-contractor-not-being-properly-licensed/

 

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.

COMPLYING WITH POST-LOSS POLICY CONDITIONS UNDER AN INSURANCE POLICY

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images-1Insurance policies, particularly property insurance policies, contain post-loss obligations (that serve as conditions precedent to payment). This essentially means that when an insured submits a claim to an insurer, an insurer can demand obligations from the insured, and the insured is required to comply with these obligations. These obligations could be requiring the insured to submit a sworn proof of loss, allowing the insurer to inspect the damaged property, submitting all applicable documentation to the insurer, and allowing the insurer to take an examination under oath of the insured. An examination under oath is simply a pre-suit deposition where the insured answers the insurer’s questions under oath about the insurance claim with a court reporter memorializing the questions and answers. While these post-loss obligations can pose an inconvenience to the insured, they are obligations under the policy (the insurance contract) and refusing to comply with these obligations will allow the insurer to easily argue that the insured forfeited insurance coverage. Thus, an insured could be in a position where they are denied coverage for failure to comply with post-loss obligations in an insurance policy when, had they complied, there would have been coverage and payment.

 

To briefly illustrate, recently, in Edwards v. State Farm Florida Insurance Company, 37 Fla. L. Weekly D1269a (Fla. 3d DCA 2011), a homeowner, through a public adjuster, submitted a claim to its property insurer for reimbursement for the costs to fix roof damage from a hurricane. The insurer made numerous efforts to obtain documentation of expenses that the homeowner incurred to fix the roof, but was never provided this documentation. The insurer also scheduled an examination under oath of the insured, which was cancelled prior to the scheduled date. The insured providing documentation to reflect the amount of the claim and submitting to an examination under oath were post-loss conditions in the insurance policy. Because the insured did not comply with these policy conditions, the Third District Court of Appeal held that the insured forfeited coverage: “Failure to comply with a condition precedent to payment relieves the insurer of its duty to make payment.” See Edwards.

 

Accordingly, an insured that submits a property insurance claim (or any insurance claim, for that matter) should ensure they are complying with post-loss policy conditions that are being requested by the insurer.

 

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.

ARGUMENTS FOR LENDER LIABILITY WHEN CONTRACTORS REMAIN UNPAID ON A CONSTRUCTION PROJECT

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imagesWhen a lender provides a construction loan they will have a security interest in the property in the form of a mortgage that should be superior to any construction liens. This is because the lender records its mortgage on the property collateralizing its loan prior to the recordation of the notice of commencement. Since construction liens usually relate back in time and take priority as of the date the notice of commencement was recorded, lenders want to be certain their mortgage was recorded first so that they have the number one priority in the event the borrower / owner does not pay according to the construction loan. This mortgage priority is the lender’s true leverage in the event of nonpayment.

 

In your typical construction project that is financed through a construction loan, the owner enters into a construction loan with the construction lender. The construction lender immediately records its mortgage on the property and subsequently records the notice of commencement prior to the disbursement of loan proceeds. The owner enters into a direct contract with the general contractor who is responsible for building the project. The general contractor then contracts the trade subcontractors to build various portions of the project.

 

What happens if a construction projects is halted mid-construction due to an owner not having enough money to complete the project, or a project is finished, but there are contractors that have not been paid for their work? In this situation, contractors that properly preserved their lien rights pursuant to Florida’s Lien Law (Florida Statutes Chapter 713) can record their statutory lien and foreclose on their lien. But…and this is a big but…if there is no equity in the property and the construction lender has number one priority, foreclosing the lien may only result in a pyrrhic victory because there will not be enough equity in the property to pay off the lender and the foreclosing contractor(s). This has been the unfortunate case in a recent economic climate when projects were financed and started during the construction boom.

 

To illustrate, let’s assume an owner took out a ten million dollar construction loan to build a project and the project was completed or halted mid-construction. The lender recorded a mortgage on the property to secure its loan and disbursed all of the loan proceeds. The owner failed to pay its general contractor one million dollars. However, the project is now only worth seven million dollars due to the decline in property values, and the owner still owes close to ten million dollars to the construction lender. In this case, although the contractor wisely recorded a construction lien, foreclosing on the lien may have little effect. The reason being is that there is no equity in the property so that whoever purchases the property at the foreclose sale–which would be doubtful because the property is worth less than what is owed–is going to take it subject to the lender’s mortgage. The contractor would need someone to purchase the property for at least one million dollars (again, highly doubtful) in order to get paid its principal amount. While the contractor can use its judgment amount to serve as a bid credit to bid and obtain title to the property, this may make little sense if the contractor does not want to pay off the mortgage because it will only be a matter of time before the construction lender forecloses and takes title to the property. Indeed, many times the lender initiates its own mortgage foreclosure lawsuit during the pendency of the contractor’s foreclosure lawsuit and looks to foreclose the contractor’s subordinate lien interest which means there is slim to no chance the contractor is going to recover on its lien.

 

In this illustration, while the contractor can also sue the owner for breach of contract in addition to foreclosing on its lien, sophisticated owners / developers are single-purpose entities that own nothing but the project they are developing. Stated differently, smart developers form an entity for each project they are building and the entity they establish only owns the property—the same property that is being foreclosed. Or, the developer, if not a single-purpose entity, may not have the capital or assets to pay a one million dollar judgment and essentially be what is referred to as “uncollectible.” Thus, the contractor may be forced to face a difficult reality of having self-financed construction work only to see no avenue of recovery to recoup its expenditures. This is tough to swallow.

 

However, the contractor may be able to assert creative arguments against the construction lender that would serve as its only true recourse in recovering what it is owed under certain circumstances. Sometimes these creative arguments need to be explored in detail in furtherance of optimizing a monetary recovery.

 

A. An Equitable Lien on Undisbursed Construction Loan Proceeds

 

If there remain undisbursed loan proceeds, the contractor may have an argument that it should have an equitable lien on these proceeds if the construction project was completed. The justification being that a lender would be unjustly enriched if it were allowed to keep these undisbursed funds in addition to having the security of the mortgage when the project is completed. Morgan-Oswood & Associates, Inc. of Florida v. Continental Mortgage Investors, 323 So. 2d 684 (Fla. 4th DCA 1975).

 

To explain, in Morgan-Oswood, a general contractor completed a hotel. The owner, however, breached its construction loan agreement resulting in the lender foreclosing on the property while it still retained undisbursed loan proceeds. The Fourth District Court of Appeal held that: “to allow the lender to retain the undisbursed construction loan funds, while getting the security for the loan as well, would result in unjust enrichment at the expense of the contractor, and the contractor was therefore entitled to an equitable lien against those funds.” Emerald Designs, Inc. v. Citibank F.S.B., 626 So. 2d 1084 (Fla. 4th DCA 1993) discussing Morgan-Oswood.

 

Additionally, in Emerald Designs, a subcontractor filed a counterclaim against a lender that foreclosed on a project that had been completed seeking an equitable lien on undisbursed construction loan proceeds. The Third District Court of Appeal held that a subcontractor could claim an equitable lien against undisbursed construction loan funds when the construction project is completed and the lender forecloses.

 

Therefore, if it is determined that the lender did not disburse all of the loan proceeds on a completed project, this argument should be explored.

 

B. Being Equitably Subordinated to the Priority of the Construction Lender’s Mortgage

 

Although this is an extremely difficult argument, there may be an argument that the contractor’s lien should be equitably subordinated to the lender’s priority when the lender disbursed all loan proceeds if the contractor can establish the lender engaged in fraud or affirmative deception.

 

In Rinker Materials Corp. v. Palmer First National Bank and Trust Company of Sarasota, 361 So.2d 156 (Fla. 1978), the lender assured subcontractors that there were sufficient loan proceeds to complete the project and that there would be no need for the subcontractors to record liens. The subcontractors continued to perform work only to remain unpaid. The subcontractors argued that the lender should be equitably estopped from asserting its priority so that their equitable liens could have priority over the lender’s mortgage. The Florida Supreme Court disagreed expressing, “The mistaken observation that there seemed to be enough money left in undisbursed loan funds to complete the project falls short of what we contemplated as ‘affirmative deception’ equivalent to fraud and misrepresentation which would justify the imposition of an equitable lien.” Rinker Materials at 158-59. The Court further elaborated: “We hold that a party may successfully maintain a suit under the theory of equitable estoppel only where there is proof of fraud, misrepresentation, or other affirmative deception. To hold otherwise would inject an unnecessary amount of uncertainty into the construction loan industry.” Id at 159.

 

This ruling leaves open the difficult-to-prove possibility of claiming a priority position over a lender’s mortgage when the lender disbursed all of the loan proceeds and there is proof of some affirmative deception committed by the lender.

 

C. A Lender’s Liability under Florida Statute §713.3471

 

Florida Statutes §713.3471 (contained within Florida’s Lien Law) imposes responsibilities on construction lenders that could expose them to certain liability. Contractors should familiarize themselves with these responsibilities if they remain unpaid, especially if they remain unpaid significant funds due to a project that failed mid-construction.

 

1. Florida Statutes Section 713.3471(2)

 

Subsection 713.3471(2) requires a lender to provide the contractor and any other lienor that has given the lender notice to owner (i.e., preserved its lien rights) five business days notice of making its final determination to cease further advances under the loan. The lender shall not be liable to the contractor based upon its determination to cease further advances if the lender gives the contractor notice within five days and the determination is permitted under the loan documents.

 

Importantly, if the lender fails to provide notice to the contractor within five days, the lender is liable to the contractor to the extent of the actual value of materials and direct labor costs furnished by the contractor plus 15% for overhead, profit and all other costs from the date that the lender’s determination should have been served on the contractor and the date on which notice of the lender’s determination is actually served on the contractor. The lender’s liability is limited to the amount of undisbursed funds at the time the notice should have been given unless the failure to provide notice was done with the intent of defrauding the contractor.

 

This subsection should be explored when projects cease or fail mid-construction. The point is that the contractor should not continue to perform work when the lender will not be funding the work. This makes sense because contractors don’t want to work for free. Thus, contractors that are involved in a failed project and owed a substantial amount of money should explore the date they received the notice from the lender (assuming a notice was received) versus the date the notice should have been served.

 

2. Florida Statutes Section 713.3471(3)

 

Subsection 713.3471(3) applies to the use of designated construction loan proceeds and provides:

 

“If the lender and the borrower have designated a portion of the construction loan proceeds, the borrower may not authorize the lender to disburse the funds so designated for any other purpose until the owner serves the contractor and any other lienor who has given the owner a notice to owner with written notice of that decision, including the amount of such loan proceeds to be disbursed. For purposes of this subsection, the term ‘designated loan proceeds’ means that portion of the loan allocated to actual construction costs of the facility and shall not include allocated loan proceeds for tenant improvements where the contractor has no contractual obligation or work order to proceed with such improvements.”

 

Under this subsection, the lender will not be liable to the contractor based upon the reallocation of construction loan proceeds if notice is timely given. However, if the owner fails to provide notice to the contractor and disburses designated construction loan proceeds for any other purpose, the lender is liable to the contractor to the extent of any such disbursements or to the extent of the actual value of the materials and direct labor costs plus 15% for overhead, profit, and all other costs, whichever is less. (Notably, this subsection does not apply to residential projects of four units or less or to construction loans less than $1,000,000 unless the lender has committed to making more than one loan exceeding $1,000,000. The lender is also exempt from liability under this subsection if the total amount of proceeds to be disbursed from the designated proceeds does not exceed five percent of the designated proceeds or $100,000, whichever is less.)

 

This subsection may come in handy if it is revealed that designated construction loan proceeds were applied for a different purpose to the detriment of the contractor. The point also being that if the contractor knows that designated loan proceeds are being applied elsewhere, they are going to know that there likely isn’t going to be enough money to fund the completion of construction.

 

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.

UNDERSTANDING INSURANCE COVERAGE – NOT AN EASY FEAT

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imagesKnowing what losses or damages are covered under your insurance policy is extremely important and oftentimes ignored until there is a substantial a loss or damage. But, understanding your insurance coverage is very important so that you know exactly what is covered and what supplemental insurance you may want to procure to protect your interests.

 

Most owners obtain some form of property insurance. Property insurance is designed to cover those direct losses (or “all-risks”) except those losses that are excluded from coverage. This is tricky because you start off with broad coverage that gets dwindled down by various exclusions and policy endorsements that restrict coverage. Understanding these exclusions and endorsements is the key to knowing what is covered and, in many cases, how to present a claim to an insurer. This is not easy because insurance policies are confusing.

 

To explain the confusing language in insurance policies, in Certain Interested Underwriters at Lloyd’s, London Subscribing to Policy Number, MI2226 v. Chabad Lubavitch of Greater Florida, Inc., 36 Fla. L. Weekly D1218a (4th DCA 2011), a building was damaged when a crane landed on it during a tropical storm. The owner had two property insurance policies. It had a policy covering wind damage (“Wind Policy”) and a separate all-risk policy with Lloyd’s of London that excluded windstorm (“Lloyd’s Policy”). The owner’s damages exceeded the limits of its Wind Policy so it smartly submitted a claim under the Lloyd’s Policy for the additional damages arguing that this policy should provide coverage becuase the crane, not the wind, actually caused the damage.

 

The Lloyd’s Policy contained the following exclusion for wind:

 

“We will not pay for loss or damage:

1. Caused directly or indirectly by Windstorm or Hail, regardless of any other cause or event that contributes concurrently or in any sequence to the loss or damage…

But if Windstorm or Hail results in a cause of loss other than rain, snow, sand or dust, and that resulting cause of loss is a Covered Cause of Loss, we will pay for the loss or damage caused by such Covered Cause of Loss. For example, if the Windstorm or Hail damages a heating system and fire results, the loss or damage attributable to the fire is covered subject to any other applicable policy provisions.”

 

This bolded language is known as the Ensuing Loss Exception to the windstorm exclusion. Confusing – Oh Yes. What this language really says is that the policy will not cover wind damage, BUT if the wind results in a loss that sets in motion another loss that would be covered under the policy, there is coverage for the other loss. The language in the policy is so confusing that it contains a hypothetical. The hypothetical is really what gives meaning to the application of this Ensuing Loss Exception. The hypothetical illustrates that if a windstorm damages a heating system, the damage to the heating system would not be covered due to the wind exclusion. But, if the damage to the heating system sets in motion an intervening fire that causes damage, this fire damage would be covered. The reason this damage would be covered is because it was not caused by the wind, but rather the ensuing fire (even though the fire was set in motion by damage caused by the wind).

 

In this case, the Fourth District remanded this case to the trial court to determine the actual cause of the crane falling on the building since it was a factual issue in dispute. Under the Court’s line of thinking, if the crane fell on the building because of wind, there would not be coverage under the Lloyd’s Policy due to the wind exclusion. However, if the crane fell on the building due to some other intervening loss set in motion by the wind there should be coverage under this Ensuing Loss Exception. In other words, if the crane fell because some flying object picked up by the wind struck the crane causing the crane to fall on the building, there would arguably be coverage for the loss to the building.

 

This case is an example of the confusing language in policies and having an understanding of the language can enable you to present arguments to maximize insurance coverage.

 

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.

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

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imagesMost 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.

 

 

 

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.

WELCOME TO MY BLOG ON CONSTRUCTION LAW UPDATES

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Florida Construction Legal UpdatesWelcome to www.floridaconstructionlegalupdates.com, a blog that covers newsworthy legal events and information focusing on the construction industry. This blog was created by David Adelstein.

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