Illinois Construction Law Blog : Illinois Construction Lawyer & Attorney : Foran Glennon Palandech Ponzi & Rudloff Law Firm : Chicago IL

It’s New Suit Friday and this week we have some new cases that just about every reader will be interested in. From attorneys looking at sample complaints and causes of action to design professionals, owners and contractors wondering what issues they might face and what could give rise to liability, this week’s spot is interesting.

In Erickson v. 2678 Orchard LLC, the plaintiff is alleging that the defendant violated several building code regulations after the plaintiff’s property became infested with rodents shortly following the beginning of excavation of the defendant’s property. The complaint also alleges that plaintiff’s tenant vacated the rental property due to the infestation and plaintiff had to reimburse pre-paid rent and incurred a revenue loss. The plaintiff seeks a permanent injunction forcing defendant to remove materials from plaintiff’s property, an end to the trespassing, correction of damages to the property and compliance with the building codes along with counts for trespass, negligence and nuisance.

In Phillips v. Savino, the plaintiffs allege that defendant, contractor, breached its contract when it failed to complete home renovations it had been paid to perform. The complaint states that the plaintiffs purchased their home and contracted with Savino for construction work, the purchase of construction materials, and services as a general contractor. The plaintiffs allege that they paid Savino for work, materials and services approximately $250,000 and that defendant did not complete and/or deficiently completed excavation of the patio, interior and exterior calking, roof flashing, floor resanding, driveway damage and siding work they also seek damages for work performed to fix work that defendant performed, and other out-of-pocket expenses they were asked to pay by the defendant during the term of the job.

In K-Mart Corp. v. Menard, Inc., a sublessor is suing a sublessee for damages which allegedly incurred during the sublessee’s 18 year tenancy in a building in Hanover Park. The complaint seeks damages for monies K-Mart says it had to/ or will have to expend to replace a parking lot a drainage system, a building roof, exposed wiring and many other problems that it claims the sublessee had a duty to maintain and keep in good repair under the lease.

In McWalters v. Lee and GLP, Inc., a partner in a design firm is suing another partner alleging that the partner and the company have damaged him by breaching their shareholder agreement which required that his shares be purchased back at a price described in a specific formula, that the defendant partner breached fiduciary duties to both the plaintiff partner and the company and the because of the breach, the shares are worth less than what they would be worth had the breach not occurred, and that the plaintiff partner was fraudulently induced into purchasing his shares of the company based on the defendant’s false representations that the shares would be redeemed at the price derived through the specified formula. As a shareholder, the plaintiff partner also asserts causes of action against the defendant partner on behalf of the company. The allegations include claims that the defendant partner used company money for personal travel and renovation of his private residences, to pay himself an undeserved salary, to start up a publishing company, and offered a rent-free sublet to a friend.

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Joshua Glazov over at the Construction Law Attorney Blog has an April 23, 2009, posting about Illinois House Bill 344 which, as introduced, would amend the Illinois Contractor Prompt Payment Act to limit, on a percentage basis, the amount of retainage legally allowed under construction contracts to contractors and subs.

The bill passed the house with the percentage provisions intact and the Illinois Senate now has amended the bill to include a definition of retainage:

(d) "Retainage" means funds that are earned by the contractor but not paid until some agreed upon date, such as the completion of the job.

The senate amendment also eliminates the percentage restrictions on outright retainage and instead has proposed making this bill a restriction on retainage for materials:

(b) Under a construction contract, it is unlawful to withhold retainage on materials required for completion of the construction contract that are delivered to a job site and are billed in accordance with the periodic payments in the construction contract.

This  provision is interesting given that the bill could alter the general nature of invoices by allowing those parties that do not distinguish between materials and labor in their payment applications to parse out the two and demand payment for the materials listed in the  payment applications leaving the owner without recourse to its contract's retainage provision for those payments.

CLAB’s posting lists and links to some advocacy groups that can be contacted to comment on the bill.

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O'Connor Construction Company v. Belmont Harbor Home Development is a classic case in construction dispute damages. The plaintiff filed a mechanics lien against a condominium project after the developer refused to let it complete the project. O'Connor had been the carpentry subcontractor responsible for blocking and for trim finishing. It completed most of its work under its contract and had been asked to work, contrary to the contract, to finish the units as units were sold rather than finishing the project as a whole.

After a dispute over payment applications, O'Connor requested that the developer deliver the materials it needed to complete the project in a timely fashion, and the developer failed to supply the needed materials in a timely way. O'Connor then filed a mechanics lien for the amount it was owed under its contract and refused the developer's demand to rescind the lien. When O'Connor would not rescind its lien, the general contractor terminated the contract with O'Connor.

The facts in the trial court showed that O'Connor's contract price plus extras was $351,989.00. This is what O’Connor would have been paid under its contract if the contract had been completed. It also showed that O'Connor had been paid $175,189.50. The trial court found that O'Connor had substantially completed its contract and that the cost to finish the contract for work that was not performed after O’Connor was let go was $41,200. Using a method of calculating damages that would award damages for the benefit received by the developer from O'Connor's work, the trial court found that O'Connor was owed $50,876.50. On appeal, the appellate court found that this was the wrong measure for damages in both a mechanics lien action and a breach-of-contract action.

The appellate court found that the proper measure of damages owed to O'Connor would be $351,989.00 O'Connor would have received had it been allowed to finish the project minus the $175,189.50 that O'Connor had been paid, and also less the $41,200 it would cost the defendants to finish the work O'Connor was in not allowed to complete. This is in stark contrast with the $50,876.50 figure the trial court had awarded. The appellate court also found that under the mechanics lien statute O'Connor was allowed its attorneys fees where a portion of the payment that O'Connor was owed had not been turned over, and the defendants testified that it was due to O'Connor.

Also worth noting in the opinion is the fact that the mechanics lien statute provides interest at 10% per annum, which was greater than the 5% per annum O'Connor could expect under its contract. As we’ve said before, along with the Contractor Prompt Payment Act the mechanics Lien act provides any party who has not been paid a powerful tool and obtaining payment for services rendered. Knowing that in a fixed-price contract, there is a certain expectation you may have when someone else breaches your contract, using the mechanics in statute to get that payment back allows you a remedy that you otherwise might not have… and awards damages in a manner similar to contractual damages and possibly not just for damages in line with the benefit someone has received from your work.

In a day and age when attorneys fees can become a considerable hindrance to the prospect of recovering on low-cost contracts – it is worth noting that payment held without just cause can  entitle someone to remuneration for the fees of having to bring a court action under the statute.

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Those of you follow our blog know that we've been waiting for the Illinois Supreme Court's Weather-Tite decision for quite some time. The facts of Weather-Tite were undisputed.  The University hired a general contractor who hired subs for the renovation of a residence hall. On five different occasions, the general contractor submitted sworn statements in accordance with the Illinois Mechanics Lien Act to the University requesting payment.

After receiving monies for each of the first four sworn statements, the University paid the general contractor the amount listed on each statement. For the last statement, the University paid the money to the general contractor but the bank where the funds were deposited exercised a right of set-off and took the money from the account of the general contractor before the subcontractors were paid the amounts reflected in the general contractor's last sworn statement.

Several of the subcontractors including Excel filed mechanics lien claims against the University for payment. The University was awarded summary judgment on the Excel claim in the trial court, following a determination that Excel did not have a valid lien pursuant to Section 5 of the Mechanic's Lien Act, the appellate court reversed and the decision was appealed to the Illinois Supreme Court.

In the Supreme Court, the University argued that section 5 of the Mechanics Lien Act only required it to pay the amount listed on the general contractor's sworn statement to the University. Excel argued that under section 5, and in conjunction with other sections of the Act, the university was required to withhold the amounts listed on the general contractor's sworn statement shown due to Excel.

The Illinois Supreme Court has agreed with arguments contrary to those of the University advanced by Excel and the opinion is informative to anyone working on a construction project. The Illinois Supreme Court has ruled that Section 5, read in conjunction with sections 27 and 32 of the Illinois Mechanics Lien Act, requires that any owner receiving a contractor's sworn statement withhold the funds noted on the statement for payment directly to the subcontractor(s). Failure to withhold the funds subjects the owner to the possibility of a mechanics lien against its property if payments are made to the contractor and the contractor in turn fails to pay the subcontractor. The opinion is not only well written, it is extremely informative and delineates certain guidelines a party should follow when paying for work.

As delineated by the court, it was the intent of the Illinois legislature that there be an orderly method for conducting construction transactions to protect subcontractor claims: (1) The owner and general contractor enter into a contract for the construction work; (2) as the work is completed, the general contractor submits a section 5 sworn affidavit that must list all subcontractors and the amount due, or to become due, or advanced; (3) when the section 5 sworn affidavit lists an amount due or to become due a subcontractor, section 24 requires the owner retain sufficient funds to pay the subcontractor; and (4) section 27 requires the owner to make subcontractor payments upon receiving notice of a subcontractor claim pursuant to a section 5 sworn statement. To protect itself an owner can require a lien waiver be provided by a contractor when the subcontractor is paid and the owner can require a lien waiver by every subcontractor when paying the contractor.

In supporting its opinion, the court looked to the Knickerbocker decision of 1914 in the Luczak Brothers decision of 1983.

The Weather-Tite opinion represents sound guidance that the general contractor's sworn statement provides the owner notice of subcontractor claims and imposes a duty on the owner to retain funds sufficient to pay those subcontractor claims. Owners should be aware that if the contractor's sworn statement shows monies owed to the subcontractor the owner should withhold those funds for payment directly to the subcontractor or wait to release those funds until a waiver is provided.

The delineation of construction project payment procedures along with a sound interpretation of section 5 and the requirements given to owners should provide a decent path for anyone to follow regarding when payments can be made to a contractor and what should be requested of the contractor when the owner believes that there may be subcontractors on the project. For subcontractors, in order to avoid an owner's claim that it had no knowledge that a subcontractor was performing on the project, the subcontractor's 60 day notice of performing work on the project should probably be sent at the beginning of the project. Once all parties have knowledge of who is working on the project and who is responsible for payment, the current problem of the possibility of a contractor failing to pay the subcontractors and liens being placed on the premises or the possibility of a contractor going bankrupt before subcontractors are paid funds advanced by the owner can ultimately be lessened or done away with entirely.

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Gary L. Cole over at Law/Ark has published the first part in what promises to be a multiple-part article on the legal liability issues faced by design professionals and contractors. His piece “The Real Green Goblin – Emerging Legal Liability for Green Design Professionals and Contractors (Part 1)” promises to be interesting and the first installment delivers:

“The purpose of this Law/Ark discussion, which will be presented in several short installments, is to highlight the missteps that design professionals and contractors may make along the green path of good intentions which increase their exposure to later claims of liability when things go wrong – as they often do in construction.”

The article will be worth following as the themes are developed and explained by Mr. Cole. Additionally, while this blog hadn’t been on our radar before, we’ve added a link to it at the right along with the other construction related blogs we recommend.

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We've warned before about the recent dangers of relying on a certificate of insurance as proof of your coverage as an additional insured. In the United Underwriters article, we wrote about the exclusionary language contained in a certificate insurance and its interpretation. In the recent case of Nautilus Insurance Co. v. Mona Fabrication et al., we again find the issue of a policy's interpretation regarding additional insured coverage.

In Nautilus, the court was confronted with the issue of whether or not a party not named as an additional insured in an endorsement could nonetheless be included as an additional insured where the endorsement also stated that additional insureds are those “as required by written contract and per certificate of insurance as approved and on file with the company” and a contract existed requiring the company be named as an additional insured but no certificate of insurance was on file with the insurance company.

Mona, along with the Muslim Community Center and others were sued in a personal injury action that occurred during construction on the Muslim Community Center. The Muslim Community Center along with others tendered to Mona's insurance company and the insurance company filed a declaratory judgment action seeking a ruling that it did not owe Muslim Community Center and others coverage or defense.

In assessing the policy language cited above, the court found that where there was no evidence that both an insurance certificate was on file with the insurance company and Mona was required to name the Muslim Community Center as an additional insured by contract, therefore the policy precluded coverage for the Muslim Community Center.

As we said before it's likely that the best policy is to make sure you're named in the endorsement. However, if the endorsement requires something as simple as contractual language stating that you should be named as an additional insured along with making sure a certificate is on file with the company, you should also ensure that a certificate is on file with the company and make sure your contractual language is sufficient.

It is becoming increasingly rare that an insurance certificate is found to be proof that one is actually covered as an additional insured under a policy.  With a small amount of due diligence, this problem can be alleviated.

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For those of you following the Illinois Supreme Court's decisions regarding mechanics liens, you will be happy to know, that the Court, will be releasing its Weather-Tite  decision on May 21, 2009. We will update you when the opinion arrives, for now, you can follow these links to our last posts, regarding the Weather-Tite case.

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House Bill 236, which alters the Illinois Mechanic’s Lien Act and requires contractors on single-family homes to provide a notice to the home-owners of the filing of a lien within ten days of recording has passed the Senate (as amended) and is now back in the House for approval of the amended bill.

For those of you looking for more information, our other posts on this topic contain a bit more detail.

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There haven’t been very many interesting cases for this week’s New Suit Fridays here are the few we’ve pulled for you:

In Stone, DDS v. Franzia, MD a dentist has filed this complaint against a doctor who leased medical office space from the dentist. It’s alleged that after failing to pay rent and being served with a notice of default on this commercial lease, the doctor vacated the property and the dentist discovered broken windows, holes in the drywall, exposed wires along with missing molding. The dentist seeks damages for the failure to pay the rent, real estate taxes, utilities, failure to keep the property in good repair and the attorney’s fees. A copy of the lease is attached to the complaint along with the notice sent from the attorneys for the dentist.

In First American Title Insurance v. LaSalle Title Company, the complaint alleges that its agent failed to investigate a suspicious mortgage release before issuing a title commitment. This case will be of interest to any title company or its insurer. The allegation is that a release recorded on the property in 2005 for a mortgage recorded in 2003 should have been a red flag to the title searcher where there was no record of a refinancing. After a title policy was issued the previous lender moved to foreclose and confirmed that the release and property deed for the sale were forgeries and plaintiff ended up paying $288,000 in settlement damages to the lender. The counts are for professional negligence, and breach of contract seeking indemnity.

In Cuchetto v. Bilecki et al., a complaint alleges damages against an appraiser, a mortgage company, an attorney, and real estate agents involved in a real estate purchase for a civil conspiracy regarding representations made about the value and zoning classification of the property that the plaintiff purchased. Similar to the complaint above, this one is also alleging that the title company should have noticed inconsistencies in some of the documents that arguably should have alerted them to the alleged fraud. The complaint alleges fraud, breach of fiduciary duty, negligence, civil conspiracy and constructive trust.

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We first wrote on the travails and accomplishments of Mr. Schultz back in 2008. The case involves the Illinois Drainage Code and will be important to any land owner, particularly farmers.

The case was granted leave to appeal and has now been argued in front of the Illinois Supreme Court.

As in the previous court, Mr. Schultz argued the case himself. Video of the argument can be found here. 

If you listen to the argument, you'll see that the attorneys for the Halpin's are arguing that the appellate court essentially re-tried the case at the appellate level and that the appellate decision was against the manifest weight of the evidence and that the appellate court abused its discretion.

This will be an important decision for developers and those who represent them.  We may end up seeing confirmation of the appellate court's constitutional concern:

"The law does not favor the expropriation of private property for the public good without just compensation.  Even less attractive is the expropriation of private property for the private benefit of an adjoining property owner."

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We wrote about HB 236 for the first time back when it was introduced here, and criticized its lack of clarity. When the bill was then amended we wrote about it again, here, and again asked why the bill couldn’t be as specific for the service of notice as other portions of the Mechanic’s lien act, so that contractors, architects, engineers, or anyone practicing in Illinois who could be planning to file a lien could have a little more specificity.

Well, the HB 236 was passed out of the Illinois House after the last amendment and in the Senate, it has finally been amended to address those concerns we’ve raised.

In lieu of amending Section 1, the new proposed Senate Amendment 001 would amend Section 7 by adding paragraph notations “a” through “c” to the already existing paragraphs of Section 7 and then would add the following:

 (d) A contractor for improvements of an owner-occupiedsingle-family residence must give the owner written noticewithin 10 days after recording a lien against any property ofthe owner. The notice is served when it is sent or personally delivered. If timely notice is not given and, as a result, theowner has suffered damages before notice is given, the lien is extinguished to the extent of the damages. The mere recording of the lien claim is not considered damages. This subsection does not apply to subcontractors, and it applies only to contracts entered into after the effective date of this amendatory Act of the 96th General Assembly.

For some reason, the Illinois Construction Industry Committee has yet to weigh in on this bill. It appears that the movement in the Senate may be as fast as the movement in the House.

Depending on how you want to spin this, it’s either an added protection for home-owners or another burden to the general contractors involved in home projects.

My personal take is that the ten-day requirement is not a burden in the least and that, since we traditionally treat home-owners differently (i.e. bankruptcy, the home repair and remodeling act) there’s no reason not to let a home-owner know that someone they’ve contracted with directly is claiming that they have not been paid.  After all, we make subs notify the home-owner as well.  Dropping a piece of mail into a post-office box after you’ve filed the lien isn’t going to lead to the end of enforceable Mechanic’s Liens.

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Approximately one month after the Third District Appellate Court in Majetich v. P.T. Ferro Construction Company explained that circumstantial evidence alone cannot establish proximate causation where more than one conclusion can be drawn from the circumstances (see “When is circumstantial evidence sufficient to create a question of fact as to proximate cause?”), the First District Appellate Court in Strutz v. Vicere also affirmed entry of summary judgment in favor of defendants where direct evidence of the cause of injury was lacking.

In Strutz, Henriette Strutz filed a negligence action against Christine and Christopher Vicere for the wrongful death of her husband, Russell Strutz. Russell and Henriette had lived in a two-flat owned by the Viceres when Russell fell down the indoor common stairway at their apartment. As a result of the fall, Russell sustained multiple cervical spine fractures, and he died 23 days later. 

There were no witnesses to the accident. Rather, on the morning of March 6, 2005, Henriette found Russell at the bottom of the stairs. At that time, Russell told Henriette, “I fell down over the railing.” When paramedics arrived, Russell stated that he was walking backwards while taking out the garbage when he slipped and fell. 

The paramedics transported Russell to Advocate Lutheran Hosptial. Shortly after his admission to the hospital, Russell’s condition deteriorated, and he lost the ability to speak, became paralyzed and later died on March 29, 2005. 

In the wrongful death suit, Plaintiff claimed that the Viceres failed to maintain the stairs and railing in a reasonably safe condition. Plaintiff further alleged that the staircase and railing violated the Chicago building code. Defendants moved for summary judgment arguing that the element of proximate cause could not be sustained by Plaintiff. The trial court granted the motion and Plaintiff appealed.

On appeal, Plaintiff argued that a jury could reasonably conclude that Russell’s fall was caused by the alleged defects in the stairs. In support of this argument, Plaintiff offered the testimony of an architect expert. The architect testified that the staircase violated the City of Chicago Building Code and was dangerous due to small treads, inadequate and uneven riser heights and tread widths and inadequate lighting. The architect also testified that the staircase was dangerous because there was no handrail on the wall side of the stairs, the height of the handrail on the opposite side was too low, and the staircase was excessively steep. Further, Plaintiff cited Christopher Vicere who testified that he repaired a loose newel post at the railing after Russell’s fall. Plaintiff maintained that evidence of these defects in conjunction with Russell’s statement that he “fell down over the railing” constituted direct evidence of a causal connection between the condition of the staircase and the accident. In the very least, Plaintiff argued that this evidence was sufficient to create a question of fact as to what caused Russell’s fall. 

Moreover, Plaintiff presented evidence of Russell’s careful habits in arguing that a presumption that Russell was exercising due care at the time of his fall precludes entry of summary judgment.

The Appellate Court held that there was no evidence addressing the issue of proximate cause. Strutz v. Vicere No. 1-07-2564, p. 6 (April 29, 2009). Rather, the evidence simply established defects in the premises. “Violations of an ordinance or a failure to comply with the building code, by themselves without evidence that the violation caused the injury, do not establish proximate cause.” Id. Evidence of the defendants’ negligence is insufficient to establish the cause of the alleged injuries. Id. Such evidence only establishes the possibility that the alleged conduct caused the slip and fall. Id. Further, the court stated that evidence of careful habits has no bearing on the issue of evidentiary support for the element of proximate cause. Id. at 7. 

The fact that an accident occurred in the presence of building code violations and/or defects in the premises, without more, is not sufficient to create a question of fact as to proximate cause.  Evidence that a defendant’s conduct was a possible cause will not suffice. Rather, the Illinois Appellate Courts have made it clear that some affirmative proof of causation must be established to sustain a claim of negligence.

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There are a few interesting cases for today.

In what is sure to be a case you’ll want to follow… the complaint in Weatherguard Construction Company, Inc. et al. v. John Does 1-18 is brought by construction companies against posters to a comment section on the website Topix.com for allegedly defamatory remarks and postings about the companies. The complaint includes the comments as well as the IP addresses of many of the posters. In a count for interference with a prospective business relationship, the complaint sets out other comments from the thread which allegedly show people indicating they would not be using the services of the companies after reading the website. The Cook County Clerk of Court’s website lists another case between Weatherguard and Topix.

This complaint in Burns v. GFGR, Inc. et al, alleges breach of contract, professional negligence, consumer fraud and conspiracy arising out of a transaction for the purchase of property. The plaintiffs, real estate investors, are suing, among others, an engineering firm and a real estate agent after they had to pay money to repair a building they bought that had allegedly been inspected at plaintiffs’ request by the engineering firm and found “structurally sound.” Plaintiffs claim they relied on the report prepared by the engineers when they agreed to purchase the building and later were cited by the City of Chicago for code violations including “an unstable West wall structure, rotting columns, beams and insufficient structural support of the rear porch and a front balcony lacking sufficient structural support.” The docket is here. The breach of contract claim seeks damages that include reimbursement for the “lost market opportunity in that Plaintiffs was [sic] unable to take advantage of selling 1619 West Carmen in a favorable real estate market due to delays caused by remediation of the material structural deficiencies mandated by the City of Chicago.”

The complaint in American Builders and Contractors Supply Co., Inc. v. Singles Roofing Company, et al, is brought by a supply company that was charged a $132,752.99 restocking fee by a third-party vendor when a roofing company allegedly cancelled its order. The supply company received a refund, but the restocking fee was a cost they apparently had to pay. The complaint contains counts for fraud, breach of contract and detrimental reliance.

Alleged construction defects led to the complaint in Sundararaj v. Kot. Plaintiffs claim they hired the defendant to build them a $930,000 house in accordance with “certain plans and specifications” and closed on the home in October of 2005. In 2006 and 2007 some leaks were noticed and the leaks were taken care of, in 2008 the plaintiffs noticed “a musty smell in multiple rooms” and had the property evaluated, the result of the evaluation: an allegation of “serious problems” with the construction of the property and are listed in the complaint at paragraph 15. They include the lack of a vapor barrier behind the drywall for the exterior walls, lack of proper flashing at parts of the roof, elevated mold levels and top floor bedrooms with a +20% moisture reading using a TRAMEX moisture meter. The complaint is for breach of contract.

The complaint in Studio D Architecture LLC v. Maresso et al alleges that a former employee of the architecture firm set up a competing company before he ceased working for the plaintiff. Plaintiff claims that the defendant misappropriated proprietary information including computer files, created false files on the plaintiff’s computer system and disabled their website. The trade secret count alleges that several other defendants used the proprietary information and that they knew it was proprietary since the defendant was not an architect.

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