Recently in Mechanic's Liens Category

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.

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.

 

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.

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.]

    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:

  • If a deponent is claiming a fifth-amendment right against self incrimination in answer to questions, the determination regarding the propriety of such an assertion will be made on a question by question basis in the trial court.

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.

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.