The bill passed the house with the percentage provisions intact and the Illinois Senate now has amended the bill to include a definition of retainage:
(d) "Retainage" means funds that are earned by the contractor but not paid until some agreed upon date, such as the completion of the job.
The senate amendment also eliminates the percentage restrictions on outright retainage and instead has proposed making this bill a restriction on retainage for materials:
(b) Under a construction contract, it is unlawful to withhold retainage on materials required for completion of the construction contract that are delivered to a job site and are billed in accordance with the periodic payments in the construction contract.
This provision is interesting given that the bill could alter the general nature of invoices by allowing those parties that do not distinguish between materials and labor in their payment applications to parse out the two and demand payment for the materials listed in the payment applications leaving the owner without recourse to its contract's retainage provision for those payments.
CLAB’s posting lists and links to some advocacy groups that can be contacted to comment on the bill.
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.
It's called piercing the corporate veil and the case of Fontana v. TLD Builders, Inc. (2nd Dist. Doc. No. 2-05-0045) is a simple lesson in what to watch out for when you’re running a small business. It is also an excellent read for anyone wanting to know about the factors a court will look to in determining whether or not your choice of operating as a corporate entity will limit your liability.
In Fontana, the Fontanas sued TLD Builders after TLD defaulted on a contract to build the Fontanas' a home in Clarendon Hills, Illinois. The Fontanas had signed a contract for TLD to build the home and TLD started and apparently didn’t finish the project. As a result the Fontana’s had to demolish the partially constructed home because the damage caused by the work stoppage made the cost of completion well in excess of the $2.2 million the home would be worth if it was completed.
The Fontanas also sued the architect who settled with them prior to trial.
The Fontanas sought not only to be reimbursed from TLD, but recognizing that TLD was an underfunded corporation that would likely not have the ability to satisfy the $2 million judgment they were seeking, they also filed an action against TLD’s president seeking to hold him personally liable for any damages – even though his wife was the sole owner of the company and he only ran it.
The Fontanas won their case and the court determined that the president was liable and that the corporation, even though it was properly incorporated, was used as nothing more than a shell where the president ran the operation.
The appellate court upheld the decision… The factors the court looked to in determining whether or not liability would be limited to the corporation or passed on to the president are important factors to watch for in your operations to make sure that the corporate designation you’ve paid for is actually going to protect you:
The fact that the president didn’t own the company but that all the shares were in his wife’s name was not a factor that would protect him – he ran the business and acted as though its assets were his own.
There was no record of the initial $1000 check purported to be paid by the wife for the 1000 shares ($1 per share) when the corporation was created.
The corporation had little to no money in its accounts and even made loans after it was sued – an alleged attempt to divert the assets to try and avoid having any money to pay in satisfying a possible judgment.
The corporate minutes did not reflect resolutions or votes authorizing some of the loans made to various people and entities.
The corporate minutes did not attach legal descriptions to resolutions to sell properties.
The director (owner) had no real decision making power and/or did not exercise it.
Even though by-laws, resolutions, shareholder actions, and tax returns were filed with the state and a separate bank account and financial records were kept, there were many corporate records that were not kept, like the resolutions regarding loans, notes or claims of indebtedness, nor records of repayments.
The company never actually paid a salary to anyone, and the tax returns did not show payment to corporate officers – funds were transferred from the corporate account into personal checking accounts.
Monies were transferred after the suit was filed and the corporation was left with little money at the time of judgment - salaries were paid and monies were loaned when a suit was in place (this was read as an apparent attempt to transfer assets before a judgment was rendered).
For both people going after a corporation that has been less than honest, and for those looking to use their corporate status in order to keep from being held personally liable, paying attention to these formalities is important.
The corporation, or LLC exists as a method of helping us all come together to create more wealth and to take chances on creating capital that we might otherwise not take. Not keeping up the requirements imposed by states for operating those entities will result in losing the protections they offer.
On a different note, this opinion also contains a section on awarding attorneys fees pursuant to a contractual provision that read:
"To the extent Builder or Purchaser fails to comply with provisions of this Contract, the other party may retain an attorney to assist it in the enforcement of the provisions of this Contract, and the party at fault (i.e., not in compliance with the provisions of this Contract), shall pay any and all reasonable expense relating to the enforcement of the provisions of this Contract."
While the court did find that reasonable attorney's fees were recoverable under the contract, the opinion does note that it may be better practice to include the term “attorney’s fees” when drafting a provision for a party to bear the costs of another’s attorney.
With the spring remodeling season underway and construction beginning for many, Madigan addressed the issue – from her press release:
“Home repair, remodeling and construction complaints consistently rank among the top that my office’s Consumer Fraud Bureau receives each year, especially during the warmer months,” Madigan said. “Consumers need to make sure to ask questions before choosing a contractor so that they can avoid the types of companies we have sued today.”
To that end, the Attorney General’s office brought several suits against:
Boss Construction, Inc., a New Lenox, Ill., based company that sells and installs gutters, downspouts, roofing, siding, doors and windows, and its President Steven R. Smith,
Alpine Glass & Window Co., a Wilmette, Ill.-based window and door installation company, and its President Carol L. Bernahl,
John M. Burow, doing business as John’s Home Repair, a Willow Springs, Ill.-based home repair service,
Shane Rasmussen and Paul Haley of 123 General Construction, Inc., a Frankfort-based remodeling company,
The acts alleged in the complaint are important for home-owners and can act as a guideline or at least offer some insight about things to look for when contracting for repair and remodeling work:
Make sure your contractor is licensed as a roofing contractor if they’re doing roofing work for you;
Don’t let payments in advance of work get too costly, you should see some performance before they start taking your money, and then payments should be made incrementally, but not without a waiver (see below);
Check the construction permits to make sure they’re accurate and valid;
Get a full accounting and demand a written sworn statement and waiver of lien before you make any payments… do not give over any form of large down-payment;
Do your research – How was this company recommended? Are they a company? Are there online comments about the company or its work? – Is a license required for their specialty?
If you’re having trouble getting in touch with your contractor, or your phone calls aren’t being returned, you may think about contacting someone who can help;
Protecting yourself and your rights is the first step in making sure you don’t get taken for a ride.
It’s a good feeling when we’re able to show you just how important following through on protecting your rights can be… not to mention the smug satisfaction of being able to say we told you so.
The architect was retained by a client and drafted plans for a veterinary clinic. The parties executed and AIA standard form agreement, likely the B151-1997 because the opinion references an Article 6 that deems the architect the author of the plans and drawings and this all took place in 1998.
The relationship went south over disputes about payment and budgeting. The architect sent the vet a letter warning that all the plans they had produced were proprietary and that no one could use them to complete the project and demanded return of the plans. The vet responded that the plans were useless and that they had been “rolled up and discarded.”
Shortly thereafter, the architect took the step securing a copyright over the plans by filing an application with the United States Copyright Office.
In September of 1999 the parties formally terminated their disputes over payment with a written Termination Agreement and the agreement stipulated that Article 6 remained in full force and effect. The agreement also said that neither the vet nor his proposed hospital would use any of the work solely produced by the architect.
The vet hired a different architect to complete the hospital and in June of 2000, the veterinary hospital opened for business.
In 2004, the architect came across an article in Veterinary Economics featuring a drawing of the floor plan of the veterinary hospital at issue… and that the design had won a merit award. The architect went to city hall and got a copy of the building plans and concluded that his copyright had been violated.
In September of 2005, the architect filed suit in federal court against the hospital, the vet and several other parties alleging copyright infringement and other violations.
The defendants moved to dismiss based on the three-year statute of limitations contained in the copyright act. The district court granted the motion to dismiss ruling that any reasonably diligent person would have learned of the copyright infringement when the hospital opened, so the copyright claim’s three-year statute of limitations ran from that date in June of 2000. The architect appealed.
The appellate court analyzed the lower court’s determination about when a reasonable person would have been aware of the infringement and found that the availability of the plans on file and the fact that the hospital was open for a time did not amount to notice that would start the limitations clock:
“Architects have no general, free-standing duty to comb through public records or to visit project sites in order to police their copyrights.”
The court held that the record in front of them did not compel a finding that the architect had not been vigilant or that the architect had been on notice since 2000 and reversed the dismissal of the copyright claim.
The architect now has the ability to prosecute his copyright claim and if he prevails, he may ask for his attorney's fees as well. For the small cost of filing the copyright he gained this added protection… not to mention, since he retained the rights to the plans, he had the ability to request them when something went south on the project… in Illinois, if one adds these remedies to the contractor prompt payment act and the mechanics lien act - a design professional’s ability to obtain payment is drastically strengthened.
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 ASWORN STATEMENT OF PERSONS OR SUBCONTRACTORS FURNISHINGLABOR, SERVICES, MATERIAL, FIXTURES, APPARATUS ORMACHINERY, 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 CONTRACTORAND TO ANY SUBCONTRACTOR THAT THE CONTRACTOR USES. THESEDUTIES 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.
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.
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-occupiedsingle-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.
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.
Major construction projects can lead to major construction disputes. These disputes typically involve numerous project participants. Because the disputesMore...
Joshua Glazov over at the Construction Law Attorney Blog has an April 23, 2009, posting about Illinois House Bill 344 which, as introduced, would amend the Illinois Contractor Prompt Payment Act to limit, on a percentage basis, the amount of retainage legally allowed under construction contracts to contractors and subs..jpg)
Those of you follow our blog know that we've been waiting for the 
in his wife’s name was not a factor that would protect him – he ran the business and acted as though its assets were his own.
The acts alleged in the complaint are important for home-owners and can act as a guideline or at least offer some insight about things to look for when contracting for repair and remodeling work:
The relationship went south over disputes about payment and budgeting. The architect sent the vet a letter warning that all the plans they had produced were proprietary and that no one could use them to complete the project and demanded return of the plans. The vet responded that the plans were useless and that they had been “rolled up and discarded.”
This week, State Senator 
As it reads, notice could be given the day before the lien is filed. 
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.