Lienors’ Recourse Against Superior Construction Lenders

In this economic climate when construction liens are being wiped out by superior mortgages, I want to develop a point I made in a prior blog about a contractor’s potential ability to fight back and preserve its lien.  In my September 21, 2010 post, I discussed §713.3471 of the Florida Statutes, potentially making a construction lender liable to lienors should a construction loan’s funding be terminated before all loan proceeds were distributed to those performing work.  Under that statute, a lender can only cease funding under a construction loan, or reallocate construction loan proceeds to a non-construction purpose, if the lender first provides written notice of same to the contractor and lienors who served a notice to owner.  Absent the notice, the lender is potentially liable to the contractor and lienors for all actual construction costs incurred plus 15% for overhead and profit.

You might be surprised at how many construction loans were not completely funded.  Therefore, if you’re an unpaid contractor or lienor who recorded a construction lien on a job, don’t panic if a superior mortgage holder forecloses on the property and tries to wipe out your lien.  First, review the loan documents, which should be attached as exhibits to the lender’s foreclosure complaint, and determine whether it appears the loan was fully funded.  If not, then consider your rights under §713.3471.  You won’t be able to avoid the lender’s foreclosure, which may wipe out your lien, but you may nonetheless have recourse directly against the lender for your construction costs plus 15%.  Given the possible uncollectibility of the project owner (since they defaulted on the mortgage), this statute may give you a collectible judgment against a much more solvent bank.

You may also have an equitable claim like unjust enrichment if the lender knew you were working on the job while the loan was in default, but did not foreclose because they wanted you to continue building so their equity position would improve.  Long story short, before you throw in the towel when faced with a mortgage foreclosure, consider your options and think outside the box.