Equitable liens and construction financing.

• Author: Schwartz, Martin A.

Equitable liens are judicially imposed against property in the absence of any statutory or contractual basis for the creation of a lien. (1) These liens arise in a number of different situations, (2) but the below discussion is limited to situations involving construction financing. In this context, the project has gone awry and the construction lender may be pitted against two distinct sets of potential claimants: contractors or subcontractors furnishing labor or materials to the project and contract purchasers of improvements being constructed on the project. In almost all of these cases, the builder/ developer has failed, become bankrupt, or disappeared; and the only source of recovery for a contractor or contract purchaser is the project or the construction lender.

Equitable lien claims are typically based on theories of either equitable estoppel or unjust enrichment. (3) An equitable estoppel claim is predicated on some unsavory action by the construction lender (4) while an unjust enrichment claim is grounded in a lender being inappropriately benefited as a result of the activities of the claimant to the detriment of such claimant. (5) Whatever the theory, because the basis for recovery lies in equity, the claimant has to be without an adequate traditional legal remedy in order to prevail. (6)

Lender vs. Contractor

The leading case in the area of contractor claims is Rinker Materials Corp. v. Palmer First National Bank and Trust Company of Sarasota, 361 So. 2d 156 (Fla. 1978). In Rinker, the Florida Supreme Court articulated the basis for imposing an equitable lien under the theory of equitable estoppel: "[A] party may successfully maintain a suit under the theory of equitable estoppel only where there is proof of fraud, misrepresentation, or other affirmative deception. To hold otherwise would inject an unnecessary amount of uncertainty into the construction loan industry." (7) Plaintiffs in Rinker were subcontractors alleging that they continued to perform work on this project after receiving assurances from the bank furnishing construction financing that there were sufficient funds in the loan to complete the project. Although those assurances proved untrue, they were held insufficient to meet the threshold established by the Supreme Court. Subsequent cases relying on this standard proved the difficulty of relying on equitable estoppel for contractors' recovery. (8)

A more successful theory pursued by contractors has been unjust enrichment. The basis for recovery under this cause of action is that the lender is receiving an enhanced value of its collateral by reason of the contractor's improvements without paying for it. (9) Under such a basis for recovery, it is unnecessary to allege fraud or quasi-fraud. (10)

However, Florida courts have imposed roadblocks to recovery even when a lender has received the alleged benefits of the contractor's work. Unless a contractor could demonstrate that his or her work had been totally completed in accordance with the construction contract, the courts were not inclined to award unjust enrichment claims. Courts refused to grant awards after "substantial completion" (11) and when there was 96 percent completion. (12) The articulated rationale of the courts appears to be that a contractor should not be compensated if he or she failed to complete a contract. However, it seems implausible to expect a contractor to complete performance of his or her obligations under a contract after the owner has previously defaulted by failing to make payment. Although not articulated by the courts, it might be argued that the cost to the lender of re-hiring a new contractor to complete unfinished work and incurring remobilization costs might outweigh the benefits of any near-completed construction.

The concept of equitable liens as applied to contractor claims may be vitiated as a result of a recent case that appears to have changed the landscape on contractors' equitable lien claims. In Jax Utilities Management v. Hancock Bank, 164 So. 3d 1266 (Fla. 1st DCA 2015), the court held that a statute adopted by the Florida Legislature in 1992 precluded contractors from asserting both equitable estoppel and unjust enrichment claims against a construction lender. The court's analysis of the contractor's claims was filtered through F.S. [section]713.3471(2). Paragraph (a) of this section requires a construction lender...