Can an owner use a related entity to purchase the construction loan from the lender and then foreclose on that loan to wipe out a contractor’s construction lien? Not in Florida.
In CDC Builders, Inc. v. Biltmore-Sevilla Debt Investors, LLC, the Florida appellate court refused to allow an owner to avoid a construction lien through the owner’s web of deception. In this case, the owner created two related entities for the project and hired CDC Builders, Inc. to build homes in Florida. The entities failed to pay for several homes and defaulted on the construction loan. The contractor recorded two construction liens to preserve its payment rights.
The owner then created another entity to purchase the defaulted construction loan and the loan was assigned to the new entity. The assignment, in theory, allowed the new entity to step into the shoes of the construction lender’s superior lien position. The new entity then foreclosed on the construction loan in an effort to wipe out the contractor’s construction liens.
The trial court allowed the owner’s new entity to foreclose on its construction loan and wiped out the construction liens. The contractor appealed and the appellate court reversed the trial court, finding that:
[I]nvestors cannot grant mortgages, contract for the improvement of the property mortgaged, and then use a network of companies to purchase and foreclose the mortgage for the primary purpose of extinguishing the construction liens that increased the value of the property.
Take Away: There are three points to this case. First, contractors have to be careful about who they do business with. Second, developers cannot use corporate shells to avoid lienors of their right to payment. And, third, sometimes the trial court does not get it right and the matter have to be appealed.