CONSTRUCTION LIENS: LIENING FOR AMOUNTS NOT YET TECHNICALLY DUE DOES NOT MEAN LIEN IS FRAUDULENT

A 2024 bankruptcy ruling, In re Edgewater Construction Group, Inc., 657 B.R. 668 (S.D.Fla. 2024), touched upon an interesting issue when it comes to construction liens.  Is a construction lien fraudulent simply because the lien includes amounts not yet due? Not necessarily.

In this bankruptcy dispute, the subcontractor debtor (that filed for bankruptcy) recorded two construction liens on projects.  The general contractor argued in the bankruptcy court that the subcontractor debtor’s liens were fraudulent.

As to the first lien, the general contractor argued that the lien was fraudulent because it included amounts that the debtor knew the general contractor had already paid to the debtor’s subcontractors/suppliers. The bankruptcy court disagreed: “The Court finds that, although the Debtor had been told that [the general contractor] had paid these subcontractors, in light of the ongoing dispute between Debtor and [the general contractor], it was reasonable for the Debtor to demand proof. Debtor’s subsequent filing of a partial satisfaction of lien once the Debtor received the requested proof of payment from [the general contractor] counters any claim of willful exaggeration.”  In re Edgewater Construction Group, supra, at 672-673.

As to the second lien, the general contractor argued the subcontractor was not entitled to be paid because the general contractor had not been paid and the subcontract included a pay-if-paid provision. The bankruptcy court also disagreed and found that this argument would lead to an absurd outcome: “[T]he Court finds that, notwithstanding the presence of a ‘pay-if-paid’ clause, a subcontractor or materialman who files a claim of lien for amounts not yet due under a pay-if-paid contract in order to satisfy the statutory deadline has not filed a fraudulent claim of lien.”  In re Edgewater Construction Group, supra, at 673.

Here is why this is interesting and things that should be noted when it comes to liens:

1. Just because you’ve been told a lower tier has been paid, doesn’t mean you need to take that as faith without proof.
2. Once you get that proof, the smart thing is to record a partial satisfaction of lien for those amounts. It’s the right thing to do and presents well, as it presented well here.
3. A lien needs to be recorded within a statutory deadline (90 days from final furnishing). This means that even if amounts are not yet technically due, the smart thing is to still lien for them to preserve your lien rights.

If you are dealing with a lien or non-payment, make sure to work with construction counsel the preserve and maximize your rights.