Bond Claims

Illinois adds bond substitution provision to the Mechanics Lien Act

project of construction and renovation houseIntroduction

On July 30, 2015, Illinois Governor Bruce Rauner signed H.B. 2635 into law. This bill amends the Illinois Mechanics Lien Act  (770 ILCS 60/1 et seq.) and significantly changes Illinois construction law by adding section 38.1 which allows substitution of a bond for an Illinois mechanics lien claim.

Illinois is the last state in the United States to enact such a provision.

Before this amendment, owners or general contractors had the ability to purchase bonds to cover disputed lien claims at a title company.  The title company would then litigate the lien claim if a claimant tried to enforce it. However, the lien claim remained as a cloud on title and there still was a risk of foreclosure. HB 2635 sets forth a formal process for substituting a bond and removes the cloud on title. The amendment does not eliminate mechanics lien rights and a lien will still be a cloud on title until a bond is furnished.

Bond Petition

Generally, this new section (sometimes referred to as a “bonding over” provision) provides that an owner or anyone else with an interest in real estate (such as a lender, other lien claimant or even a condominium association) may file a verified petition with the clerk of the court in the county where the property is located requesting that a surety bond be substituted for a lien claim. The surety bond must be from an insurance company that is rated A or higher by AM Best and be size IX or larger, be in an amount equal to 175% of the lien claim, and must require that the surety and principal BOTH be jointly liable to the lien claimant. Upon granting the petition, the lien would be discharged and the parties would proceed with a lawsuit against the bond as well as any other causes of action such as for breach of contract, fraud, deceptive practices, account stated, conspiracy, enforcement of security interest, replevin, or quantum meruit, as applicable. These other causes of action are not covered by the bond and litigation as those counts would proceed as they normally do.

A petition for bond substitution can also be filed in a pending foreclosure action but must be done so within five months of the suit commencement.

However, the bill is unclear as to what happens when there multiple claimants in a single law suit and if some claims are bonded over and others are not. It also unclear as to what happens with blanket liens or liens against multiple parcels such as condominiums if one unit or lot owner bonds over his portion of the lien claim and another unit or lot owner does not.  If some parcels or some liens are protected by a bond and others are not in a foreclosure action, this could result in even more complicated and expensive litigation because property owners would then have to defend against both lien claims as well as any bond claims.

Advantages and Disadvantages

On the plus side, Section 38.1 will streamline litigation. There will be less parties which will save on court costs, service fees, and attorneys fees. Normally, in an action to enforce a mechanics lien claim, the lien claimant is required to name and serve all of the parties in the chain of contract between him or her and the owner plus anyone else with an interest in the property such as a lender, unknown owners and non-record claimants. With a bond in place, the only parties would be the principal and surety on the bond as well as the party the contractor had its agreement with.

This new provision also provides for an award of mandatory attorneys fees which adds liability to the general contractor or owner which did not previously exist.  If a lien claimant recovers at least 75% of its lien claim, it is gentled to recover its attorneys fees incurred. On the other hand, the owner is entitled to its attorneys fees if the claimant recovers less than 25% of its lien claim. This is a big change from Section 17 of the Illinois Mechanics Lien Act (770 ILCs 60/17) which provides for attorneys fees against the original owner (and no one else!) who fails to pay “without any just cause or right”. Section 17 also requires privity between the owner and contractor; Section 38.1 does not.  This change is a huge benefit for subcontractors and material suppliers.

Another major advantage is that there will be money to pay the claim.  Sometimes contractors go out of business or real estate ends up over-encumbered or “under water” by other loans leaving nothing to pay a subcontractor for his or her hard work. With a bond in place, the lien claimant should generally not have to worry about a judgment not being collectible.

A major disadvantage of this new provision is that it can reduce leverage for subcontractors and material suppliers because the threat and pressure of foreclosure would be diminished. However, filing a petition and purchasing a bond has its costs and some owners might still not bother to proceed.   Some owners or developers may also not want to automatically accept liability for any attorneys’ fees incurred by the lien claimant especially if the defenses for non-payment are weak.

The Illinois Mechanics Lien Act still provides a valuable method of recovery for unpaid subcontractors and material suppliers and should still be an important part of an overall collection plan and strategy. A bond still has its advantages as described above. However, in order for an owner to even consider a bond, the claimant still needs to have a valid and enforceable mechanics lien claim against the real estate at issue.

Public Projects

Section 38.1 only applies to private construction projects such as homes, office buildings, stores, condominiums, apartments, factories, etc. This amendment does not apply to public construction projects such as public schools, airports, city parts and municipal buildings.  Section 23 of the Illinois Mechanics Lien Act (770 ILCs 60/23) as well as the Illinois Public Construction Bond Act (30 ILCS 550/1 et seq.) remain unaffected by this new section.

Conclusion

This law goes into effect January 1, 2016 and it remains to be seen if property owners and developers will take immediately advantage of it and how the courts will eventually interpret it. In future articles, we will review the actual procedure on how to file the petition (and objection) to substitute a bond for an Illinois mechanics lien claim.

A complete copy of the new law can be found here:

http://www.ilga.gov/legislation/publicacts/fulltext.asp?Name=099-0178

I welcome any thoughts or discussion on it.

By:  Mark B. Grzymala, President and Founder

Grzymala Law Offices, P.C. 

How to Perfect and Enforce Your Lien and Bond Claim Against Illinois Public Construction Projects

BuildersProtective Equipment

Introduction

This is our fourth and final installment in our series on Illinois Mechanics Liens.  We have gone through the process of enforcing a lien claim against privately owned projects. Now we will now look at the steps that need to be taken in order to perfect and enforce a lien claim against Illinois public projects such as municipal buildings, public schools, city parks or Illinois roads.

‘Perfecting’ your Illinois Mechanics Public Lien Claim

General Contractors

With respect to public projects, General Contractors (those who contract directly with the public entity/owner) generally do not have lien rights.  Because public liens are liens against funds and not against real estate, they must recover any the balance due from the owner. 

Subcontractors and Material Suppliers

If you are a subcontractor working on a public project and are unpaid, you are then entitled to assert a lien claim against the funds that the public entity is holding.  This right is granted pursuant to Section 23 of the Illinois Mechanics Lien Act. This type of lien claim is often referred to as a “trapping lien” and traps any funds that are left to be paid for the project.  A subcontractor asserts or perfects its lien claim against the funds by serving a Notice of Claim.

A Subcontractor’s Notice of Claim for Lien against Public Funds must:

  1. Be written and verified
  2. Identify the name and address of the subcontractor asserting the claim
  3. Identify the the subcontractor’s contract and the project the work is performed
  4. Identity the general contractor and any upper tier contractors
  5. Describe the work the subcontractor performed
  6. State the balance due the subcontractor

The Notice of Claim must be served upon the general contractor and the clerk or secretary of the local public entity (or director if a state agency) via registered or certified mail with return receipt requested.  The notice can also be served by personal delivery and is good upon acceptance by the public entity.

There is no statutory deadline to assert such a lien claim, however, once the general contractor is paid there will be no more funds left to assert a lien against.  It is important to assert your rights as soon as you suspect difficulty in receiving payment.

Once the Notice of Claim is served, it can be enforced.

Enforcing your Illinois Public Mechanics Lien Claim 

In order to enforce a claim for lien against public funds, a subcontractor must file a lawsuit for an accounting and to enforce its lien claim within ninety (90) days of serving the Notice of Claim.  The lawsuit is filed in the county where the project is and must include all parties in the chain of contract between you and the owner.  The public entity does not need to be named unless you are seeking action against it or alleging some type of wrong doing (e.g. you are seeking interest under the Illinois Local Government Prompt Payment Act)

In the lawsuit, you will be asking the court to order to pay the public entity the balance due in addition to interest and attorneys fees incurred as provided by the Illinois Mechanics Lien Act.  The lawsuit can also contain other causes of action such as breach of contract against the owner or general contractor, fraud, actions for bounced or NSF checks, account stated, and any thing else related to the contract or project.  The complaint can also and should include an action to enforce your bond claim as explained below. 

Please note that whether or not the subcontractor names the public entity, the clerk or secretary of the public entity must always be served with a copy of the filed complaint within ten (10) days after filing

If the lawsuit is not filed within 90 days, the subcontractor will lose its lien rights.

Enforcing your Illinois Bond Claim

The Illinois Public Construction Bond Act (30 ILCS 550/1 et seq.) requires that for any public project over $50,000.00 a general contractor provide bonds that guarantee performance of the contract by the general contractor and payment to the subcontractors. This law is often referred to as a “Little Miller Act” in reference to the federal law governing bond requirements on projects owned by the federal government or its agencies. 

In order to assert a claim against a payment bond against an Illinois or local project, the subcontractor or material supplier needs to prepare and send a Notice of Claim. 

A Subcontractor’s Notice of Claim Against Payment Bond is very similar to a Notice of Claim Against Public Funds and must:

  1. Be written and verified
  2. Identify the name and address of the subcontractor asserting the claim
  3. Identify the the subcontractor’s contract and the public project the work is performed
  4. Identity the general contractor and any upper tier contractors
  5. Describe the work the subcontractor performed
  6. State the balance due the subcontractor
  7. Although not required, the notice should state the name of surety and bond number if known

The Notice of Claim against Payment Bond must be served upon the local public entity via registered or certified mail with return receipt requested or by personal delivery and a copy to the general contractor within 10 days of service.  However, it is good practice just to send the notice out at the same time to everyone, including the surety if known.  The claim is good upon acceptance by the public entity and can be enforced immediately.

In order to enforce a claim against payment bond, a subcontractor must file a lawsuit to enforce its lien claim within 1 year of its last date of furnishing.  The lawsuit is brought on behalf of the public entity for the use and benefit of the subcontractor and against the surety.   The lawsuit is filed in the county where the project is. 

If the lawsuit is not filed within 1 year of the last furnishing date, the subcontractor will lose its bond rights.

Combining Notices and Law Suits 

Given that the requirements for clams against public funds and payment bond are so similar, is it common and good practice to combine both notices of claims against public funds and payment bond into one document and serve that.  A subcontractor can then commence one lawsuit and enforce both claims, as well as any other claims it may have against its customer in the same action. 

Bankruptcy – Lien and Bond Claims

What happens if your customer, the general contractor, the owner or any other interested party file for bankruptcy?

As in the case of a lien against a private project – bankruptcy stays enforcement of a lien or bond claim but not perfection.

Once a party files for bankruptcy protection, the automatic stay applies and the debtor is protected from any collection attempts by creditors. Creditors cannot commence or continue any litigation against the debtor. However the stay DOES NOT prohibit a party from asserting or perfecting its Illinois mechanics lien and bond rights.  A contractor who is not paid should still serve its Notice of Claim in order to trap any funds that are left due the general contractor. 

The automatic stay does, however, prevent enforcement of the lien claim.  A subcontractor first needs to file a motion in the bankruptcy court and seek modification of or relief from the automatic stay so that it can enforce its lien claim. The bankruptcy courts often allow this request as long as the contractor does not seek money damages from the bankrupt debtor . Once the bankruptcy court grants the motion to modify or lift the automatic stay, the contractor can then proceed to file a lawsuit to enforce the lien against the public funds. 

With respect to bond claims, a subcontractor can still assert a claim and file suit to enforce a bond claim even if its customer is bankrupt.  Only bankruptcy of the surety would stay any such action. 

Lien and Bond Claim Deadline Summary

Here is a summary of the deadlines that subcontractors need to adhere to in order perfect and enforce their lien and bond rights against public projects. These are the most important to remember.

  • Subcontractor – Lien Claim

    • Serve Notice of Claim Against Public Funds once payment issues are suspected

    • File a lawsuit to enforce lien within 90 days of serving the Notice of Claim of the last date of furnishing.

    • Serve a copy of the lawsuit to the Clerk or Secretary of the public entity

  • Subcontractors – Bond Claim

    • Serve Notice of Claim within 180 days of the last date of furnishing.

    • File suit to enforce the bond claim within 1 year of the last date of furnishing.

Both the Notice of Claim Against Public Funds and Notice of Claim Against Payment Bond can be combined into one document.  One lawsuit can be filed to enforce both claims and it is much more efficient and cost effective to do so. 

The deadlines must be followed exactly and the lien claim and bond claim notices must contain all of the necessary information described above in order to perfect and enforce your rights.  However, it is always best to consult an attorney if you suspect you are having payment issues and need to protect your lien and bond rights.

Mark B. Grzymala

President and Founder of Grzymala Law Offices, P.C.

mark@grzymalalaw.com

Who is entitled to file an Illinois Mechanics Lien Claim?

Illinois mechanics lien claim claimants

This is our second post in our series providing an overview of Illinois mechanics liens. In this installment, we will examine what is required in order to be entitled to an Illinois mechanics lien claim and who is entitled to assert one.

In a typical construction project, there is generally an owner, developer or sometimes a tenant who hires a general contractor to perform work on a project. The general contractor then hires subcontractors for specific trade work such as electrical work or carpentry. Often, those subcontractors will also hire sub-subcontractors or material suppliers (for lumber, pipes, etc.) and so on.

For purposes of the Illinois Mechanics Lien Act (the “Lien Act”), a general contractor is one who had a contract directly with the owner, the owner’s agent or someone he or she has “knowingly permitted” to contract for improvements.  This means that even a plumber can be considered a “general contractor” as long as its contract for the work performed is with the owner.  A subcontractor is one who has a contract with a general contractor.  This is an important distinction and the steps needed to assert and perfect your mechanics lien rights can vary on whether you are a general contractor or a subcontractor under the Lien Act.

General contractors, subcontractors and material suppliers who have furnished labor or materials used to improve real estate from the general contractor to the lowest tier subcontractor or material supplier is entitled to a lien claim for his or her unpaid work against that real estate.

In order to be able to assert a mechanics lien claim under Illinois law, a party generally needs to have:

  1. A valid contract with an owner or his agent (such as a general contractor)  for permanent improvement to real estate;
  2. Performance of that contract or excusable non-performance (such as a failure to timely pay);
  3. The work or materials must actually improve or add value to the real estate; and
  4. The work and materials must be lienable.

Some examples of lienable work include: carpentry work including framing, installing flooring and carpeting, installing drywall,  excavation, paving, electrical work, roofing, masonry, installation of HVAC equipment, plumbing including installing storm and sewage drains, furnishing concrete forms, cabling, drilling for well water, rental of cranes and other construction machinery, whole house painting, installation of an elevator and landscaping.

Some examples of non-lienable work include: patching and painting, cleaning, repair work, maintenance, warranty work, and installing non-permanent fixtures such as kitchen appliances and other trade fixtures.

What about public projects? In our last post we touched upon mechanics lien rights for work performed on public projects.   Under Illinois law, a general contractor (one who has a direct contract with the owner or public entity) cannot assert a lien against the public funds pursuant to Section 23 of the Lien Act.  However, a subcontractor who has furnished labor or materials used to improve a public construction project can as long as the same requirements set forth above are met.

This concludes our second installment on Illinois mechanics liens.  Next we will look the steps necessary to take to perfect and enforce your Illinois mechanics lien claim against private projects.

Mark B. Grzymala
mark@grzymalalaw.com

What is an Illinois Mechanics Lien Claim?

House being built

This is the first post in a series aimed to provide a general overview of mechanics liens and related rights under Illinois law.  We will first look at what exactly a lien is, then we will look at who is entitled to file a lien, next we will examine what is required in order to assert a lien claim, then we will review the steps needed to perfect and enforce a lien claim and finally we will touch upon specific issues that occasionally arise that might affect your lien rights.

So what is a mechanics lien? Mechanics liens in Illinois are governed by the Illinois Mechanics Lien Act which can be found at 770 ILCS 60/1, et seq.  A lien is essentially an intangible right in real property. It acts as a cloud on the owners’ title and prevents the owner from selling or refinancing the property until the lien claim is resolved. A mechanics lien claim is recorded in the office of the county recorder of deeds in which the real estate is located in. A mechanics lien claim can provide leverage and security for payment especially when your customer is slow to pay or lacks the funds to do so.  The deadline to record a mechanics lien is four months after the claimants last date of furnishing. Subcontractors also need to serve an additional notice to the owner within 90 days of their last date of furnishing.

Sometimes title companies will allow a general contractor or even a property owner to provide a bond or other insurance to cover a subcontractor’s lien claim. However, there currently is no mechanism under Illinois law which allows a party to “bond over” a lien claim. The lien claim will always remain and the contractor will always have all rights under the Mechanics Lien Act including  the right to enforce the lien claim and foreclose upon the real estate.

It is important to note that mechanics liens can only be recorded against privately owned projects and not government owned projects such as public schools, city parks, libraries, or other municipal facilities.

However, subcontractors who are unpaid on public projects have different remedies. They are able to file a lien against the funds owed from the public entity to the general contractor pursuant to Section 23 of the Illinois Mechanics Lien Act (770 ILCS 60/23).  This is also commonly referred to as a “trapping lien” and no claim is asserted against the actual real estate.  Upon receipt of the notice of claim, the public entity is required to hold funds claimed to the extent it still has them.  Furthermore, for most public projects, the general contractor is required to provide a payment bond under the Illinois Public Construction Bond Act, 30 ILCS 550/1, et seq. Subcontractors can also assert and enforce claims against these payment bonds togrethet with their claims against the public funds.  Claims against bonds must be submitted within 180 days of the claimant’s last date of furnishing.

Liens against private or public projects have very short deadlines upon which to act and you should consult with an attorney as soon as you are anticipating payment issues from your customer.

This concludes our first installment on mechanics liens. Our next post will define the parties entitled to assert lien claims against private and public projects and the requirements that need to be met in order to do so.

Mark B. Grzymala

mark@grzymalalaw.com

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