Here is an interesting lender liability dispute by a contractor against a construction lender on a failed construction project with a potentially harsh outcome to the contractor.
In Jax Utilities Management, Inc. v. Hancock Bank, 40 Fla. L. Weekly D948a, (Fla. 1st DCA 2015), a housing development project went belly up, for lack of a better expression. The developer defaulted under the construction loan and the lender ceased future disbursements under the loan and ultimately foreclosed on its mortgage. At the time of the default and the lender’s decision to cease future disbursements, the contractor was owed in the neighborhood of $500,000. The contractor sued the construction lender for equitable relief: a claim for an equitable lien (presumably as to undisbursed loan proceeds) and for unjust enrichment. For unknown reasons, the contractor did not assert a statutory cause of action against the lender pursuant to Florida Statute s. 713.3471 which details under Florida’s Lien Law a construction lender’s responsibilities under a construction loan and provides in material part:
(2)(a) Within 5 business days after a lender makes a final determination, prior to the distribution of all funds available under a construction loan, that the lender will cease further advances pursuant to the loan, the lender shall serve written notice of that decision on the contractor and on any other lienor who has given the lender notice. The lender shall not be liable to the contractor based upon the decision of the lender to cease further advances if the lender gives the contractor notice of such decision in accordance with this subsection and the decision is otherwise permitted under the loan documents.
(b) The failure to give notice to the contractor under paragraph (a) renders the lender liable to the contractor to the extent of the actual value of the materials and direct labor costs furnished by the contractor plus 15 percent for overhead, profit, and all other costs from the date on which notice of the lender’s decision should have been served on the contractor and the date on which notice of the lender’s decision is served on the contractor. The lender and the contractor may agree in writing to any other reasonable method for determining the value of the labor, services, and materials furnished by the contractor.
(c) The liability of the lender shall in no event be greater than the amount of undisbursed funds at the time the notice should have been given unless the failure to give notice was done for the purpose of defrauding the contractor. The lender is not liable to the contractor for consequential or punitive damages for failure to give timely notice under this subsection. The contractor shall have a separate cause of action against the lender for damages sustained as the result of the lender’s failure to give timely notice under this subsection. Such separate cause of action may not be used to hinder or delay any foreclosure action filed by the lender, may not be the basis of any claim for an equitable lien or for equitable subordination of the mortgage lien, and may not be asserted as an offset or a defense in the foreclosure case.
The crux of the case was whether the contractor could bypass any of the obligations in this statute (including the statutory liability of a lender for not complying with this statute) and assert common law claims against the lender for unjust enrichment and an equitable lien. The First District Court of Appeal firmly said NO! Florida Statute s. 713.3471 precluded the contractor’s common law claims against the construction lender as the contractor’s only recourse, which it did not pursue, was recourse under the statute.
What this means is that if a construction lender disregards the requirements of this statute by not properly notifying the contractor when it elects not to fully disburse loan proceeds, the lender’s liability to the contractor is based solely on this statute. This also means that if the lender complies with the requirements of this statute, it would have no liability to the contractor.
If you are on a failed project, it is imperative to consult with counsel to explore all of your rights and potential avenues of recovery. In this case, the contractor pursued equitable claims against the lender while strategically trying to bypass the statutory requirements and liability of a lender per s. 713.3471. Unfortunately, the First District was not sympathetic to these claims for equitable relief holding that the contractor only had statutory relief per s. 713.3471 and did not have any other relief (that would otherwise be available to the contractor under common 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.