Fraudulent Construction Liens: Willful Exaggeration or Good Faith Dispute?
F ile an action on behalf of your contractor client to foreclose a construction lien these days and there is a good chance that you will be confronted with an affirmative defense asserting that the lien is not enforceable because it is fraudulent. Your opponent may even file a counterclaim seeking damages as a result of your purportedly fraudulent lien. Having known your client for many years, you have come to learn that he is an honest contractor who has an excellent reputation, and you dismiss this threat as simply a boilerplate defense having no application to your foreclosure case. Besides, you search your memory banks and you recall something about good faith mistakes in the claim of lien being an exception to the fraudulent lien statute. You accordingly do not take the time to thoroughly review exactly how your client compiled the claim. What you may not realize is that your client may have compiled the lien in a manner that, under the prevailing case law, will be found fraudulent and unenforceable, and that your client may be liable for punitive damages in an amount equal to the difference between his claim and the amount actually determined to be owed.
The purpose of this article is to explore the different scenarios when fraudulent lien claims commonly arise, and to review the case law that may control how that claim may be resolved. This article, which highlights the most significant and oft-cited cases, can then be used as a starting point in researching and evaluating potential fraudulent lien cases.
A contractor who complies with the provisions of the Florida Mechanics Lien Law, F.S. Ch. 713, has a lien on the improved real property for any money that is owed to him or her for labor, services, materials, or other items required by, or furnished in accordance with, the direct contract.1 The “direct contract” is the agreement between the owner and any other person for improving real property.2 Thus, as a starting point in evaluating the validity of a claim of lien, the claim must be for work or materials that the lienor supplied in accordance with a contract to which the owner was a party.
Section 713.13(2)(a) defines a fraudulent lien in three ways:
- 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.
Subsection (2)(b) states that if the lien is found fraudulent, then this provides the owner with a complete defense to any action to enforce the lien. That subsection was amended in 1990 to include a very significant clarification to the willful exaggeration standard, the good faith dispute exception, which is discussed in detail below.
In addition to providing an affirmative defense to lien foreclosure actions, fraudulent lien claims may, under §713.31(2)(c), be asserted as counterclaims, crossclaims, or independent actions by owners, contractors, subcontractors, or sub-subcontractors who have suffered damages as a result of the filing of the fraudulent lien. Recoverable damages include attorneys’ fees, the amount of any premium for a bond given to obtain the discharge of the lien, and punitive damages in an amount not exceeding the difference between the amount claimed by the lienor to be due and the amount actually due.3
Because most actions to foreclose construction liens include claims for breach of contract, when a jury trial is requested, both the judge and the jury will be involved in resolving the case. The appropriate way to resolve these cases is for the jury to try the breach of contract claims and counterclaims, and for the trial court, based upon the evidence adduced at trial, to decide the lien foreclosure claims and fraudulent lien counterclaim issues.4
The following sections describe the more common scenarios in which fraudulent lien cases are asserted.
Asserting a Lien for Work Admittedly Not Performed
When there is evidence that the claim of lien was compiled based on work that was admittedly not performed, the owner has a pretty good chance of establishing a fraudulent lien. Such was the case in Viyella Co. v. Gomes, 657 So. 2d 83 (Fla. 3d DCA 1995). In that case, the contractor, who made certain improvements to residential property, filed a claim of lien for the remainder of the full contract price, $57,675, stating that he had completely performed the contract. The contractor later filed a contractor’s final affidavit asserting that the amount owed by the owners was $51,883, not $57,675 as he had stated in the claim of lien, and acknowledging that a substantial portion of the work had not been completed. The contractor further revealed at his deposition that the itemized cost of the work he did not perform, as specified in his contractor’s final affidavit, equaled approximately $27,740.5
The Third DCA affirmed the summary judgment entered for the owners on their fraudulent lien defense. The court relied upon the contractor’s own multiple inconsistencies, and particularly his admission concerning the value of the work he had liened for that was never completed.6
Viyella presents that rare case of self-incrimination that most defense lawyers can only hope to encounter. More common are the cases, described below, where the evidence of fraud is far less obvious.
Asserting a Lien for Nonlienable Items
Another common scenario in which fraudulent liens are asserted is when a claim of lien includes amounts that are not within the purview of the lien law. In several such cases, courts have come to different conclusions concerning the standard of review.
For example, in Stevens v. Site Developers, 584 So. 2d 1064 (Fla. 5th DCA 1991), a contractor included in his claim of lien damages for breach of contract in the nature of lost profits and delay, which are nonlienable items under §713.05.7 The trial judge enforced the claim of lien, but deducted the value of these nonlienable amounts from the award. Significantly, the court did not find the lien to be fraudulent.8
On appeal, the Fifth DCA rejected the owner’s argument that the lien was fraudulent simply because the owner had included amounts for nonlienable items. It held that the trial judge “still has discretion in determining the intent and good or bad faith of the lienor when he stated the amount of the lien claimed.”9
In exercising its discretion, the court may consider as evidence of good faith that the lienor sought the advice of counsel before preparing and filing the claim of lien.10 This may have persuaded the court of the lienor’s good intentions in Stevens, but not so in another Fifth DCA case, Onionskin, Inc. v. DeCiccio, 720 So. 2d 257 (Fla. 5th DCA 1998). The Onionskin court noted that the pivotal difference between that case and Stevens was that, in Stevens, the trial court found that the lien imposed, while including nonlienable items, was nonetheless filed in good faith. The trial court in Onionskin, however, found that the items included in the claim of lien were not lienable by any stretch of the imagination.11
The Third DCA, on the other hand, does not leave the lienor’s good or bad faith to the discretion of the trial judge. Rather, as long as there is competent substantial evidence that the claim of lien includes amounts for nonlienable items, the lien is fraudulent, apparently without regard to whether the trial court believes that the lienor acted in ignorant good faith.12
The Third DCA’s objective standard may be a preferable approach to resolving fraudulent lien cases when nonlienable items are claimed because it provides a benchmark against which other cases may be compared. Specifically, far less guidance is offered from cases in which the issue was left to the court’s subjective determination of whether the lienor was acting in good faith. However, the standard of review preferred by the Fifth DCA is probably more consistent with the cases, discussed below, which hold that good faith contract disputes are not within the ambit of the fraudulent lien statute.
Asserting a Lien When Completion of Work Is Disputed
If a lienor includes in the claim of lien amounts for work that he or she knows has not been performed, the lien is, by definition, a fraudulent lien.13 Oftentimes, however, there is a legitimate dispute concerning whether the lienor has completed the work for which the lien is being asserted. These cases frequently arise when the lienor is a design professional.
In William Dorsky Assoc., Inc. v. Highlands County Title & Guaranty Land Co., 528 So. 2d 411 (Fla. 2d DCA 1988), the owner of a hotel contended that it had terminated the architect in the schematics stage of the project. The architect, on the other hand, argued that he had completed his work through the design development stage, which is a later stage of the project, and that he was entitled to additional compensation under the contract. The trial court agreed with the owner, and found that the lien was fraudulent.14
The Second DCA reversed. Relying heavily on the fact that the architect had sought the advice of counsel before filing his claim of lien, the court held that “[w]rongful acts committed by mistake in the good faith assertion of a supposed right will not support a punitive award.”
In other words, the law does not punish a lienor for his good faith, albeit erroneous, belief that he had completed more work than was ultimately proven.
Scott v. Rolling Hills Place, Inc., 688 So. 2d 937 (Fla. 5th DCA 1996), is a similar case. An architect refused to sign and seal the final construction plans because several invoices had gone unpaid. The architect filed a claim of lien for the full contract price, and the owner asserted a fraudulent lien defense, contending that the architect had not completed the plans for which he had liened.15
The appellate court rejected the owner s defense, noting that the architect’s claim of lien indicated the amount he believed remained unpaid for the work performed. A dispute as to the amount of money owed, the court held, does not convert a good faith dispute into a fraudulent lien.16
William Dorsky and a prior Second DCA case, Vinci Development Co. v. Connell, 509 So. 2d 1128 (Fla. 2d DCA 1987), discussed below, appear to have been the impetus for the 1990 legislative amendment to the fraudulent lien statute, namely the good faith exception. Subsection (2)(b) states that “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.”
It is important to recognize when the good faith exception should be applied in cases when completion of the work is an issue. In both William Dorsky and Rolling Hills, the architect believed, in good faith, that he had completed all of the work for which he had liened. The architect and owner were, therefore, engaged in a good faith dispute as to the completion of the work, and accordingly as to the amount due. There can be no fraudulent lien under these circumstances.
But if a lienor acknowledges that he has not completed all of the work for which he has liened, then the lien is patently fraudulent: The lienor has willfully included a claim for work not performed.17 This is so even though the lienor, in good faith, believes that he is still owed the full contract amount because, for example, his contract calls for a flat fee. Under these circumstances, the law requires that the lienor deduct from the claim of lien all amounts that represent the value of the unperformed work.
Asserting a Lien Based on Disputed Method of Compensation
In some cases, fraudulent lien defenses have been asserted when the owner disputed the method employed by the lienor to calculate the amount owed for the work performed. The lien will probably not be found fraudulent unless the lienor has included amounts for work not performed.
For example, in Vinci Development Co. v. Connell, 509 So. 2d 1128 (Fla. 2d DCA 1987), a contractor sought to recover the value of the work performed, a contractor’s fee, and moneys called for under a savings or underbudget bonus provision.18 The court reversed the finding of a fraudulent lien, holding that:
[a] subsequent dispute between the parties as to the amount of compensation due according to the contract plan of compensation or even a dispute as to the method of compensation provided in the contract does not convert such a good faith dispute into a fraudulent lien. . . .19
The court concluded that the legislature never intended to make fraudulent a circumstance when, as in that case, a contractor never claims to perform more work than he has in fact performed, but rather disputes, in good faith, the owner’s method of compensating him for that work.20
Indeed, under the 1990 amendment, a good faith dispute as to the method of compensation is, in actuality, nothing more than a good faith dispute as to the amount due, which is now an explicit exception to the fraudulent lien statute under §713.31(2)(b).
Asserting a Lien for Amounts Not Authorized by Contract or Change Orders
Several fraudulent lien cases have resulted from claims for allegedly unauthorized work. Courts have routinely found that claims for work outside the scope of the contract, or otherwise not authorized by the owner are fraudulent, although these circumstances may arguably fall under the good faith exception.
In Hobbs Constr. & Development, Inc. v. Presbyterian Homes, 440 So. 2d 673 (Fla. 1st DCA 1983), a contractor agreed to build a health care facility under a cost-plus contract with a guaranteed maximum price, and provisions for changes in work with prior written approval by change orders. The claim of lien contained amounts for delays, overhead expenses, overtime labor, and interest, none of which were addressed either by the contract or any change order. Most significantly, the contract expressly stated that the cost of any item not specifically and expressly included therein, as well as costs in excess of the guaranteed maximum cost, would not be reimbursed.21
The First DCA rejected the contractor’s argument that it should be entitled to the value of its labor, services, or materials under §713.08(1)(c) rather than be restricted to the contract price. the plain language of the contract, the contractor knew that it would be paid a maximum price as affected by change orders. Accordingly, the court concluded that the lien was willfully exaggerated.22
The Third DCA concurred with this reasoning, holding in Skidmore, Owings & Merrill v. Volpe Construction Co., Inc., 511 So. 2d 642 (Fla. 3d DCA 1987): “The inclusion of items not authorized by change orders or by contract renders the lien fraudulent and unenforceable.”23
The same court later reaffirmed this rationale in Delta Painting, Inc. v. Baumann, 710 So. 2d 663 (Fla. 3d DCA 1998), when the claim of lien exceeded the amount of the contract without any evidence of valid written change orders for same. . . .24
Judge Cope’s dissenting opinion in Delta Painting makes a very significant observation concerning the good faith exception: It has essentially eliminated good faith contract disputes from the fraudulent lien statute.25 Specifically, Judge Cope suggests that the 1990 amendment was intended to codify the Second DCA holdings in Vinci Development and William Dorsky, both of which are discussed above. In the latter case, the court emphasized that fraudulent liens should be reserved for circumstances when the lienor has acted with a malicious motive or wrongful intention. Wrongful acts, the court stated, committed by mistake in the good faith assertion of a supposed right will not support a punitive award. Because the case under review was one involving a breach of contract issue, the court concluded that it would not support a punitive award under §713.31.
The conclusion that the legislature intended to eliminate good faith contract disputes from the fraudulent lien statute is probably accurate. Subsection (2)(a) states that a lien is fraudulent if the lienor willfully exaggerates the amount. On the other hand, subsection (2)(b), which contains the amendment, states that a good faith dispute as to the amount due does not constitute a willful exaggeration. Nearly every fraudulent lien case involves a dispute as to the amount due; therefore, nearly every case will turn on whether the lienor acted in good faith. Thus, it is unlikely that any particular act, such as including amounts for nonlienable items or unauthorized work, will be a de facto fraudulent lien. This result is consistent with traditional notions of fraud, which incorporate a scienter requirement.
There are various scenarios under which fraudulent lien claims may arise, and it is, therefore, important for counsel to thoroughly evaluate whether, under the circumstances of a particular case, a client’s lien may be found fraudulent. Although the good faith exception will likely protect well-intentioned lienors from the harsh penalties of the fraudulent lien statute, there are still some circumstances, such as including claims for nonlienable or unauthorized items, under which courts are likely to find fraudulent, regardless of the lienor’s apparent good faith.
1 Fla. Stat. §713.05(1999).
2 Fla. Stat. §713.01(1999).
3 Fla. Stat. §713.31(2)(c).
4 See Delta Painting, Inc. v. Baumann, 710 So. 2d 663 (Fla. 3d D.C.A. 1998); Skidmore, Owings & Merrill v. Volpe Constr. Co., Inc., 511 So. 2d 642 (Fla. 3d D.C.A. 1987) (jury answered verdict interrogatories); Vinci Dev. Co. v. Connell, 509 So. 2d 1128 (Fla. 2d D.C.A. 1987) (trial judge resolved foreclosure claims, including fraudulent lien claim, based on jury’s conclusions with regard to breach of contract claim).
5 Viyella,. 657 So. 2d at 84.
6 Id. at 84–85.
7 Fla. Stat. §713.05, discussed above, allows for liens to be asserted in order to recover the value of labor, services, materials, or other items required by, or furnished in accordance with, the direct contract.
8 Stevens, 584 So. 2d at 1064–65.
9 Id. at 1065.
10 See, e.g., Stevens, 584 So. 2d at 1065.
11 Onionskin, 720 So. 2d at 258.
12 See, e.g., Ponce Inv., Inc. v. Financial Capital of Am., 718 So. 2d 280 (Fla. 3d D.C.A. 1998); Delta Painting, Inc. v. Baumann, 710 So. 2d 663, 664 (Fla. 3d D.C.A. 1998) (holding that a finding that a lien is fraudulent is not a discretionary matter; lienor’s intent and good or bad faith in filing the lien must be based on competent substantial evidence in the record ); Martin v. Jack Yanks Constr. Co., 650 So. 2d 120, 122 (Fla. 3d D.C.A. 1995) (lien held fraudulent when it was in no way the result of a contractor’s miscalculation or overestimation, but rather was a lien for nonlienable items in amount grossly in excess of what was owed).
13 See Fla. Stat. §713.31(2)(a); Viyella, 657 So. 2d 83.
14 William Dorsky, 528 So. 2d at 412.
15 Rolling Hills, 688 So. 2d. at 938.
16 Id. at 939.
17 Fla. Stat. §713.13(2)(a); see Viyella, 657 So. 2d 83.
18 Vinci Development, 509 So. 2d at 1131.
19 Id. at 1132.
20 Id.; see also South Motor Co. v. Accountable Constr. Co., 707 So. 2d 909 (Fla. 3d D.C.A. 1998) (holding that [w]hile it is true that (contractor) did not deduct certain undisputed credits from its lien, it can not be concluded as a matter of law that this was a willful miscalculation. ).
21 Hobbs, 440 So. 2d at 673–74.
22 Id. at 674.
23 Skidmore, 511 So. 2d at 644.
24 Delta Painting, 710 So. 2d at 663.
25 Id. at 665 (Cope, J., dissenting).
Matthew S. Nelles practices construction and commercial litigation at the Ft. Lauderdale office of Ruden, McClosky, Smith, Schuster & Russell, P.A. He received his law degree, magna cum laude, from Nova Southeastern University, and his undergraduate degree in mechanical engineering from Rutgers University.
This column is submitted on behalf of the Trial Lawyers Section, Robert F. Spohrer, chair, and D. Keith Wickenden, editor.