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Can A Contractor Be Forced To Arbitrate Its Mechanic’s Lien Claim If The Construction Contract Provides That Arbitration Is The Exclusive Forum To Resolve Disputes
September, 2024
The short answer is usually yes according to the recent second district appellate court opinion in Portage Park Capital, LLC. v. A.L.L. Masonry Construction Co., 2024 IL App (1st) 240344.
Many construction contracts contain a provision that designates arbitration as the sole method for resolving disputes. Lien Claimants often ignore these provisions and file lawsuits to enforce Liens they have filed. The questions that often arises in these circumstances is whether the enforcement of a Mechanics Lien Claim can be decided by an arbitrator and, if so, can Lien Claimants who file suit be forced to submit their Lien Claims to an arbitrator, and then enforce their Lien Claims if they prevail? The starting point is consideration of several statutes and common law principles.
Section 9 of the Mechanics Lien Act provides that if a contractor having a Lien does not receive payment, then the contractor may bring suit to enforce his Lien in the circuit court in the county where the improvement is located. In a 1902 case, the Illinois Supreme Court ruled that Section 9 gave the circuit courts exclusive jurisdiction to enforce a Mechanics Lien claim. However, in order to enforce a Lien, the Claimant must prove the Lien is valid. And a Lien is only valid if the statutory requirements have been strictly observed, Tefco Construction Co. v. The Continental Community Bank & Trust Co., 357 Ill.App.3d 714 (1st. Dist. 2005). Only a court can enter judgments under the Illinois Constitution and enforcing a Lien requires a judgment of foreclosure. One would think that only a court can determine the validity of a Lien.
However, the court ruled in the recent Portage Park Capital, LLC case that enforcement of a Mechanics Lien and determining the validity of a Mechanics Lien are not the same. So while only a circuit court can enforce a Mechanics Lien and enter a judgement of foreclosure and sale, in the first instance, an arbitrator can decide the validity of a Mechanics Lien under the Portage Park Capital holding. This is because a Mechanics Lien Claim arises out of, or relates to, the contract which contains the arbitration clause. And whether a Lien is valid and enforceable depends, in part, on whether the Claimant performed its obligations under the contract. This is entirely consistent with the Illinois Arbitration Act which provides that making an arbitration agreement confers jurisdiction on the courts to enter judgment on the award. And so it goes because arbitration awards can only be enforced by the courts. So, while a circuit court has exclusive jurisdiction to enforce a Lien and to enforce an arbitration award, whether a Lien is enforceable is within the purview of an arbitrator where there is an agreement to submit contract disputes to arbitration for resolution.
Does An Unconditional Waiver Given In Exchange For A Progress Payment Bar A Breach of Contract Claim For The Unpaid Subcontract Balance
November, 2019
Not when the Does An Unconditional Lien Waiver And “Release” Given In Exchange For A evidence establishes that neither the Subcontractor of General Contractor thought the waiver was intended to prevent the Subcontractor from receiving payment for what it was owed under the subcontract.
Normally, a lien waiver waives only lien rights but does not bar contract claims. The recent case of Mormat Electrical & Construction Services, LLC v. Hunter Construction Services, 2019 IL App (5th) 170316 is quite interesting because the waiver included language much broader than typically provided in a waiver. In this case the Plaintiff subcontractor entered into an oral agreement with the General Contractor (“GC”) to furnish electrical work for the construction of a chain restaurant. Throughout the project the Sub had given signed waivers prior to receiving draws. The Sub finished work on the project and billed the GC $72,715.00 due under the Subcontract. In exchange for a waiver, the subcontractor received a $10,000.00 draw. The Sub sued for breach of contract after the GC refused to make any further payments.
A defense raised by the GC was that Plaintiff gave an unconditional lien waiver which “… waived and released “any and all *** claims against the Project, Owner, Surety, Lender, if any, and any other parties who have an interest in the Project and any other individual or entity, for such labor, skills, equipment, tools, supplies, services or associated items furnished prior to and including the 19th day of November, 2014.”
Typically, a waiver does not include language that it released all claims against anyone related to the project for labor or materials furnished prior to the date of the waiver.
Recognizing that i) waivers are frequently given before payment, ii) that Plaintiff had testified it only provided unconditional waivers so it could get paid, and ii) the Subcontractor had provided waivers throughout the project before receiving payment, the Appellate Court found that the waiver was not intended to be a final release and ruled that it did not prevent the Subcontractor from recovering what it was owed.
Is It Constructive Fraud for a Contractor to File a Mechanics Lien That Includes Amounts Due Other Trades It is Not Obligated to Pay?
January, 2020
The First District Appellate Court said yes in MEP Construction, LLC v Trucco MP, LLC and affirmed the grant of partial summary judgment dismissing the mechanics lien count of Plaintiff’s complaint, 2019 Ill. App. (1st) 180539.
Section 7 of the Illinois Mechanics Lien Act states in part that no lien “…shall be defeated to the proper amount thereof because of an error or overcharging on the part of any person claiming a lien therefore under this Act, unless it shall be shown that such error or overcharge is made with intent to defraud.”, 770 ILCS 60/7. A lien for an amount in excess of what is actually due as a result of a mistake, differences of opinion on amounts due, or set-offs, for example, or simply being unable to prove the full amount of the lien, will not render a lien unenforceable. Claiming more than is due for an improper purpose, however, will.
In MEP, the Plaintiff was hired as a construction manager for a restaurant build-out. Other “subcontractors” were hired directly by the restaurant owner. It appeared that these trades were introduced to the restaurant owner who then engaged them at the suggestion of Plaintiff. After a payment dispute, Plaintiff recorded a mechanics lien for $251,000.00. Plaintiff’s sworn statement, however, stated that it was owed only $127,000.00 and three other “subcontractors” were owed the other $124,000.00 (equaling the amount of the lien). It is common practice for general contractors to include in their lien claims amounts that they owe downstream subcontractors. The key here is that typically the general contractor is contractually obligated to pay its subcontractors and is also responsible for its subcontractors’ work. The court did not discuss weather the “subcontractors” were, in fact, owed any money for their work. Regardless, the fact that the Plaintiff included sums in its lien claim it was not obligated to pay to other trades made the lien claim fraudulent and rendered the entire lien claim unenforceable.
Is Quasi Contract Claim Valid for Extras When a Subcontractor Has an Express Contract
June, 2017
The short answer is no. quantum meruit is a form of quasi contract that arises when a party (i) performs a service to benefit a defendant, (ii) it did not perform the service gratuitously, (iii) defendant accepted the benefits of plaintiff’s work or services and, (iv) no contract existed between the parties for the work or services furnished.
Although plaintiffs, hedging their bets, frequently add quantum meruit claims to their suits for breach of contract, the law in Illinois is clear that a quasi contract claim is defeated by an express contract covering the same subject matter even if the plaintiff cannot pursue a cause of action for breach of contract. (See e.g. Industrial. Lift Truck Corp. v. Mitsubishi International Corp., 104 Ill. App. 3d 357 (1st District 1982)).
Is a claim for quantum meruit valid where, as frequently happens, a subcontractor ends up doing additional work not expressly covered by its contract? Not according to the recent case of Archon Construction Company, Inc. v. U.S. Shelter, LLC, 2017 Ill. App. (1st) 153409.
Archon involved a municipal project in which the plaintiff Subcontractor was engaged by the General Contractor to provide a sewer system. The Subcontract made approval of the sewer system by the municipality a condition of payment to the Subcontractor. The Subcontractor’s proposal specified PVC pipe for the system. The proposal was accepted by the General Contractor and PVC pipe was installed. The plaintiff was then required to excavate, remove and replace the PVC pipe. It filed suit to recover $250,000 for the removal and replacement of the PVC pipe. A Contractor or Subcontractor can only recover for extras if the additional work was required through no fault of its own and the extra work was outside the scope of that required by the parties’ contract. (In an earlier appeal of this case, the appellate court sent the case back to the trial court finding that it was unclear whether plaintiff was “at fault” in installing PVC pipe).
After the first appeal, the Subcontractor dropped all of its breach of contract claims and claims for extras and proceeded solely on its cause of action for quantum meruit. This left the Subcontractor with no recovery. The court stated that where a contract exists between the parties, recovery for quantum meruit is only allowed where the additional work is wholly beyond the subject matter of the parties’ contract. In this case, the parties entered into a contract for the Subcontractor to install a sewer system accepted by the city. The suit was to recover for the extra work that it was required to do to satisfy the city. The contract also provided that any additional work would be compensated on a time and materials basis as agreed to by the parties. Because the Subcontractor’s proposal specified PVC pipe, it likely would not be judged at fault for installing it and it may, therefore, have had more success if it pursued its claims for breach of contract and extras instead of quantum meruit.
The lesson here: always get written change orders before supplying additional work on any project.
Contractor Prompt Payment Act May Add Interest to Breach of Contract Claims
October, 2016
Many contractors know that Mechanics Lien Claimants are entitled to 10% interest on amounts they are due from the date due under Section 1 of the Illinois Mechanics Lien Act. However, barring a contract provision, breach of contract claims generally do not include interest for Contractors or Subcontractors unless they include a claim under the Illinois Contractor Prompt Payment Act.
The Contractor Prompt Payment Act provides that a Contractor submitting a pay application who performs in accordance with its contract is entitled to payment not more than 15 days after approval of the work by the Owner. If there is no approval or rejection, the work is deemed approved 25 days after submittal of the pay application. Even where there is a partial rejection of the work, the reasonable value of the non-rejected work must be paid within the same 15 days.
In the event the responsible party does not comply with the Act, the Contractor is entitled to 10% interest on the amount due until it is paid.
Does this apply to Subcontractors as well? It does. However, the 15 days for Sub-contractors starts from when the upstream Contractor responsible for payment receives payment for the Subcontractor’s work. Automatic approval after 25 days without a response does not apply to Sub-contractors according to GX Chicago, LLC v. Galaxy Environmental, Inc., the one appellate court case interpreting the statute.
Besides liability for interest, the other consequence of failing to comply with the Act is that the Contractor or Subcontractor who has not been paid in accordance with the Act can walk off the job after 7 days written notice without liability of breach of contract.
This is a very useful statute for Contractors and Subcontractors, especially where lien rights have expired or are not feasible to pursue for other reasons.
Contractors and Subcontractors beware, however, the Act does not apply to public projects (covered by the Government Prompt Payment Act) or projects involving single family homes or residences with 12 or less units in a single building.
Overstating Amount Due in Claim Imperils Lien
April, 2016
Section 7 of the Illinois Mechanics Lien Act provides in pertinent part that
“[n]o such lien shall be defeated to the proper amount thereof because of an error or overcharging on the part of any person claiming a lien therefor under this Act, unless it shall be shown that such error or overcharging is made with intent to defraud.”
Honest mistakes, differences of opinion, and legitimate disputes arise not infrequently in construction projects. Under what circumstances will a court invalidate a Lien because the Lien Claimant overstated the amount that it is due? The 1st District confronted this question in the recent appellate court case of Father & Sons Home Improvement II, Inc. v. Stuart, 2016 Ill.App. (1st) 143666. In this case, the Stuarts entered into a contract with the Contractor to construct a deck and renovate or finish a basement for the sum of $43,500.00. Eight months before the work was finished, in fact before it was even started, the contractor filed a Lien claiming that it had completed the work and that the entire contract sum plus $2,700.00 in extras was due. As required by the Illinois Mechanics Lien Act, an affidavit attesting to the facts was attached to the Lien. Plaintiff filed suit to foreclose its Lien and for other relief six or eight weeks after completing the work.
Clearly, claiming the full contract amount and extras eight months before completion necessarily means the amount claimed in the Lien was overstated. The issue before the court was whether the sworn assertion that the contract was completed eight months before it was constitutes fraud warranting dismissal of the mechanics lien foreclosure claim.
Illinois courts have a long history not invalidating exaggerated Lien claims, even those grossly overstated, without evidence of fraudulent intent on the part of the Claimant. The opinion does not address whether the contractor’s work, when finished, conformed to the contract or whether or not the Contractor was due the entire contract price plus the extras. So the overcharge must be assumed to have been based upon what the Contractor was owed when the Lien was filed. The defendants argued that filing a Lien for the full amount plus extras eight months before the work was completed constituted constructive fraud. The Contractor claimed that the excess claim was merely an erroneous overcharge which did not rise to the level of fraud. The appellate court disagreed. The court stated that intent to defraud may be inferred from documents containing overstated Lien amounts combined with additional evidence. In other words, there must be separate evidence demonstrating that the Contractor knowingly made the overstatement or overcharge.
In this case, the appellate court affirmed the trial court’s finding that the Contractor made false statements at least five times in the affidavit supporting the Lien Claim, answers to defendants’ affirmative defenses and in a brief. The court concluded that the claimant had to have known that the work was not completed as stated in the Lien and, therefore, that the Lien falsely stated that the Stuarts owed plaintiff $46,200.00 as of the filing date. There are two important lessons here. First, that the court found the Lien to be excessive based upon when it was filed. How much the Contractor was owed when the lawsuit was filed was entirely irrelevant to the court’s analysis concerning the validity of the Mechanics Lien. Second, although it seems unlikely in this case, extreme sloppiness without actually intending to defraud a customer or Contractor up the chain in a project could result in a finding of constructive fraud if there is additional evidence from which it can be inferred that the Contractor knowingly overstated the amount of the Lien or incorrectly stated when the amount was due.
Supreme Court Decides if Physical Improvement or Increase in Property Value is Required for a Valid Mechanics Lien
November, 2015
The Illinois Supreme Court just decided the case of Burke Engineering, Ltd. v. Heritage Bank of Central Illinois. In this case, the plaintiff engineering firm provided pre-development services. The trial and appellate courts ruled that the services provided by the engineering firm did not constitute lienable work and found that the plaintiff’s lien was invalid.
The question the Supreme Court faced was whether an engineering firm was entitled to a mechanics lien for surveying and then drafting and recording a subdivision plat when the development of the land was abandoned after only a single house was built.
The Illinois Mechanics Lien Act says, in part:
“(a) Any person who shall by any contract or contracts, express or implied, or partly expressed or implied, with the owner of a lot or tract of land to… improve the lot or tract of land… or for the purpose of improving the tract of land, or to manage a structure under construction thereon, is known under this Act as a contractor and has a lien upon the whole of such lot or tract of land …for the amount due to him or her for the material, fixtures, apparatus, machinery, services or labor, and interest at the rate of 10% per annum from the date the same is due.”
The defendant bank, which had a mortgage on the property, argued that the engineer’s work did not constitute “an improvement” to the property and that it was, therefore, not entitled to a mechanics lien. The Supreme Court said that the requirement of some physical improvement or calculable increase in property value is contrary to long-standing case law and inconsistent with the Mechanics Lien Act which provides that one who has a contract “for the purpose of improving the tract of land” is a contractor and entitled to a lien. The Court reasoned that creating a plat of subdivision, surveying the property and planning roads and sewers was all done to enable development of a neighborhood on the property and were, thus, done for the purpose of improving the property.
This decision is good news for engineers, architects and surveyors as it reaffirms their right to a mechanics lien when they are not paid for performing such services.
New Section of Illinois Mechanics Lien Act May Simplify Mechanics Lien Cases
November, 2015
Effective January 1, 2016, an amendment to the Illinois Mechanics Lien Act involving private projects may simplify Mechanics Lien litigation by allowing an interested party, usually the Owner or General Contractor in these situations, to file a Surety Bond with the court in lieu of the Mechanics Lien. The new law may benefit Owners, Lenders, Contractors and Lien Claimants by substituting the Bond for the Lien on real estate and funds owed to upstream Contractors.
Fewer Defendants-Less Expense
Currently, the Mechanics Lien Act requires all parties with an interest in the subject property including, Lenders, Owners, and other Lien Claimants, to be joined as parties to a Mechanics Lien foreclosure lawsuit. If a Bond is filed and approved by the court under the new Section 38.1 of the Mechanics Lien Act, the court can dismiss all parties other than the Lien Claimant and the principal and surety of the Bond. The benefit is clear: fewer parties and fewer claims to adjudicate should mean less expense and quicker resolution of cases.
Claimants’ Security Will Remain Intact Without Halting Construction
Construction sometimes grinds to a halt because Lenders are reluctant to continue funding projects while funds and the real estate remain encumbered by Liens. Other Subcontractors may file Liens when draws for completed work cease.
The amended statute will transfer the Lien to the Bond and leave the real property free and clear of the Mechanics Lien without having to wait for the sometimes lengthy process of adjudicating the Lien or Liens to be concluded. Under the new Section 38.1 of the Mechanics Lien Act, a prevailing Lien Claimant will obtain a judgment against the principal and surety of the Bond.
Cautionary Note Regarding Attorney’s Fees
Under the current Mechanics Lien Act, in the absence of a contract allowing attorney’s fees to a party in the event of litigation, a court can only award attorney’s fees to a General Contractor or an Owner facing off against each other and only if one of the parties litigates the Mechanics Lien without just cause. Under Section 38.1, however, the prevailing party in Mechanics Lien cases where a Bond is filed will be entitled to an award of attorney’s fees. It remains to be seen whether the automatic fee shifting provision of the statute helps or hurts the construction industry.
Is a Public Project Performance Bond Also a Payment Bond?
January, 2015
To the relief of government agencies and the likely distress of sureties, the Illinois Supreme Court recently answered this question in the affirmative. In Lake County Grading Company v. the Village of Antioch a Subcontractor brought suit against the Village of Antioch after the Contractor went bankrupt while still owing the Subcontractor over $200,000.00.
The Illinois Public Construction Bond Act mandates government agencies to have General Contractors to furnish completion and payment Bonds for projects costing over $50,000.00. Typically, a Subcontractor faced with unpaid work on a public project where there was no payment Bond would sue the agency for failing to comply with the Bond Act and for breach of contract on the theory that it was a third party beneficiary of any Bond requirement provisions of the general contract.
Then came Lake County Grading. In this case, the Village accepted a performance Bond which did not include a payment Bond or payment Bond language. After the Contractor defaulted and filed bankruptcy, the Subcontractor filed suit for breach of contract in violation of the Bond Act. The trial and appellate courts ruled in plaintiff’s favor on the claims that the Village was liable for accepting only a performance Bond and, therefore, did not comply with the Bond Act or the general contract which required both performance and payment Bonds.
The Bond Act provides in part:
“…all officials, boards, commissions, or agents of this State in making contracts for public works of any kind costing over $50,000.00…shall require every Contractor for the work to furnish, supply and deliver a bond to the State or to the political subdivision thereof entering into the contract…with good and sufficient sureties…the bond, among other conditions shall be conditioned for the completion of the contract, for the payment of material used in the work and for all labor…each such bond is deemed to contain the following provisions whether such provisions are inserted in such bond or not.”
The Act goes on to state that the Bond will provide that all persons and firms having contracts with a General Contractor or Subcontractors will be paid for their labor or materials furnished in the performance of the public project.
The Village argued that the “deeming language” meant that any Bond – performance or payment – was deemed to include all provisions required by Section I of the Act and, thus, the performance Bond it accepted contained the necessary payment Bond provisions. Both lower courts rejected this argument and found that the provisions deemed to be included were only included in a payment Bond once it was acquired and furnished by the Contractor.
The Supreme Court said no and held that any Bond delivered by a Contractor contains all of the terms deemed by the Bond Act to be included in the Bond supplied by the Contractor.
This case clearly ends the distinction between performance Bonds and payment Bonds for public projects in which they are required, at least to the extent performance Bonds also act as payment Bonds to the degree required by the Bond Act.
What Does the “Four Months” Deadline to Enforce Liens Against Lenders and Purchasers Mean?
Section 7 of the Mechanic’s Lien Act states that:
“No contractor shall be allowed to enforce such lien against or to the prejudice of any other creditor or incumbrancer or purchaser, unless within 4 months after completion, or if extra or additional work is done or labor, services, material, fixtures, apparatus or machinery, forms or form work is delivered therefor within 4 months after the completion of such extra or additional work or the final delivery of such extra or additional labor, services, material, fixtures, apparatus or machinery, forms or form work, he or she *** shall file *** a claim for lien.” 770 ILCS 60/7 (2013).
So, how does one compute the four month period? Is it 120 days or 4 calendar months?
The appellate court recently answered this question in a case where it was called upon to decide whether copying architectural drawings and assembling other design files was lienable work that extended the time for an architect to file a Mechanic’s Lien that would be enforceable against a mortgage holder and purchaser. The answer, it turns out, is a hybrid of these two formulas. To satisfy the time limitation to enforce a Lien against third parties, the Lien must be filed no later than one calendar day before the last work date in the 4th month following the completion date. So that would mean August 18 if the last work date was April 19. But it is also important to note what “completion date” means. As stated by the court, it must be work that is “needed to complete the claimant’s contract”. Work in the nature of maintenance, correction or repairs will not extend the time to file a Mechanic’s Lien.
If doubts arise about whether or not you will be paid for your work, be conservative and err on the side of caution. It makes no difference whether you are one day or one year late in filing a Lien, the consequence is the same.
Additional Requirements for Demand to File Suit to Enforce Lien
If a contractor or subcontractor records a Lien against the title to your property, the Mechanics Lien Act allows you to force the Lien Claimant to initiate legal proceedings within 30 days or forfeit the Lien. But, it is no longer sufficient to simply demand that the Lien claimant file suit to enforce the Lien in 30 days. The Mechanic’s Lien Act was amended and now requires that such a demand include a Notice in bold type that the Lien will be forfeited in the absence of a response by the Claimant within 30 days as required by the Mechanic’s Lien Act. While the validity of a demand without additional notice has not been ruled upon by an Illinois court, the plain language of the statutory amendment is unmistakable and its inclusion in such a demand would likely be strictly enforced.
Contractor’s Defective Sworn Statement Sinks Mechanic’s Lien Claim
A March, 2014 opinion, issued by the Illinois Appellate Court highlights the importance of general contractors following all the statutory rules concerning Contractor’s Sworn Statements and the disastrous consequences of failing to do so.
Section 5 of the Illinois Mechanic’s Lien Act provides that:
“(a) It shall be the duty of the contractor to give the owner, and the duty of the owner to require of the contractor, before the owner or his agent, architect, or superintendent shall pay or cause to be paid to the contractor or to his order, any monies or other consideration due or to become due to the contractor, or make or cause to be made to the contractor any advancement of any monies or any other consideration, a statement in writing under oath or verified by affidavit, of the names and addresses of all parties furnishing labor, services, material, fixtures, apparatus or machinery, forms or form work and of the amounts due or to become due to each. Merchants and dealers and materials only shall not be required to make statements required in this Section.”
As set forth in the case Cityline Construction v. Roberts, the cost of failing to fulfill each element of Section 5 can be an otherwise valid lien being ruled unenforceable.
In Cityline Construction, the General Contractor filed a Lien after not receiving payment for restoring a fire damaged residence. The Contractor did not furnish a Contractor’s Sworn Statement despite the owners’ request. After the contractor filed suit, the owners asked the judge to dismiss the claim to foreclose the Contractor’s mechanic’s Lien because of its failure to furnish the Sworn Statement.
The Contractor argued i) that its failure to supply the Contractor’s Statement was unimportant because all of the subcontractors and material suppliers had been paid and there was no risk of any other lien claims. The court agreed with the Owners and dismissed the mechanic’s lien foreclosure claim stating that the statute must be strictly followed. The Appellate Court affirmed the dismissal, citing several opinions emphasizing the need to exactly follow the statutory requirements set forth in Section 5 of the Mechanic’s Lien Act.
In one case cited by the Cityline Construction court, a contractor provided a letter listing the Subcontractors on the job and a certified pay application listing the trades and amounts due or to become due to trades together with Subcontractors’ lien waivers after it was asked for a sworn statement. But the pay application did not name the subcontractors and it was not sworn to by the contractor. Although the Contractor won at trial, the judgment was reversed by the Appellate Court. A certified pay application without the names of the Subcontractors does not satisfy the requirements of Section 5 of the Mechanics Lien Act, even though the subcontractors were named on the lien waivers.
In another case relied on by the court, the General Contractor provided a Contractor’s Statement, but the oath was not properly administered. In this case, the Owner did not ask for the Sworn Statement until after the Contractor filed its lien. After the request, the Contractor furnished a Sworn Contractor’s statement containing the names and trades of its subcontractors and a gross amount due for the work to date and the remaining contract balance after payment. Although the Sworn Statement was signed, it was not notarized.
The proper information was contained on the document, but the trial court dismissed the case because the statement was not “under oath or verified by affidavit”. On appeal, the general contractor argued that an oath was administered by a notary public who merely neglected to sign the Sworn Statement. Affirming the dismissal, the Appellate Court said not good enough because the express rules of Section 5 were not satisfied.
These cases all underscore the necessity of general contractors complying with all the technical requirements of Section 5 of the Mechanic’s Lien Act in order to properly perfect an enforceable Mechanic’s Lien.
Illinois Reverses Judicial Trend Against Subcontractors
Subcontractors had been given a rough time by Illinois Courts in recent years. In a much watched case, for example, the State Supreme Court handed Subcontractors a serious blow in LaSalle Bank, N.A. v. Cypress Creek 1, LP. Despite the language of former Section 16 of the Mechanic’s Lien Act that said:
“…upon questions arising between encumbrances and lien creditors, all previous encumbrances shall be preferred to the extent of the value of the land at the time of making of the [construction] contract and the [mechanics] lien creditor shall be preferred to the value of the improvements erected on said premises…”,
The Court ruled that when the proceeds from a foreclosure sale are insufficient to satisfy the Mortgage Lender and Mechanic Lien Claimants, the Lender was entitled to the same priority as perfected Lien Claimants to the extent the loan paid contractors for improvements to the property. This decision came on the heels of several other court decisions favoring Lenders over Contractors and, in Cypress Creek, resulted in the Subcontractors’ liens being wiped out or significantly reduced. This is because the priority the Court granted the Subcontractors, that is Lien Creditors, was limited to the value of their own, individual work, not the value of the entire completed work. In other words, the Court did not grant the Subcontractor’s priority to the value of all of the completed improvements built for the Project. The Lender’s priority extended even to work for which Subcontractors submitted Lien Waivers.
To correct the Court’s strained, and some said unsupportable, interpretation of the Statute, the Legislature amended Section 16, which now provides:
“No encumbrance upon land, created before or after the making of the [construction] contract for improvements . . . , shall operate upon the building erected, or materials furnished until a lien in favor of [those furnishing labor and materials] shall have been satisfied and upon any questions arising between encumbrances (such as mortgage holders) and lien creditor, all previous encumbrances shall be preferred only to the extent of the value of the land at the time of the making of the contract for improvements . . . and each lien creditor shall be preferred to the value of all of the subsequent improvements erected on said premises, whether or not provided by the lien creditor . . .”
The new law unmistakably restores the priority of Contractors with perfected Mechanic’s Liens over Lenders in the distribution of sale proceeds attributable to the entire value of the work completed for the Project.
Lender’s Mortgage Lien Takes Priority Over Lien of Subcontractor Who Fails to Serve Lender with Intent to Lien
What happens with a Subcontractor’s perfectly good Mechanics Lien if it does not serve the owner’s mortgage lender with a 90 Day Notice? The Second District Appellate Court recently reaffirmed the requirement for subcontractors to provide mortgage lenders notice of their lien under Section 24 of the Mechanics Lien Act in the case of Parkway Bank & Trust Co. v. Meseljevic, 406 Ill. App.3d 435.
In this case the construction lender sued to foreclose its construction mortgage and for the sale of the underlying real property. Beta Electric, Inc., a subcontractor, filed a counterclaim arguing its Mechanics Lien had priority over the Parkway mortgage. The court granted judgment in favor of the lender before trial. The Appellate Court affirmed stating that to prefect a Mechanic’s Lien under the Act, a Subcontractor must serve a notice of its Lien Claim within 90 days after “completion” of its work to any lending agency, “if known”. If the subcontractor does not provide a known lender with the notice, the lien is unenforceable against the lender.
So what happens? A Subcontractor can win its case and have the property sold at auction to satisfy its judgment. But, if a third party is the high bidder, the lender gets paid first. If the Subcontractor bids its judgment and it is the high bid, the property will remain subject to the mortgage and loan will have to be paid by the Subcontract.
Subcontractor’s must always serve their Section 24 notices on mortgage lenders when they can find the lender with reasonable diligence or if the property is sold to satisfy the judgment the lender will be the first, and if there is insufficient proceeds to satisfy the mortgage, the only one paid.
When Does the 3 Year Work Limit for Contractors to be Able to Claim a Lien Begin to Start?
Section 6 of the Illinois Mechanics Lien Act states that a Contractor can claim a Lien, provided, “…that the work is done or material furnished within three years…” This provision raises several questions. Does the three years begin when the contract is entered into or when the work under the contract actually starts? Does this mean that a lien for only part of the work or materials furnished is defeated if the entire project start to finish took more than three years?
The First District recently answered both of these questions in Doornbos Heating & Air Conditioning, Inc. v. Schlenker, 403 Ill. App.3d 468, 932 N.E.2d 1073 (1st Dist. 2010). In this case the HVAC Contractor began work on a medical facility in April 1999 and finished in July, 2002. The Contractor’s original proposal was submitted in 1998. The HVAC Contractor received draws in excess of $317,000.00, leaving an unpaid balance of approximately $53,000.00 for which it claimed a Lien and filed suit to foreclose.
The Owners claimed that the Lien was defeated by Section 6 of the Act because the work took more than three years. As part of this argument, they asserted that the work began pursuant to the original proposal which was dated more than three years before the last work performed. Rejecting this argument the court said the three year period commences with the beginning of the work not with the date upon which the contract for such work was entered into. The court also held that Section 6 of the Act only requires that the work for which the mechanic’s lien is asserted be completed within three years. Since the lien was for only parts of the work finished within that time period, Section 6 did not defeat the lien.
Big Win for Contractors
Contractors who work in owner/occupied residences are governed by the Illinois Home Repair and Remodeling Act.
The Home Repair and Remodeling Act states that:
“prior to initiating home repair or remodeling work for over $1,000.00, a person engaged in the business of home repair or remodeling shall furnish to the customer for signature a written contract or work order that states the total costs, including parts and materials listed with reasonable particularity and any charge for an estimate…”.
The Act makes it “unlawful” to make repairs or charge for remodeling or repair work before obtaining a signed contract or work order for over $1,000.00. The Act also requires contractors to provide its customers with a Consumer Rights Brochure for every project requiring a written contract.
After several years of inconsistent rulings by the Illinois Appellate Courts (see below) and uncertainty about the consequences for Contractors who fail to meet all of the technical requirements of the Illinois Home Repair & Remodeling Act the Illinois Supreme Court handed contractors a huge victory by ruling that a Contractor who technically violates the Illinois Home Repair and Remodeling Act (the “Act”) by not complying with some of the provisions can i) enforce a mechanics lien ii) sue for breach of contract and iii) sue for quantum meruit or the reasonable value of its services.
In K. Miller Construction Company, Inc. v. Joseph McGinnis, the plaintiff Contractor entered into an oral contract with the defendant, a real estate attorney, to do the remodeling work to convert a 3 flat into a single family home. The original contract was for about $190,000. As is frequently the case, McGinnis decided to enlarge the project and the cost increased over time to about $500,000. The contractor received the first $65,000 but then the owner refused to make any further payments until the project was completed. This was not the first work plaintiff had done for McGinnis the two had been friends.
The McGinnises visited the building repeatedly and gave approval for the extra work that was being done. Subject to a moderate punch-list, the work was approved during the final walk-through. McGinnis made some additional payments but still owed Miller over $300,000. McGinnis refused to pay, so the Contractor filed suit in three counts to foreclose a Mechanic’s Lien; for breach of an oral contract and for quantum meruit. The Owner sought to have the case dismissed arguing that plaintiff had not complied with the Act, which requires a written contract for jobs over $1,000.00. Following some of the Appellate Court decisions, the trial judge granted the motion and dismissed the case. Miller appealed and got some, but not total relief. The Appellate Court held that because of the violation of the Act, the contractor could not sue for breach of contract or enforce its mechanic liens and affirmed the dismissal of those claims. But, the Court said Miller could bring a case for quantum meruit. McGinnis appealed to the Illinois Supreme Court.
The Court ruled that technical violations of the Act such as not entering into a written contract or failing to provide a consumer rights brochure do NOT make the contract unenforceable or prevent a contractor from foreclosing a mechanics lien claim. The Court also ruled quantum meruit would be available to a Contractor. Violations of the Act that cause Owners to incur damages can be remedied under the Illinois Consumer Fraud & Deceptive Trade Practices Act. Finally a sensible meaning has been given to a poorly written statute. Common sense has prevailed and contractors can breathe a big sigh of relief.