Practical Solutions to the Problems Resulting from the Real Life Application of Florida’s Construction Lien Transfer Bond Statute
Florida’s construction lien law has been defined by one appellate court as a complex set of rules and procedures that continues to confuse the bar and the judiciary just as much as it does the very folks it seeks to protect.1 Generally, Florida’s construction lien law provides that certain defined parties (lienors) who supply labor, work, or materials for the improvement of private real property located within Florida are entitled to lien the improved property for the value of the materials, labor, or work provided.2 The purpose of the statute is “to protect those who have provided labor and materials for the improvement of real property” by providing an additional remedy, namely foreclosure of a lien, to the common law right to sue for breach of contract and related claims.3
Savvy owners wishing to avoid liens against their property are also afforded relief under the lien law.4 First, owners (typically of large commercial or condominium projects) can generally exempt the property from all future liens at the outset of construction by requiring their general contractor to post a payment bond pursuant to F.S. §713.23 or §713.245 before construction begins. To do so, the owner is required to attach and record a copy of the bond with the notice of commencement prior to the beginning of construction. The owner must also identify the surety and the nature of the bond within the notice of commencement. As a result, unpaid lienors on a bonded construction project are generally protected by the surety bond instead of the real estate.5 Second, owners are also provided the opportunity to transfer recorded liens to a cash or surety bond after a lien is recorded against the property. In the ever increasing world of construction litigation in Florida, the transfer of existing construction liens to such bonds has increased significantly during the past three years.
Florida’s transfer bond statute, F.S. §713.24, permits an owner (or any other interested party to the lien) whose property is encumbered by a claim of lien to transfer that lien off the property to other security — namely a cash deposit or surety bond. Problems with Florida’s transfer bond statute have surfaced, however, and “those who have provided labor and materials” are finding themselves unprotected and exposed to losses plainly not intended by the drafters. This article explains the purpose of the transfer bond statute, the advantages and disadvantages of the statute, the problems and complications that arise when the statute is applied to actual cases, and the various possible solutions/changes to the current statutory framework that should improve the statute and further its purpose of protecting the lienors, while still benefiting owners.
The Transfer Bond Statute — F.S. §713.24
The legislative intent of the transfer bond statute was simple: “to permit any owner, whether or not he is in privity with a lienor, to remove the cloud of a lien from his property against which the lien is impressed.”6 The practical result to the owner is that, since the cloud on title is no longer present, the owner may proceed to finance, refinance, or sell the property, or if a construction loan is in place, to release holds on draws by the bank on account of the lien.
An owner who elects to transfer a claim of lien from real property to security under F.S §713.24 can do so by either depositing cash or by posting a surety bond in a requisite amount with the clerk of court. Specifically, the owner is required to deposit:
an amount equal to the amount demanded in such claim of lien, plus interest thereon at the legal rate for three years, plus $1,000 or 25 percent of the amount demanded in the claim of lien, whichever is greater, to apply on any attorneys’ fees and court costs that may be taxed in any proceeding to enforce said lien.7
Once the transfer has taken place, the clerk is required to record a certificate evidencing the transfer and mail a copy of it to the lienor whose lien was transferred.8 The statute further provides that at any time, and without limit, “any party having an interest in such security or the property from which the lien was transferred,” almost always the lienor, can request the court to require an increase in the amount of the cash deposit or lien transfer bond if the statutory required amount of the deposit or bond that is in excess of the amount claimed in the claim of lien is insufficient to pay the lienor’s attorneys’ fees and court costs incurred in the action to enforce the lien.9 If the court finds the request for additional security to be warranted, the court is required to increase the amount of the lien transfer bond.10 The purpose of the bond increase provision is to preserve the lienor’s right to adequate security for the attorneys’ fees, costs, and interest that are properly awardable to a lienor who prevails on a construction lien foreclosure and which would otherwise be paid from the proceeds of the ensuing sale.11
Practical Reality: The Transfer Bond Statute Fails as Written
There are several significant problems with the real life application of the transfer bond statute. The first problem involves F.S. §713.24(1)(b) and pertains to the amount of the cash deposit or surety bond required to transfer a lien. This provision is intended to ensure that small subcontractors and material suppliers remain adequately protected for the attorneys’ fees and court costs to be incurred enforcing the claim of lien and interest. The statute fails because, more times than not, the amount deposited for attorneys’ fees is quickly surpassed in the underlying litigation. The statute’s strict 25 percent of the lien amount allocation for attorneys’ fees and court costs is almost always insufficient for small liens (i.e., liens under $50,000), whereas it is likely to be at least adequate for large liens (i.e., liens greater than $50,000), despite the fact that both liens invariably cost the same to litigate. In other words, the statute’s failure to delineate greater percentage allocations for attorneys’ fees and costs based on the amount of the lien penalizes the party the statute seeks to protect most (i.e., small subcontractors and material suppliers who have improved real property and who generally record liens of less than $50,000).
To protect against this problem, the drafters included language in F.S. §713.24(3) that permits lienors to seek an increase in the amount of the security initially posted to transfer the lien. The actual application of this provision, however, leads to a second problem with the transfer bond statute in that it fails to enumerate any consequence(s) for noncompliance with an order requiring an increase in the security. At the same time, the statute fails to provide courts with any specific authority (above and beyond the court’s inherent authority) to enforce its order increasing the bond.
This was precisely the issue in Smith Original Homes, Inc. v. Carpet King Carpets, Inc., 896 So. 2d 844 (Fla. 2d DCA 2005). In Carpet King, a carpet company sued a home builder and the purchasers of a home for failing to pay $7,000 for floor covering.12 The carpet company sued the builder for breach of contract and sought to foreclose a construction lien on the property.13 After the home builder transferred the lien to a bond pursuant to F.S. §713.24(1), the carpet company sought to increase the amount of the bond under F.S. §713.24(3) because its attorneys’ fees and costs had exceeded the initial 25 percent of the lien statutory amount deposited for attorneys’ fees and costs ($1,700).14 The county court denied the carpet company’s request, after which the circuit court to which the case was transferred ordered the home builder to deposit an additional $28,000 with the registry of the court.15 The home builder failed to pay the additional security on the ground it could not afford it, and the carpet company filed a motion for sanctions to include striking of the home builder’s pleadings, which the trial court granted.16
The home builder appealed. In reversing the trial court’s order requiring the increase and the striking of the pleadings, the appellate court observed: “There is no express authority for sanctions for failure to pay an ordered increase in [a] surety bond. Even were we to conclude that the court had some inherent authority to impose the sanction of striking pleadings, it made no findings of willful disregard, gross indifference, or deliberate callousness.”17 The net effect of the reversal immunized the home builder from paying the statutorily-required additional security, not because it questioned the legitimacy of the fees or costs, but rather solely because the trial court lacked authority to compel the home builder to do so in the first place and because the court made no finding of willful disobedience with its court order. Carpet King also recognizes that if the transferor simply does not have the financial ability to comply with the court’s order, such noncompliance would not equate to a willful failure to comply.18 Finally, even though the opinion is silent on this issue, it can certainly be argued that the appellate court was deferring to the legislature to provide courts with express authority to respond to a party’s failure to increase the amount of the security under F.S. §713.24.
It is, of course, possible for a lienor who has obtained an order increasing the bond to file a motion for entry of an order to show cause citing failure to comply with the court’s order. And if the transferor still does not comply, but has the ability to do so, the court has the discretion to, among other things, strike that party’s pleadings for noncompliance. However, under a financial inability scenario (as discussed in Carpet King), such noncompliance would not be willful and, therefore, the lienor is likely left “holding the bag” containing an unenforceable order and no additional security. In such a case, the overall purpose of the construction lien law (ensuring payment for small subcontractors or material suppliers for the work performed along with the incurred attorneys’ fees and costs) is frustrated. Indeed, by this time, the lienor has incurred additional effort and attorneys’ fees in its attempt to force the transferor to comply with the court’s order, and yet has nothing to show for it.
Additional problems in F.S. §713.24 include its failure to describe the method by which the amount of any additional security is determined, and its failure to define a time period for compliance with an order requiring an increase in the bond amount. For instance, does the court have unbridled discretion to set the amount of the additional security, or is any increase limited to the amount of the attorneys’ fees deficiency alleged by the lienor? If the former, what guidelines must the court follow in determining the amount of additional attorneys’ fees when it is certain that the transferor will claim that the lienor has exaggerated the amount of the incurred fees? Should the transferor be heard to argue that the amount of the fee deficiency claimed by the lienor is unreasonable? The statute is silent on these issues.
Reasonableness of such a fee increase and the evidence required to support it was addressed in Lake Eola Builders v. Metropolitan at Lake Eola, 2006 WL 2194389 (Fla. M.D. Aug. 2, 2006), and in Royal Marble, Inc. v. Innovative Flooring, 932 So. 2d 221 (Fla. 2d DCA 2005). The court in Lake Eola held that 1) the increase provision only applies to incurred fees and costs, and not future anticipated fees and costs; 2) there must be sufficient evidence of the fee charges incurred by the lienor; and 3) entitlement to an increase under the transfer bond is limited to those fees incident to enforcing the lien.19 Because the plaintiff failed “to establish amounts actually incurred and sufficiently related to the lien claim,” the court denied the requested bond increase.20 The trial court in Royal Marble denied the fee increase because “Royal Marble had failed to present sufficient evidence to establish that its claimed attorneys’ fees were reasonable.”21 The appellate court denied Royal Marble’s petition for writ of certiorari because it did not allege irreparable harm.22
The Royal Marble method of dealing with a transfer bond increase request is problematic because the statute is silent as to the extent of the proof required to compel an increase. Additionally, unlike the standard for awarding attorneys’ fees to a prevailing party post-litigation where a full-blown evidentiary hearing is necessary, such a hearing should not be applicable to transfer bond increase motions primarily because conducting such a hearing would only add time and expense to a process that was intended to make it simple for lienors to be adequately protected. Second, the determination of reasonableness should not be required because the court is not awarding fees to the lienor. Indeed, the ultimate issues of entitlement to and amount of a reasonable fee award, requiring an evidentiary hearing, will be decided later and only if the lienor prevails in the litigation. Instead, the court requiring an increase in the amount of the bond/security warrants an expedited method of determining the increase — since the purpose of the security is to protect the lienor.
A second pitfall involves the parsing out or separation of fees. As was the case in Lake Eola, claims other than the lien foreclosure claim are often brought by the lienor in the same action.23 Some of these, such as breach of contract, may provide for the recovery of fees while other claims, usually equitable ones, do not. The owner may also have filed counterclaims against the lienor, most of which are compulsory. Under a similar scenario, the Lake Eola trial court denied a transfer bond increase request based, in part, on the fact that the lienor’s fees included amounts arising from prosecution of other claims and defense of counterclaims. distinguishing between enforcement of the lien claim, fees of which are awardable to the prevailing party under F.S. §713.29, and prosecution of other claims, or defense of a counterclaim for which fees may not be awarded to the prevailing party, the Lake Eola court implied that separation of the fees incurred on such claims should be considered when determining a requested transfer bond increase.24 This may be so under Lake Eola even if the claims originate from the same core facts giving rise to the lien in the first place.
The Lake Eola approach to ruling on a motion to increase a transfer bond is questionable for two reasons. First, Florida case law clearly stands for the proposition that even when actually awarding fees to a prevailing party, it is difficult to separate the fees incurred for recoverable claims, and those that are not. 25 In fact, the separation of fees is generally only practical when there are separate counts sued upon and the time disconnected accordingly.26 More importantly, since the court is not awardingfees to the lienor when increasing the amount of the bond, the effort associated with parsing out recoverable fees and costs should not be the standard. This is especially true considering that the owner has taken advantage of the transfer bond statute to replace his improved real estate as the security for the unpaid lien which would include all of the lienor’s attorneys’ fees, costs, and interest against the real estate until a post-litigation, full blown evidentiary hearing on fees dictates otherwise.
The following hypothetical highlights the problems for lienors and their attorneys associated with the current version of Florida’s transfer bond statute.
Your client is a small tile installation company. It complains that it has not been paid on a job where it installed $20,000 worth of tiles for a general contractor and, as a result, records a claim of lien against the property. Shortly thereafter, the owner of the property transfers the lien to a F.S. §713.24 cash bond in the amount of $31,600 ($20,000 for the amount of the lien, $6,600 for three year’s interest based on an 11 percent interest rate, and $5,000 for attorneys’ fees and costs which represents 25 percent of the lien amount). After you file suit to foreclose on the lien/transfer bond and against the general contractor for breach of contract, the owner and the contractor dispute your client’s lien. It is not long before your client’s attorneys’ fees add up to more than the $5,000 allocated to fees and costs by the transferor owner in the cash bond. Your fees eventually reach $20,000, and, as a result, you file a motion to increase the security by $15,000 as allowed by F.S. §713.24(3). Along with your motion, you submit an affidavit attesting to the total amount of the fees incurred to date prosecuting the lawsuit. You proceed to the hearing and, after the judge reviews F.S. §713.24(3), along with your motion and affidavit, she grants your motion to increase the amount of security, but, without explanation, she limits the increase to half the fee you were seeking and that your client has incurred. The order also allows the transferor 30 days to comply with the increase. Now, it is five weeks later, and you must advise your client that bond has not been increased per the court’s order.
You want to tell your client that the court can impose sanctions for defying the order, but you know that under the Carpet King case this may not be true. You also want to advise your client that the court exceeded its authority by reducing the attorneys’ fees increase request by half, but you know that F.S. §713.24 is silent as to the method the court should employ to set the amount of the increase, and you are also conscious of the existence of the Lake Eola and Royal Marble decisions.
Under the existing case law in Florida and the current version of F.S. §713.24, there is really not much you can do for your lienor client at this point but continue with the litigation and, if you win, hope that the transferor is solvent to pay the additional fees and costs incurred. As a result of this, the very entity the legislature intended to protect has been likely left without adequate protection for most of its incurred litigation costs and all future fees and costs.
Nailing Down the Transfer Bond Statute: A Blue Print for Success
In the opinion of the authors, the better solution would be for the statute to expressly provide concrete consequences for noncompliance with all ordered increases in bond amount, regardless of financial ability. Indeed, the transferor should not be able to clear a lien off its property by use of the transfer bond statute and subsequently trump a lienor’s right to be adequately protected by claiming financial inability to comply with an order increasing the amount of the bond. In other words, F.S. §713.24 should not be used as sword and shield by owners almost always motivated financially to remove a lien from their property. At the same time, the court should not have unbridled discretion to reduce a bond increase request. At the very least, the court should be required to explain the reasons for any reduction and, perhaps a better solution is for the legislature to provide the court’s with limited discretion to reduce a bond increase request.
A few modifications to Florida’s transfer bond statute may solve the aforementioned problems with the real life application of F.S. §713.24. In doing so, the legislature can still effectuate the two-fold purpose of the transfer bond statute: to provide owners with the ability to remove clouds on title in order to finance, refinance, or sell their property; or if a construction loan is in place, to release holds on draws on account of the lien by the bank, and to provide subcontractors and material suppliers, particularly small ones, the reassuring prospect of being compensated for legal expenses enforcing their lien. The following suggested amendments to sections 713.24(1) and 713.24(3) will account for the illustrated pitfalls. F.S. §713.24(1) may be amended as follows:
(1) Any lien claimed under this part may be transferred, by any person having an interest in the real property upon which the lien is imposed or the contract under which the lien is claimed, from such real property to other security by either:
(a) Depositing in the clerk’s office a sum of money, or
(b) Filing in the clerk’s office a bond executed as surety by a surety insurer licensed to do business in this state, either to be in an amount equal to the amount demanded in such claim of lien, plus interest thereon at the legal rate for 3 years, plus $1,000 or 75 percent of the amount demanded in the claim of lien if such amount is less than $25,000, 50 percent of the amount demanded in the claim of lien if such amount is greater than $25,000 but equal to or less than $50,000, 40 percent of the amount demanded in the claim if lien if such amount is greater than $50,000 but equal to or less than $75,000, or 25 percent of the amount demanded in the claim of lien if such amount is greater than $75,000 25 percent of the amount demanded in the claim of lien, whichever is greater, to apply on any attorneys’ fees and court costs that may be taxed in any proceeding to enforce said lien. Such deposit or bond shall be conditioned to pay any judgment or decree which may be rendered for the satisfaction of the lien for which such claim of lien was recorded. Upon making such deposit or filing such bond, the clerk shall make and record a certificate showing the transfer of the lien from the real property to the security and shall mail a copy thereof by registered or certified mail to the lienor named in the claim of lien so transferred, at the address stated therein. Upon filing the certificate of transfer, the real property shall thereupon be released from the lien claimed, and such lien shall be transferred to said security. In the absence of allegations of privity between the lienor and the owner, and subject to any order of the court increasing the amount required for the lien transfer deposit or bond, no other judgment or decree to pay money may be entered by the court against the owner. The clerk shall be entitled to a service charge for making and serving the certificate, in the amount of up to $15. If the transaction involves the transfer of multiple liens, an additional charge of up to $7.50 for each additional lien shall be charged. For recording the certificate and approving the bond, the clerk shall receive her or his usual statutory service charges as prescribed in s. 28.24. Any number of liens may be transferred to one such security.
F.S. §713.24(3), meanwhile, may be amended as follows:
Any party having an interest in such security or the property from which the lien was transferred may at any time, and any number of times, file a complaint in chancery in the circuit court of the county where such security is deposited, or file a motion in a pending action to enforce a lien, for an order to require additional security, reduction of security, change or substitution of sureties, payment of discharge thereof, or any other matter affecting said security. The party requesting an increase in the amount of the cash deposit or surety bond shall provide the court with a motion and affidavit from the party’s attorney attesting to the amount of the incurred attorneys’ fees and costs, the amount of the deficiency and the amount of the requested increase. If the court finds that the amount of the deposit or bond allocated for attorneys’ fees and court costs in excess of the amount claimed in the claim of lien is insufficient to pay the lienor’s attorneys’ fees and court costs incurred in the action to enforce the lien, the court must shall increase the amount of the cash deposit or lien transfer bond by the amount of the deficiency. If, in its sole discretion and without an evidentiary hearing, the court determines that the requested increase for attorneys’ fees and costs is unwarranted, the court shall have the limited discretion to reduce the requested increase up to a maximum of twenty (20) percent. The court shall specify its reasons for any reduction. The party ordered to increase the cash deposit or lien transfer bond has thirty (30) days from the date of the court’s order to comply. In the event that the order increasing the bond is not complied with, the court shall have the right to formulate any appropriate remedy to compel compliance, including but not limited to, striking the non-complying party’s pleadings and/or defenses. The party that secures an order increasing the transfer bond shall be entitled to an award of reasonable attorneys’ fees and court costs incurred enforcing the court’s order which shall be awarded commensurate with the effort to compel compliance and not at the conclusion of the litigation. Nothing in this section shall be construed to vest exclusive jurisdiction in the circuit courts over transfer bond claims for nonpayment of an amount within the monetary jurisdiction of the county courts.
The message to be sent by these suggested changes is simple: small lienors will still receive the full benefit of the lien law when their lien is transferred to a cash bond. At the same time, an owner who wishes to take advantage of the transfer bond statute to remove liens from his or her property will not be allowed to use the existing voids in the statute to trump a lienor’s right to be adequately compensated for its incurred attorneys’ fees and costs that it would otherwise recover from the resulting foreclosure sale of the real estate. It bears re-emphasizing that an owner’s motivation for transferring a lien to a bond is almost always a financial one — either to sell, finance, refinance, or release holds on construction draws.
Conclusion
Florida’s transfer bond statute is necessary and serves useful and practical purposes by providing an owner with the opportunity to remove clouds on title while at the same time providing a lienor with alternative security for its lien, interest on its lien, and the associated attorneys’ fees and costs that it would otherwise recover from the foreclosure sale. This article, however, suggests that F.S. §713.24 could be amended to correct the noted deficiencies in the real life application of the statute. The suggested changes to the statute should simplify the way transfer bonds are administered by litigants and the courts, while at the same time preserving the general intent of the transfer bond statute and Florida’s construction lien law.
1 American Fire & Cas. Co. v. Davis Water & Waste Industries, Inc., 358 So. 2d 225 (Fla. 4th D.C.A. 1978) (“There can be no more confusing statute in Florida than the one on liens under Chapter 713. The frequent impracticality of its application in the field, coupled with ill conceived, confusing, patchwork amendments, all topped off by conflicting appellate decisions, have all combined to make life miserable for judges, lawyers, legislators and the vitally affected construction and lending industries.”).
2 See Fla. Stat. §713.02 and §713.06 (2007). Unless otherwise noted, all statutory references are to the 2007 version of §713.01 et al.
3 WMS Construction, Inc. v. Palm Springs Mile Associates, Ltd., 762 So. 2d 973, 974-75 (Fla. 3d D.C.A. 2000) (citations omitted).
4 This procedure is only available to private property owners since it is well established to the point of not needing a citation that liens cannot be recorded against public property. Lienors on public projects are nevertheless protected under Fla. Stat. §255.05 (2007), also known as the “Little Miller Act.”
5 This statement must be qualified. If the bond is issued under §713.23 and the owner properly records the bond, then the lienor’s remedy lies solely against the bond. If the bond was issued under §713.245 — the conditional payment bond statute — and the remaining conditions of the statute are satisfied, the lienor must perfect its lien rights as a prerequisite to perfecting a claim against the bond. The claim against the conditional bond will only be available if the owner has paid the contractor for the lienor’s work and properly transfers the lien to the conditional bond. If the owner has not paid, the lienor must proceed against the real estate on its lien as it normally would on a non-bonded project. For a detailed analysis of the conditional payment bond statute and its pitfalls, see Daniel R. Vega, “Here Comes The Money”: A Subcontractor’s and Material Supplier’s Guide to Perfecting Construction Lien and Bond Rights Under Florida Law, 76 Fla. B. J. 22 (2002).
6 Deltona Corporation v. Indian Palms, Inc., 323 So. 2d 282 (Fla. 2d D.C.A. 1975).
7 Fla. Stat. §713.24(1).
8 Id.
9 Fla. Stat. §713.24(3).
10 Id.
11 Coppenbarger Homes, Inc. v. Williamson, 611 So. 2d 33, 34 (Fla. 1st D.C.A. 1992); Fla. Stat. §713.29.
12 Carpet King, 896 So. 2d at 845.
13 Id.
14 Id. at 845-46.
15 Id. at 846.
16 Id.
17 Id. at 847.
18 Id., citing Garden-Aire Vill. Sea Haven Inc. v. Decker, 433 So. 2d 676 (Fla. 4th D.C.A. 1983) (“When a failure to comply with a court order is due to confusion or inability rather than gross indifference, a default judgment should not be entered against the noncomplying party.”).
19 Lake Eola, 2006 WL 2194389at *1.
20 Id. at *2.
21 Royal Marble, 932 So. 2d 221, 222 (Fla. 2d D.C.A. 2005).
22 Id.
23 Lake Eola, 2006 WL 2194389at *1,
24 Id.
25 See Anglia Jacs. & Co., Inc. v. Dubin, 830 So. 2d 169, 171-72 (Fla. 4th D.C.A. 2002) (“When counts are intertwined, the trial courts often have no choice but to award attorneys’ fees as to time spent on all claims…. Where the claims involve a ‘common core’ of facts and are based on ‘related legal theories,’ a full fee may be awarded unless it can be shown that the attorneys spent a separate and distinct amount of time on counts as to which no attorneys’ fees were sought.”); see also Caplan v. 1616 East Sunrise Motors, Inc., 522 So. 2d 920, 922 (Fla. 3d D.C.A. 1988), quoting Chrysler Corp. v. Weinstein, 522 So. 2d 894, 896 (Fla. 3d D.C.A. 1988) (“Where, as here, all the claims made against a defendant involve ‘a common core of facts and [are] based on related legal theories,’ the award of attorneys’ fees should not be reduced in the absence of a showing that the defendant’s attorneys spent a separate and distinct amount of time in defending a count upon which no attorneys’ fees were awardable.”); State Farm Fire & Cas. Co. v. Becraft, 501 So. 2d 1316, 1318-19 (Fla. 4th D.C.A. 1986) (“There was no way to separate the investigation and prosecution of the [various claims] and therefore, they are entitled to an attorneys’ fee for the entire time spent on the case …. Under these circumstances, where the bulk of the work involved was intertwined with both issues, so as to make it difficult to separate the time spent, the allowance of fees for the entire service furnished is not error.”).
26 Id.
Daniel R. Vega is a shareholder with Carlton Fields’ Miami office, where he concentrates on construction and commercial litigation matters in federal and state courts. He is a graduate of the Florida State University School of Law and is board certified in construction law.
Matthew S. Ellish is a is an associate with Carlton Fields’ Miami office, where he was a summer associate in 2007. He is a recent graduate of the University of Florida Levin College of Law.
