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

The district split that we identified in our posting about K. Miller Construction Company, Inc. v. McGinnis (1^st Dist. Doc. No. 1-08-2514) has another fracture. Last week, the Illinois Second District Appellate Court handed down its decision in Artisan Design Build, Inc. v. Bilstrom (2^nd Dist. Doc. No 2-08-0855).

In case you don’t feel like re-reading, the split is over the Illinois Home Repair and remodeling Act (815 ILCS 513/1 et seq.) and whether the failure of a contractor to comply with the act will strip the contractor of the right to recover monies that it is owed or whether the failure to comply with the act bars certain claims but not others. For instance, a contractor may be owed $10,000 for a job, but failed to provide a copy of the pamphlet required under the act – in the fourth district, this would be a bar to all claims for payment including mechanics liens, breach of contract claims, unjust enrichment claims and the like. In the first district, the failure to provide the pamphlet would not currently bar an unjust enrichment claim but would bar the mechanic’s lien claim and the breach of contract claim given that the act calls contracts made in contravention of its requirements “unlawful” and unlawful contracts are void. (see K. Miller above.)

Now comes a new wrinkle. 

In Artisan, the plaintiff was a contractor who claimed it was owed in excess of $208,695.69 for construction work on a house in Hinsdale, Illinois. The plaintiff wasn’t paid and sued the owner alleging it had a mechanic’s lien for the sum, that the owner had breached the contract, and also pled a claim for unjust enrichment (even if there wasn’t a contract, the owner benefited from the work and should have to pay for that work).

The owner asked the district court to dismiss the case because the plaintiff had failed to provide the owners with the brochure, had failed to commence or complete work within the contracted time period, and didn’t maintain insurance. The district court dismissed the case on the basis that the plaintiff admittedly did not furnish the owners with the consumer rights brochure. The plaintiffs appealed and asked that the appellate court overturn the decision.

The Second District was faced with the same decision as the other districts have been faced with… what, if anything, does a contractor’s failure to comply with the act mean for its claims against the home-owner?

The Second District interpreted the act to mean that the contractor’s failure to provide the consumer with the brochure does NOT remove the contractor’s right to recover in either equity (quantum meruit) or law (breach of contract, mechanic’s lien).

“To hold that a failure to provide a consumer with the brochure allows the consumer to defeat all legal and equitable claims by the contractor would lead to mischief and a result the legislature could not have intended.”

In reaching this conclusion, the Court said it was looking to legislative intent, which is a phrase and methodology addressed in many of the cases involving this act. Oddly, apart from attempting to interpret legislative intent through reading the “plain language” of the statute, none of the cases attempt to examine what the legislature had to say about the bill in debate or committee.

Many of the transcripts of the Illinois Legilsature’s general session debates dating back to 1971 are available online. These transcripts include debate on House Bill 1177 from the 91^st General Assembly’s session in 1999 that became the Home Repair and Remodeling Act. Of note from the debates are the main debate from the House after the final reading of the bill, and the similar debate from the Senate.

From the Senate and House transcripts on the matter, we see that there was not only opposition to this bill on the part of people who felt the bill just added an extra hoop for honest contractors to have to jump through without punishing the ne’er-do-wells who were the reason for the bill, but that the main justification for its passage was the protection of seniors and unwary consumers. Another point was the information this bill would force on people having their homes repaired – like the rights involved in contracting, an up-front contract price, and – after a 1994 amendment – a knowing acceptance or relinquishment of arbitration and the right to trial by jury. The debates focus on the Attorney General’s ability to prosecute and say nothing about voiding contracts or allowing a private right of action (an issue heavily debated by the justices of the Courts).

During the original House debate, representative Winters had these closing remarks,

“The Attorney General of the State of Illinois has listed home repair fraud as the #1 consumer complaint in their offices. Over the last five years, they average almost 500 complaints from consumers a year of being ripped off by artists who simply go up and down the street looking for the elderly, looking for the unprotected, looking for the uninformed. This Bill seeks to inform the consumer, it is not onerous to the contractors, a simple brochure and contract language is all that it requires….

“The only way that the criminal provision in this would be put forward is in fact that the State’s Attorney or the Attorney General can find a consistent pattern of fraud. And it is only a civil penalty in this Bill, it is not criminal. We have other criminal statutes under deceptive business practices. This Bill is simply civil penalties for failing to have the brochure disseminated and signed off by the consumer. It is a great consumer protection Bill, very little burden to the, to the contractors of this state. And I would urge adoption of this Bill.” [emphasis added]  IL H.R. Tran. 2000 Reg. Sess. No. 55

The failure to have the brochure passed out and signed off on was to be the ground for a penalty… and not just the loss of the right to arbitrate or to have a trial by jury, that provision wasn’t even part of the act until 1994, so the statement that there would be a penalty for failure to have the brochure passed out contemplated some other form of a civil penalty.

The notion that there should be some form of a penalty for failure to comply with the act by passing out a brochure along with the “shall” language of the act's requirements seems to make more sense when interpreted with the loss of the legal rights given the nullification or voidance of any contract between parties subject to the act where the act hasn’t been complied with. But again, that reading means that Section 35 of the act giving the AG and SAGs the power to enforce the act is not the sole mechanism for enforcement… If the act was to help seniors, did that really mean that the legislature wanted the “500” annual complaints referenced by representative Winters to be handled solely by the AG’s office? Wouldn’t it make more sense to allow Seniors to void any contracts and eliminate mechanics liens where the act hasn’t been complied with… if, as discussed in the General Assembly’s debates, compliance was as simple as handing over a brochure?

Another issue comes out of the transcripts of the assembly’s deliberations – that of the knowing contractor vs. the unwary contractor.

Back in March of this year, we discussed a case called Kunkel v. P.K. Dependable where the 5^th District decided that a contractor guilty of a violation under the act wouldn’t have to pay the attorneys fees of a home owner forced to go to court and pay an attorney to prosecute this kind of action if the contractor didn’t “knowingly” not comply with the act.

Interestingly, the Assembly transcripts show that the “knowing” issue was also important to the legislature and they expected the contractors to know about the act and also thought other State agencies as well as trade associations would hand out brochures and increase awareness… but in the end, that “knowing” would not be an issue.

The best way to make sure there are no problems is to comply with the act.  The brochure is linked above and getting the homeowner to sign off on it, having insurance, and delineating the terms of the project in a written contract or statement are what the act requires.  No home-owner should be allowed to reap a windfall for the failure to turn over the pamphlet, but if allowing a few wind-falls finally forces everyone to comply with the act, which is what the legislature intended, it is not unlikely that a few more courts may award a few wind-falls to accomplish that.

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If people really bought into the adage that you can’t fight city hall, or at least the asserting-your-rights-against-a-state-seeking-to-infringe-on-them principle that it represents, we’d all be British subjects. In truth, we’d be a lot of things, likely all the same things given the unusual mandate authority consistently seems to have for homogeny. But this post isn’t a lesson about the Shakman decrees or the recent end of the Chicago Desegregation order or any other lesson in the history of fighting city hall. It’s a new chapter in the fight and it involves challenging public works projects... anyone thinking they might need to fight city hall or challenge bid awards when Chicago’s 2016 Olympic dreams are realized will want to bone up on the proper procedures for fighting city hall… which is what today’s case is all about.

The plaintiff’s in Ziller v. Rossi (Doc. Nos. 2-09-0511 and 2-09-0592) were fighting town hall, literally… they wanted to keep it from being built, and based on their town board’s inadequate notices for the issues to be discussed at town meetings and improper requests for funding in light of pending requests to present the issues to the electors of Grafton Township, they were successful. 

The board was attempting to enter into lengthy installment contracts and pledge public funds in excess of $3.5 million in debt certificates in order to purchase land and construct a new town hall. Plaintiffs were a group of individuals who sought to challenge the board’s authority for the action given the board’s failure to follow the proper statutory procedures and rules for acting in such a manner.

In 2007 and in 2008, the board had voted to purchase land for, and construct, the town hall, but had failed to properly place notification of these actions on the notice of the meeting that was required to be distributed prior to the meetings. They had also passed an ordinance in a similar manner for financing the projects. The plaintiffs challenged the action and sought an injunction from the court to stop the board from taking any steps towards purchasing the land, financing the purchase, entering into construction contracts for the town hall, or constructing the town hall because the notices for the meetings were in violation of the Illinois Township Code (60 ILCS 1/1 et seq.).

In addition to claiming that the board had violated the Township Code and that because of the violation, the boards actions were void, the plaintiff’s also followed the code and submitted their own petition to submit the town hall issue to the electorate during an election rather than allowing the town board to vote on the matter and bind the citizens. (In addition to other issues, the town code allows citizens to submit petitions requiring that question of constructing a town hall, be put to the electorate during the general election and not decided by the town board when appropriate). The plaintiffs sought a second injunction compelling the clerk to certify the question in their petition to the proper election officials to be submitted to the electorate at the general election.

The trial court granted the plaintiff’s request for an injunction and told the board that it could not obligate the township and that its previous actions had not comported with the requirements of the township code and required clerk to certify the question. The town board appealed the decision and the appellate court’s opinion upheld the decision of the trial court. The township code must be followed and the petition should be submitted to the electorate for a vote.

Few issues are as publicly contentious as the use of common property, this is why the procedures for addressing these issues are so heavily detailed in statute. The greater guidance for public deliberation and decision regarding the commons, the less chance a party has to feel like they were not given a voice and heard… This assumes the procedures were followed. When the procedures aren’t followed, not only is it more likely that trouble will result, it is more likely that someone is attempting to assert their rights over another and that the assertion may not be entirely justified or proper.

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An interesting issue we’ve been coming across in contract negotiations over the past few months are the different retainage mandates of the states for private and public contracts. Most states have statutes affecting the amount of retainage permissible in public contracting, and some states have laws governing the amount of retainage allowed in contractual arrangement for private agreements.

What’s fascinating about the different laws regarding retainage is that they evince the true spirit of a republic with the different states acting much like the laboratories Justice Brandeis contemplated in New State Ice Co. v. Liebmann.  Some states fashion their laws to protect owners, some to protect contractors, some even attempt to protect subcontractors and owners.

In Illinois there is no construction law for private contracts regarding retainage, but there is the recently proposed amendment to the Contractor Prompt Payment Act, that we’ve posted about before. For public contracts, the Illinois Statutes don’t specify a percentage, but based on certain amounts for the public construction of highways, the state may place funds with an Illinois financial entity if the retainage is over $20,000 and the parties agree. Funds can be withheld at the request of a contractor/sub. For Highway projects, the Standard Specifications for Road and Bridge Construction dictates terms for retainage.

Wisconsin statutes list a maximum percentage of 5% on public contracts and, like many of the retainage statutes for public contracts, states that no funds can be retained after 50% of the work is complete along with terms for additional retainage for nonsatisfactory progress. There is no Wisconsin statute for retainage on private projects.

In Michigan, the statutes for retainage on public contracts cap the amount at 10% and there is no law regarding private retainage.

Ohio has retainage set at a maximum rate of 8% under the Ohio Revised Code  and mandates the escrow of the funds with interest falling to the contractor.

Minnesota has a public project limitation of 5%. Minnesota also has a private project construction law statute that allows an owner to keep up to 5% but does not allow for retainage for residential improvements nor is the owner allow to retain funds from an architect, or for other professional services.

Iowa has a public limitation of 5% of the labor and materials.

The retainage statutes outside the Midwest with provisions for private contracts generally deal with either limiting retainage percentages or with specifying to whose benefit interest on retained funds will run.

As with any transaction, where the different incentives rest is important.  The question of which party is receiving the benefit of an agreement to retain funds until some future contractually agreed term is met is also varied. Statues like Alabama’s (§8-29-3), provide that retained funds produce interest for the subcontractor while the benefit of retaining monies to ensure proper performance accrues to the contractor/owner. 

Texas’ Property Code regulates retainage on private contracts through its mechanic’s lien statute. This method is novel and makes sense by allowing the retainage on the owner’s end while also protecting the owner and any possibly affected subcontractors by ensuring that some funds are at least set aside in case a contractor fails to pay monies through to its subs.

Some states like California and Vermont provide for explicit release dates if retainage has been held back, but make no determinations regarding percentages. Interestingly, none of the 50 states has any egregious conditions for retainage or a law that clearly favors one party to the transaction over the other.

Given the plethora of statutes concerning the matter, it’s best to check for the particular state legislation before deciding to include or exclude a retainage provision and such a provisions specific terms.

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When I decided to create this website the main goal was education. Through an understanding of trends, developments and principles in the legal aspects affecting the industry we’d all be a little bit better off.   It's also a great way to get informational updates to clients who might otherwise not want to receive a monthly newsletter or "litigation updates" every time something new happens in the law, but prefer to review the information on their own schedule.

In addition to the influx of calls from businesses contracting or looking to contract in the midwest and out-of-state attorneys looking for information, I never realized what a repository of information it would become or how that repository would end up being utilized by readers. 

The topics and posts are currently accessed close to 160 times a day by people looking for information on any number of issues.  That number has only grown since 2007 when we started and continues to grow monthly. I realize that number of hits pales in comparison to a site like Above the Law, or the Wall Street Journal, but we’re not a big site and there’s very little gossip for us to traffic in – “Did you hear what the AIA said about the AGC on Letterman last night?”   But just like those sites, we’re privileged with emails from readers containing questions, comments and even some outright disagreements from time to time.

Another unique aspect of this blog has been the interest and open communication it has fostered. Anyone looking for information or wanting to suggest a posting only has to pick up the phone to make contact. Quite frankly, whether the person on the other end was in Alaska, Berlin or Naperville, every phone call has been interesting and informative… at least from my end.

But apart from the calls and the emails, possibly the most fun outcome has been the request for presentations and speaking. We’ve been asked to give talks, present on topics and even moderate discussions of different issues for clients, strangers, associations, companies, small shops, large shops and even webinars for unidentified listeners. It is a great chance to learn and to have a Q&A and no one has yet balked at the price of “free”. Thanks to readers input and requests, the list of available presentations and posts keeps growing.

In gearing up for our 2010 presentation schedule and in looking toward future postings I’d like to hear your thoughts on presentations and issues you would like to see or hear about. In addition to the topics below for which we already have presentations and information, what’s out there that you might want us to come and present at your business on?   What new and interesting issues are you coming across? Are there any particular problems you’ve faced in the past year or that you see on the horizon that you might want to hear more about?

The categories below are just a sampling, but are a good place to start. If you have anything new you’d like to hear about, or if you’d like to have us present on any issues we’ve already presented on in the past, please just let us know.

• Claim Prosecution & Defense
• Construction Litigation
• Contract Documents – Drafting, Negotiation
• Contract Administration, Performance & Enforcement
• Damages & Time Extensions
• Design
• Dispute Avoidance & Resolution
• Financial Consideration
• Environmental and Green Issues
• Federal Construction and Contracting
• Insurance & Surety
• International Construction
• Liens
• State & Local Government
• Procurement
• Project Delivery & BIM
• Public Policy & Legislation
• Workforce Management

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It’s that time of year again. Those of you regularly following blogs, even this one, are encouraged to submit your favorites to the American Bar Association. The Blawg 100 Amici submission form can be found here.

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If there’s one thing our legal system abhors, it’s a lie. Apart from just making a decision about liability or guilt, juries help ferret out the veracity of our fellows by listening to live testimony and making a decision about credibility. The success of a lie, its perpetration on our populace, can shake the foundational beliefs regarding the just nature of our judicial process. 

Lie takes on many names. The fun lie of what is possible is fiction. The lie under oath is perjury. The damaging lie we are concerned with today is fraud.

In our previous posts on the case of Cordeck v. Construction Systems, Inc., we have discussed the issues raised by a bank, FMB, with a mortgage on a property against which two mechanic’s liens were filed and foreclosed on. (The liens and the appellate briefs of the parties can be found in the earlier posts) One lien was filed by a contractor, CSI, the other, by the contractor’s sub, Cordeck. Cordeck’s lien alleged that it was owed over $1 Million for work on the project because it had performed close to $1 Million under the contract and $500 thousand in extras and had only been paid $500 thousand.

During discovery on the issue of work performed, Cordeck only supplied evidence of $100 thousand in extra work – the other $400 thousand was not substantiated by the documentation produced. After this revelation, Cordeck apparently settled its claim for the extra work with the general, CSI and amended the Cordeck lien by reducing more than $500 thousand. In the trial court, the bank, in challenging the Cordeck lien, made the argument that the magnitude of the reduction compelled the conclusion that Cordeck’s initial lien claim was intentionally overstated and should therefore be invalidated.

The operative principle here is that “where a lien claimant knowingly files a lien containing a substantial overcharge, the claim should be defeated on the basis of constructive fraud.” Much like timeliness, constructive fraud is a lien defeating issue. A finding of constructive fraud as a result of an intentional overstatement of the amount invalidates the entire lien. The overstatement is not enough to prove an intent to defraud, constructive fraud must be proved though additional evidence from which the intent to defraud can be inferred. (Slip Opinion at 9).

In its opinion, the appellate court provides a litany of examples of overstatement invalidating a lien claim and additional evidence as proof of constructive fraud:

“In Lohmann Golf Designs, Inc. v. Keisler, 260 Ill. App. 3d 886 (1994), the contractor filed liens against each of three separate properties for the full amount of the total claimed to be due, resulting in a total lien filing of triple the outstanding debt. 260 Ill. App. 3d at 891-92. In Fedco Electric Co. v. Stunkel, 77 Ill. App. 3d 48 (1979), the contractor's president admitted that his lien total had intentionally overcharged and undercredited the property owner, apparently due to animosity resulting from prior difficulties in collecting payment. 77 Ill. App. 3d at 50-51. In Marsh v. Mick, 159 Ill. App. 399 (1911), the court found that the contractor's overcharge was a claim for the full amount of a contract that it had not completely performed; the court also found that the overstated liens were intentionally filed to compel the property owners and other lienors to pay him an "unjust amount." 159 Ill. App. at 405.”

The appellate court found that at the trial court level, the bank had not produced any such additional evidence of an intent to deceive, but took note of the fact that the bank had been denied a copy of the settlement agreement between the sub and its general. The Court held that the potential relevance of the settlement agreement was evidenced by the facts that the general’s original answer to the sub’s complaint stated that the sub’s work was substantial or not done at all; that the general spent a substantial sum to correct problems with the sub’s work; that over $400 thousand of the original lien claim was not supported by the evidence provided by the sub during discovery; and that after the settlement, the sub abandoned its claim for the extras reducing the lien by more than half.

With the potential relevance noted, the court found that the bank should have been given a copy of the settlement agreement because to the extent that it may or does demonstrate acknowledgement that any portion of the sub’s original claim was not asserted for a valid debt, it would constitute the additional evidence that would support the bank’s claim of constructive fraud.

Even after the amount claimed by the sub was reduced, proof that the original amount claimed was constructive fraud would invalidate the whole lien.

So what does that mean for the sub? It means that the sub better hope that the settlement agreement doesn’t contain any terms stating that the debt wasn’t valid or even inferring such a case – which it likely doesn’t, given that settlement agreements rarely, if ever, acknowledge anything other than that a claim has been made and usually specifically state that the settlement agreement makes no recognition regarding the validity of the settled claims… but you never know.

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In yesterday’s post we began our discussion of the issues raised in the recent appellate court opinion of Cordeck Sales, Inc. v. Construction Systems, Inc. et al. (Doc. No. 1-08-0554). The opinion is the second opinion rendered in this case within the past two years. Both opinions discuss a host of issues pertaining to the Illinois Mechanic’s Lien Act and are recommended reading for contractors, subcontractors, owners and anyone involved in a construction project that worries about having to file a lien to get paid.

A short description of the case and the appellate briefs filed by the parties can be found in yesterday’s post. In short, a bank with a mortgage appealed several issues involving liens filed by contractors on a condominium development project. The bank wanted the liens invalidated and the contractors wanted to be paid. The liens filed by the two contractors can be found here, and here. Both purport to be subcontractor liens, but the opinion refers to Construction Systems (CSI) as a general contractor (Section 7(c) of the Act states that a statement that a party is a subcontractor will not invalidate a later determination that the party was, in fact, a contractor).

One of the issues raised by the bank, First Midwest Bank (FMB), in challenging the lien filed by CSI, involved the timeliness of CSI’s lien filing given facts and evidence regarding CSI’s last date of work.

Timeliness is a make-or-break issue under the Illinois Mechanic’s Lien Act. This means that the failure to file within the statutorily prescribed time limits, even by one day, can completely invalidate a lien. This all-or-nothing style issue is contrasted with issues surrounding property descriptions within the lien or innocent errors in stating the amounts owed which can be weighed by court’s and, as we have seen in other posts, ignored if justice may require it. In short, and in lieu of another hyphenated catch-phrase; timeliness is essential.

Under the Act, against private property, a general contractor must file the lien within four months of the date of completion of the work, a subcontractor must send notice of the lien within 90 days of completion to the required parties and the lien must be filed within 4 months from the completion date. For a public contract the timelines are different – here is our post from April regarding the issue – and getting the notice of lien on file with the proper public officer is essential to your claim.

The requirements are not simply some arbitrarily imposed deadlines.  The limits protect subsequent purchasers and owners from having their property interests infringed by unforeseen or delinquent claims for payment and provide contractors with a clear map for obtaining payment when it is owed them.  The boon is that there are clear guidelines for what must be done that can be relied on; the detriment is that if the guidelines are not followed to the letter, there may be no relief at all.  Without the statutory requirements, the Act would be nothing more than another cause of action to add to a complaint that would inevitably take as long to litigate as any other cause of action.  The desire to protect the right of contracts and see that the contractor is paid is on equal footing with the rights of the owner when the edicts of the Act are followed, e.g. requiring notice of subcontractors performing work, and statements of amounts owed.  This is true because if the Act were followed, assuming the owner had money to satisfy the contract, a lien would not be possible or necessary.  When the act is not followed, and liens become necessary, issues like timeliness become important.

Usually, timeliness can be established through work-orders, employee logs, emails or even GPS logs of the location of fleet trucks. However, as is the case with the challenge to the timeliness in this matter, two conflicting assertions regarding the date of a party’s completion of work with adequate proof for each can create an issue of fact that can preclude summary judgment.

In this case, FMB had evidence from logs kept by the project manager, AMEC Construction Management, recording the times and dates that contractors were present that placed CSI on the project at no time from May 25 of 2003 forward. CSI presented an affidavit of its vice president indicating that he and other workers were on the project through June 18^th, 2003. This is important because the date for filing the lien in a timely fashion is four months from the last date of work/date of completion. Since the CSI lien was filed on Septembe25, 2003, that date would be May 23, 2005 or after for the lien to be timely. If CSI is correct about the last date of June 18^th, the lien is timely, if the logs are correct and CSI was not there on May 25^th or afterwards, the lien would not be timely.

After reviewing the evidence the trial court granted summary judgment in favor of CSI because of the affidavit of the vice president, the appellate court reversed that decision and remanded the case for further proceedings finding that the absence of CSI from the project manager’s logs created an inference in favor of FMB, the CSI affidavit created an inference in favor of CSI and that these two competing inferences should be determined by the trier of fact and not resolved in summary judgment. Note that the dissenting opinion in this case offers some additional information about the affidavit – it apparently stated the names of the employees, the hotels that they stayed in, detailed the work they performed and the materials they used.

The lessons from the opinion and its holding are apparent. Adequate documentation of the work performed is essential. Keeping time logs, receipts, and any other form of documentation regarding the work can either win the issue of timeliness, create an issue precluding summary judgment, or even outright defeat a claim that a given lien was timely filed. It is imperative that your operations take these facts into account and that a system for documentation and proof is established. 

Tomorrow we will address the issue raised in this appeal regarding constructive fraud in stating the amounts due and owing in a lien claim.

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Back in April of 2008 we wrote about a lengthy opinion delivered by the 1^st District Appellate Court concerning a mechanic’s lien dispute over the property shown below:

View Larger Map

Since the Appellate Court delivered that opinion some of the parties were apparently able to settle their disputes and some of the parties found new issues to appeal. On September 9, 2009, the Court issued a second appellate opinion in this matter addressing several issues surrounding mechanic’s liens. Over the next few days, we will be addressing these decisions.

The full set of facts is available in the opinions. In short, Cordeck was subcontracted to Construction Systems, Inc. (CSI) to supply and install structural steel for a condominium project in Chicago. On January 23, 2003, Cordeck filed this lien stating it was owed $1,003,489.70 for work on the project and filed suit to foreclose on that lien in April 2003. In August of 2003, the condominium declaration was filed (if you want to read it, you’ll have to go to the Cook Count Recorder of Deeds office – it’s document 0324110024). On September 25, 2003, CSI filed this lien claiming it was due $1,979,412.00 and filed an answer and amended counterclaim in the Cordeck case alleging as much.

A bank holding a mortgage on the property, First Midwest Bank (FMB) challenged the validity of the liens filed by both Cordeck and CSI, the challenges and the Court’s decisions are the subject of our posts on this case.

The first challenge raised by FMB to the lien filed by CSI was that the lien failed to sufficiently describe the property encumbered by the lien. Here is the appellate brief filed, you will see that it contains arguments regarding the sufficiency of the description under Section 7 of the mechanic’s lien act, but also that it asks the court to consider the issue of Section 9.1 of the Illinois Condominium Property Act which arguably requires apportionment of a mechanic’s lien on a condominium property once a unit has been conveyed to a purchaser.

Here are the briefs in response to the appellate brief and the reply brief filed. You will see that the argument made in contravention of applying the apportionment rule of 9.1 centers around the fact that no unit had yet been transferred to a purchaser when CSI filed its lien and arguably then, CSI was not required to apportion the lien.

The reason we’re attaching the briefs and discussing the argument is that the appellate opinion didn’t address the issue. While we don’t know why the Court did not want to finally wade into the waters of Section 9.1, we can see from the briefs that a decent argument was advanced in contravention of applying the apportionment requirement to the CSI lien which may be the reason it wasn’t included in the opinion.

FMB also argued that even if Section 9.1 did not apply, the fact that a more recent and particular property description had been filed prior the recording of the CSI lien meant that the CSI lien was invalid if it did not include the most recent and more particular description. The Court addressed the description included in the CSI lien in accordance with the terms of Section 7(a) which requires that the claim for lien include:

“a sufficiently correct description of the lot, lots or tracts of land to identify the same”

The court found that the description of the CSI lien met the requirement that “the description be sufficient to identify the affected land” – adequate under the standard of the Act – and rejected the request to invalidate the lien on the basis of the description.

As you can see from the lien, it used the plat of survey description, included the common address of the property and also had the property identification numbers for the parcels that had existed prior to the apparent merger of the property into a different number. It is also interesting that there was testimony from an employee of the recorder’s office who testified that a lien recorded on the property as a whole would appear in a search of the chain of title of each unit included in the condominium declaration. (This is perhaps true of searching at the actual recorder’s office, but searching online with the PINs for the condominium units shows none of the liens filed by Cordeck or CSI. The first condominium unit PIN can be found on this map from the Assessor’s Office).

There are more than a few parties that would have appreciated a discussion of the application of Section 9.1, but the facts appear to have been against the treatment of the issue. For now, we have another case that offers some welcome guidance regarding the sufficiency of a property description under the Act. 

Tomorrow we will discuss the issue of timeliness in filing the lien raised in this case.

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After yesterday’s outline and brief discussion of the opinion in International Production Specialists, Inc. v. Schwing America, Inc., several of our readers have written in with a common question:

“Why was a case involving a project in Illinois litigated under Wisconsin law where the Illinois Construction Contracts Act (815 ILCS 665/1 et seq.) bars such a practice?”

For those not familiar with the Illinois Construction Contracts Act, construction contracts - “contract for the design, construction, alteration, improvement, repair, or maintenance of real property, highways, roads, or bridges” - that are performed in Illinois are prohibited by the statute from containing a forum selection clause that subjects the contract to the law of another state or that “requires any litigation, arbitration, or dispute resolution to take place in another state.”

In IPS v. Schwing, the project and a majority of the work took place in Illinois. A review of the docket and filed documents on Pacer didn’t turn up the purchase order referenced in the opinion or the change order. However, we do know that the original purchase order was sometime in 2001 and the subsequent negotiations were in 2004.

Unless the 2004 change order augmented a forum selection provision in the 2001 contract, the Construction Contracts Act would not apply because it did not go into effect until 2002 and it does not apply retroactively, or so says the Illinois Second District’s opinion in Foster Wheeler v. LSP Equipment (Doc. No. 2-03-0963).

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It’s not that often that we get to see an in depth analysis of a factual scenario in a construction dispute case. It is even less often that such an analysis is performed by the 7^th Circuit.

In the recent case of International Production Specialists, Inc. v. Schwing America, Inc. (Doc. No. 07-3632) the facts were an integral part of the appellate court’s decision to uphold a district court’s determination regarding delay.

A full recitation of the unique situation can be found in the opinion linked above. In short, IPS sued Schwing after Schwing terminated a contract with IPS under which IPS was to supply several silos for a waste treatment facility. Schwing terminated alleging delay on IPS’ part. The contracts had been negotiated and even suspended for a period of time over the course of three years. However, once the contracts were negotiated for a final time and work resumed, Schwing was correct in assuming certain negotiated time-frames and rightfully terminated the contract when IPS failed to perform within time-frames that, while not specifically delineated in the final contract, were at least feasible under previous iterations of the parties’ agreements.

The court upheld the decision in favor of Schwing and also reduced a breach of contract damages award under a theory of betterment for money Schwing was awarded that it hadn’t actually lost through payment to IPS.

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We thought this Friday would be a good time to highlight some great pieces from around the web that you may find interesting:

• There is an article up at Blair Kamin’s Cityscapes (formerly The Skyline) about Jeanne Gang’s Dwell Magazine featured project.
• Ken Adam’s has an extremely informative discussion going over at Adam’s Drafting regarding re-writing the American Arbitration Association’s Standard Arbitration Clause in light of the Manual of Style for Contract Drafting’s proposals on clearer contract language.  The read is important for people honestly interested in their contract language and some possible implications of using the AAA’s recommended language.
• The Fair Housing Defense Blog has an article about occupancy standards and why they matter.  For those dealing with FHA issues on a regular basis, this piece will pique your curiosity.
• Anyone who’s a fan of the Car Talk Puzzler will get a kick out of the Friday fun going on over at the venerable Drug and Device Law.  You may also be curious about this piece they did over a week ago regarding some non-empirical evidence of the life of legal blogs.  (For the record, ILCLB’s at One Year and 10 months.)

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Yesterday we discussed the court’s analysis of contractual language for arbitration provisions in short form contracts in the case of Timmerman v. The Grain Exchange.  A discussion of the factual matter surrounding the case can be found in the previous entry. Today we discuss the decision in Timmerman, to invalidate the contracts that the individual farmers had entered into with the grain dealer because the dealer’s license was revoked.

First, it’s important to understand that the licensure process for grain dealers in the state of Illinois is regulated by the Illinois Grain Code (240 ILCS 40/1-1 et seq.). Much like the codes regulating the professions for Illinois architects, engineers, warehouseman, and many other design and construction professions, the operation of a grain dealership without a license from the state of Illinois is a criminal offense.

What happened in this case was that The Grain Exchange signed the contracts for the future purchase of the grain with the farmers, lost its license, and then after losing the license, assigned the contracts to a subsequent grain dealership that did have a valid license. The subsequent grain dealer sought to enforce the contracts and have the assignment found valid. The farmers wanted the contracts declared void premised on the idea that the original party they had contracted with was unlicensed, but in reality, voiding the contracts favored the farmers because the price of grain had increased from the time the contracts had been entered into with The Grain Exchange. The farmers could now make more profit if they had the chance to sign new contracts.

The court’s analysis struck a middle ground in reasoning but held in favor of the farmers by finding that the that the contracts with The Grain Exchange were anticipatorily repudiated (Even though it was not yet time for the contracts to be performed, the contracts could not be performed because something had happened that rendered performance impossible - Check here for the Uniform Commercial Code’s definitions for anticipatory repudiation at 810 ILCS 5/2-610). The court found that the contracts were repudiated when the license was lost because without a license, it would be against the law for the Grain Exchange to perform under the Grain Code.

At the moment of repudiation (i.e. when the license was lost) the farmers were justified in treating the contracts as terminated. The court would not enforce the assignment made by the Grain Exchange to the other grain dealer after the loss of the license had occurred, and the farmers were not bound by those contracts.

The court noted that if the contracts had been assigned to the other grain dealer prior to the loss of the Grain Exchange’s license, then the assignments might be valid.  There was no mention of the interesting question regarding what would have happened if The Grain Exchange could have gotten a new license before the contracts were due to be performed and had attempted to do so, but the farmers signed new contracts with a different dealer in the interim.  - What if the architect loses his license before completing the design drawings and attempts to renew the license but in the interim the owner hires a new architect for the project?

We’ve written before about the difference between “registration” and “licensure” but nothing has brought home the point as clearly as Timmerman, which is a lesson that licensed professionals or firms should take to heart. The failure to maintain a valid license can completely nullify your existing performed or in the process of being performed contracts, it can subject the unlicensed party to criminal penalties as well as excessive civil damages including the full disgorgement of the earned payments on the contracts. On the flip side, for the sophisticated party, checking the license of a party that has aggrieved you by something under the contract to issue can be one of the first steps to determining the full amount of damages available to you for a breach.

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In using most standard-form agreements on a particular project the primary parties tend to negotiate the specific terms and reach an accord that will either include or exclude arbitration as their chosen form of primary dispute resolution. Opinions on the effectiveness and usefulness of arbitration are as varied as the fish in the sea.

The decision to utilize arbitration as the default on short standard form contracts is an individual one in the hands of the entity providing the contract for signature. In the construction industry there are many organizations offering arbitration services for one to choose from. But making sure the party who signs your contract will be bound by them is a trickier issue. Anyone wishing to add an enforceable arbitration provision to a short, standard form agreement would do well to familiarize themselves with the recent Illinois case of Timmerman v. The Grain Exchange, et al. (5^th Dist. Doc. No. 5-08-0404).

In Timmerman, farmers caught up in The Grain Exchange fiasco brought an action against the grain dealer they had contracts with for the supply of grain. The dealer had its license revoked and assigned the contracts it had with the farmers to another grain dealer after the revocation; also a defendant sued by the farmers.

The farmers sought a determination that they were not bound by the contracts because the grain dealer’s license had been revoked.  In arguing against such a finding, the grain dealers asked the court to determine that the arbitration provisions contained in the one-page-single-sided contracts that the farmers entered into with the grain dealer. The contracts were created by the dealer and contained a term stating that “the Rules of the National Grain and Feed Association” would apply to the contract. Nowhere did the contract mention arbitration, which is contained in the Rules referenced in the contract. And, the rules were not made available to the farmers prior to signing, nor were the farmers told that the Rules referenced in the contract contained an arbitration provision.

The district court found that the attempt to apply the Rules’ arbitration provision to the farmers would be procedurally unconscionable – “a situation where a term is so difficult to find, read, or understand that the plaintiff cannot fairly be said to have been aware he was agreeing to it.”

The appellate court agreed. In agreeing with the district court, the appellate court cited a long string of cases and examples of contractual provisions found to be unconscionable due to their placement in the contract, the lack of their conspicuous nature, the failure to point them out to signatories and the failure to allow signatories time to understand or peruse the contract before signing.

While many of the cases cited by the court are examples of what not to do, for those seeking to have an enforceable arbitration provision in a short contract there were several decisions referenced.

Of note was the appellate court’s recitation of the decision in Bunge Corp v. Williams (45 Ill. App. 3d 359) from 1977 which upheld an arbitration provision printed on the back of a contract where the words:

“THE TERMS PRINTED ON THE BACK HEREOF ARE A PART OF THIS CONTRACT.”

Appeared in bold letters just above the signature line on the front page.

The decision in Turner Construction v. Midwest Curtainwalls (187 Ill. App. 3d 417) from 1989 where a construction subcontract was valid where it incorporated an arbitration provision in the general contract by reference and stated that the general contract was “available for examination by the Subcontractor at all reasonable times at the office of the general contractor” and that the subcontractor “represents and agrees that it has carefully examined and understands the general contract.”

While any party to your agreement may attempt to challenge its arbitration provision, carefully crafting one that will be upheld with an eye to decisions regarding upheld provisions can help you overcome any such challenge.

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R. David Donoghue of Holland & Knight had an informative post the other day on his Chicago IP Litigation Blog that linked to the Bryan Cave Art Law Blog.

The piece is about debunking common copyright myths. Written by Jonathan Pink, it is humorous and informative. Written in a multiple-choice formatted style, you can read the full text here.

Of note to our readers is Myth #9:

“Myth 9:
Sure, you can copyright a book, a movie, or a song, but there is no way you can copyright a house.
a. This must be true. Just drive through Orange County.
b. Not so fast. I'm from Orange County, and the houses are not all alike; those shades of beige are distinctly different.
c. This is false; you can copyright a building, but only if it was built less than a dozen years ago.
The answer is c. Architectural works are entitled to copyright protection if they were created after December 1, 1990, or embodied in unpublished plans or drawings created before that time, even though they were not actually constructed. See 17 USC §102.
This is good to know if you represent architects or developers. If you represent the developer, advise your client to acquire the copyright in any architectural plans he or she commissions. If you represent the architect, advise negotiating hard when it comes to determining the price of that copyright. Remember, working together, we can rid this state of unsightly farmland, pristine hillsides, and bucolic open spaces.”

We’ve written about the issue before. Obtaining the registered copyright puts you in line to make claims for your attorney’s fees and to have the statutory damages from the Act. In contracting for or against any given fee arrangement, realizing that these rights have value is an important step in understanding the full range of incentives inherent even in standard form agreements like the ConsensusDocs or the AIA standard form agreements.  

As a design professional, imagine not giving up the copyright until project completion… it is entirely possible that the filed copyright could add another cause of action brought in addition to those for past-due payments if an owner tries to complete the building using your plans with a different design professional.

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