Article by Nicholas Siegfried in Today’s Daily Business Review: “Contractor’s Fraudulent Lien Doesn’t Mean Owner Automatically Wins”

The firm’s Nicholas D. Siegfried authored an article that appeared as a “Board of Contributors” guest column in today’s edition of the Daily Business Review, South Florida’s exclusive business daily and official court newspaper.  The article, which is titled “Contractor’s Fraudulent Lien Doesn’t Mean Owner Automatically Wins,” focuses on the surprising results of a recent ruling by the Fourth District Court of Appeal involving a contractor’s lien that the lower court found to be fraudulent.  His article reads:

For those in the construction industry, the right to impose a lien against the improved property in the event of nonpayment is an effective tool to get paid. Chapter 713, Florida Statutes, as well as countless cases require lienors to prepare their liens accurately and to include only lienable items. The failure to properly prepare a claim of lien can result in a claim for punitive damages and exposure to attorney fees and costs.

However, based upon a Fourth District Court of Appeal case, not all is lost if a contractor’s lien is discharged as fraudulent. In fact, despite a contractor’s fraudulent lien, a contractor can still be deemed the prevailing party in an action against an owner and avoid a claim for attorney’s fees.

In Scott Newman v. Sony Construction et al., the homeowner retained the general contractor to build an addition to his home. When the owner failed to pay, the contractor ceased work, recorded a claim of lien for approximately $134,000 and later recorded a partial release of lien reducing the lien to about $100,000.

The contractor filed suit against the owner for foreclosure of the construction lien, breach of contract and quantum meruit (payments due that are not enforceable under contract). The owner filed a counterclaim against the contractor for fraudulent lien and breach of contract, and the parties subsequently agreed to a bifurcated proceeding whereby the trial court would first determine whether the claim of lien was fraudulent prior to a trial on the remaining issues.

The trial court found that many of the charges included in the lien amount by the contractor were not lienable. These included a charge for approximately $15,000 for supervision and an additional $22,200 for the contractor’s 20 percent profit margin. The trial court found that these charges, which represented a large percentage of the lien, were not supported by the contract between the parties and therefore were not lienable items.  It also found other charges included in the lien for pool cleaning chemicals and services, hand tools purchased for use at the job site but not left on the premises after completion, air-conditioning warranty work and rental equipment abandoned by the contractor at the job site were “not lienable by any stretch of the imagination.”

His article concludes:

Ultimately, the trial court concluded that the contractor’s claim of lien “was compiled with such willful and gross negligence that it amounted to a willful exaggeration and should be deemed a fraudulent lien under Fla. Stat. § 713.31.”

A bench trial subsequently ensued on the contractor’s claims for breach of contract and quantum meruit. Surprisingly, although the trial court discharged the contractor’s claim of lien as fraudulent, it ruled in favor of the contractor and entered final judgment for approximately $82,000, including interest, plus nearly $10,000 in costs. Moreover, having found that the contractor prevailed on the significant issues in the case, the trial court, relying on 713.31(2)(c), denied the owner’s motion for attorney fees and costs which the owner claimed was owed as a result of the fraudulent lien.

The owner appealed the trial court’s denial of its motion for attorney fees and costs, contending that the significant-issues test does not apply, and he was entitled to the award of attorney fees regardless of the fact that the contractor prevailed on the remaining counts for breach of contract and quantum meruit.

On appeal, the Fourth DCA found Jan. 4 that the relevant statute had been amended in 2007 to include a prevailing party standard in the fraudulent lien context. It ruled that the trial court properly applied the significant-issues test in denying the owner’s claim for attorney fees under the current version of statute. The law states that owners may recover attorney fees only “if the lienor who files a fraudulent lien is not the prevailing party.”

The Fourth DCA concluded that the owner relied on case law applying the pre-2007 version of the statute. It affirmed the trial court’s order denying the award for attorney fees and costs based on the determination that the owner was not the prevailing party on the significant issues. It also affirmed the award of costs to the contractor as the prevailing party in the litigation.

On the contractor’s cross-appeal challenging the determination that its lien was fraudulent, the court found no abuse of discretion in the lower court’s decision that it was fraudulent.

In sum, despite the contractor’s fraudulent lien and a finding of willful and gross negligence on behalf of the contractor, it successfully obtained a judgment against the owner, prevailed in the litigation and avoided liability for the owner’s claim for attorney fees and costs. Moreover, although not raised in the case, if the owner was found to be the prevailing party, the contractor would have also been exposed to a claim for punitive damages due to the fraudulent lien.

While this case stands for the proposition that a contractor can still prevail even where its lien is deemed fraudulent, all lienors should be on notice that courts will review claims of lien and discharge them if they fail to comply with Florida’s construction lien law. This case can only be described as the exception, rather than the rule, and contractors must ensure proper preparation of their claims of lien to avoid a different and costly outcome.

Our firm congratulates Nicholas for sharing his insights on the ramifications of this recent appellate ruling with the readers of the Daily Business Review.  Click here to read the complete article in the newspaper’s website (registration required).