TRANSFERRING A LIEN TO A LIEN TRANSFER BOND DURING A LIEN FORECLOSURE LAWSUIT

Posted on May 18, 2012May 18, 2012 by Edward Garber

When a construction lien is recorded, the lien can be transferred to a lien transfer bond (thereby removing the encumbrance or cloud on the property caused by the lien). The procedure to transfer a lien to a lien transfer bond is statutory in nature and governed under Florida Statute §713.24.

A lien does not necessarily have to be transferred to a bond immediately after the lien is recorded. Rather, an owner (or other person with interest in the property) can transfer the lien to a bond after the entity or person that recorded the lien (referred to as the “lienor”) files a lien foreclosure lawsuit. In this circumstance, it is important for the lienor to know that they must amend their lien foreclosure action to assert a claim against the lien transfer bond; otherwise, the lienor will essentially lose its lien rights. The lienor will not be able to foreclose the lien as to the property (because it was transferred to a bond) and the lienor will not be able to pursue its claim against the lien transfer bond.

This is exactly what happened in The Cool Guys, LLC d/b/a Paragon Indoor Air Quality v. Jomar Properties, LLC, 2012 WL 716084 (Fla. 4th DCA 2012). In this case, the lienor recorded a construction lien and filed a lien foreclosure lawsuit. While the lawsuit was pending, the owner transferred the lien to a lien transfer bond. Under Florida Statute §713.24, if a lien is transferred to a bond during the pendency of a lien foreclosure lawsuit, the lienor must commence an action against the lien transfer bond within 1 year after the transfer. The lienor in this case, however, did not amend its lawsuit to assert a claim against the lien transfer bond until two years after it was transferred. The owner moved for summary judgment arguing that the lienor could no longer assert a claim against the bond because it waited more than one year after the lien was transferred to the bond to assert its claim on the bond. The trial court agreed which was affirmed by Florida’s Fourth District Court of Appeal. Thus, the lienor was neither able to foreclose its lien on the property or the bond.

Therefore, as an owner, it is important to know that a construction lien recorded on your property can be transferred to a lien transfer bond immediately or during the course of a lien foreclosure lawsuit. As the lienor moving to forclose the lien, it is important to know that when a lien is transferred to a lien transfer bond, the recourse is against the bond and not the real property.

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.

INDEMNITY AGREEMENTS BETWEEN A SURETY AND ITS BOND PRINCIPAL

Posted on May 15, 2012May 15, 2012 by Edward Garber

Sureties that issue contractors payment and/or performance bonds obtain indemnity agreements with the contractor, or bond principal, prior to issuing such bonds. These indemnity agreements, besides requiring the bond-principal contractor to indemnify, defend, and hold harmless the surety in the event a claim is submitted on the bonds, are designed to fully protect the surety in the event the contractor fails to do so.

There are situations where a surety needs to protect its own interests and comply with the terms of the bond and pay a claim on a performance or payment bond (such as if the contractor gets into financial trouble, walks off a project, is not paying subcontractors, etc.). If the surety pays a claim, they typically assert a claim against the bond-principal contractor for breach of the indemnity agreement along with any person that personally guaranteed the agreement (which is often the case). The indemnity agreement will include a provision that provides that the bond-principal assigns certain collateral to the surety in the event the principal is in default of the agreement. Among those rights that are collaterally assigned to the surety would be all of the principal’s contract rights and causes of action for accounts receivable.

The case of Guarantee Co. of North America v. Mercon Construction Co., 2012 WL 1232104 (M.D.Fla 2012), exemplifies a surety’s rights under the indemnity agreement. This case involved a situation where a surety paid a performance bond claim on behalf of its principal contractor and sued the contractor, as well as others, under the indemnity agreement. The surety also exercised its right under the indemnity agreement and settled a claim the contractor had against another payment bond (issued by a different surety). In other words, the surety’s position was that the claim for an account receivable under the other payment bond was collaterally assigned to the surety due to the contractor’s default. The contractor asserted a counterclaim arguing, among other things, that the surety did not have the authority to settle its account receivable payment bond claim. The Middle District disagreed and dismissed the contractor’s counterclaim with prejudice!

If a bonded contractor is involved in a situation where its surety either paid a claim or will pay a claim, it is important for the contractor to consult an attorney to understand the surety’s rights under the indemnity agreement. Again, surety’s oftentimes have the indemnity agreement personally guaranteed so that the obligations under the agreement could not only impact the bond-principal contractor but also the guarantors to the agreement.

THE CARDINAL CHANGE DOCTRINE

Posted on May 15, 2012May 15, 2012 by Edward Garber

The cardinal change doctrine is a doctrine that originated from government contract work in the United States Court of Federal Claims and, until recently, was not really discussed or applied in a Florida case. This changed when the Southern District of Florida in Hartford Casualty Insurance Co. v. City of Marathon, 825 F.Supp.2d 1276 (S.D. Fla. 2011), applying Florida law, discussed the cardinal change doctrine and used it to relieve a performance bond surety of obligations under a performance bond. While the specific facts of this case will not be discussed in detail, the Court’s discussion of the cardinal change doctrine will be because it is a doctrine that contractors on very difficult projects (i.e., completed project is substantially different than original plans, there were never-ending or wholesale, material changes, and the completed project cost substantially more than original contract amount) may want to argue under.

In this case, the Court held:

“To determine whether a change order is outside the general scope of the underlying construction contract so as to qualify as a cardinal change, courts look to the following factors:

(i) whether there is a significant change in the magnitude of work to be performed; (ii) whether the change is designed to procure a totally different item or drastically alter the quality, character, nature or type of work contemplated by the original contract; and (iii) whether the cost of the work ordered greatly exceeds the original contract cost.”

City of Marathon, 825 F.Supp.2d at 1286 citing Becho, Inc. v. United States, 47 Fed.Cl. 595, 601 (Fed.Cl.2000).

The Court expressed that these factors are all fact-intensive analyzed on a case-by-case basis and the party utilizing this doctrine must prove the factors with particularity. Id. citing PCL Const. Serv., Inc. v. United States, 47 Fed.Cl. 745, 804 (Fed.Cl. 2000).

Regarding the first factor—whether there is a significant change in the magnitude of work to be performed—the Court will look to see whether the completed project is substantially different than the project called for in the original plans and specifications. Id. citing Wunderlich Contracting Co. v. United States, 173 Ct.Cl. 180 (1965). For instance, in City of Marathon, the Court found this factor applied because the government gave the contractor a change order that added a new water treatment plant to the contract that was to be built on a separate location with different plans and specifications. Additionally, the cost of the new water treatment plant was more than 100% of the contract amount.

Regarding the second factor—whether the change is designed to procure a totally different item or drastically alter the quality, character, nature or type of work contemplated by the original contract—the Court will look to see whether the change is contemplated by the contract. City of Marathon, supra, citing Becho, 47, Fed.Cl. at 601. In City of Marathon, the Court found that while the contract contemplated changes (as most construction contracts do), the magnitude of the change from both a scope and cost standpoint was not contemplated.

And, regarding the third and last factor—whether the cost of the work ordered greatly exceeds the original contract cost—the Court will look to see the total increase of the original contract amount due to the change or changes. In this regard, the Court noted that increases of the original contract amount of 100% or more tend to suggest a cardinal change whereas increases less than this percentage tend not to. In City of Marathon, as previously stated, the change increased the original contact amount by more than 100%, thus satisfying this factor.

Although the application of this doctrine carries a heavy burden, there are certain projects where it may apply. Contractors that end up constructing a project substantially different then the plans and specifications their contract is based on which results in extensive change orders / wholesale, material changes and massive cost increases may, depending on the circumstance, want to argue under this doctrine in order to circumvent harsh contractual provisions to recoup their costs, etc. for performing additional work.

BUTTONING-UP CONTRACTUAL INDEMNIFICATION LANGUAGE

Posted on May 15, 2012May 15, 2012 by Edward Garber

A contractual indemnification provision is one of the most important provisions in construction contracts. Owners want to be indemnified from the general contractor to the extent a person or entity performing a scope of the general contractor’s work asserts a claim against the owner or a person is injured on the owner’s property. Likewise, general contractors want their subcontractors to indemnify them to the extent the owner asserts a claim against them arising out of the general contractor’s work or a person or entity performing a scope of the subcontractor’s work asserts a claim against the general contractor.

Indemnification (hold harmless) provisions need to be carefully drafted because Florida Statute §725.06 includes a limitation on indemnification for construction contracts. In short, this statute provides in material part that if a contract requires an indemnitor (such as a subcontractor required to indemnify a general contractor) to indemnify and hold harmless the indemnitee (such as the general contractor receiving the indemnification) “for liability for damages to persons or property caused in whole or in part by any act, omission, or default of the indemnitee…[the indemnification provision] shall be void and unenforceable unless the contract contains a monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and is part of the project specifications or bid documents, if any.” Stated simply, if the indemnification provision does not comply with Florida law, it may be unenforceable – a very bad thing for a party expecting to be indemnified!

Recently, the First District Court of Appeal in Griswold Ready Mix Concrete, Inc. v. Reddick, 2012 WL 1216268 (Fla. 1st DCA 2012), dealt with the enforceability of an indemnification provision. In this case, a concrete supplier leased a pump truck (to facilitate pouring concrete). The lease agreement provided that the concrete supplier was to:

“(g) To assume all risks and liabilities for and to indemnify Lessor [of the pump truck]…and Lessor’s agents against all claims, actions, suits, penalties, expenses and liabilities, including attorneys fees, whether or not covered by insurance, for (i) loss or damage to the Equipment; (ii) injuries or deaths of any persons; and (ii)[sic] damage to any property, howsoever arising or incurred from or incident to the use, operation or possession of the Equipment, unless such claims, actions, suits, penalties, expenses or liabilities are caused solely by the intentional conduct of the Lessor or its agents.”

When concrete was being poured, a construction worker was injured and asserted a claim against the concrete supplier and the lessor of the pump truck. The lessor settled the claim and asserted a claim for contractual indemnification against the concrete supplier based on the contractual language above. Among other arguments, the concrete supplier argued that the indemnification provision was unenforceable under Florida Statute §725.06 because it contained no monetary limitation.

Although the trial court found the indemnification provision to be enforceable, the First District disagreed, maintaining, “The indemnity provision at issue in this case does not contain a dollar limit to Griswold’s [concrete supplier] potential liability. For that reason, it is void and unenforceable as provided in section 725.06, and the trial court erred in ruling otherwise.”

While this case does not contain a lengthy discussion with respect to the language of the indemnification provision between the concrete supplier and the lessor of the pump truck, it appears clear that the provision required the concrete supplier to indemnify the lessor for the lessor’s potential negligence (i.e., damage or injury caused in whole or in part by any act, omission, or default of the lessor). For this reason, the indemnification provision needed to include a monetary limitation and should have under the law also expressed that it was part of the bid documents or project specifications.

This case illustrates the importance of making sure an indemnification provision is properly worded and drafted in accordance with Florida law, especially if you are a contractor or an owner where the indemnification provision is a material portion of the contract. As you can see, not doing so can have the harsh effect of having the indemnification provision declared unenforceable.