Skilled Legal Analysis or After-The Fact Luck?

SKILLED LEGAL ANALYSIS OR AFTER-THE FACT LUCK?

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.

In Dooley Mack Constructors, Inc. v. M&I Marshall & Ilsley Bank, 2010 WL 2035139 (M.D. Fla. 2010), Redfish Key, LLC ("Developer") had a contract with Dooley Mack Constructors, Inc. ("Contractor") for construction of a condominium project. M&I Marshall & Ilsley Bank ("Lender") provided a construction loan to Developer for the project. Developer became unable to pay Contractor's final payment application for $279,156.93. To avoid Contractor from recording a lien on the project, Lender agreed that Contractor, rather than Lender, would receive $150k from the proceeds of the sale of one of the units. The email from Lender to Contractor setting forth that agreement also indicated that the balance owed to Contractor would then be paid out of a subsequent unit closing. Contractor received the first $150k payment, but before the next closing occurred Lender assigned Developer's note to another lender, SPCP Group ("SPCP"). Contractor asked SPCP to honor the terms of Lender's agreement to pay the balance Contractor was owed from the next sale. SPCP refused, and refused to pay anything to Contractor since the period within which Contractor could legally record a claim of lien had expired in reliance on Lender's promise.

Contractor sued Lender for breach of contract, among other things. Lender moved for summary judgment, asserting that there was no real dispute as to the material facts and Contractor was barred from recovery on its breach of contract claim. Lender argued that Contractor's claim for breach of contract was barred by the Statute of Frauds.

The Statute of Frauds requires that a guarantor's promise to pay the debt of another must be in writing and signed by the guarantor. If not, the person who received the guaranty may be barred from recovering from the guarantor. The reason for the rule "is to protect the guarantor who receives no direct benefit from his promise. Such a [guarantor] should be bound only by the exact written terms of his promise." American Atlantic Lines v. Ros Forwarding, Inc., 441 So.2d 1153, 1154 (Fla. 3d DCA 1983). Presumably, Lender argued to the trial court that its promise to pay the debt did not satisfy the signature requirement because it was communicated by email.

Case law in Florida establishes that a person who receives independent value for a promise to pay the debt of another essentially is not a guarantor, but instead takes on an independent contract obligation that is not subject to the Statute of Frauds. Simply put, if the person making the guaranty receives something of value in exchange for that guaranty, that guaranty becomes a mutually binding contract, and the writing requirement of the Statute of Frauds is inapplicable. Florida law also provides that Contractor's giving up the right to record a claim of lien constitutes independent value to support an independent contract, even when that contract is to pay the debt of another.

Contractor offered facts to show that it had given up its right to record a claim of lien based on Lender's agreement to pay Developer's debt arising from the final payment application. The trial court ruled that these offered facts, if proven, would establish that Lender's promise was an independent contract and not a contract of guaranty requiring the promise to be in a signed writing. Because a genuine dispute existed on that factual issue, Lender was not entitled to summary judgment on its Statute of Frauds defense.

Construction lien rights can be valuable, but perhaps less valuable in recent times when property values have plummeted and the liens of construction lenders frequently eclipse the value of the property being liened. Perhaps Contractor knew of the law creating the "exception" to the Statute of Frauds and before giving up its lien rights and calculated the risk of doing so against the likelihood of defeating Lender's Statute of Frauds defense. Whether Contractor was so skilled, or just lucky, the waiving of lien rights should not be done without seeking sound legal advice as to the potential repercussions of such an act.