Deficiency Judgments Increasing in Number

According to this piece written by Kris Hundley in the St. Pete Times, lenders are becoming more and more likely to seek a deficiency judgment after a foreclosure. There has been some thought that lenders have been uninterested in pursuing deficiency judgments. "Two years ago, a waiver of the deficiency was normal course, but it's been eroding ever since," said Richard Zaretsky, a lawyer in West Palm Beach. "Banks came to the conclusion they were throwing away the opportunity to collect funds." Banks are more sophisticated than that, and knew from the inception of the foreclosure boom that they had plenty of time to commence efforts to obtain deficiencies. I am actually surprised that the number of deficiencies cited (270 in Lee County in 2010, a five-fold increase from 2008) is not much higher, as drastically falling real estate prices have led to many residences worth less than the debt against them, with second mortgages likely to be undersecured. Many second mortgagees find themselves without any value in the collateral at all. Wherever collateral is worth less than the balances of loans, judgments on deficiencies will remain the norm.

Liability of Qualifying Agent

As all certified and registered Florida contractors know, every company which engages in the business of contracting (be it general contracting or specialty contracting) must have a designated "qualifying agent," the person who personally holds a contractor's license and who bears the responsibility to supervise, direct, manage, and control the contracting activities of the business organization with which he or she is connected and who has the responsibility to supervise, direct, manage, and control construction activities on a job for which he or she has obtained the building permit. A qualifying agent who does not fulfill these responsibilities is subject to sanctions imposed by the Division of Professional and Business Regulation (DBPR), including fines, suspensions, and license revocations. The responsibilities and sanctions are set forth in Chapter 489, Florida Statutes, and the accompanying regulations.

Recently, a private property owner attempted to use the sanctions in chapter 489 as a basis for a private cause of action (lawsuit) against a qualifying agent. The court held (reaffirming existing law) that the qualifying agent's breach of the duties imposed by chapter 489, providing administrative remedies against a qualifying agent, does not give rise to a private cause of action against the qualifying agent for a building code violation. Scherer v. Villas Del Verde Homeowners Ass'n, Inc., --- So.3d ----, 2011 WL 148801 (Fla.App. 2 Dist.,2011). In other words, only the state agency can use Chapter 489 against a qualifying agent, and a person cannot bring a lawsuit in court based only on an individual's status as a qualifying agent.

Most contractors are honest businesspeople who strive to fulfill responsibilities which come along with their trade and status as qualifying agent. However, when exceptions to this rule arise, despite the court's recent ruling, the threatened or actual consequences of a complaint to the DBPR which may result in a DBPR action for sanctions can often inspire a qualifying agent to act to remedy a situation for which he is ultimately responsible. Therefore, even though the remedies of Chapter 489 belong only to the DBPR, they still can often indirectly address private grievances because anyone can file a complaint asking the DBPR to exercise its powers under Chapter 489.

Code Enforcement Liens - Judicial Restriction on Priority

Municipalities often issue notices of violation to property owners who do not keep their property in compliance with codes and ordinances. If the property owners do not come into compliance within the allowed time, or if they are repeat offenders, fines can be imposed. Chapter 162 of the Florida Statutes provides that a municipality may levy certain fines for noncompliance, and that the fines, until paid, create a lien on the owner's property.

The general rule is that liens, mortgages, and the like, have priority over each other based on when they were recorded. Some cities have passed ordinances providing that their lien rights are superior to the rights of mortgage lenders and other persons with liens on property (even if they were recorded first), meaning that a mortgage lender could be forced to pay off the lien to avoid losing their rights. For example, the city can foreclose its lien rights and, unless someone pays the fines, become the owner of the property free and clear of mortgages.

There has been a case winding through appellate court where a mortgage lender challenged a City’s right to declare its code enforcement liens to be superior to other liens by its ordinances. The 5th DCA has ruled against the City of Palm Bay in that case. City of Palm Bay v. Wells Fargo Bank, N.A., --- So.3d ----, 2011 WL 180363 (Fla.App. 5 Dist.). This decision came out on January 21, 2011.

The gist of the ruling is that a city ordinance purporting to give code enforcement liens “superpriority” goes beyond home rule powers of Art. VIII of the Florida Constitution because such an act directly conflicts with the legislative rule at 695.11, F.S., setting forth that priority is determined by the timing of recording – “first in time, first in right.”

Unless the legislature acts to create an exception to the “first in time, first in right” rule for code enforcement liens, or the supreme court overrules the Fifth District (an unlikely outcome, although my understanding is that the City of Palm Bay is seeking review and has solicited support from other municipalites in this regard), then code liens will be subordinate to mortgages recorded earlier, and city foreclosures of code liens will be much less desirable in many occasions.

Protecting leased property against construction liens

Landlords do not want their ownership interest to be subject to construction liens resulting from improvements made by their tenants. However, unless certain steps are taken, a Florida landlord's property WILL be subject to liens, even if they are unaware that the tenant has contracted for improvements. Chapter 713.10(2), Florida Statutes provides two options for the landlord to protect against liens on his interest:

-->First, the landlord may include a provision in the lease expressly prohibiting liens for tenant improvements and record the lease (or a short form of the lease) in the public records to put the world on notice;

-->Second, the landlord (if he leases to multiple tenants) may include an express prohibition of liens for tenant improvements in all of his leases and records a notice in the public records which contains enumerated information and states the specific language in the leases.

A landlord must be very careful when using the second option. A court recently reminded landlords how careful they must be to meet the statutory requirement. (Everglades Elec. Supply, Inc. v. Paraiso Granite, LLC, 28 So.3d 235 (Fla.App. 4 Dist.,2010). In that case, the landlord had included language limiting construction lien liability in all of its leases. However, in one of the leases, the landlord had used slightly different language limiting liability. The court held that since the language was not the same in all of its leases, then the notice which was recorded was defective because it did not include "The specific language contained in the various leases prohibiting such liability." Landlords should take note and consult an attorney to be sure that the notices they record comply with the detailed and technical construction lien law.

Can debts arising from misapplied construction funds be discharged in bankruptcy?

Recently, a case out of the Federal Sixth Circuit Court of Appeals made headlines, holding that a contractor in Michigan receiving funds from the owner on a job could not use bankruptcy to discharge its debts to a subcontractor (or probably a laborer or material supplier) to whom the contractor should have passed along the funds. Patel v. Floorcovering Services, Inc. This holding extended not only to the contractor (a corporation) but to the licensed contractor who guaranteed its debts. The cardinal bankruptcy concept is that the debtor receives a fresh start, with all debts being paid or wiped away by the bankruptcy process. The narrow exceptions to this "discharge" of debts are enumerated in Section 523 of the bankruptcy code. They include certain types of debts (such as student loans, to the chagrin of certain of my law school classmates) and debts resulting from wrongdoing such as "fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." In Michigan, at least, the misapplication of construction funds received from the owner falls into this category.

A trustee acts in a fiduciary capacity. Under Michigan law, funds paid by an owner for the benefit of subs, laborers or material supplieres are considered trust funds, and the contractor or subcontractor is considered the trustee of the funds. Because the basic rule is that trustees act in a fiduciary capacity, the debts of the contractor (or sub) to his subs, laborers and material suppliers cannot be removed by bankruptcy.

As mentioned in a previous post, bankruptcy courts must make decisions involving both federal and state law. Obviously, the question facing Florida construction professionals is whether Florida law would intersect with federal law in the same way such that Florida contractors would not be able to discharge debts in bankruptcy resulting from the misapplication of funds. In contrast to the recent ruling interpreting Michigan law, when deciding In re Gropp, 153 B.R. 350(Bkrtcy.M.D.Fla.1993), a Florida bankruptcy court reiterated its position that even though Florida law makes misapplication of construction funds a crime, it does not create a "fiduciary" duty such that the debt would be immune to bankruptcy discharge. Although Florida's Section 713.345 (outlawing misapplication of funds) seems to have much in common with Michigan's law at 570.151-153, MCL (outlawing misapplication of funds), the Michigan law can be distinguished because it specifically states that money paid under a construction contract to a contractor (or sub) is considered a trust fund and the contractor or sub receiving the fund "shall be considered the trustee of all funds so paid to him for building construction purposes."

Despite the subtle differences in various state statutes, the Sixth Circuit will have some persuasive authority nationwide. It will be interesting to see if attorneys in jurisdictions outside Michigan (including Florida) attempt to use the Patel v. Floorcovering Services, Inc. decision to expand the scope of debts resulting from wrongdoing that cannot be wiped clean by bankruptcy.

Loss of Construction Jobs in Florida

The Associated General Contractors (AGC) of America has published an analysis of federal construction employment figures and determined that employment has declined in 276 of 337 metropolitan areas in the year ending July, 2010. According to the September 1, 2010 issue of the Orlando Business Journal, this decline was felt at the rate of 8% in the Orlando metro area and 7% throughout the areas analyzed within Florida.

Judge bombs Vista Lakes case

My local news made much of the revelation that the "Vista Lakes" subdivision and surrounding developments were built adjacent to a WWII-era bombing range and that the purchasers of homes in those developments did not learn about the range until it was too late. Property values fell (probably in part due to self-fulfilling media reports of potentially falling property values), and one resident sued several entities including Ryland Homes and the original developer of Vista Lakes.

The Honorable Judge Presnell of the US Distric Court for the Middle District of Florida has held that the plaintiffs case does not create liability under common law negligence. The court recognized that Florida law allows for novel negligence claims, but did not find one in this case. Virgilio v. Ryland Group, Inc., --- F.Supp.2d ----, 2010 WL 503023.

Specifically, the court held found no "affirmative duty on a developer, or on an entity that promotes a residential development, to publicly disclose material facts that may negatively affect the economic value of a home that the developer did not build, own or sell." Furthermore, a party that markets but does not directly sell the property to the purchaser does not have a duty to disclose facts materially affecting value of property which are not readily observable and are not known to purchaser but result only in loss in market value.

If someone drives over an unexploded shell and it explodes, then she might have a negligence cause of action.