This blog is taken from a webinar that was presented by SunRay Construction Solutions and Patrick L Edgerton from Edgerton & Edgerton, Attorneys at Law. The firm does litigation especially regarding mechanic’s liens. Patrick is a board-certified construction attorney, who serves clients in the state of Illinois. In this blog we will discuss how to get paid as a contractor, subcontractor or supplier.
Just Because You Perfect Mechanic’s Lien Claim, Does Not Mean You Automatically Get Paid
First of all, there are a number of individuals who think that because they perfected a mechanic’s lien they are now going to get paid, meaning that it is somehow automatic. It is not. It is merely a lien on the real property that might make it more difficult for a property owner to sell or refinance. Ironically, it does not stop a property owner from selling and refinancing.
Keep that in mind. They can always do a TI account in the title company and usually put one and a half times the amount of the construction lien and it will actually close. Or there’s a new bonding requirement or bonding that is now permitted, where you have to do certain things to bond over the lien claim and that also can then be sold or refinanced without consequence. But you are protected because there is going to be money there if you win.
How to Maintain Lien Rights
So what must you do after you lien to maintain your lien rights?
a. To maintain lien rights, contractors and subcontractors must file suit
Contractors and subcontractors have to file suit within two years of the completion date for all private mechanic’s liens otherwise the mechanic’s lien in Illinois lapses. Keep that in mind because it is the completion date that controls, not the recording date. Some people think it is two years from the recording date. If you follow the two years of the recording date, and they find out your completion date was prior to that then you would be knocked out on your lien rights.
Keep in mind that even though the mechanic’s lien does not require you to list the completion date in your Claim for Lien that you record, there is a split in the districts in Illinois that talk about if you have to include it. The first district says yes you have to put your last date you do substantial work or completion date in the Claim for Lien. That’s the Merchant’s Environment case. And if you do not list it, then your lien can be knocked out.
Now if the second district has ruled that the mechanic’s lien does not state it, then you are not required to put it in there. But it is highly recommended that you put it in. But you have to file within two years. The exception is if you get something called a Section 34 demand by certified mail with return receipt requested or personally served on you.
You have to file suit within 30 days. If not, you will likewise be out. So keep that in mind. Generally, it is two years from the completion date or the last day that you did substantial work, or within 30 days of receipt of a Section 34 demand.
One thing that people ask is what happens after the two years. If a property owner says they do not plan to sell or refinance within two years, they should ignore it. So you have to keep in mind to watch it and to file suit at least at Day 30 or Day 60, and make sure you get all these necessary parties named.
Waiting until the last minute can be problematic. If you do not name all the necessary parties, your lien claim can also be knocked out. Necessary parties are obviously the homeowner, the mortgage company, and the other person on title who has an interest on the property. If you wait too long and miss one of those, you will also be knocked out.
b. Can true subcontractor seek quantum meruit/unjust enrichment against property owner?
There is something called a ‘knowingly permitted exception.’ Sometimes subcontractors think they can directly go after a property owner even if the lien is knocked out under those equitable theories of unjust enrichment and quantum meruit. Those are the equitable authorities that say you do not really have a contract with anyone, or at least with the owner. But they were enriched by your work, therefore you should be allowed to sue them.
c. If no direct relationship exists between subcontractor and owner, they cannot pursue unjust enrichment/quantum meruit claims
The courts have overwhelmingly ruled that for a subcontractor who is not in privity of contract with the owner, you have no quantum meruit or unjust enrichment as against the owner. Your only rights are through the mechanic’s lien. So do not think that just because there is a theory of quantum meruit and unjust enrichment, and you do not perfect your lien properly that you can still name a property owner. That is not accurate to do.
Your exclusive remedy against the owner is under the mechanic’s lien. You will still have your contract action against your immediate contractor, either the general contractor or subcontractor if you are a sub-subcontractor. But do not think you can get away with unjust enrichment against the owner without being in privity of contract with them.
d. If no privity exists, owner has no Breach of Contract action against subcontractor
Now the nice thing about that is sometimes you file a suit as a subcontractor, to enforce a mechanic’s lien count against the owner and their interest, owners try to file counterclaims for a Breach of Contract against you as a subcontractor. Well if it is good for the goose, it is good for the gander.
If you cannot file a direct action other than the mechanic’s lien against the owner, the owner cannot file one against you for Breach of Contract. Because again, they are in a lack of privity. Now there might be some sort of negligence toward claim, but for pure contract actions, they cannot do that.
There was a theory where a district became the first to try to get around it under the implied warranty of habitability where they overruled the Minton v. Richards Group, there is another case after that where the courts were basically finding that if the owners are having a lot of problems with the property, they will sue the general contractor for implied warranty of habitability or breach of it.
If you could prove that the general contractor is out of business, or didn’t have the funds, then maybe you could go after the subcontractor. Well, the Supreme Court ruled a few years back that you cannot do that. So keep in mind that the lack of privity can also work to your advantage as well.
e. Can a true sub-subcontractor seek quantum meruit from a general contractor?
Generally speaking, no, but in a very limited circumstance, yes, rarely. There was a case that came down in 2014 that was surprising to everyone, but it was an extreme fact. Remember that on a project, you have an owner, general contractors, subcontractors, and sub-subcontractors.
For example, you have an owner, the general contractor, the subcontractor like the electrician, and the sub-subcontractor who is often the material supplier to the subcontractor electrician who is contracted with the general contractor who is then contracted with the owner.
Can the sub-subcontractor who now has a subcontractor that might be out of business go after the general contractor? Generally speaking, you cannot quantum meruit it but there was the extreme case Szabo above.
They were able to prove that the sub-subcontractor took over the job, the general contractor knew about it and then even got paid from owner for the sub-subcontractor's work and felt that it did not have to pay the sub-contractor. Now that is extreme but the judge who took the decision might have seemed wrong, but when you read the facts, you will feel that they are unique.
Actions Taken by Property Owners to Protect Themselves from Mechanic’s Liens
Keep in mind that this is a conversation on how to get paid. But in a way you also have to know what to do if the owner does something to keep you from being paid. So these are all the traps that we have to bring to your attention just in case. They can demand a Section 5 Contractor’s Affidavit from you.
a. They demand a Section 5 Contractor’s Affidavit/Statement from general contractor
It is like the Chicago title form that has the name of the contractor, you or your subcontractors, the legal description of the work, the amount of the contract, extras, credits or payments, the amount due for this payment and the balance you come to.
That is the requirement if the owner demands it. There was a split in the circuits about 15 years ago where the first district said the owner has to demand it, then you have to provide it, and as long as you write it once upon a demand, you have your lien rights.
The second district once ruled that you do not even have to demand it if you do not provide a contractor statement before you file suit, you are barred, but finally they reverse themselves after much criticism. Even Section 5 talks about ‘upon request’ or ‘upon demand’ of the owner.
The Mechanic’s Lien Act in part provides:
So if you get a demand, you better provide it and it better be under oath. Do not just sign it and what have you. It better be a Sworn Contractors Statement with a notary. Read Section 5, and then under Section 22 it is the same thing,
b. Property owner may demand Subcontractor’s Affidavit/Statement under Section 22 from known subcontractors
In Section 22 for subcontractors, let us say a general contractor sends a Section 22 demand to a subcontractor. They also have to provide it otherwise there are offenses that can be direct action against them as well for failure to provide it. So if you ever get something called a Section 5 demand or a subcontractor Section 22 demand, provide the contractor statement otherwise you will not have your lien rights.
The Mechanic’s Lien Act provides, in part:
Also, under the law, a property owner may also demand a final waiver from the general contractor.
Now possession of a lien waiver from a general contractor is a prima facie defense to a claim for mechanic’s lien. The law used to be that the owner had to prove they not only had the waiver, but then they relied on it by payment.
Well, ironically, this court went up to the appellate court and they affirmed they changed the law that said as long as they had it, that was enough. Basically, they did not have to prove that they even replied on payment. So in essence, you then have to do something called a 191 affidavit to force them to prove when they paid. But it is a little odd that a general contractor could give a waiver in the beginning when the subcontractor is not even hired yet.
That would pretty much be evidence that the general contractor has already paid. It seems like an unusual decision but that is the way the first district ruled.
Actions Taken by Property Owners AFTER Perfection of Mechanic’s Liens by Contractors or Subcontractors
The Section 34 demand was discussed above.
a. Property owner may make Section 34 demand made upon lien claimant to file suit or release lien
You have to file suit within 30 days, and you have to name all the necessary parties within 30 days. It used to be that the decision just came down and that if you filed suit, you did not get all the necessary parties, but you did it before the two years was up, you were fine.
The Mechanic’s Lien Act provides:
The court ruled recently that you have to have all the necessary parties within 30 days. So let us say you did your search, and it did not come back fast enough, and you filed suit thinking you had it right, and it turns out that you missed a mortgage company.
You are going to get your construction lien claim knocked out. So if you get a Section 34 demand, you have to move quickly. Talk to your lawyer quickly and do not wait until the 27th day to contact them.
Now this is the part that is interesting. If you have an arbitration provision in your contract, like as a general contractor or owner with the general contractor or the subcontractors, and you want to enforce it, but you do a Section 34 demand under the Illinois Concrete case, you waive your right to arbitration.
If you have an arbitration provision that you want to enforce, do not do a Section 34 demand. A court will say that you could have just simply sought arbitration to proceed and not do the Section 34 demand unless you do not care. Attorneys see arbitration provisions in contracts all the time. You should still file suit. Only about one out of every 10 actually tries to afford the arbitration provision.
b. Section 34.5 Mechanic’s Lien Administrative Adjudication was Added When the County Code was Amended
Then there is the Section 34.5 which is brand new. A lot of attorneys have never seen it used, but it actually allowed the County Recorder’s Office to adjudicate these liens. The Mechanic’s Lien Act is a complicated act. It is very difficult to learn about this act. If you are a general contractor and someone tried to do Section 34.5 through the recorder’s office, and you want to actually litigate this, if you file suit, the judge will take over.
This would be a real judge not an administrative law judge. You might not have any familiarity with the Mechanic’s Lien Act. It is recommended that unless you know who the administrative adherent law judge is. If he or she is familiar with it, then it is fine. If not, get out of there and go to court.
c. Under Section 35, if contractor or subcontractor fails to institute suit after service of Section 34 Demand
Then there is also Section 35. This is the part that attorneys can nail people with easily. If you get a Section 34 demand and you do not file suit under Section 35 Demand, it basically says if you do not provide a release of mechanic’s lien, within ten days 10 days the other side is going to sue you for $2,500 plus attorney's fees in small claims court.
d. New law: Substitution of bond for lien. 770 ILCS 60/38.1
Above where the substitution of bond claim was being discussed that new law was effective as of 2016. When this first came out and you had to deal with it, no one else had dealt with it. It is very detail-specific, but you have to file an application and get your lien claim. Now what you will see is something people do all the work, and they record a document of bonding substituting in the lien claim.
That is not really enough. Now let us say you put a general contractor on notice or a subcontractor on notice, and they file suit. But you still file the judicial way, then you have to bring a petition to substitute the bond in.
There is nothing wrong with people putting it in as a bond and recording something to indicate to any other person’s viewing title that there is a bond in lieu of a mechanic’s lien. But that is not enough. The owner will actually have to petition the court or general contractor if the general contractor is trying to protect the owner, file a petition to substitute the bond for subject matter property.
i. Requirements when applicant files petition to substitute bond for subject property
There are a lot of requirements when you look at the verified petition that you have to include. It includes the following:
· Name and address of applicant and attorney,
· Name and address of the lien claimant,
· If suit already pending, name of attorney for lien claimant. If no suit pending but lien recorded, name of the preparer of the lien claim,
· Name and address of property owner and name and address of association,
· Description of property: common, legal, address. etc.,
· Attach copy of lien claim which includes date of its recording, where recorded, and recording number if there is no pending proceeding to enforce,
· Attach copy of proposed eligible surety bond,
· Certified copy of the surety’s certificate of authority from the Department of Insurance or other state agency charged with the duty to issue such certificate; and
· Undertaking by applicant to replace bond with another eligible surety bond in the event that the proposed eligible surety bond at any time ceases to be an eligible surety bond.
ii. Petition shall be ‘personally served’ or sent via ‘certified mail, return receipt requested’
The petition shall be ‘personally served’ or sent via ‘certified mail, return receipt requested’ to each person identified in the petition and his or her attorney of record in a pending action, with a copy of the petition attached with specific notice language contained in the Act.
iii. If no objection filed within 30 days after all persons entitled to notice
If no objection is filed within 30 days after all persons entitled to notice, objections are waived. If the petition complies with the requirements order would enter:
- substituting the eligible surety bond for the property securing the lien claim;
- substituting the lien claimant’s right to recover on the bond for the lien claimant’s causes of action that could be asserted under Section 9, 27, or 28 of the Act.
iv. If objection filed within 30 days after service of notice is required
If the objection is filed within 30 days after service of notice required, petitioner may, upon notice to all parties, move for hearing as to adequacy of bond. Burden on petitioner to establish prima facie that proposed surety is eligible, the order would enter the same as the above two points.
v. If court enters order discharging as security for the lien claim
If the court enters an order discharging as security for the lien claim (i.e., the recorded mechanic’s lien claim) and substitutes the surety bond as security, the petitioner shall:
- send copies of the order to the lien claimant and all persons who were to receive copies
- record a copy of the order, together with an executed copy of the approved ‘eligible surety bond’ with the Recorder of Deeds.
Now this is the part that is interesting.
vi. If approved, action on bond shall be in equity against principal and surety of bond
If approved, action on the bond shall be in equity against the principal (i.e., ‘applicant) and surety of bond. The principal and surety shall become parties to proceedings and all other parties to the lien claim count or counts may be dismissed. An action under this section does not preclude a claimant from bringing any other action that does not arise under the Act.
vii. Prevailing party provisions
As you probably know, the Mechanic’s Lien Act has an attorney provision, but it is hard to win. Just because you win, it is not automatic though. If you have a written contract that calls for attorney's fees, and you substantially win, then it is pretty much automatic subject to the judge. But it is a lot easier to win under contract action. Say you do not have a contract providing for attorney’s fees.
The ‘prevailing party’ provisions are:
- If lien claimant wins at least 75%, claimant is a prevailing party,
- If lien claimant wins less than 25% of the claim, principal of the bond (i.e., applicant) is the prevailing party, and
- If lien claimant wins between 25% and 75%, no party is considered a prevailing party.
So even though a contract does not call for it, and it does not talk about the higher standard of vexatious and reasonableness, it could be automatic as long as you win a certain percentage or lose a certain percentage.
You should be aware of the last point above where no party is considered a prevailing party. For example, if an attorney is representing an owner and there is no written contract requirement for attorneys, they are warned that under the bond claim they might lose. Or if the attorney is representing the general contractor, if they do not win at least 25%, they might also lose, meaning that they will have to pay attorney’s fees.
So these are all interesting facts that attorneys have to litigate or deal with recently and
viii. If ‘prevailing party’ entitled to reasonable attorney’s fees
If the prevailing party is entitled to reasonable attorney’s fees. However, fees for lien claimant shall be limited to the amount remaining on the bond after payment of the claim and interest. Fees for the principal shall be limited to 50% of the amount of the lien claim.
ix. Principal and surety may assert defenses
The principal and surety may assert only defenses that could have been asserted against the lien claim by the principal or owner of the record at the time of the contractor’s contract.