House Bill 236 Passes
House Bill 236 has passed both houses and is now awaiting the signature of the Governor. Once signed, the bill will require the stated 10 day notice to home-owners from general contractors placing liens on owner-occupied homes.
How Should a Court Determine Damages If My Contract Is Breached?
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.
Weather-Tite - A Lesson For Owners Regarding Payments
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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.
Weather-Tite Mechanic's Lien Case Is Coming
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.
HB 236 Amending Mechanic's Lien Law Passes Senate, Sent Back To House
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.
Update on House Bill 0236 - Mechanics Lien Act Amendment
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 tocontracts 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.
Some Things To Know About Placing A Mechanic's Lien On A Public Project
Take a look at that beautiful aerial of Chicago’s City Hall from the Cook County Assessor’s Interactive Mapping Site (the left side with the beautiful garden, that’s it… the right side that’s simply roof… that’s the county’s side). It has a Property Identification Number (PIN), it can be located, but you can’t lien it - it’s public property.
More pertinent to today’s discussion is this:
The Irving Park Brown Line stop… again, a public space, recently renovated and again, you can’t lien it… it’s public. Anyone getting ready to work on building projects for Chicago's hopeful 2016 Olympic bid will want to familiarize themselves with ways to get paid for public works projects.
Section 23 of the Illinois Mechanics Lien Act governs the application of the act to public projects, or rather, to the public funds behind the public project. The distinction is important because unlike a regular action, Section 23 only allows a person performing work for someone who has a contract with the public entity (or someone in the chain of such contracts – but certainly not those entities contracting directly with the public body) who has performed work on a public project to place a lien on public funds dedicated to that project… and only on those funds that haven’t been disbursed by the time it notifies the public entity in charge of the project that it is claiming a lien.
Time is of the essence in exercising your mechanics lien rights on these public funds. You need to get the notice on file as soon as possible so there will still be a chance that funds are left, and then you’ll be forced to file a court action within 90 days after your notice is received or you will lose the rights. An attorney can walk you through the process, but suffice it to say, timing is important, and so is getting the notice right.
To that end, today’s case involves exactly such a lien for work done on the Brown Line Renovation Project mentioned above. Here is a copy of the complaint. EMCO Metalworks is suing the CTA and McHugh for foreclosure of its mechanics lien on the public funds and for breach of contract. The electronic case docket can be found here.
The complaint will be informative not only for the pleading, but also for the notice provided as Exhibit C.
The lessons about timing and making sure you’re ready cannot be overlooked when you know you will be filing suit within 90 days of the notice if you have not been paid.
Supreme Court Hears Argument in Weather-Tite Lien Case
We’ve been following this mechanic’s lien case for you and wrote about the appellate 
court opinion here, and the decision to allow appeal here. Now that oral argument has occurred, we can soon expect the opinion, but before that happens, here’s something you’ll want to watch… the video of the oral argument. (.wmv file new window) A link to just the Audio is available as well. (new window)
Update on House Bill 0236 - Mechanic's Lien
We had previously written about this proposed amendment to the Illinois Mechanic's Lien Act. HB 0236 originally would have required notice to home-owners from original contractors prior to filing a lien.
The new amendment alters the bill substantially, changing its nature from a bill requiring pre-filing notice to a bill that creates a post-filing step for contractors.
The amendment turns the bill into one creating a requirement that a contractor provide the owner written notice by certified mail within 10 days of the recording of the lien.
This is really pointless. A contractor would certainly want the owner to have notice after the lien has been filed because usually those filing liens are trying to get paid without the heavy cost of litigation. The whole point to filing the lien is that you have one more bargaining chip in getting the money you're owed and also have an extra claim if you need to collect in court. So what kind of contractor wouldn't or doesn't let the owner know that a lien is in place?
Additionally, when will "notice" be considered served. Under Section 24 (770 ILCS 60/24) for subcontractors:
"notice by registered or certified mail is considered served at the time of its mailing."
Here, we have not added the caveat for contractors. Why? Do we seek to completely strip a contractor of its rights if it can't get the home-owner to sign for the certified mail? And why was this changed from a pre-filing requirement to a post-filing measure?
Illinois Senate Bill 2073 - Amending the Mechanic's Lien Act
It’s unclear if we can go a week without attempting to amend the Illinois Mechanic’s Lien Act to accomplish what the Mechanic’s Lien Act could accomplish if Section 32 were just removed.
Last week we wrote this entry on HB 0236 which sought to keep contractors from filing liens without first providing written notice to the owner.
This week, State Senator Pamela J. Althoff has introduced SB 2073 which would bar a subcontractor from any remedy under the act for work on owner-occupied single-family homes unless the contractor’s written agreement with the home-owner includes this statement:
"THE LAW REQUIRES THAT THE CONTRACTOR SHALL SUBMIT A SWORN STATEMENT OF PERSONS OR SUBCONTRACTORS FURNISHING LABOR, SERVICES, MATERIAL, FIXTURES, APPARATUS OR MACHINERY, FORMS OR FORM WORK BEFORE ANY PAYMENTS ARE REQUIRED TO BE MADE TO THE CONTRACTOR."
IT IS IMPORTANT THAT YOU READ AND UNDERSTAND THE DUTIESTHAT YOU HAVE AS AN OWNER OF THE PROPERTY TO THE CONTRACTOR AND TO ANY SUBCONTRACTOR THAT THE CONTRACTOR USES. THESE DUTIES ARE PRINTED AND INCLUDED IN THIS CONTRACT UNDER THEHEADING NAMED "PROPERTY OWNER'S DUTIES UNDER THE LAW".
The underlined portions are the one’s being added.
The Illinois Construction Industry Committee doesn’t have anything up on its website about this bill yet.
A few comments…
Adding “or subcontractors” to the language of the already required statement accomplishes nothing. Subcontractors are included as “persons” in that statement.
This bill requires that a new section entitled “Property Owner’s Duties Under The Law” be included in all contracts, but adds nothing to the Act about what that portion of the contract should say and doesn’t enumerate the duties that need to be included in the statement. Does this amendment seek to now impose a duty to include in contracts a complying section and list every duty owed by a property owner under the law? - Does that mean the Act or the entirety of the Law?
The Amendment also adds the following penalty provision:
(iv) The failure of a contractor to include thestatement contained in paragraph (i) on the face of the contract relieves the owner of the property of any legalobligation to pay any subcontractors under this Act.
Normally, the contractor couldn’t give away the rights of the sub, but since the act is a legislative remedy, the legislature is free to divine the methods and remedies it affords those performing construction work. But what has a subcontractor done by performing work and not getting paid that it would even have a chance to rectify at the time the owner and the contractor enter into an agreement? Usually, subs aren’t even involved in the process at the time the contract is entered into. We understand the goal is to protect home-owners, but why punish the subs?
Again, Section 32 of the Act, that strips the Act's remedies for the home-owner’s already made payments from the home-owner for failure to request and exercise its rights under the Act, could be removed and the home-owner would not have to pay the monies it has already paid for the benefit of the subs to the subs again if the contractor has failed to pay those monies out.
Illinois House Bill 0236 - Amendment to Mechanic's Lien Act
Introduced by Representative Kathleen A. Ryg, HB 0236, the bill seeks to amend 770 ILCS 60/1 (Section 1 of the Mechanic’s Lien Act in Illinois) to include a provision requiring contractors (read “not subs”) on owner-occupied single family residences to given written notice before filing a lien:
(e) A contractor for improvements of an owner-occupied single-family residence must give the owner written notice before filing a lien against any property of the owner.
The act already contains such a similar provision for subcontractors in Section 21(c):
(c) It shall be the duty of each subcontractor who has furnished… work for an existing owner‑occupied single family residence, in order to preserve his lien, to notify the occupant either personally or by certified mail, return receipt requested, addressed to the occupant or his agent of the residence within 60 days from his first furnishing labor… The notification shall include a warning to the owner that before any payment is made to the contractor, the owner should receive a waiver of lien executed by each subcontractor who has furnished labor, services, material, fixtures, apparatus or machinery, forms or form work.
The notice shall contain the name and address of the subcontractor or material man, the date he started to work or to deliver materials, the type of work done and to be done or the type of materials delivered and to be delivered, and the name of the contractor requesting the work. The notice shall also contain the following warning:
"NOTICE TO OWNER
The subcontractor providing this notice has performed work for or delivered material to your home improvement contractor. These services or materials are being used in the improvements to your residence and entitle the subcontractor to file a lien against your residence if the services or materials are not paid for by your home improvement contractor. A lien waiver will be provided to your contractor when the subcontractor is paid, and you are urged to request this waiver from your contractor when paying for your home improvements."
Such warning shall be in at least 10 point bold face type. For purposes of this Section, notice by certified mail is considered served at the time of its mailing.
As you can see, the description of 21(c) is a bit more informative and contains a lengthy mandate of procedures that are required to be followed as well as prescriptive language for the notice.
The problem with the subcontractor’s failure to perform the task of notifying the home-owner is that the act gives the appearance of protecting the home-owner but fails to follow through.
Section 32 of the act strips the home-owner of its protections if it fails to request the Section 5 statement of entities performing work on the project:
Sec. 32. Payments to contractor by owner.
No payments to the contractor or to his order of any money or other considerations due or to become due to the contractor shall be regarded as rightfully made, as against the sub‑contractor, laborer, or party furnishing labor, services, material, fixtures, apparatus or machinery, forms or form work if made by the owner without exercising and enforcing the rights and powers conferred upon him in Sections 5, 21 and 22 of this Act.
As a home-owner, even if you’ve only made a contract with one entity, you still need to request the list of subcontractors… or you won’t have the protections of the act. If you get the statement from the contractor and it shows that money is owed to a sub, you need to withhold that money from the payment to the Contractor. Unless you comply with all the terms, the fact that the sub is required to give notice to a home-owner is meaningless.
Certainly, the bill makes sense. Home-owners can’t be considered in the same manner as sophisticated developers who may fully understand the rights and obligations that having work performed on their homes entails. The protections provided by the act for subcontractor liens would be better if they had actual teeth and didn’t dissipate completely with the failure to comply with Section 5 in obtaining the statement regarding subcontractors and their work. Especially in an age where we are seeing more and more residential contractors fail to pay their subs or declare bankruptcy leaving the subcontractors without money and putting them in a position to place liens on owner-occupied single family homes.
To apply those same principles to contractors makes sense as well, but the failure of this amendment to specify a time limit for giving the notice prior to filing the lien is an oversight by the legislature to make this amendment have a meaning.
As it reads, notice could be given the day before the lien is filed. What protection does that afford the home-owner? What if it was just taped to the door?
A better amendment would be to require that before a contractor can file a lien, it should have to deliver to the home-owner the required Section 5 notice listing all the subs and the monies owed. This would not only give the home-owner adequate notice, it would, with the proper time limitations, allow the home-owner to obtain financing necessary to pay the amounts owed.
You can follow the bill’s status here.
Springfield Heating and A/C v. 39477-55 King Drive at Oakwood, LLC, et al, (1st Dist., Doc. No. 1-07-2987)
The litigation involved the foreclosure of a mechanic’s lien by a HVAC and plumbing subcontractor. The general had hired the sub based on a contract for $465,000 to perform work on a property in Chicago commonly known as 3947-55 King Drive and 401-415 E. Oakwood. As noted in the Google street map below, this location was home to Chicago's Rosscoe's which was the subject of a suit in 2008 (the Chicago IP Litigation Blog's Entry on the subject can be found here) and has since changed its name to Chicago's Home of Chicken and Waffles.
The sub performed $289,302 in work before the relationship went south and it terminated its relationship with the general. The sub filed liens for the full amount – because the property was on two different parcels, it apparently recorded two separate liens against the properties, each for the full amount, rather than just recording a single document that listed the multiple properties.
Four days after the liens were filed, the sub sued to foreclose its lien and brought two extra counts, one for unjust enrichment and one for quantum meruit (two equitable claims alleging that even if there was no contract with the property owner, the owner benefited from the work the sub did, so the sub should be paid).
After multiple motions, the trial court dismissed all the claims made by the sub. The trial court found that the fact that two liens were recorded for a total that was in excess of the actual amount owed was constructive fraud on the part of the sub requiring dismissal of the foreclosure action. The court also found that the equitable claims were not available because the sub had no contract with the land owner.
The appellate court reversed finding that the duplicative filings did not amount to a showing of constructive fraud where the defendants could not show there was an intent to defraud and even the Illinois Mechanic’s Lien Act stated that the misstatement of the amount required a showing of intent to defraud before the misstatement could be used to defeat the lien. The appellate court upheld the trial court’s determination that the equitable claims were unavailable to a subcontractor that only had a contract with the general.
While no one is going to recommend filing a lien that hasn’t been proofed and double-proofed, it’s nice to see the intent of the law given form here to help people get paid even if a small technical error arises.
The opinion can be found here.
Inter-Rail Systems, Inc., v. Ravi Corp., et al. (1st Dist., Doc. No. 1-07-2369)
An important lesson in asserting a claim for a lien is elaborated in Inter-Rail Systems, v. Ravi Corp. Determining whether your work is maintenance or lienable work that has improved the property as part of an overall plan for improvement, and whether you can and have provided proof of the overall value added to the land because of your work is important where the statute doesn’t explicitly describe your work as an improvement. (See the Mechanic’s Lien Act – 770 ILCS 60/1(b))
In Inter-Rail, the plaintiff was contracted by the land owners to clean up a portion of a site containing drums and waste in a warehouse and an adjacent parking lot deemed hazardous by the U.S. EPA.
Specifically, the plaintiff was contracted for the removal and disposal of drums from both the parking lot and the warehouse. The cleanup also required the plaintiff to scrape, sweep and decontaminate or remove any areas of the site or trailers in the parking lot where spills of the hazardous materials had occurred. The plaintiff completed its cleanup work and the defendant failed to pay the balance due – the plaintiff filed a lien and sued to enforce the lien and for other causes of action.
The defendants moved for summary judgment (a finding that they should win without a trial based on the evidence) and the trial court granted their motion finding that part of the work was non-lienable and that the plaintiff’s failure to apportion the lien amount in order to allow the court to distinguish between the amounts owed for lienable and non-lienable meant that the lien failed. The trial court did allow the plaintiff 30 days to re-plead its causes of action on the lien to include apportionment, but when the plaintiff failed to do so, the court entered judgment for the defendants.
The plaintiff appealed and the appellate court upheld the judgment. In its finding, the court noted that the purpose of the Mechanics Lien Act is to “require a person with an interest in real property to pay for the improvements or benefits which have been induced or encouraged by his or her own conduct.” “The focus of the inquiry to determine whether a mechanic’s lien should be granted is whether the work performed has enhanced the value of the land to be charged with the lien.” This notion of “enhanced value” appears to necessitate that the work be part of an overall plan to improve the property. The court cited cases it distinguished from this one by noting that in all the other cases involving debris clean-up where removal of debris/contamination was concerned, the removal was also part of other work in a plan to improve the property, whether it be the removal of debris from a demolition site, or removal of debris after storage tanks are taken out of the ground, such removal is part of an overall plan to improve the property and thus, not similar to the present case where the plaintiff cleaned up the site.
The court even went so far as to say that the plaintiff had not filled the contaminated drums with the hazardous waste, did not change the structure of the site… “It merely removed and disposed of the drums, already filled with the waste, and performed incidental cleaning activities. None of these activities were shown to be part of an overall plan to improve rather than simply maintain the property.”
Surprisingly, the court went on to distinguish this case from a case of asbestos removal where the removal of asbestos was found by a federal court to have improved the premises where the plaintiff in that case had provided expert testimony that the value of the asbestos contaminated property was significantly less with the asbestos inside of it than without the asbestos – and a trial was held where that information was provided… Here, as the court points out, the plaintiff failed to offer evidence that its work improved the property, “such as evidence of the value of the site prior to and after the work it performed.”
The golden ruling:
“We conclude that the activity of removing and disposing of drums containing hazardous waste, in and of itself, does not constitute an improvement to real property so as to be a lienable activity under the Act. 
As there was no evidence that plaintiff’s work was part of an overall plan to improve the property, its work was not a lienable activity under the Act.”
The court went on to note that even if some of the work were lienable the failure of the plaintiff to apportion its lien and subsequently amend its complaint meant that the plaintiff had waived the argument.
A lesson in defending against the liens for owners should be obvious… look for a way to argue maintenance. For those looking enforce a lien, apportionment and characterization of the work and proof of an enhanced value should be paramount.
Illinois Supreme Court to Hear Mechanic's Lien Case
The Illinois Supreme Court has granted leave to appeal in Weather-Tite, Inc. v. University of St. Francis. The case involved whether a subcontractor could recover money from an owner when the owner had not complied with the withholding provisions of the mechanic’s lien act once it received the final notice from the GC and did not withhold the funds stated in the notice for the subcontractor.
We previously covered and discussed this opinion here.
The Court’s determination that it will accept briefing on the matter means that it could address issues related to striking a balance between the statute and the reality that payments are often disbursed to a GC by an owner without meticulously following the act and withholding payments when a balance is owed to subs.
Don't Forget to Apportion a Lien Filed Against a Condo Association
Pepper Construction Company is being sued for its work constructing the high-rise condo building over at 720-726 Randolph in Chicago. The complaint alleges multiple counts including:
- Delays on the project
- Faulty workmanship
- Slandering the title to the land
- Breach of warranty
- Breach of their contract with the owner
- And fraudulent concealment of defective work
This may be the first in a series of suits over this property, the City View Tower.
Starting on page 23 of the complaint, you’ll see an interesting claim regarding the mechanic’s lien and its something worth noting if you’re either involved in the construction of condominium projects (high-rise or not) or if you’re developing them. There are multiple cases presently before the courts regarding this issue. The Condominium Property Act requires that mechanic’s liens be apportioned – Section 9.1. So, in addition to making sure the strict timing requirements of the Mechanic’s Lien Act are followed, anyone seeking to file their lien against a condominium property (any property where the condominium declaration has been recorded) should familiarize themselves with Section 9.1 before filing.
Mechanics Liens Are Another Tool for Repayment... When They're Done Right
Any business engaged in the construction industry in Illinois should be aware of the rules and requirements for filing a mechanics lien, or at least have someone they can reach out to in order to answer those questions.
The statute is possibly the best method available to any contractor, architect, sub any other person working on a project for ensuring payment. It creates an encumbrance on the land that allows not only for foreclosure, but also forces subsequent buyers to deal with the encumbrance before moving forward by either bonding around the lien or attempting to extinguish it. Whether the claim is for $1,000 in work or for $10,000,000, no matter what the amount, if the requirements are met, you can avail yourself of the act and pursue payment. Depending on the exact situation, the act may force you to get something filed and deliver notice anywhere from 90 days to four months after your last date of work, and knowing and complying with the act’s guidelines helps ensure another method for getting paid (the act also allows for attorney’s fees). If you don’t you will lose your rights and while the amounts of each account receivable may not seem like a lot, if everyone starts to skimp on the receivables, the effect of non-payment can become calamitous to your business. In the current economic climate, even if you know that payment is down the road, it’s best not to sit on these rights and lose them… talk to someone and get it done right. Because if its not done right, you could end up like the plaintiff in Speedy Gonzalez Landscaping, Inc. v. O.C.A. Construction, Inc., (1st Dist., Doc. No. 1-07-2370).
The plaintiff was a sub-contractor hired to perform services for the removal, hauling and disposal of rock and gravel from a site for the construction of a new school. The plaintiff performed its work and sought payment for some $637,382.53 that it was owed. Because the project was for a public building improvement built with public funds, section 23 of the Illinois Mechanics Lien Act applied. The plaintiff complied with the applicable notice required by the section for delivering notice of its lien to the Public Building Commission of Chicago. The plaintiff then properly filed its complaint against the defendants asking for an accounting within the applicable 90-day time limit from the filing of the notice, but failed to abide by the statute and also deliver a copy of the complaint to the public body within the time limits. The GC filed a motion to dismiss the claim based on the failure of the plaintiff to follow the applicable time requirements and the court granted the motion, thereby barring the plaintiff from its count for a mechanics lien. The appellate court upheld the decision of the trial court.
For the simple failure to provide a copy of the complaint to the right person, the plaintiff has lost its mechanics lien claim.
Think You Have The Right To Contest A Mechanic's Lien Claim? Think Again.
Here's something you're sure to be interested in. We had previously discussed an order in Vancil v. Tres Amigos (C.D.IL, Doc. No. 06-71254) regarding Tres Amigos attempt at attaining summary judgment to extinguish two mechanic's liens filed by former subcontractors of Vancil in a bankruptcy proceeding initiated by Vancil. That entry is here.
Today, the court denied Tres Amigo's motion for reconsideration. Of note to everyone working in the industry and dealing with mechanic's liens, this order, holds that section §60/9 of the mechanic's lien act, which allows the parties to an Illinois mechanic's lien foreclosure to contest each other's rights without the need for multiple pleadings between all of the parties, is a procedural statute and not a substantive right given to the parties. Because the federal court is not bound by state procedure, but rather, by state substantive law, in order to maintain an action against the other lien claimants, a party must file pleadings against the other parties in order to contest the issues between them. Given this assessment of the nature of the rights granted under §60/9 the court denied Tres Amigo's motion for reconsideration and held, again, that it needed to have pleadings on file against the lien claimants it was contesting, or no remedy was available from the federal court.
Following the Mechanics Lien Statute
The Mechanics Lien is a
testament to the fact that the same problems have been occurring in
construction projects since construction began. The concept behind the
act is rooted in equity - a person puts time and effort into
improving something and has a right to remuneration for those
improvements. Usually, the improvements cannot be removed from the thing,
so justice requires some remuneration, either by getting to sell the thing for
the money owed on the improvement or by having a right in any eventual
sale. Many state's have lien laws similar to Illinois' that can cover a
multitude of types of work, from car, boat and horseshoe repair to construction
work, mining work, and liens for judgments awarded to parties in
litigation. What those state laws have in common for the most part, is
the creation of a system for conducting affairs in that trade or business that,
when followed, can grant parties rights they would otherwise not have outside
of the statute.
In the case of the Illinois
Mechanics Lien Act, compliance with the provisions of the act can protect
the owners of property from subcontractors' liens when the owner complies by
requesting statements from the general regarding amounts owed to subs and then
withholds the amounts owed the subs from payment to the general for their
benefit. Subs and generals can protect themselves by providing the proper
documentation required under the act to the owner and will have a claim for
unpaid monies that attaches to the land and allows them to foreclose on the
lien and the possibility of selling the property to satisfy that
judgment. The important point is that the parties need to follow the
letter of the act or problems (the same old problems that were cause for the
creation of the act in the first place) will arise and they will not have the
protections that they thought they did.
Depending on your viewpoint,
a comedy of errors came together and an owner's problems were exacerbated for
not following the act, forcing the Third District to reverse a Will County
trial court decision in favor of an owner (University
St. Francis) against an electrical subcontractor (Excel Electric, Inc.) in this
case.
St. Francis hired a general
contractor to renovate a residence hall at the university. The GC hired
Excel as the sub. Work was performed and up to the final invoice, the GC
submitted invoices showing the subs and the amount due to the subs. The
original invoices were all paid. The final invoice was sent to St.
Francis by the GC showing the amount of the final payment as $458,237.56 and
stating the $130,948.48 was due to Excel. St. Francis transferred the
full amount to the GC (which included the 130k for Excel) to the GC's Harris
Bank account, but instead of having access to the money, Harris Bank took the
funds pursuant to its right of set off for a debt that the GC owed Harris
Bank. Excel and other subs never got their money.
Excel filed its claim for a
lien and noticed St. Francis that it was owed $140,547.09 (likely the amount
plus interest, but the opinion is silent regarding the discrepancy).
Another sub that had a lien filed a foreclosure action and pursuant to the
statute, Excel joined in that action and filed a counter-complaint to foreclose
on its lien. The university and Excel both filed motions for summary
judgment. Excel argued that it had a valid and enforceable lien in the amount
of $130,948.48 and St. Francis argued that the lien was not enforceable.
The trial court agreed with St. Francis and based its opinion on an
understanding that because Excel did not file its notice of lien until after
St. Francis had made final payment to the GC.
The appellate court
reversed. The opinion is worth reading for anyone in the industry who is
interseted in either enforcing liens or trying to get out of them. The
court cited the notice provisions required in §5(a) and §24(a) of the Act and
noted that the final invoice from the GC put the university on notice that
Excel was owed money. Under the act, St. Francis should have withheld the
funds for the benefit of Excel (possibly paying them directly to Excel, or at
least waiting to obtain a final lien waiver from Excel before transferring
payment). It is interesting that if the final statement from the GC had
been fraudulent, and listed the amount as $60 or that no money was owed Excel
and then St. Francis did, in fact either retain the $60 or make payment,
Excel's claim against the university would not stand.
Owners should note that they
need to request that final statement of subcontractors and amounts due and
owing to be protected under the Act. Contractors should note that they
need to get their notices and billings to the owner in a timely fashion under
the act to preserve their rights.
Lakewood Prairie, LLC v. Ibarra Concrete Company, et al. (N.D.IL Doc. No. 08 C 1200)
Given the glut of Bankruptcy cases we have been seeing over the past four months where differing lien matters are being resolved over limited funds in bankruptcy actions, it's refreshing to see an interpleader action. (An action filed by a party that has control or possession of property that should go to some other party, but first it needs the court to determine which party is the correct party. In the context of this action, which involved a developer in control of funds that would have been paid to a general contractor but for the fact that the contractor was no longer in business.) The reason this is refreshing is that lately we have been seeing cases where the GC gets behind and starts using all kinds of funds from different projects to pay its bills. Often, the GC does not reveal its financial state to the parties it contracts with know of its financial state until it is too late. The GC goes bankrupt, which consumes the remaining monen that was to be paid out to its subs and other creditors... resulting in a GC that can't pay and multiple liens filed against property owners who had no idea that the payments they were certifying weren't getting to the subcontractors and creditors.
In this action, the company that went under had also failed to make its FICA payments to the IRS. At the time the interpleader action was filed, the developer was still in possession of some money that it intended to use to pay the GC. This money was put forth in the interpleader action with a request to adjudicate a settlement of the pending mechanic's lien claims in state court. The developer also added the US as a party because of the lien the US had on the missing FICA tax payments. The US then filed a motion to remove the case to federal court to which the mechanic's lienors and other creditors objected. The court denied the motion to remove the case back to state court finding that the interpleader action had properly consolidated all the cases, and that venue was correctly in federal court under the US Code.
The case is also a reminder that one quick way to federal court when you can't get diversity jurisdiction is to join the U.S. Government as a party.
The case is available here.
Korte & Luitjohan Contractors, Inc. v. Thiems Construction and IDOT (5th Dist, Doc. No. 5-05-0516)
In this case, subcontractor brought a suit against the Illinois Department of Transportation (IDOT), and the general contractor on a project. The bid on the project was to perform services for the general to excavate a trench, install a sewer pipe, and supply backfill. The contract required that the parties abide by the IDOT Standard Specifications and the plans specified in the general contract. The suit alleged a claim for foreclosure under the mechanics lien act, in which IDOT was named a party, a claim for breach of contract, and a claim that the GC had violated the State Prompt Payment Act (30 ILCS 540/0.01 et seq.) The trial court dismissed IDOT from the case, and found that the IDOT specs precluded the breach of contract and lien actions. The trial court then determined that retaining payment was improper and awarded interest under the State Prompt Payment Act. The parties appealed.
Here, the appellate court concluded that the trial court was right in dismissing IDOT given that the mechanics lien act authorizes the funds to be set aside before resolution of the issue, but does not authorize making a state agency party to a foreclosure action. The opinion discusses a topic that should be of interest to those contracting with the state when it considers payment under the mechanics lien act. §23 of the act authorizes subcontractor remedies through liens against public funds for state projects, but the act has never applied to contractors. Additionally, suing pursuant to this section means that a subcontractor will be bringing an action for an accounting within 90 days of providing the required notice, and the only way to bring in an officer of the state under the act is in an action claiming they failed to comply with §23 of the statute.
The breach of contract claim filed against the GC was premised on an interpretation of IDOT Standard Specifications. (This may bore some of our readers, but it is actually pertinent to anyone looking for courts to favorably interpret government specs.) §208.03(b) governs methods of measurement quantities for trench backfill, and contains a clause stating that any backfill required in excess of the maximum quantity as calculated but he specs "shall be furnished by the Contractor at his/her own expense." The plaintiff argued that there was no established width to the trench and tried to say that use of the word "shall" in §550.04 (the IDOT spec which states exactly how wide a trench should be on such a project) didn't really mean shall, but meant something like "shall not be less than," which, you don't have to be Bryan A. Garner to understand, is bad form in just about every school of legal interpretation... especially when the court can read other sections of the IDOT specs and see that when IDOT meant to set a minimum limit on something, it used some variant of "shall not be less than" and not just "shall."
Utilizing this reading of §208.03 the court upheld the trial courts determination that the plaintiff was not owed monies for the excess it was required to provide and the dismissal of the breach of contract claim was proper.
With regard to the final argument, the court held that it was IDOT that failed to make prompt payments to the GC who, pursuant to provisions of the contract and federal regulations was then to turn around and hand the money over to the plaintiff. Contrary to the trial court's opinion, the GC was not in error when it did not turn over monies that had not been forwarded by IDOT. The GC would only be in error if IDOT had turned over the funds and then the GC failed to pay them to the subcontractor. The appellate court also said that the trial court had properly interpreted the State Prompt Payment Act, but because the GC did not owe money to the plaintiff, there was no violation of the act.
[NOTE: In addition to the State Prompt Payment Act, there are other prompt payment acts that can be alternative sources for causes of action regarding getting paid such as the Contractor Prompt Payment Act, the Local Government Prompt Payment Act, any of which, along with a host of other methods, can be utilized under the law in securing payments owed.]
Mechanic's Liens, Mechanic's Liens
It's not often that we get a 97 page opinion from an appellate court, even more rare is the occasion that any such opinion would be of interest to the industry. This week, we were happy to find both in Cordeck Sales, Inc., v. Construction Systems, Inc., et al., (Doc. No. 1-06-3702, 1st Dist).
In Cordeck, a developer had gone belly-up on a multi-million dollar condo development. Multiple mechanics liens were filed by the various entities involved in the construction for work performed, the lender filed a claim to foreclose its mortgage, and a receiver had been appointed to sell the individual units and collect the proceeds into a pot from which the resolved disputes would be compensated. The opinion doesn't go too far in creating any substantively new nuances to the statute that Representative George Scully has called "a patchwork of quilts...of patches put on this quilt over the past hundred years" (Slip op. at 44). Some clarifications and holdings are still important. Of interest are:
- A reminder that the dates of the contracts are the attachment dates for the liens of contractors and subs. They will be instrumental in establishing the priority of liens against third parties and other claimants.
- The date of recordation for a mortgage will establish the date of a mortgage for the determination of priority in the scheme of liens and claims against third parties.
- Construction Managers can have liens, even on contracts prior to the 2004 and 2006 amendments to the Act.
- Amendments to a recorded lien for amounts of work done over time past the date of the first recorded lien can still affect the assertions of rights against the owner, but may not have affect as to the right in priority or assertions against third parties.
- Fees earned on a project are not inherently "unalienable."
Of note to many practitioners:
Make Sure There's Relief to Be Had
Here's a reminder from the Northern District of Illinois Bankruptcy Court. In Vancil v. Tres Amigos (docket #06-71254) the owner of a property, Tres Amigos, was looking to extinguish liens filed by two subcontractors of Vancil. Tres Amigos brought the action to extinguish the liens where the two subs had not properly served Tres Amigos with their 90 day notices under the Illinois Mechanic's Lien Act.
A problem arose when the Court noted the Tres Amigos had never made one of the subs a party to the action and that it failed to assert a claim against the other sub, which was a co-defendant. The Court pointed out the Tres Amigos would likely have prevailed on its claim, had it not failed to properly plead actions for which relief could be granted against the subcontractors.
- The lesson learned here: Make sure all your ducks are in a row before time, effort and money are spent asking the Court for relief that cannot be granted.
Amending The Mechanic's Lien Act to Include Written Notice for Contractors
In what is sure to be a contested issue, the new House Bill 5572 is a proposition to require written notice from the contractor to the owner of a single-family, owner-occupied dwelling, prior to filing a lien against any property of the owner.
- Given that there is no time provision installed in this legislation, and that it does not include a method for serving the notice, and that the term "any" could be construed in multiple ways, it is likely that we'll see some revisions of this bill before it could be incorporated into the mechanic's lien act.
