Contractor's Lien Discharged for False Information in Payment Application

CONTRACTOR'S LIEN DISCHARGED FOR FALSE INFORMATION IN PAYMENT APPLICATION

By: Larry R. Leiby, Esq. and Robert S. Tanner, Esq.

About the Author: Larry Leiby, Esq. was the founder and first chairman of the Florida Bar Construction Law Committee in 1976. He is the author of the Florida Construction Law Manual. He is Board Certified in Construction Law and was on the Construction Law Certification Committee that creates and grades the tests for construction law board certification. He was awarded the lifetime achievement award by the Florida Bar Construction Law Committee and teaches construction law at the Florida International University College of Law. He can be reached at leiby@mkpalaw.com. For more information, please visit www.mkpalaw.com.

Does the law allow a contractor's lien to be invalidated because the lienor submitted a false application for payment? That was the question that the appellate court decided in the case of CDC Builders, Inc. v. Riviera Almeria, LLC, Case No. 10-1197 (Fla. 3d DCA Dec. 8, 2010).

CDC Builders, Inc. ("Contractor") had entered into contracts with three developers (collectively, "Developer") to build 25 homes/townhomes on three parcels. After construction commenced, Developer exercised its contractual right to terminate the contracts for convenience. Developer told Contractor that it had insufficient financing and inadequate sales of the units to proceed to completion. Nevertheless, Developer requested that Contractor complete the eight units where construction had commenced. Contractor continued to construct those eight units and requested some compensation in connection with the 17 units that were cancelled. Developer refused. While continuing to work to complete the 8 commenced units, Contractor filed suit seeking the additional compensation in connection with the 17 cancelled units. After suit was filed, Developer stopped paying Contractor for work furnished to the 8 commenced units, claiming that Contractor had been overcharging for that work, and that the contract allowed Developer to hold back funds under such circumstances. Contractor completed the eight units and recorded claims of lien. Developer filed counterclaims for breach of contract, fraudulent lien, and violations of the Florida Deceptive and Unfair Trade Practices Act.

During the litigation, Developer filed a motion for partial summary judgment in which it argued that Contractor's liens should be discharged. The trial court agreed, and held that since Contractor had filed an interim payment affidavit containing false information, it was necessary to discharge the liens. While the trial court acknowledged that no specific provision of the Construction Lien Law "mandated" that result, the trial court felt that when read as a whole, discharge of the liens was required. Contractor timely appealed.

The appellate court looked to the dual purposes of the Construction Lien Law, which includes the goal to ensure the full payment to those who furnish labor or materials to improve property, as well as to protect an owner against having to pay twice for the same labor and services. The appellate court also reasoned that the requirement imposed on Contractor to submit payment applications was contractual and was not imposed by the Construction Lien Law. Additionally, the appellate court expressed concern that upholding the trial court's ruling would open the possibility that liens would be subject to discharge just because a payment application contained errors in calculation or were otherwise inaccurate. In short, the appellate court held that the trial court's order was not supported by the law, did not advance either of the Construction Lien Law's dual purposes, and could undercut the purpose of liens.

Although the CDC case establishes that inaccurate interim payment applications may not be a basis for discharging a lien, Florida Statute, section 713.31 allows punitive damages and for the discharge of a lien that is willfully exaggerated, or that includes a claim for labor, services and/or materials not performed or furnished, or that is compiled with such willful and gross negligence to amount to a willful exaggeration. Additionally, the Construction Lien Law provides for criminal sanctions under some circumstances against a person who supplies false information about the payment status of subcontractors, sub-subcontractors, or suppliers. While supplying a false payment application may in the end not prove fatal to an otherwise valid claim of lien, care should be taken to ensure the accuracy of each and every payment application served in order to avoid a potential host of other consequences.