Is Your Lien Fraudulent?
Let’s start with what isn’t a fraudulent lien. It isn’t a lien with minor mistakes or errors, especially when the miscalculations have not adversely affected the property being liened. And it isn’t a lien where the incorrect amount is the result of a good faith dispute. An innocent mistake within an otherwise valid lien for legally lienable materials or services will normally not invalidate that lien.
If however there is a willful exaggeration of amounts due or a claim for work not performed or materials not furnished, or if a document is prepared so negligently as to amount to an intentional overstatement, then that lien will be considered fraudulent.
So when a flooring contractor with a contract to install marble tiles throughout an apartment only installed a portion of the tiles and then filed a lien as if he installed the entire job, his lien was found to be fraudulent since he knew a substantial portion of the work remained to be done. And when a lienor included the additional costs incurred for corrective work because his work was not properly performed, his lien was determined to be fraudulent.
Interestingly, some courts have gone so far as to extract amounts from a lien which were not proper, such as overhead and profit, and then allowed the remainder of the lien to stand. But this is unusual and such a result should not be counted on.
Liens, being creatures of statute, are almost always interpreted strictly. There is rarely any wiggle room if a non-lienable item, such as for example, lawn and pool maintenance, cleaning services, restocking charges or office overhead, is included in a lien. Worse, courts are especially unhappy if it is shown that work specifically not authorized by the applicable contract are included in a lien.
The repercussions of filing a fraudulent lien can be quite harsh. Not only would the lien be thrown out but the filer can be exposed to damages and fees for having filed such a lien.
3 Ways Your Lien Can Become Fraudulent
When properly filed, a construction lien is a great tool for contractors, subcontractors, and material suppliers seeking money owed for work performed or goods provided to improve real property. So, when a property owner fails to pay the general contractor that general contractor is entitled to enforce a claim for payment by placing a lien on the owner’s property. But when improperly filed, a claim of lien may be found to be fraudulent and prove to be unenforceable. Worse, the lienor can be liable for damages including attorneys’ fees, court costs, and, potentially, punitive damages. Additionally, if the lienor files the fraudulent lien willfully, the consequences may include a third degree felony charge.
Given the harsh consequences for improperly filing a claim of lien in Florida, it’s important to understand what qualifies as a fraudulent lien and what can be done to avoid having a lien declared unenforceable. Under section 713.31 of Florida Statutes, fraudulent liens are those that:
(1) willfully exaggerate the amount of the claim; (2) willfully include a claim for services not performed or supplies and materials not delivered upon the property; or (3) are compiled with such willful and gross negligence as to amount to a willful exaggeration.
What this means is that liens can only be asserted to recover the reasonable value of the lienor’s labor, services, or materials. Other costs, such as lost profits, are non-lienable items. So if a contractor files a lien for $100,000, including overhead, profit, and overtime, on a contract for just $80,000, he exposes himself to a claim of fraudulently filing a lien.
To avoid including unauthorized amounts in a lien remember the work must be performed (i) in good faith; (ii) within a reasonable time; (iii) pursuant to the terms of the contract; and (iv) is necessary to finish the job. Additionally, a lienor cannot claim that it performed work on the property above and beyond what, in fact, was done. For example, imagine a contractor is hired to build an addition for $60,000 and the owner terminates the contractor when the project is only 50% finished. The contractor can’t automatically lien for half the contract amount or $30,000. He can only lien for the amount of work which he actually has completed and which is currently due. And he surely cannot lien for the full contract price.
Oftentimes, there is a legitimate dispute concerning whether the lienor has completed the work for which the lien is being asserted. And when there is a good faith dispute, there is no willful exaggeration defeating an otherwise valid lien. When a hotel owner terminated its architect at the schematics stage resulting in the architect recording its lien because it believed it had actually completed work through the design and later stage of the project, there was no fraudulent lien because the architect and owner were in a good faith dispute as to the completion of the work and the amount due. Moreover, as evidence of good faith, the architect showed he had consulted with his lawyer before filing his lien and had relied on the lawyer’s advice. He could use a good faith argument to counter the fraudulent lien claim raised by the hotel owner.
Florida’s construction lien law is very helpful for contractors seeking to get paid. However, filing proper liens is critical to keep the process from backfiring on the contractor and having a lien declared fraudulent.
Contractor Files Fraudulent Lien But Still Comes Out Ahead
Earlier this year, the appellate court handed down a decision that surprised a lot of construction folks.
A homeowner and his contractor weren’t seeing eye to eye any longer so the owner stopped paying the contractor. In turn, the contractor ceased work, recorded a lien and filed suit to enforce his lien, for breach of contract and for unjust enrichment. The owner counterclaimed for fraudulent lien. At the trial that followed, the judge concluded that the contractor’s claim of lien “was compiled with such willful and gross negligence that it amounted to a willful exaggeration and shall be deemed a fraudulent lien.” Pretty damning but the court still ruled in the contractor’s favor on its other claims. And having determined that the contractor prevailed on the significant issues of the case, the court went on to deny the homeowner’s claims for attorney’s fees and costs incurred as a result of the fraudulent lien.
Not surprisingly, the homeowner appealed, arguing that the significant issue test shouldn’t apply given the fraudulent lien. The court disagreed, finding that the 2007 amendment to the fraudulent lien statute which included a prevailing party standard, applied to this case. It was no longer enough to just win on a fraudulent lien issue, you had to be the prevailing party in the case as a whole to also be awarded your incurred legal fees and costs, and that was not the case for the homeowner in this matter. It was actually the contractor who prevailed on the significant issues.