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

            There's an interesting This American Life episode about the current mortgage crisis entitled "The Giant Pool of Money" (the link lets you listen for free).  It's a primer on the current mortgage crisis and how we got into the mess that's currently being reported on across the internet.  The effects are varied and will continue to expand, today's Wall Street Journal has a page one piece on the mortgage insurance industry and its own response to the crisis.  The TAL is a must-listen and takes you through the history about how the financial industry's craving for investment instruments led to brokers offering mortgages with no money down to individuals without verifying salary histories.

            While the spot is an introduction, it gives context for a recent case that should pique the interest of financers.

            In First Franklin Financial Corporation v. Amerihome Mortgage Company (IL N.D. Doc No. 08 C 1089) we find First Franklin (a financer) suing Amerihome (a company acting as an independent mortgage broker for First Franklin) to recoup the monies from defaulted mortgages.  Amerihome entered into an agreement with First Franklin to act as a mortgage broker.  The agreement contained an indemnification provision and a provision requiring Amerihome to investigate and verify the information about an applicant's creditworthiness by asserting that the information contained in the application and supporting documentation for the loan was true.  Sure enough, some of those applications were for borrowers who later defaulted on their loans.  First Franklin filed an action against Amerihome alleging that Amerihome breached its agreement with First Franklin by submitting loan applications with false information and alleging that Amerihome has a duty to indemnify First Franklin for the losses incurred because of the breach.

This case is unique in that Amerihome is solvent.  For too many lenders, the mortgage brokerages they have dealt with have since gone out of business, or have filed for bankruptcy.  It is also unique in that Amerihome may be able to pay the amount First Franklin alleges it is owed, while smaller mortgage brokers would have a harder time coming up with the cash to satisfy a judgment for the amount of an entire mortgage deficiency.

Amerihome filed a motion to dismiss the action for indemnification claiming that the indemnity provision which the court denied and the case will now go forward.  If you've heard the TAL piece, then it should come as no surprise that a company is going after the individuals that procured the investment for it in the first place, and of course it doesn't hurt that First Franklin apparently insisted on the indemnification provision in the first place.  It will be interesting to see how actions such as this one continue to develop as institutions investigate ways to recoup their losses. 

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            We haven't seen as much discussion as would seem to be merited by the provisions of the Illinois Contractor Prompt Payment Act (815 ILCS 603/1 et seq.).   This act has written itself into every construction contract in the State of Illinois (excepting public works, single family homes and buildings with fewer than 12 family units, of course).  This lack of constructive commenting is likely because the Act didn't become law until August 31, 2007.  However, from the comments and criticisms we have seen, there's an extremely important and sure to be contested issue that needs to be addressed:  Is it possible to "opt" out of the provisions of the Act?

The original version of the House Bill (HB 0743) that introduced what later became the Act included language at the beginning of Section 10 which read:

• "Construction contracts.  All construction contracts shall be deemed to provide the following unless they expressly exclude the provisions of this Act"

            This provision was the sole subject of Senate Committee Amendment No. 1, which was adopted by the Senate and the House and incorporated into the Act and struck the "unless they expressly exclude the provisions of this Act" language from the Act.

            This creates a strong argument for anyone wishing to claim that it was the express intent of the legislature to not allow parties to "opt" out of the act.  Combine this with the ideas that the public policy of the act was to ensure prompt payment to contractors and subs as defined by the Mechanic's Lien act; to allow contractors and subs an additional recourse should payments not be forthcoming; to shorten the time it takes for payment and approval of work, and we end up with a decent case that parties could end up contracting around the act for naught.

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