1. law, govt and politics

Pecåqær
ö.AbraÍmsüffi
A Professional Corporation Attorneys & Counselors at Law
TO:
FROM:
DATE:
RE:
Lisa Colon Heron, Esq. -- American Bar Association Division 7
Ralf Rodrizuez, Esq.
Julv 6. 2011
Construction Lending/Equitable Lien Claim Presentation
CONSTRUCTION LENDING/EQUITABLE LIEN CLAIM
PRESENTATION OUTLINE
I.
Introduction
A construction lender is defined
as "any person who loans money
to an owner for
construction of an improvement to real property, who secures that loan by recording a
mortgage on the real property, and who periodically disburses portions of the proceeds
of
that loan for the payment of the improvement."l Almost all construction projects require
more than out-of-pocket funding from the owner. Accordingly, it is important for those
who practice construction law to be awaÍe of and understand the various
nuances,
problems and pitfalls pertaining to construction lending.
II.
Lender LiabiliW for Breach of the Construction Loan and Lender's Duties to
the Owner and/or Contractor
A.
The Requirements of FIa. Stat. S687.0304
Inevitably, problems arise when a construction lender does not provide funding
as
agreed under the terms of a construction loan. From a practical perspective, before an
owner andlor a contractor proceed to invest time, money and work on a construction
project, it is important to verify that the construction loan documents create
' Fla. stat. g7l3.o1(r7).
Page 1
of38
a
binding and
Peckær 6'Ahräffi'rsffiffi
A Professional Corporation Attorneys & Counselors at Law
enforceable contract requiring the lender to loan funds for use on the project. That is, the
borrower will need to prove that avalid, enforceable construction loan agreement exists.
In Florida, for a construction loan agreement, or any credit agreement, to
enforceable, the agreement to loan funds must be manifested
in writing.' Fla.
be
Stat.
$687.0304(2) provides that "[a] debtor may not maintain an action on a credit agreement
unless the agreement is in writing, expresses consideration, sets forth the relevant terms
and conditions, and is signed by the creditor and the debtor."3 Moreover, while the
signature requirement of Fla. Stat. $687.0304 does not require the debtor and creditor to
contemporaneously sign the credit agreement,
parties be provided
it
does require the signatures
in connection with a specific
transaction.a
of
both
In Collins v. Citrus
National Bank, the debtor, who brought suit against a bank, asserted that a letter from the
bank president, combined with hypothecation and assignment agreements, satisfied the
signature requirement of Fla. Stat. $687.0304(2). However, despite previously executing
the hypothecation and assignment agreements, the debtor had not affixed his signature to
2 See also Eboni Beauty Acad.
v. Amsouth Bank of Florida, 761 So. 2d 481 ,482 (Fla.s'l'DCA
2000)(holding that debtor's claim for breach of oral crerlit agreement was barred by statute of frauds for
credit agreemeuts, Fla. Stat. $687.0304) and Metro Bldg. Materials Corp. v. Republic Nat'|. Bank of Miami,
919 So.2d 595,598 (Fla. 3d DCA 2006)(recognizingthat Fla. Stat. $687.0304 precludes a debtor from
bringing a claim based on an oral credit agreement).
3
Fla. Stat. 9725.01 may also apply.
o
See e.g., Collins v. Citrus Nat'l Bank, 641 So. 2d 458, 459 (Fla.5'h DCA l994)(remanding action to
determine if letter, assignment, and hypothecation agreements, that were not signed in one sitting, were all
part of same transaction.).
Page 2
of38
e Abrärylsrm
Peckan
A Professional Corporation Attorneys & Counselors at Law
the letter until just prior to filing suit.s Accordingly, the Court remanded the case to
determine whether the signatures occurred as part of the same transaction.6
While Fla. Stat $687.0304(2) requires a credit agreement to be supported by
consideration,
it is equally
important
for any
agreement to be supported by consideration.
subsequent modifications
In Coral
to a credit
Reef Drive Land Dev., LLC v.
Duke Realty Ltd. P'ship, the terms of the loan documents provided the land developer a
first mortgage loan of $10 million.T The commercial real estate development partnership
bargained for an option with the land developer that would allow the parties to enter into
joint venture to acquire the property by paying the land developer
a
a
premium above the
amounts necessary to repay the partnership loan.8 The land developer ultimately failed to
make payments on the loan and the commercial real estate development partnership
issued a letter of default and filed a foreclosure action.e In its appeal from summary
judgment and final judgment
of foreclosure, the land developer claimed that certain
verbal communications between the parties constituted a binding commitment to enter
into a joint venture.rO The Third District Court of Appeal affirmed the trial courts
decision and held that the land developer "provided no such consideration for the alleged
5
Id.at460.
6
Id.
7
Coral Reef Drive Land Dev., LLC v. Duke Realty Ltd. P'ship,45 So. 3d
8
Id. at8gg.
e
Id. atg}t.
'o
Id. at Bgg.
Page 3
of38
897
,8gg (Fla. 3d DCA 2010).
Feckan e Abr&rnsoxÌ
A Professional Corporation Attorneys & Counselors at Law
modification of the loan documents"ll and noted that *[t]he world of commercial real
estate is not a
wann
and
fazzy place."rz The practice point to be taken from this case is
that a modification to a credit agreement must be supported by consideration and,
stated by the Third District Court of Appeal,
as
"[g]et it in writing...for better or worse."l3
In addition to signatures and consideration, a loan agreement must set forth the
relevant terms and conditions of the loan.la However, even
if
all the details are not
definitely fixed, an agreement may still be found to exist, binding the parties to the
agreed upon essential
terms.ls For example, in Blackhawk Heatíng & Plumbing Co. v.
Data Lease Fin. Corp.,the plaintiff sought specific performance of a lending agreement
whereby the plaintiff loaned money to the defendant for the purchase of certain bank
stock. In exchange for the loan, the defendant gave the plaintiff the option to purchase
a
portion of the bank stock.r6 In addition, the terms of the agreement provided that the
plaintiff was entitled to share in the "cash-flow benefit" received by the defendant from
the purchase of the bank
stock.tt The defendant argued the agreement was unenforceable
tt Id. atgo2.
t2
13
Id. atgo3.
.,
14.
tn
Fla. Stat. 9687.0304(2)
ts
Blackhawk Heating & Ptumbing Co. v. Data Lease Fin. Corp.,302 So.2d 404,408 (Fla. 1974).
t6
Id. at4o5-06.
"
Id.
Page 4
of38
Peclçae"
e Abramsrn
A Professional Corporation Attorneys & Counselors at Law
because the term "cash-flow benefit" was too vague.ts The Court held the term "cash-
flow benefit" was not so indefinite as to render the agreement unenforceable, and the
failure of parties to agree on the amount of money to be paid upon exercise of the
purchase option under such circumstances, did not preclude the option from being
properly exercised.le Likewise, the Court in Sanchis v. Rosell found that "[e]ven where
all the elements of a contract are not initially fixed," if there was (1) an acknowledgment
of a debt owed, (2) a promised payment, and (3) an amofüzation or liquidation plan for
repayment, then such terms were sufficient to create an enforceable loan agreement.20
In contrast, where the relationship between the lender and borrower
does not
result in definite and essential contract terms (such as when the money will be advanced,
when the loan will be repaid, and/or what rate of interest shall apply) a court is not likely
to find that there is a binding and enforceable loan agreement.tt Fot example, in Calosso
v. Fìrst National Bank of Pompano Beach, the Court held there was no enforceable loan
agreement because the parties had not reached an "understanding as to when any money
was to be advanced nor...any agreement as to method and time of repayment or rate
"
Id.
te
Id.
20
Sanchis v. Rosell,569 So. 2d833,834 (Fla. 3d DCA 1990).
2t
Calosso v. First Nat'l Bønk of Pompano Beach,l43 So. 2d343,343 (Fla, 2d DCA 1962)(holding
contract terms were too vague for a court to enforce the loan agreement against the lender).
Page 5
of38
of
Peckar e Åbrarylsffiffi
A Professional Corporation Attorneys & Counselors at Law
interest."22 úr addition, Florida courts
will not enforce a loan
agreement where there is
"no understanding as to any particular amount to be loaned."23
B.
Lender Liability for Breach of Contract
Once the requirements of Fla. Stat. $687.0304 have been satisfied,
if
a lender
fails
to comply with the terms of the loan agreement, a borrower can maintain a cause of
action for breach of the loan agreement by alleging the lender failed to comply with the
terms of the \oan.2a
ln Godwín v. (Jnited Southern Bank, the plaintiffs were unsatisfied
with the construction of their home.2s Accordingly, they brought a multi-count
complaint, alleging, inter alia, that, contrary to the parties' agreement, the final draw
of
the construction loan was released to the contractor without their "endorsement."26 The
construction loan agreement stated that "construction shall not be deemed complete for
purposes
of final disbursement unless and until
fa]cceptance
Lender shall have received...
of the completed improvements by Lender and Borrowet."21 The Fifth
District Court of Appeal held that the plaintiffs had sufficiently alleged a claim for breach
of contract because the term "endorsement" could be fairly read as without the
"
k!.
"
Id.
to
Sn" u.g., Godwin v. (Jnited Southern Bank,688 So. 2d313,373 (Fla.s'h DCA 1997).
"
Id. at3r4.
'u Id.
"
Id.
Page 6
of38
freeï<ar e'AbräËmsrffi
A Professional Corporation Attorneys & Counselors at Law
homeowners' acceptance.2s As such,
language
it is clear that Florida courts will
of the parties' loan agreement to determine
if
look to the
a cognizable claim has been
alleged.
Conversely, Florida Courts have recognized an affirmative defense to a lender's
foreclosure action where the lender has negligently disbursed and grossly mismanaged
the loan funds.2e For example, in Schaeffer v. Gilmer, the Court found that the trial court
improperly struck the affirmative defense of the guarantors to the loan who asserted that
the lender had negligently disbursed and grossly mismanaged the loan, preventing the
borrowers from performing, where the lender had permitted construction to begin on a
phase of construction despite no occuffence of the preconditions in the loan documents.30
The lender prematurely disbursed funds despite the loan agreement's requirement that,
"[t]he total amount of disbursement shall be limited . . . until such time . . . that
a
minimum of 72 of the condominium units have been sold."3l Under this factual
scenario, the First District Court
of Appeal determined it was improper to strike the
guarantors' affirmative defense to the lender's action seeking to enforce the terms of the
guatantee, which alleged negligent disbursement of the loan funds by the lender.32
'8 Id.
2e
See Schaeffer v. Gilmer,353 So. 2d 847,852 (Fla. 1st DCA 1977)(holding trial court erred in striking
affirmative defense that the loan was negligently disbursed and grossly mismanaged.)
to
Id. atB52.
t' Id.
t' Id.
Page 7
of38
Peclqen &'Abramsffirþ
A Professional CorporationAttorneys & Counselors at Law
What is important about this decision is that the First District Court of Appeal has
recognized, at least in the context of an affirmative defense, that a guarantor may allege
negligence by the lender
in
defense
to an action to enforce the terms of
guarantee
agreement for a loan.
In
addition,
a lender can also have liability to other parties for breach of
contract.33 For example, where a contractor has direct dealings with the construction
lender, the contractor may also be able to assert a breach of contract claim against the
lender.3a In Norin Mortg. Corp. v. Wasco, Inc., a lender and contractor entered into an
agreement whereby the contractor undertook certain obligations
in
exchange for the
lender's guarantee that it would set aside specific funds from the construction loan to pay
the contractor.3s Under these facts, the Second District Court of Appeal held that under
the terms of the agreement between the lender and the contractor, the lender was
obligated to pay the undisbursed balance of the loan, which the owner/borower owed to
contractor for completion of the work.36
A lender may also be liable for construction defects where the lender has taken on
the role of a developer.3'1 A lender can become "the developer" where the lender assumes
33
tu
tt
tu
See
Norin Mortg. Corp. v. llasco, Inc.
, 343 So. 2d 940, 941 (Fla.2dDCA lg77).
Id.
Id.
Id.
Page 8
of38
Peckar g.Abr&rxlsmxÏ
A Professional Corporation Attorneys & Counselors at Law
control of the construction project, completes portions of the construction work, and
holds itself out as "the developer" by marketing and selling the improved property.'8 For
example,
in Chotka v. Fidelco Growth Investors, the lender foreclosed on its loan
and
took possession of a condominium project that was still under constructiott.3e Th" lender
then completed construction of the condominium project and, while holding itself out as
"the developer" and "owner" of the project, advertised and sold the condominium units to
the public.aO Und"r these facts, the Second District Court of Appeal held that the lender
became "the developer" of the project, and could be liable for representations made to the
buyer, for patent construction defects in the entire condominium project and for breach
of
any applicable warranties resulting from defects in the portions of the project completed
by the lender.al
In contrast, a lender who simply forecloses on a construction loan will not be
liable for defects unrelated to the lender's active construction on the property.a2 For
31
See Chotka v. Fidelco Growth Investors,383 So. 2d 1169,1170 (Fla. 2d DCA l980)(Condominium
association sued construction lender, which had foreclosed after original developer had defaulted on loan,
for damages for defects or omissions in the construction of the condominium building and common areas.).
t8
Id.
t' Id.
oo
ot
lcl.
Id.
o'
See e.g., Port Sewall Harbor & Tennis Club Owners Ass'n, Inc. v. First Fed'l Savings & Loan Ass'n of
Martin County,463 So. 2d 530,531-32 (Fla. 4th DCA 1985X"4 lender who forecloses a mortgage on a
construction project and becomes the developer of that project is liable to a purchaser of a unit of the
project for (a) performance of express representations made to the purchaser by the lender, (b) patent
construction defects in the entire project, and (c) breach ofany applicable warranties resulting from defects
in the portions of the project completed by the lender").
Page 9
of38
fleclqmr &.Ab$"&rnsrn
A Professional Corporation Attorneys & Counselors at Law
example, in Port Sewall Harbor and Tennís Club Owners Ass'n, Inc. v. First Federal
Savings and Loan Ass'n of Martin County, a homeowners' association attempted to bring
a
claim against a lender who foreclosed on the developer's construction loan.a3 While the
lender did complete some improvements
to certain
subdivisions
of the project,
the
specific defects the homeowner's association was complaining about were unrelated to
the lender's work. Moreover, in this case, the lender made no express representations to
the buyers and no implied warranties were applicable under Chapter 718, Florida Statutes
because the property was not a condominium.aa Accordingly, the Fourth District Court
of Appeal held that the lender could not be held liable for construction defects unrelated
to any of the work completed by the lender.as
However, where the lender is aware of latent construction defects in a residential
project and participates in the marketing and sale of the residential project to the public,
the lender has the duty to disclose such latent defects to a buyer.a6 "¡Wlhere the seller
a home knows
of
of facts materially affecting the value of the property which are not readily
observable and are not known to the buyer, the seller is under a duty to disclose them to
the buyer."ot In the landmark case of Johnson v. Davis, the Court created a new tort
n3
Id. ut s3r.
no
Id.
ot
Id. at530-31.
o6
Johnson v. Davis,480
4'
So.
2d 625,629 (Fla.
1986).
Id.
Page 10
of38
in
Peclqaå' Ð' Abrarnscffi
A Professional Corporation Attorneys & Counselors at Law
Florida
-
breach of duty to disclose known defects with respect to the sale of a home.
The duty only extends to those defects that the seller is aware of and are not patently
obvious to the buyer.as Moreover, the duty to disclose does not apply to the sale
of
commercial property.ae
C.
Lender's DuW to Inspect. Audit and Manage a Proiect
The lender's responsibilities with regard to a construction project are generally
limited to that of "a money lender and security holder."so Generally, a lender will not
have liability to the borrower or third-parties for any inspections or audits
it may carry
out in connection with protecting its loan interest on a construction project.sl In First
lí/isconsin Nat'l Bank of Milwaukee v. Roose, the owner of a condominium apartment
asserted that the mortgagee and developer v/ere,
in essence, in a joint venture relationship
by virtue of the loan agreement.s2 As such, the owner asserted the mortgagee had a duty
o8
Id.
oe
Futuro Realty v. Lone Star Buitding Centers (Eastern),578 So. 2d363,364-65 (Fla. 3d DCA 1991)
bhat Johnson v. Davis does not impose a duty of disclosure in a commercial setting.) and Wasser v.
Sasoni,652 So. 2d 4ll,4l2 (Fla.3d DCA 1995)(holding there is no duty to disclose known defects in a
(holding
commercial setting).
s0
First Wisconsin Nat'l Bank of Milwaukee v. Roose,348 So. 2d,610,611 (Fla. 4th DCA 1977); see also
Sobi v. First South Bank, Inc., 946 So. 2d 615,617 (Fla. 2d DCA 20071 lrecognizing a lender has no
liability for construction defects); Rice v. First Fed. Sav. & Loan Ass'n of Lake County, 207 So. 2d 22, 23
(Fla. 2d DCA l968X"A lender of construction money has an interest in the progress and quality of the
construction of its security proportional to the amount of money invested and would reasonably be
expected to inspect the construction and be entitled to additional compensation for its additional costs in
making such inspection."); Armetta v. Clevetrust Realty Investors, 359 So. 2d 540,540 (Fla. 4th DCA
1978)(holding contract provisions inserted solely for protection of lender do not create duty to others on
part oflender).
tt
s2
Rice,207 So. 2d at23.
First \í/isconsin Nat'l Bank of Mihuaukee, 348 So. 2d at
Page 11
6ll.
of38
Feelcar &'AbraxmsffiËï
A Professional Corporation Attorneys & Counselors at Law
to protect the interests of the owners by supervising the construction and maintenance by
the developer.s3 As further support of its position, the owner also pointed to the fact that
the mortgagee deducted an inspection fee from loan proceeds prior to disbursing the
proceeds to the developer.so The loan documents, however, did not contain a provision
stating the lender had any duty to the borrower to inspect the project.ss Accordingly, the
Court held the lender's inspection was for the benefit of the lender only (to protect its
security interest) and, therefore, the lender had no duty to inspect the project with respect
to the owrre..t6
ln
Sobi v. First South Bank, Inc., the contractor built the owner's home eight
inches below the flood
plain. The owners who were borrowers under the construction
loan for the project brought an action against the lender premised on the failure of the
lender to obtain a flood insurance certificate before disbursing the construction loan funds
to the contractor.st Finditrg no liability by the lender, the Court noted that while the loan
agreement gave the lender the option to obtain flood insurance before making the loan
disbursements,
it did not require the lender to obtain a flood
insurance certificate.s8 In
holding the lender had not breached any duty to the owners, the Second District Court
tt
to
Id.
Id.
tt Id.
tu
Id.
t' Sobi,946
t8
So. 2dat616-11.
Id.
Page 12
of38
of
Feclqas'e Ahå"ffisyïs#ffi
A Professional Corporation Attorneys & Counselors at Law
Appeal stated, "under Florida law, as a general rule a lender has no liability for
construction defects. "59
ilI.
Lender's Dutv to Make Proper Payments
When construction loan funds are disbursed, the lender can make payments
directly to the owner, who then pays the contractors providing construction services and
materials. In such case, a lender has no statutory duty under Chapter 713, Florida
Statutes
to any contractor on the job with regard to payment.60 Ho*",rer, if required by
the terms of the loan, the lender can make payments directly to the contractors.
If
so, the
lender must make proper payments as provided by Ftorida law.6l Specifically, Fla. Stat.
$713.06(2)(d) provides, "[a]ny lender who, after receiving a notice fto owner], pays a
contractor on behalf of the owner for an improvement shall make proper payments as
provided in paragraph (3Xc) as to each such notice received by the lender."
To give rise to a duty of proper payment from a lender, a
subcontractor,
materialman, or supplier must serve the lender with a notice to owner.62 The lender,
after being served with such notice, is required to comply with the procedural mandates
of Fla. Stat. $713.06(3)(c), which mandates include, without limitation, the following:
te
uo
u'
62
Sobi, 946 So. 2d
at
6Ii.
Flu. Stat. g7l3.o6(2)(d).
Id.
Id
Subsection (2)(d) provides in part that "A notice to an owner served on a lender must be in writing,
must be served in accordance with s. 713.18, and shall be addressed to the persons designated, if any, and
to the place and address designated in the notice of commencement."
Page 13
of38
Pecåqar 6.AbräsnsffiKì
A Professional Corporation Attorneys & Counselors at Law
1.
Paying each subcontractor, materialman, or supplier the amount due; and
2. Where the payment due under the direct contract between the owner and
general contractor
is in
sufficient
to pay all of the bills of
the
subcontractors, materialmen, or suppliers having served a notice to owner,
the lender must prorate the amount due.
If the lender will
be paylng the contractor directly, Fla. Stat. $713.13(7) states
"[a]
lender must, prior to the disbursement of any construction funds to the contractor, record
the notice of commencement in the clerk's office." However, the owner still retains
responsibility for posting the notice of commencement on the jobsite.63 Where a lender
voluntarily undertakes the duty to record the notice of commencement, the lender has
a
duty to record it in a timely rnarmer.uo In Napolitano v. Sec- First Fed. Sav. and Loan
Ass'n,the lender voluntarily assumed the duty to record the notice of commencement but
did not record it until after the lender had permitted construction to coÍtmence on the
project.65 Under these facts, the Fifth Circuit Court of Appeal held that where a lender
voluntarily assumes the duty to record the notice of commencement, the lender, "must
record the notice of commencement in a timely manner without regard to any
o'Fla. Stat. (i713.13(7X"The posting
of the notice at the construction site remains the owner's obligation."),
6a
Napolitano v- v. Sec. First Fed. Sav. qnd Loan Ass'n,533 So. 2d,948,949 (Fla. 5'h DCA 1988)(holding
that where lender voluntarily undertakes duty to file notice of commencement, lender must file it in a
timely manner).
6t
Id. utgso.
Page 14
of38
Peeå<an
e rqbå"&sylsüffi
A Professional Corporation Attorneys & Counselors at Law
contingencies yet unperformed relating to the approval or recording
of a construction
loan."66
With regard to final payments, including those due
if
the contract is terminated
prior to completion, the contractor must provide the lender with a final payment affidavit,
in the form
as required by Fla. Stat. $713.06(3XdX1).67 Without such an affidavit, the
contractor has no right of lien and no right to demand final payrnent.6s The lender "shall
retain the final payment due under the direct contract" until the final payment affidavit is
furnished by the contractor.ue If the lender fails to retain final payment prior to receiving
the contractor's final payment affidavit, the lender may become liable to the owner for
improper payment.To
Furthermore, once a contractor provides a ftnal payment affidavit to the lender,
the lender must give the contractor providing such affidavit 10 days written notice before
making any payment directly to other lienors that are due money under any subcontract
by and between the contractor and a subcontractor, materialman, or supplier on the
uu
Id.
ót
Fla. Stat. $713.06(3)(dXf ): The contractor shall give to the owner a final payment affidavit stating, if
that be the fact. that all lienors under his or her direct contract who have timely served a notice to owner on
the ou,ner and the contractor have been paid in full or, if the fact be otherwise, showing the name of each
such lienor who has not been paid in full and the amount due or to become due each for labor, services, or
materials furnished . . .
u8
Id.
6e
See Fla. Stat.
$713.06(3)(d)(5).
70
see Fta. Srar.
9713.06(3)(d)(6).
Page 15
of38
Pecå<ar e
Abranlsrffi
A Professional Corporation Attorneys & Counselors at Law
project.Tl In the event that the payment due in the contractor's final payment affidavit
will be insufficient to pay all lienors giving notice, the lender "shall pay no money
to
anyone until such time as the contractor has fumished him or her with the difference,"T2
or
if
10 days have passed since the lender has received the final affidavit, and the
contractor has not fumished the difference, the lender can determine the amount due each
lienor pursuant to the terms of the direct contract the owner has with the general
contractor.T' Th" lender must before paying any money directly to a lienor (except the
contractor or any laborer), give the contractor at least 10 days' written notice of his or her
intention to do so, and the amount he or she proposes to pay each lienor."74
In Kalbes v. Caliþrnia Fed.l Sav. and Loan Ass'n, the owner alleged that the
lender had failed to make proper payments pursuant to Fla. Stat. $71 3 .06(3) resulting in
7t
See Fla. Stat. $713.06(3)(d)(2): If the contractor's affidavit required in this subsection recites any
outstanding bills for labor, services, or materials, the owner may, after giving the contractor at least l0
days' written notice, pay such bills in full direct to the person or firm to which they are due, if the balance
due on a direct contract at the time the affidavit is given is sufficient to pay them and lienors giving notice,
and shall deduct the amounts so paid from the balance due the contractor. Lienors listed in said affidavit not
giving notice, whose 45-day notice time has not expired, shall be paid in full or pro rata, as appropriate,
from any balance then remaining due the contractor; but no lienor whose notice time has expired shall be
paid by the owner or by any other person except the person with whom that lienor has a contract.
72SeeFla.
Stat. $713.06(3Xd)(3): If the balance due is not sufficient to pay in full all lienors listed in the
affidavit and entitled to payment from the owner under this pan and other lienors giving notice, the owner
shall pay no money to anyone until such time as the contractor has furnished him or her with the difference;
however, if the contractor fails to furnish the difference within 10 days from delivery of the affidavit or
notice from the owner to the contractor to furnish the affìdavit, the owner shall determine the amount due
each lienor and shall disburse to them the amounts due from him or her on a direct contract in accordance
with the procedure established by subsection (4).
"
7a
Id.
SeeFla. Stat. $713.06(3)(9).
Page 16
of38
Pecåqar
e AbramsoËÏ
A Professional Corporation Attorneys & Counselors at Law
numerous liens against the owner's property.T5 Under the terms of the loan agreement,
the lender completely controlled the disbursement of the loan funds.76 The Second
District Court of Appeal held where a lender insists on controlling disbursement, the
lender "had a duty to the owner to exercise reasonable care to see that the payments were
made in compliance with the mechanics' lien law."71 "To hold otherwise would mean
that a lender, secure
in the knowledge that its mortgage would have priority
over
mechanics' liens, could make disbursements for the account of the owner with absolute
impunity."t8 In trrpport of its holding, the Court referenced the generally recognized rule
that "a construction mortgage may have distinctive features in that the mortgagee may
become liable in tort to the mortgagor
if
reasonable care is not exercised in disbursing the
funds to protect the mortgagor from mechanics'liens filed against the property."Te
In Strickland-Collins Constr. Co. v. Barnett Bank of Naples, the Second District
Court of Appeal held that a general contractor was barred by the Economic Loss Doctrine
from bringing a negligence claim against the lender.8O
contractor joined the borrower
in
ln
Strickland, the general
executing the loan document. Moreover, the loan
agreement contained a provision stating, "Lender shall not be liable to third parties such
"
Kalbet v. Caliþrnia Fed'l Sav. and Loan Ass'n, 497 So.2d 1256,1257 (F1a.2d DCA 1986).
76
Id. at1258.
"
Id.
"
Id-
'e
Id.
80
çciting 55 Am.Jur.2d Mortgages {i 14, at 203
(lgll)).
Striclcland-Coltins Constr. Co. v. Bctrnett Banlc of Naples,545 So. 2ð,476 (Fla. 2d DCA 1989).
Page 17
of38
Peekar e AbramsrrÌ
A Professional Corporation Attorneys & Counselors at Law
as the general contractor ...
for services, labor or materials employed upon ... the land ...,
and further as to such third parties lender shall be under no obligation to adhere to the
requirements hereunder imposed as conditions for the disbursement
of loaned funds
which are expressly intended to be for the sole and exclusive benefit of lender."8l
Accordingly, the Court held that, in the absence of personal injuries or property damage
to property outside the contract, the contractor's negligence claim was barred because
Florida will not create a duty in tort to permit recovery of economic losses where the
parties have allocated the various risks of their bargain by contract.82 Moreover, under
the traditional principles of tort law in Florida, there is no duty by the lender to the
contractor to use reasonable care in disbursing construction loan funds.83 Accordingly,
no Florida court has yet recognizeda coÍrmon law claim fornegligent disbursement
of
construction funds by a contractor against a lender.
IV.
EquitableLien.UniustBnrichment. and Ouantum Meruít Claims
"The equitable lien doctrine is firmly established in Florida.
declared by a court ofequity out
It
arises when
ofa general consideration ofright andjustice
as applied
to the relations of the parties and the circumstances of their dealings in the particular
It Id.
82
ut4ii.
Id.
83
Sobi,946 So. 2d at 617 lrecognizing a lender has no liability for construction defects); Rice, 207 So. 2d
at 23 (holding lender had no duty to inspect); Armetta v. Clevetrust Realty Investors,359 So. 2d 540, 540
(Fla. 4th DCA l978xholding lender had no duty for negligent supervision of developer).
Page 18
of38
Ëseckan
e Abrärmsrx]
A Professional Corporation Attorneys & Counselors at Law
case."84 Equitable liens are an appropriate remedy to combat fraud and misrepresentation
by a construction lender,8s or other circumstances requiring special equity,86 such
"lender misconduct, affirmative deception,
or
material misrepresentation."sT
as
The
rationale behind this type of remedy is that a lender should not be unjustly enriched when
a contractor has
fumished materials and services, yet the construction loan funds have not
been disbursed leaving the contractor unpaid for his work.88 However, allegations
of
fraud or other misrepresentations are not necessary to maintain a cause of action for
equitable lien.8e
8a
PenÌnsular Suppty Co. v. C.B. Day Realty of Florida, Inc., 423 So. 2d 500, 502 (Fla. 3d DCA 1982)
(holding equitable liens could exist where construction lien had not been perfected),
85
See
Merritt v. IJnkefer, 223 So. 2d.123,724 (Fla. 1969) (holding that an equitable lien could persist
where fraud had occurred.).
86
See Crane Co. v. Fine, 221 So. 2d 145, 148 (Fla. 1969) (finding record showed special equities to
support an equitable lien where "the plaintiffhad no cause ofaction against the surefy on the performance
bond nor against the owner-contractor joint venturers on either a quasi-contractual or contractual basis");
compare Hallmark Mfg Inc., v. Lujack Const. Co., (nc.,372 So. 2d 520,521 (Fla. 4th DCA 197gxfinding
no cause of action for equitable lien exists where complaint alleged no more than breach of contract, no
grounds on which to base equitable lien, and plaintiff has adequate remedy at law); Cohen v. Lunsford,362
So. 2d 383,384 (Fla. lst DCA 1978) (holding that where subcontractor afforded adequate remedy at law
and record reflects no special equities, subcontractor's claim ofequitable lien must fail).
"
Edd Helms Elec. Contracttng, Inc. v. Barnett Bank of South Florida, N.A., 531 So. 2d 238,239 (Fla. 3d
DCA 1998).
88
See Morgen-Oswoocl & Associates, Inc. of Floridø v. Continental Mortgage Intestors,323 So. 2d,684,
685 (Fla. 4th DCA 1975) (holding that to allow the lender to retain the undisbursed construction loan funds,
while getting the security for the loan as well, would result in unjust enrichment at the expense of the
contractor, and that the contractor was therefore entitled to an equitable lien against those funds); Emerald
Designs, Inc. v. Citibank F.S.B., 626 So.2d at 1085 (holding lender would be unjustly en¡iched if it were
permitted to foreclose on completed homes and also allowed to retain the undisbursed funds); First Florida
Bank v. Advantage Builders of America, Inc.,2l So. 3d 921 (Fla. 2dDCA 2009)(per curium)(affirming
holdings in Morgen-Oswood & Associates, Inc. and Emerald Designs, Inc.).
8e
Emeralcl Designs, Inc- v. Citibank F.5.8.,626 So. 2d 1084, i085 (Fla. 4'r' DCA 1993)(holding no
allegation of fraud is necessary to establish an equitable lien on undisbursed construction loan funds)(citing
Gffin Industries of Jacksom,ille, Inc. v. SoutheasÍern Associates, hnc.,357 So. 2d 217 (Fla. l't DCA 1978)
Page 19
of38
Peckan
e ÅhraÍnsrn
A Professional Corporation Attorneys & Counselors at Law
In Emerald Designs, Inc. v. Cìtíbank, the subcontractor alleged that it performed
landscape services on a project
for which it had not been paid, that the lender had
retained undisbursed construction loan proceeds, that the homes v/ere completed, and that
the lender would be unjustly enriched
if it
were permitted to foreclose on the completed
homes and also allowed to retain the undisbursed funds.e0 The lender countered that the
subcontractor must allege fraud or misrepresentation to establish an equitable lien.el The
Fourth District Court
of Appeal disagreed and held that an equitable lien can be
established in the absence of any allegations of fraud or misrepresentations.e2
ln CTX Mortg. Co., LLC v. Advantage Builders of Am., Inc., a builder sought
an
equitable lien on the undisbursed construction funds held by the lender.e3 The lender
advanced approximately 100 percent of an owner's cost to acquire a lot and build a home
on it.ea In the construction contract, the parties allocated at least apart of the financial
risk to the builder, who agreed that the lender would have no obligation to make the final
and J.G. Plumbing Services, Inc. v. CoasÍal Mortgage Co., 329 So.
dismissed, 339 So. 2d 1169 (Fla. 1976).
e0
ot
e'
2d 393, 395 (Fla. 2d DCA), cert.
Emerald Designs,626 So.2d, at 1084.
Id.
Id.
e3
CTX Mortg. Co., LLC v. Advøntage Builders of Am., Inc.,47 So.
eu
kr.
Page 20
of38
3d 844 (Fla. 2d DCA 2010).
fl}ecåqar
e AbrffirrylsüËÏ
A Professional Corporation Attorneys & Counselors at Law
advance
until all loan conditions were satisfied.es Ultimately, the owner refused to close
and filed a petition in bankruptcy, leaving the lender and builder to litigate entitlement to
the final draw between them.e6 The lender foreclosed on the mortgage, sold the property
and sustained a loss exceeding $250,000.et Th" Second District Court of Appeal
reversed the
trial court's award of an equitable lien on the undisbursed construction funds
to the builder and held that the builder failed to establish that the lender's retention of the
undisbursed construction funds was inequitable and that the "rationale for awarding an
equitable lien on undisbursed construction funds
to a contractor who has completed
construction is unjust enrichment."e8 The Second District Court of Appeal went on to
note that "to the extent that the Lender may have been enriched by the Builder's
completion of the residential construction, the allocation of the loss of the relatively small
amount of the final draw to the Builder-in accordance with the parties'written agreement*
does not result in a windfall to the Lender that is unjust."ee
Furthermore, a contractor may assert a claim for quantum meruit in addition to an
equitable lien claim.100 In Banks v. Steínhardt, the contractor sought, inter alía,
es
Id. at846.
e6
Id.
"
Id.
eB
Id. cítingto Blosam Contractors, Inc. v. Republic Mortg. Investors, 353 So.2d 1225, 1227-28 (Fla.2d
DCA 1977); Morgen-Oswood & Assocs., Inc. of Fla. v. Cont'l Mortg. Investors, 323 So. 2d 684,685 (Fla.
4th DCA 1975).
oe
Id. utB4i.
Page21 of38
Freckan
&,AbrämsrrÏ
A Professional Corporation Attorneys & Counselors at Law
foreclosure of equitable lien and asserted a claim based on quantum meruít- The Fourth
District Court of Appeal held that the trial court erred in dismissing the quantum meruit
claim, depriving the defendant of pursuing an altemative claim for relief.l0l Contrary to
the defendant's position, the Court noted that the claim for quantum meruit was not
duplicative of the equitable lien claim.102 This was most likely because a claim for
quantum meruit imputes the existence
of a contract
based upon one party's having
performed services under circumstances in which the parties must have understood and
intended compensation to be paid.103 Unjust enrichment, however, is not based upon the
parties conduct or assent.l0a Rather, "where there is no enforceable express or implied in
fact contract but where the defendant has received something of value, or has otherwise
benefitted from the service supplied, recovery under a quasi contractual theory may be
appropriate."lo5
Moreover,
in order to
maintain an equitable lien claim
or claim for
unjust
enrichment against the undisbursed loan funds, the construction needs to be completed.106
'00 Snn Banks v. Steinhardt, 427 So. 2d 1054 (Fla. 4tr' DCA 1983) (holding that contractor's claim for
quantum meruit could exist coextensively with equitable lien claim).
t0,
t0,
Id.
Id.
tot
Sun generally, Commerce P'ship 8098 Ltd. P'ship v. Equity Contracting Co.,695 So. 2d 383 (Fla.
DCA l997)(explaining the difference between quantum meruit and unjust enrichment claims).
,00
4tr'
Id.
'ot Id.
t06
Id.; sne also Edd Helms Electrica| Contracting 531 So. 2d at239
at 1084.
Page22 of38
and,
Emerald Designs, Inc., 626 So.2d
Pecåqæn
e Ahr&ffilsffiK?
A Professional Corporation Attorneys & Counselors at Law
The Court recognized,
"[i]f all of the funds
called for under the loan agreement have not
been disbursed by the time construction has been completed, the construction lender then
has more security than
it bargained for."
107
Should the borrower default, the "lender will
be in the position of being able to foreclose upon (and perhaps buy in) a completed
building even though it has not yet disbursed all of the construction loan money."108 On
the other hand, a lender who forecloses on an incomplete project may find itself without
sufficient security to cover the loan amounts disbursed during construction because the
partially completed project may have a lower market value than the amount of the
disbursed loan funds.tOe Accordingly, where construction is incomplete, the lender may
not be unjustly enriched and a contractor cannot establish an equitable lien against the
undisbursed construction loan funds.
V.
I 10
Lender's Decision to Cease Disbursement of Construction Loan Funds
'Where
a borrower defaults on its loan obligations, a construction lender may
decide to cease disbursements
of
construction loan
funds. Under Fla. Stat.
ç713.3471(2)(a), the lender must notify a contactor and all subcontractors on the project,
to wit: "[w]ithin 5 business days after a lender makes a final determination, prior to the
t0'
J.G. Plumbing Service, Inc. v. Coastal Mortgage Co.,329 So. 2d 393, 395 (Fla. }IDCA1916).
to9
Id.
,on
Id.
"o Sun Gffin Indust. of Jacks;onville, Inc. v. Southeastern Associates, 1nc.,357 So. 2d 217 (Fla.lst DCA
1978)(holding that where a project is incomplete, materialmen and laborers are not entitled to relief against
undisbursed loan proceeds).
Page 23
of38
il}ecåqms*
e ÅbrffiffiìsffiËÌ
A Professional Corporation Attorneys & Counselors at Law
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."lll The
statute
also provides that 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."r12 However, under Fla. Stat. ç713.347I(2Xb),
if
the lender fails to
give the required notice, the lender is "liable to the contractor to the extent of the actual
value of the materials and direct labor costs fumished 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 underlying rationale necessitating such a rule is to protect the lienor who
would otherwise continue working on the project to the lenders benefit. The situation
was addressed by the Court in J.G. Plumbíng Service, Inc. v. Coastal Mortgage Co., in
dealing with equitable lien claim brought by a contractor against a lender. Therein, the
Court discussed the contractor's allegation the lender "knew of fOwner's] defaults upon
which it based its foreclosure action but delayed in asserting its rights thereby allowing
fContractor] to continue to supply services, materials and labor to the job so as to
I
tt
See Fla. Stat. $7 13.34i t(2)(a).
,t, Id.
Page24 of38
P*ckar e Ahr&Kffisrm
A Professional Corporation Attorneys & Counselors at Law
enhance the value of the property upon which [Lender] intended to foreclose."lt3 The
Second District Court of Appeal held "a construction lender should not be permitted to
affirmatively mislead subcontractors and materialmen so as to induce them to continue to
work upon and supply materials to the job to their detriment. A construction lender who
falsely advises a materialman or subcontractor that the mortgage is not in default must
suffer the consequences
if
further work and materials are incorporated into the project in
reliance thereon. Such action would be equivalent to the fraud and misrepresentation
which the courts have traditionally sought to remedy where possible through the
imposition of an equitable
lien."lla
However, a lender's liability for failure to provide
timely notice under Fla. Stat. ç713.3471(2)(a)
will "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."l15
The rational supporting Fla. Stat $7133a11Q)@) was once again confirmed in
Whìtehead
v. Tyndalt Fed'l Credit (Jnion.lt6 In
Whítehead, the contractor began
construction on a new home and the lender distributed construction advances over several
months.l17 Disputes arose and the contractor was advised by the owners that no further
"3 J.G. Plumbing Service,Inc., 329 So.2dat395.
tt4
Id. at396.
"t
Fla. Star. 9713.34i1(2)(c).
tt6
Whitehead v. Tyndalt Fed't Credit (Jnion,46 So. 3d 1033 (Fla.
tI7
Id. at 1034.
Page 25
of38
l't DCA 2010).
Feckar e Åbr&msffiffi
A Professional Corporation Attorneys & Ccunselors at Law
draws would be disbursed.l18 The contractor recorded a lien but continued to work on the
house in the hopes that the dispute would be resolved.lle The contractor was ultimately
terminated by owners prior to completion of construction and sued the lender for failing
to give proper notice pursuant to Fla. Stat. $713 3a7\2)(a) when it
disbursed the
remaining loan proceeds to a replacement contractor.l2O The trial court found that the
lender did not violate the provisions of Fla. Stat. ç713.347I(2)(u).t" The First District
Court of Appeal reversed the trial court's order granting summary judgment in favor
the lender stating that "under the statute, once a lender knows that it
of
will stop advancing
funds to a contractor or any other lienor, the lender has a duty to notify that contractor
of
its decision [and] [i]f the lender fails to do so, it may be liable to the contractor."t22 The
First District Court of Appeal went on to note that "[t]o read the statute to allow for such
unjust enrichment at Contractor A's expense leads to an absurd result and would frustrate
clear legislative intent. "
1
23
| "t td.
tte
Id. at 1035.
|
''o Id.
|
,r,
ld.
| "'Id.atlo35-36.
I t" ttt.at 1036.
Page26 of38
Peekan
e Abräsnsrffi
A Professional CorporationAttorneys & Counselors at Law
VI.
Determinine Priority between Mechanic's Liens and Mortgages Attaching to
Real Propertv
The method for determining priority of liens is set forth in Fla. Stat. $713.07:
(1) Liens under ss. 713.03124 and 713.04r2s shall attach at the time
recordation of the claim of lien and shall take priority as of that time.
of
(2) Liens under ss. 713.05126 and713.06127 shall attach and take priority as
of the time of recordation of the notice of commencement, but in the event
a notice of commencement is not filed, then such liens shall attach and
take priority as of the time the claim of lien is recorded.
All
such liens shall have priority over any conveyance, encumbrance
or demand not recorded against the real property prior to the time such
lien attached as provided herein, but any conveyance, encumbrance or
demand recorded prior to the time such lien attaches and any proceeds
thereof, regardless of when disbursed, shall have priority over such liens.
(3)
If construction ceases or the direct contract is terminated before
completion and the owner desires to recommence construction, he or she
may pay all lienors in full or pro rata in accordance with s. 71 3.06(4) prior
to recommencement in which event all liens for the recommenced
construction shall take priority from such recommencement; or the owner
may record an affidavit in the clerk's office stating his or her intention to
recoÍxnence construction and that all lienors giving notice have been paid
in full except those listed therein as not having been so paid in which
event 30 days after such recording, the rights ofany person acquiring any
interest, lien, or encumbrance on said property or of any lienor on the
recommenced construction shall be paramount to any lien on the prior
construction unless such prior lienor records a claim of lien within said 30day period. A copy of said affidavit shall be served on each lienor named
therein. Before recoÍtmencing, the owner shall record and post a notice of
commencement for the recommenced construction, as provided in s.
713.r3.
(4)
t'o
Fla. Stat. $713.03 relates to liens forprofessional services.
"t
Fla. Stat. {i713.04 relates to liens for subdivision improvements.
ttó
Fla. Stat. {i713.05 relates to liens of persons in privity of contract with the owner.
"'
Flu. Stat. $713.06 relates to liens of persons not in privity of contract with the owner.
PageT7 of38
feckar &.Abrarylson
A Professional Corporation Attorneys & Counselors at Law
The priority scheme outlined above gives contractors, materialmen, and other
recognized statutory lienors (other than professionals or lienors involved in subdivision
improvements) who provide materials and services
to improve the owner's property
priority from the date of recording of the notice of commencement such that all lienors
who record under the same notice of commencement have equal lien priority.l2s The
contractor's
lien rights, therefore, relate back to the date that said notice of
coÍrmencement is recorded by the owner. However, the contractor's lien priority is
established at the "time of recordation," of the lien claim in the event that 1) no notice
commencement
is
recorded
or 2) if the notice of
commencement expires
of
or is
terminated.l2e The notice of commencement and its date of expiration therefore become
important for the purposes of construction lienors' priorityl30 and how this relates to
construction lenders wishing to record a mortgage on a construction project.
"All such fconstruction]
liens have priority over any conveyance, encumbrance,
or demand" that has not yet been recorded at the time that said lien attaches.l3l Florida
courts have recognizedthat a lien attaches at the time the notice of commencement is
rt8
Fla. Stat. g713.07(2).
,r9
Id,
t'0
Said notice generally lasts for one year, unless the notice clearly states that it will last longer. SeeFIa.
Stat. {i713 . 13(6): 'Unless otherwise provided in the notice of commencement or a new or amended notice
of commencement, a notice of commencement is not effectual in law or equity against a conveyance,
transfer, or mortgage
of or lien on the real property
described in the notice, or against creditors or
I year after the date of recording the notice of
subsequent purchasers for a valuable consideration, after
commencement."
'3' Fla. Stat. g713.07(3)
Page 28
of38
Peckar Ð AbraËnsrm
A Professional Corporation Attorneys & Counselors at Law
recorded.l32 Accordin gly, "any conveyance, encumbrance, or demand recorded prior to
the time the lien attaches have priority."t3t
As a result of Florida's recording statutel3a, a lender will almost always require
the owner to terminate any existing notice of commencement as a condition to closing a
construction loan. The purpose of the termination of the notice of commencement is to
give the lender a priority position over anyone else who may assert a security interest or
claim of lien in the property that serves to secure the
loan.
However, the owner must
record a "Notice of Termination" in such a situation.l3t Fla. Stat. $713.132 provides:
(1) An owner may terminate the period of effectiveness of a notice of
commencement by executing, swearing to, and recording a notice of
termination that contains:
(a) The same information as the notice of commencement;
(b) The recording office document book and page reference numbers and
date of the notice of commencement;
A
statement of the date as of which the notice of commencement is
terminated, which date may not be earlier than 30 days after the notice of
termination is recorded;
(c)
(d) A statement specifying that the notice applies to all the real property
subject to the notice of commencement or speciSring the portion of such
real property to which it applies;
t32See
Adamson v. First Fed'l Sav. and Loan Ass'n of Andalusia, 519 So. 2d 1036 (Fla. l't DCA
1988)(holding mechanic's lien had priority over purchase money mortgage that was recorded after the
notice of commencement).
t33
'30
t"
Id.
Fla. Stat. g713.07
Fla. Srat. 9713.132.
Page29 of38
Peakar e Ahr&smsrn
A Professional Corporation Attorneys & Counselors at Law
(e)
A statement that all lienors have been paid in full; and
(Ð A
statement that the owner has, before recording the notice of
termination, served a copy of the notice of termination on the contractor
and on each lienor who has given notice. The owner is not required to
serve a copy of the notice of termination on any lienor who has executed a
waiver and release of lien upon final payment in accordance with s.
7t3.20.
(2) An owner has the right to rely on a contractor's affidavit given under s.
713.06(3Xd), except with respect to lienors who have already given
notice, in connection with the execution, swearing to, and recording of a
notice of termination. However, the notice of termination must be
accompanied by the contractor's affidavit.
(3) An owner may not record a notice of termination except
after
completion of construction, or after construction ceases before completion
and all lienors have been paid in full or pro rata in accordance with s.
713.06(4).If an owner or a contractor, by fraud or collusion, knowingly
makes any fraudulent statement or affidavit in a notice of termination or
any accompanying affrdavit, the owner and the contractor, or either of
them, as the case may be, is liable to any lienor who suff,ers damages as a
result of the filing of the fraudulent notice of termination; and any such
lienor has a right of action for damages occasioned thereby.
(4) A notice of termination is effective to terminate the notice of
commencement at the later of 30 days after recording of the notice of
termination or the date stated in the notice of termination as the date on
which the notice of commencement is terminated, provided that the notice
of termination has been served pursuant to paragraph (lXÐ on the
contractor and on each lienor who has given notice.
However, the Notice of Termination does not automatically terminate the notice
of commencement, and the contractor's lien may still have priority. To that end, the
notice of commencement cannot be effectively terminated until at least 30 days after the
Notice of Termination is recorded.136 Therefore, a coÍrtractor receiving such
t36
seeFla. Stat. g713.132(1Xc).
Page 30
of38
a
Notice
of
Peckar e AbräxffisûtÌ
A Professional Corporation Attorneys & Counselors at Law
Termination, as
is required to be
served under the statute, and
to the extent
such
contractor is owed monies under its contract and has a valid claim of lien, should record
his claim of lien immediately and before the effective date of said termination occurs.
The lender's desire to gain priority therefore
will not be effective over the claim of lien
that was already recorded by the contractor being served with such Notice of
Termination.
Furtheq the owner also owes the contractor certain obligations when terminating
the notice of commencement. The owner must state in the Notice of Termination that
"every lienor has been paid in
1¡11::137
and the Notice of Termination has "been served on
the contractor and on each lienor" who has given notice under the initial notice of
cofirmencement.l3s However, an "owner does not have to serve a copy of the notice
of
termination on any lienor who has executed a waiver and release of lien upon final
payment."l3e Finally, "an owner may not record a notice
of termination except
after
completion of construction, or after construction ceases before completion and all lienors
have been paid in
full or pro ratain accordance" with Florida's lien law.1a0 Therefore,
an
owner must comply with numerous provisions before terminating the notice of
cofitmencement. Contractors that are familiar with such obligations have a good chance
tt'
"t
Fla. Stat. g713. 132(lXe).
Flu. Srar. g713.132(lXÐ.
"eFla. Stat. $7I3. 132(lXÐ
too
Fla. Stat. $713.132(1) (c). This provision contemplates that said payments must be made in accordance
with Fla. Stat. $713,06(4).
Page 31
of38
Pecåqar
e Abraffnsrn
A Professional Corporation Aftorneys & CounseJors at Law
of preventing lenders from obtaining premium security interests over lienors who have
already provided labor and materials to
VII.
a
job.
Enforcement of Subordination Clauses and Equitable Subroqation
Subordination clauses are enforceable in Floridalal and they can often work to a
contractor's detriment.to' The effect of a subordination clause is to require a lienor such
as a contractor to give up his priority position regarding his/her claim
of lien or security
interest in the subject property such that the lender who issues a construction loan to
develop the subject property attains a priming lien or priority security interest
in
the
property. However, often a contractor who accepts a contract containing a subordination
clause is left without any meaningful remedy to foreclose on his/her claim of lien for
construction services and materials rendered. Curiously, it appears that no Florida court
has yet to visit the specific issue as to whether enforcement
of a subordination
against a statutory lien claimant is contrary to Florida's policy that
clause
"la] right to claim a
lien may not be waived in advance.r:l43 1o that end, Florida law makes it clear that "[a]
t4t
See Fla. Stat. ç727.114(2), "A subordination agreement is enforceable under this chapter to the same
extent that such agreement is enforceable under applicable law."
'02 See Southern Floridabanc Fed'l Sav. and Loan Ass'n v. Buscemi,529 So. 2d 303,304 (Fla. 4th DCA
1988)(holding subsequent mortgage, which contained subordination provision, took priority over prior
mortgage); Johnson v. Florida Bank at Orlando, 13 So. 2d 799, 801 (Fla. l943)(holding where
materialmen and laborers executed subordination agreement to induce bank to make mortgage loan to
owners and bank discontinued payments under mortgage on suspension of construction work, bank
mortgage was entitled, on foreclosure, to priorily over liens of materialmen and mechanics although full
amount ofmortgage note had not been advanced).
'03
Fla. stat. g7r3.2o(2).
Page 32
of38
Pecå<an
e Åbr&sns#rÈ
A Professional Corporation Attorneys & Counselors at Law
lien right may be waived only to the extent of labor, services, or materials furnished."laa
Accordingly, "[a]ny waiver
of a right to claim a lien that is made in
advance is
unenforceabl".:r145 Such statutory language appears to allow a credible argument that
subordination clauses should therefore be declared void or unenforceable to the extent
they require an advance waiver of a contractor's lien rights.
ln Credithrift v. Knowles, amortgagee/appellant
appealed from final judgment
of
foreclosure finding that its mortgage was inferior and subordinate to another.la6 The
appellant asserted that despite recording its mortgage subsequent to the appellee, its
mortgage be given priority pursuant
to the terms of the mortgage's
subordination
clause.laT The appellee countered that the subordination clause was unenforceable
because
it was vague and ambiguous.l4s The First District Court of Appeal
agreed that
the language of the subordination clause contained a latent ambiguity.lon The Court went
on to hold that the existence of the latent ambiguity permitted the finder of fact to resolve
too
'05
Id.
Fla. Stat. g713.20(2).
ta6
Credithrift v. Knowles,556 So. 2d115 (Fla. 1" DCA 1990) superseded in part by statute, Fla. Stat.
$45.0314, as recognized in Abdoney v.York,903 So. 2d981(Fla. 2d DCA 2005)(noting that the enactment
of Fla. Stat. (i45.0315 extended the time for redemption by junior mortgagee.)
t47
Id. at776.
,ot
Id.
,0,
Id.
Page 33
of38
Fleclqar
e ÅhrffiËmsrrÏ
A Professional Corporation Attorneys & Counselors at Law
the conflicting evidence in determining the correct interpretation of the contract
language.ls0 Other states have found vague subordination clauses to be unenforceable.l5l
rso
Id. lciting Grffin v. Fed'l Deposit Ins. Corp.,532 So. 2d 1358,1360 (Fla. 2d DCA 1988)(citing Bunnell
Med. Clínic, P.A. v. Barrera, 419 So. 2d 687,683 (Fla. 5th DCA 1982))(latent ambiguify exists when
contract language appears to be clear, but some extrinsic fact or extraneous evidence creates a need for
interpretation).
"t The court in MCB Limited v. McGowan, 86 N.C.App . 607,610-ll, 359 S.E.2d 50,52-53 (1987) took an
extensive look at California precedent and held that North Carolina adopted that uncertain subordination
clauses were unenforceable for vagueness:
California, has dealt extensively with the problem of enforcement of
subordination provisions. In Gould v. Callan, 121 Cal. App.2d l, 2'73 P.2d 93
(1954), California first identified the material terms of such a clause, holding that
the subordination provisions must draw, at a minimum, the outside limits of the
seller's exposure by stipulating the amount of the new proposed loan by the buyer,
the maximum rate of interest, and the term and method of the loan's repayment.
The Gould Court found that failure to include these terms rendered a claule
incomplete and too uncertain for enforcement. Gould v. Callan, 127 Cal.App.2dl,
213 P.2d 93. Accord, Roskømp Manley Assoc. v. Davin Dev. & Inv., 184
Cal.App.3d 513,229 Cal.Rptr. 186 (1986); Cummins v. Gates, 235 CaLApp2d
532, 45 Cal.Rptr. afl Q965); Magna Dev. Co. v. Reed, 228 Cal.App.2d 230,39
Cal.Rptr. 28a G96Ð; Roven v. Miller, 168 Cal.App.2d 391,335 P.2d 1035
(lese).
In later cases the California Courts recognized, as does this Court, that the degree
of particularity discussed above is not always attainable where details of future
loans are not known prior to the sale of the property.In Stockwell v. Lindeman,
229 Cal. App.2d 750,40 Cal.Rptr. 555 (1964) the California Court of Appeals
held that a subordination clause must state the matters which most directly affect
the security of the seller's purchase money mortgage-the maximum amount of the
proposed loan and the maximum rate of interest permitted on the future
obligation. Remaining details in the provision may be determined by an outside
standard, such as a third parfy institutional lender, custom and usage in the area
for such loans, or negotiations between the lender and the buyer. Id. Accord,
Yackey v. Pacifica Development Co., 99 Cal.App.3d 776, 160 Cal.Rptr. 430
(1979); Eldridge v. Burns, 76 CaLApp.3d 396, 142 Cal. Rptr. 845 (1978);
lI/oodworth v. Redwood Empire Sav. & Loan Assn., 22 Cal.App.3d 347, 99
Cal.Rptr. 373 (1971); Magna Development Co. v. Reed, 228 Cal.App. 2d 230, 39
Cal.Rptr, 284; Gould v. Callan, 127 Cal. App.Zd 1,213 P. 2d 93. However, the
Stockwell Court stressed that a subordination provision will be found uncertain
and unenforceable, if øny details are left to the future agreement of the buyer and
the seller. Stockwell v. Lindeman, 229 Cal. App. 2d 150,40 Cal. Rptr. 555. Prior
to and sitce Stockwell, the California Courts have consistently held that when a
material term is reserved for future agreement by parties to a contract no legal
obligation arises until the parties reach such agreement, since they may be unable
to reach a consensus as to that term on a later date. Id. Accord, Roskamp Manley
Assoc. t,. Dayin Dev. & Inv., 184 Cal. App .3d 513,229 Cal. Rptr. 186:' Yackey v.
Page 34
of38
Peclqan
e Abr&rnsrn
A Professional Corporation Attorneys & Counselors at Law
However, these same states have enforced unambiguous subordination
agreements despite their harsh effects.ls2 Needless to say, one could argue that the effect
of a subordination
clause
is to require an advanced waiver of lien rights otherwise
allowed under Florida law, which is proscribed by Fla. Stat. $713.20.
In Florida, the elements of a claim for equitable subrogation include: (1) that the
subrogee made a payment to protect its interests; (2) that the subrogee did not voluntarily
make the payment; (3) that the subrogee was not primarily liable for the debt; (4) that the
subrogee paid the debt
in full; and (5) that allowing subrogation will not prejudice any
third party.ls3 In Suntrust Bank v. Riverside Nat'l Bank of Ftorida,lhe issue presented
was whether Suntrust Bank, which was deemed to have lost priority of its original first
mortgage
to an intervening
mortgagee when
it refinanced
and satisfied the original
mortgage, was entitled to relief under the doctrine of equitable subrogation so that
it
Pacifica Development Co., 99 Cal. App. 3d 176, 160 Cal. Rptr. 430; Lawrence v.
Shutt, 269 Cal. App. 2d 749, 75 Cal. Rptr. 533 (1969); LVhite Point Co. v.
Herrington,263 Cal. App. 2d 458,73 Cal. Rptr. 885 (1968); Magna Development
Co. v. Reed, 228 Cal. App. 2d 230, 39 Cal. Rptr. 284; Gould v. Callan, 127
Cal.App. 2d
l,
273 P. 2d 93.
tsz
Itr/oodworth v. Redwood Empire Sav. & Loan Assn., 22 Cal. App. 3d 347, gg Cal. Rptr. 373
(1971)(Vendor who, in return for conveyance of real property, received note secured by deed of trust
containing clause automatically subordinating his vendor's interest to liens of construction loans, who
owned one-third of stock and was director and officer of newly created corporate purchaser and as such
participated in all transactions, signed necessary documents and collected salary from purchaser, and who
participated in original discussions which led to oral agreement for sale of his property and was represented
by counsel in subsequent negotiations which led to the note and deed of trust could not argue that the
subordination clause was unenforceable as being void for vagueness).
"3 Dade County
Sch. Bd- v. Radio Station WQBA,73
I
So.
2d
638 (Fla. 1 999) and Biscayne Inv. Group,
Ltd. v. Guar. Mgmt. Services, lnc.,903 So. 2d25I (Fla. 3d DCA 2005).
Page 35
of38
feckax^ e Abr&rxrsffiffi
A Professional Corporation Attorneys & Counselors at Law
could reestablish priority as of the date of recording the original mortgage.tto The Fourth
District Court
of
Appeal held that Suntrust Bank would be entitled
subrogation unless such a finding would result
to
equitable
in any injustice to the rights of
other
parties.lss Accordingly, Suntrust was entitled to equitable subrogation to the extent that
the intervening mortgagee was found to be no worse off than
it would have been if
the
original Suntrust mortgage had not been satisfied.ls6 In Wolf v. Spariosu, the borrowers
and the lender agreed that the subsequent mortgage issued by the lender would be
substituted
in the place of two prior mortgages.lsT Between the time the first two
mortgages and the subsequent third mortgage was recorded, a lienor recorded a lien
against the property.lss The lienor argued his lien should take priority over the third
mortgage because it was recorded prior to the mortgag".tte The Third District Court
of
Appeal held that under doctrine of conventional subrogationl6O, a lender's lien was
tsa
Suntrust Bank v. RiversÌde Nat'l Bank of Florida,792 So.2d 1222, 1227-28 (Fla. 4tr'DCA 2001).
"t
Id.
ttu
Id.
tt' ltrol¡u. Spariosu,706 So. 2d 881,
ts9
,te
882 (Fla. 3d DCA 1998).
Id.
Id.
'60 Id. at 883. (" 'Conventional subrogationf, however,] arises by virrue of an agreement, express or
implied, that a third person or one having no previous interest in the matter involved shall, upon
discharging an obligation or paying a debt, be substituted in the place ofthe creditor with respect to such
rights, remedies, or securities as [the creditor] may have against the debtor.' ")(citing Forman v. First Nat'l
Bank, 76 Fla. 48, 53,79 So.'142,744 (1918) (quoting Kent v. Bailey, 181 Iowa 489, 164 N.W. 852, 853
(1917)); see also Federal Land Bank v. Godwin, 107 Fla. 537,549,145 So. 883, 885 (1933); Lovtngood v.
Butler Constr., 100 Fla.1252,1261,131So. 126, 131 (1930); but cf.Boley v. Daniel,72Fla. 121,72 So.
644,645 (1916) (subrogation rights did not exist absent agreement that first discharged mortgage was to be
"kept alive" by payment).
Page 36
of38
Fleckan å.Åbr&smsrxl
A Professional Corporation Attorneys & Counselors at Law
superior to the intervening lienholder's lien, where the agreement under which a lender
discharged the first two mortgages provided that the lender is subrogated to the rights
of
the first mortgagee.161
On the other hand, in Bìscayne Inv. Group, Ltd. v. Guar. Mgmt. Services, Inc., the
developer of a condominium filed a complaint alleging, ínter alia, a claim for equitable
subrogation against the management company the developer had hired to manage the
condominium.l62 The developer asserted that
it
should be entitled
to equitable
subrogation because the management company had failed to collect assessments that the
developer later paid.163 The Third District Court
of Appeal held that the
subrogation claim could not stand because the developer failed to allege that
equitable
it
was not
primarily liable for the debt.r6a
V[I.
Conclusion
In summary, a lender who fails to
adhere to the terms
of a construction
loan
agreement may be held liable to the borrower.I6t Horr",r"r, a lender has no duty - beyond
that set forth in the loan agreement - to audit, inspect, or manage a construction project.166
t6'
Id. at883-84.
t6'
Biscoynn Inv. Group, Ltd., gO3 So. 2d at 251
'u3
t64
'6t
t66
.
Id. at25r.
Id. at255.
God*ir, 688 So. 2dat3i4.
First Wisconsin Nat'l Bank of Milwaukee,348
So. 2d at 611.
Page 37
of38
feckan e Abr&rmsrffi
A Professional Corporation Attorneys & Counselors at Law
Conversely, where the lender assumes the responsibility to pay contractors on the
project, the lender does have a duty to the owner to make proper payment pursuant to Fla.
Stat. $713.06(3)(u).'u' Nonetheless,
in
addition
to statutory
claims
for
improper
payments by an owner, Florida courts recognize claims for equitable lien foreclosure,l6s
unjust enrichment, and quantum meruit.l6e Additionally, Florida Courts enforce
subordination agreementslT0 and permit claims
for
equitable and conventional
subrogation.lTl
'ot F-ia. Stat. g713.06(2)(d).
t68
t6e
Peninsular Supply Co.,423So. 2d at 502.
See
Banks, 427 So.2ð.at1054.
t'o
Snn Fla. Stat. 5127.114(2),-A subordination agreement is enforceable under this chapter to the same
extent that such agreement is enforceable under applicable law."
t"
wolfTo6 So. 2d,atBB3-84.
Page 38
of38