SIGNIFICANT ISSUES TEST APPLIES TO FRAUDULENT LIEN CLAIMS TO DETERMINE ATTORNEY’S FEES

imagesConstruction lienors need to appreciate on the frontend that recovering statutory attorney’s fees in a construction lien action is NOT automatic—far from it.  This is because the prevailing party for purposes of attorney’s fees in a construction lien action is determined by the significant issues test,”subjective test with no bright line standards based on who the trial court finds prevailed on the significant issues in the case.  If you want to talk about the subjective and convoluted nature of recovering attorney’s fees in a construction lien action under the significant issues test, a recent opinion by the Fourth District Court of Appeal is unfortunately another nail in the coffin.   

 

In Newman v. Guerra, 2017 WL 33702 (Fla. 4th DCA 2017), a contractor recorded a construction lien on a residential renovation project and filed a lien foreclosure lawsuit.  The homeowner countersued the contractor and asserted a fraudulent lien claim pursuant to Florida Statute s. 713.31.  An evidentiary hearing was held on whether the lien was a fraudulent lien and the trial court held that the lien was fraudulent (therefore unenforceable) because it included amounts that were not lienable under the law.  The remaining claims including both parties’ breach of contract claims proceeded to trial.  There was no attorney’s fees provision in the contract.  At the conclusion of the trial, the court found that the contractor was entitled a monetary judgment on its breach of contract claim. 

 

Question:  If the owner prevailed in the contractor’s construction lien claim and established that the lien was in fact fraudulent, is the owner entitled to his statutory attorney’s fees? 

 

While equity may suggest “yes” as the answer, the answer is not necessarily.  This is because of the significant issues test where the court is going to look at the outcome of the entire litigation to determine the party that prevailed on the significant issues in the entire case.   Since the contractor ultimately recovered a money judgment, the court held the owner was not the prevailing party for purposes of attorney’s fees under the significant issues test.  The contractor was not either, but this is beside the point since the owner established the lien was fraudulent and the contractor recovered a money judgment under a breach of contract claim that did not provide for attorney’s fees.  Nonetheless, the court maintained:

 

In sum, the trial court properly applied the “significant issues” test…in denying the homeowner’s claim for attorney’s fees under section 713.31 [fraudulent lien statute]. Even if a party prevails on a fraudulent lien claim, the party must be the prevailing party in the case as a whole to be entitled to attorney’s fees under section 713.31.

Newman, supra, at *4.

 

 

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.

 

WHAT IS A FRAUDULENT LIEN?

What is a fraudulent lien? 

 

Just because a construction lien is recorded does not mean the lien is a fraudulent lien.  In fact, getting a lien declared a fraudulent lien is not an easy feat.

 

A fraudulent lien is defined in Florida’s Lien Law.  Florida Statute s. 713.31(2)(a) states:

 

“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.”

 

But, “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.” Fla. Stat. s. 713.31(2)(b).

 

So, a lien that (a) willfully exaggerates the amount, (b) willfully includes work not performed or materials not furnished, or is (c) compiled with willful and gross negligence, constitutes a fraudulent lien.   But, a minor mistake in a lien does not constitute willful exaggeration to constitute a fraudulent lien. And, a good faith dispute as to what a lienor claims it is owed does not constitute willful exaggeration to constitute a fraudulent lien.

 

What is the recourse if a fraudulent lien is recorded?

 

Florida Statute s. 713.31(2)(b) explains:

 

“It is a complete defense to any action to enforce a lien under this part, or against any lien in any action in which the validity of the lien is an issue, that the lien is a fraudulent lien; and the court so finding is empowered to and shall declare the lien unenforceable, and the lienor thereupon forfeits his or her right to any lien on the property upon which he or she sought to impress such fraudulent lien.”

 

So, if a fraudulent lien is declared, the lienor loses its lien—the lien becomes unenforceable. 

 

Plus, with respect to an action for damages, s. 713.31(2)(c) states:

 

“An owner against whose interest in real property a fraudulent lien is filed, or any contractor, subcontractor, or sub-subcontractor who suffers damages as a result of the filing of the fraudulent lien, shall have a right of action for damages occasioned thereby. The action may be instituted independently of any other action, or in connection with a summons to show cause under s. 713.21, or as a counterclaim or cross-claim to any action to enforce or to determine the validity of the lien. The prevailing party in an action under this paragraph may recover reasonable attorney’s fees and costs. If the lienor who files a fraudulent lien is not the prevailing party, the lienor shall be liable to the owner or the defrauded party who prevails in an action under this subsection in damages, which shall include court costs, clerk’s fees, a reasonable attorney’s fee and costs for services in securing the discharge of the lien, the amount of any premium for a bond given to obtain the discharge of the lien, interest on any money deposited for the purpose of discharging the lien, and punitive damages in an amount not exceeding the difference between the amount claimed by the lienor to be due or to become due and the amount actually due or to become due.”

 

So, in addition to the fraudulent lien being declared unenforceable, the lienor can be liable for damages including, without limitation, attorneys’ fees, court costs, and, potentially, punitive damages in an amount not exceeding the difference between the amount claimed by the lienor to be due and the amount actually due.

 

What does this mean?

 

It is important for lienors  to consult with counsel prior to preparing and recording a lien since a routine defense to a lien is that the lien is an unenforceable fraudulent lien.

 

Here are important tidbits regarding fraudulent liens:

 

 

  • Including amounts in the lien NOT authorized by contract can render the lien fraudulent. See Skidmore, Owings, and Merrill v. Volpe Const. Co., Inc., 511 So.2d 642, 644 (Fla. 3d DCA 1987) (“The inclusion of items not authorized by change orders or by contract renders the lien fraudulent and unenforceable.”); accord In re Hayes, 305 B.R. 361, 366-67 (M.D.Fla. 2003).   For instance, think disputed change order requests.  Sometimes, it is better to pursue these amounts in a breach of contract action so as not to risk the lien being declared fraudulent.  But see In re American Fabricators, 917 B.R. 987, 992 (M.D.Fla. 1996): “The test for determining whether extras [changes] are lienable under Florida’s mechanics’ lien law is whether work was performed (i) in good faith; (ii) within a reasonable time; (iii) pursuant to the terms of the contract; and (iv) is necessary to finish the job.”

 

  • Consulting with counsel including full and complete disclosure of pertinent facts regarding the lien will help establish that there is a good faith dispute as to the amount in the lien and, therefore, there is no willful exaggeration to support a fraudulent lien.   As one appellate court explained “[A] lienor can rely on consultation with counsel prior to filing the claim of lien as evidence of good faith only in the event of a full and complete disclosure of the pertinent facts to the attorney from whom the advice is sought before the lienor acts on the advice. Consultation with an attorney is not entitled to any legal weight if the contractor did not disclose all pertinent facts to the attorney.”  Check out this article for more information on the value of consulting with counsel.

 

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.

 

 

 

INCLUDE PROPER (LIENABLE) AMOUNTS IN YOUR CONSTRUCTION LIEN!

images-1Contractors, subcontractors, and suppliers need to appreciate what amounts to actually include in a construction lien before preparing and recording that lien.  Stated differently, contractors, subcontractors, and suppliers need to appreciate what items are lienable and what items are not.  In a nutshell, the item needs to relate to a labor, service, or material constituting an improvement to the real property—the item needs to bestow a permanent benefit on the real property and should be performed under another’s (e.g., general contractor) direct contract with the owner. 

  

Not every item constitutes an improvement / bestows a permanent benefit to real property

 

Items that have NOT been found to be properly lienable include without limitation:

 

  • Extended general conditions / delay damages;
  • Residential cleaning;
  • Maintenance services including landscaping and pool upkeep (see example below);
  • Materials from a supplier not incorporated into property (excluding specially fabricated materials);
  • Lost profit;
  • Expert witness services;
  • Insurance and property tax payments for partially constructed home (see example below);
  • Constructing a removable kiosk at a mall (see example below); and
  • Extras (change order work) not performed in good faith, pursuant to the terms of a contract, within a reasonable time, and were unnecessary to finish a job.

 

 

imagesFor example, in Palm Beach Mall, Inc. v. Southeast Millwork, Inc., 593 So.2d 1121 (Fla. 4th DCA 1992), a contractor constructed a kiosk in a mall and recorded a lien for unpaid amounts.  The kiosk was not a permanent improvement to the mall, but was removable at the termination of the tenant’s lease.  The Court held that the contractor could not lien for constructing the kiosk.

 

As another example, in Levin v. Palm Coast Builders and Const. Inc., 840 So.2d 316 (Fla. 4th DCA 2003), a contractor recorded a lien that included costs for lawn maintenance, pool upkeep, utility charges, and association maintenance fees. Not only did the Court hold that these items were not lienable, but affirmed that the lien was fraudulent!

 

And, as the last example, in Sam Rodgers Properties, Inc. v. Chmura, 61 So.3d 432 (Fla. 2d DCA 2011), discussed in detail in a previous posting, a contractor was building a custom home when a payment dispute arose.  The owner stopped making payments and the contractor ceased construction and recorded a lien.  Subsequently, the contractor performed additional work to protect the unfinished structure from the elements and amended its lien to include these amounts as well as property taxes and insurance the contractor paid on the property.  Regarding the additional work to protect the unfinished structure, the Court held that these amounts were lienable: “All of these items were contemplated by the contract, and all of them were completed in a good faith effort to secure the property and mitigate damages so that a bad situation did not become worse.”  Chmura, 61 So.3d at 439.   But, as it related to the property taxes and insurance, the Court held these items were not lienable as they pertained to the maintenance of the property as opposed to improvement of the property.

 

By including inappropriate amounts in a lien, a lienor runs the risk of having its lien declared fraudulent under Florida’s Lien Law that would not only render the lien invalid, but expose the lienor to liability.  Do not let this happen to you!

 

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.