Overstating a Lien Claim Can Result In Dismissal - Cordeck v. Construction Systems, Inc. II - Part 3
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.
The lesson in defending against a lien is to be on the lookout for overstated sums and in filing and prosecuting a lien is to make sure you’re not inflating the amounts owed for some reason.