CONTRACTORS AND SUPPLIERS-DO NOT NEGLECT THE NOTICE REQUIREMENTS IN FLORIDA’S LIEN LAW

Posted on October 9, 2011October 9, 2011 by Edward Garber

Oftentimes, subcontractors, suppliers, and sub-subcontractors rely on companies to serve the statutory notices that are prerequisites to preserving a lien or bond claim under Florida’s Lien Law in the event of nonpayment. However, if these notices are not served in accordance with Florida’s Lien Law, the outcome could be injurious to the subcontractor, supplier, or sub-subcontractor. Stated differently, the outcome could mean a loss of lien or bond rights which may be the only true leverage the party has to secure payment.

The case of Stock Building Supply, Inc. v. Soares Da Costa Construction Services, LLC, 36 Fla. L. Weekly D2200a (Fla. 3d DCA 2011), illustrates the absolute importance of complying with the notice requirements in Florida’s Lien Law.

In this case, an owner hired a contractor to build a condominium. The contractor subcontracted with a structural shell subcontractor which, interestingly, held a 40% ownership interest in the contractor. The subcontractor engaged a supplier to provide rebar to the project. The contractor also engaged the same supplier to provide certain materials to the project. To graphically illustrate:

Contractor –> Shell Subcontractor –> Supplier

and

Contractor –> Supplier

Originally, there was no payment bond on the project. Therefore, once the supplier was engaged to provide materials, it served a statutory notice to owner on the contractor and the owner stating that it was supplying materials under an order given by the subcontractor. It served a second notice to owner on the contractor and owner stating it was supplying materials under an order given by contractor. (Notably, Florida Statute §713.06 requires lienors not in privity of contract with the owner to serve a notice to owner on the owner no later than 45 days after commencing services. The notice should also be served on anyone up the chain to the owner the lienor is not in privity of contract with, i.e., the sub-subcontractor or supplier to the subcontractor should serve the notice on the contractor too. This is a mandatory statutory notice if there is not a payment bond in place.)

Shortly after construction commenced, there was a funding problem that led to a halt in construction. The supplier recorded 2 claims of lien for nonpayment: one for nonpayment by the subcontractor and the other for nonpayment by the contractor.

The owner then paid the supplier and had the liens satisfied and recorded a notice of termination of the initial notice of commencement which is a procedure under Florida’s Lien Law that allows an owner to terminate a notice of commencement that accurately states that all lienors were paid in full. After the notice of commencement was terminated by law, the owner recorded a new notice of commencement that attached a payment bond, meaning the owner’s property was now exempt from all liens except that of the general contractor it hired. (One of the main reasons an owner would terminate a notice of commencement and record a new notice of commencement is so a construction lender financing construction can record a mortgage and maintain a first priority encumbrance on the property in the event the owner did not repay the loan.)

Once construction restarted, the supplier continued supplying rebar to the structural shell subcontractor. The supplier also continued to supply building materials to the contractor. However, for whatever reason, the company the supplier hired to serve the statutory notices served only one statutory notice to contractor stating that the supplier was supplying building materials under an order given by the contractor. Unlike the notice to owner mentioned above, when there is a payment bond in place, lienors not in privity of contract with the contractor must serve a notice on the contractor stating that they intend to look to the contractor’s payment bond for payment. In other words, the supplier was required to serve a notice on the contractor that it was supplying materials under an order given by the subcontractor, but it really wasn’t required to serve the same notice for the supplies it was providing under an order given by the contractor.

The point or objective of the notices is so the owner, in a situation without a payment bond, and a contractor, in a situation with a payment bond, know specifically who is performing work on the project to ensure these entities get paid. The reason why a contractor doesn’t need to serve a notice to owner (when there is no bond) or a subcontractor doesn’t need to serve a notice on the contractor (when there is a payment bond) is because the owner or contractor in these situations know the entities it hired to ensure these entities get paid.

Although the contractor paid the structural shell subcontractor for the rebar, the subcontractor did not pay the supplier. The supplier then served a notice of nonpayment on the payment bond surety (another prerequisite to suing on a general contractor’s payment bond) and filed suit.

The main issue in this case was whether the supplier had properly preserved a payment bond claim for the rebar it supplied to the subcontractor that it was not paid for by virtue of its neglect in serving the proper notice on the contractor that it was supplying rebar under an order given by the subcontractor. The trial court concluded that the supplier could NOT pursue a payment bond claim because it failed to serve this notice. The Third District affirmed the trial court on this issue essentially holding that because lien and bond claims are creatures of statute, the supplier’s failure to comply with the lien law by serving this initial notice was fatal to its bond claim for rebar materials it supplied to subcontractor.

Unfortunately for the supplier, this is a hypertechnical argument that killed its claim against the payment bond for materials it supplied under the order given by the structural shell subcontractor. This ruling, however, does not seem to make sense in light of the specific facts of the case. Again, the whole point of the notice is so the contractor in this situation knows that the supplier is supplying rebar to the subcontractor and that it will look to the payment bond if it is not paid so that the contractor can affirmatively ensure the supplier gets paid. First, the contractor knew the supplier was supplying rebar because before the owner terminated the notice of commencement, the supplier was supplying the same rebar and the contractor was made aware of same. Second, after the owner recorded a new notice of commencement with a payment bond, the supplier served a notice on the contractor (although it was not legally required to do so) that it was serving materials to the contractor per an order given by the contractor. Well, at this point in time, the contractor had continued knowledge the supplier was still involved in the project and still supplying materials, even though there may have been oversight in that another notice was not also provided by supplier for the materials it was providing under an order given by the subcontractor. And, last, the subcontractor owned 40% of the contractor, thus, how could contractor not know that its minority owner was still utilizing and ordering rebar? The Third District did not get into this, but I believe this fact is important because it would seem to impute some knowledge on the contractor under this fact pattern that the subcontractor was still utilizing the supplier, which just so happened to an identical supplier that contractor was utilizing and ordering materials from. Thus, where was the prejudice to the contractor??

Regardless of the equities of the Third District’s decision, the morale remains that it is absolutely critical to comply with Florida’s Lien Law, as in many circumstances, oversight or neglect will not be tolerated!! Do not let this happen to you!

In this case, the supplier used an outside company to serve the required statutory notices and it was uncertain why the outside company did not serve the required notice on the contractor that supplier would look to the bond for protection if it was not paid for materials supplied to the subcontractor, especially when it served the unnecessary notice for materials being supplied directly to contractor. The supplier or outside company’s oversight, whatever the case may be, resulted in a loss of its payment bond claim.

To prevent this from happening, it is always a good idea to utilize an attorney on the front end to ensure the proper notices are being served. An attorney understanding construction will ask: 1) is it a private project or publicly funded project; 2) do you have a copy of the notice of commencement (to see whether there is or is not a payment bond in place); 3) who hired you; and 4) when did you first start commencing services. In the event of nonpayment, the attorney will ask the follow-up questions: 5) when was your last day on the job and 6) how much are you owed and how did you arrive at this specific amount (e.g., retainage owed, contractual work owed, change order work owed, does this include delay-related damages or lost profit, etc.) in order to ensure the lien or payment bond claim comports with Florida’s Lien Law.

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.

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.