Following the Mechanics Lien Statute

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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.

 

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This page contains a single entry by FGPP published on June 20, 2008 10:40 AM.

The People v. Lincoln, Ltd. (1st Dist. Doc. No. 1-07-2517) was the previous entry in this blog.

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