LawPulse

A new section of the Act allows lien claimants to satisfy their claims by proceeding against a bond and thereby avoid delays and red tape.

On July 29, 2015, Governor Rauner signed Illinois House Bill 2635, which adds section 38.1 to the Mechanics Lien Act. The new section allows lien claimants to satisfy their claims by proceeding against a bond, avoiding the normal claim process. Proponents say it will enable lien claimants to be paid faster and keep construction projects from being held up in court.

In Illinois, a mechanics lien claim can cause real estate development projects to grind to a halt while the interests of the parties are adjudicated. With a bond in place, the court may dismiss all parties to the case except the principal, the surety of the bond, and the lien claimant.

This avoids lengthy litigation and can lead to lien claimants being paid faster. The bond would also remove the mechanics lien from the real property, allowing a construction project to go forward. The legislation becomes effective on January 1, 2016.

Glendale Heights attorney Howard M. Turner, who is authoring a forthcoming book on mechanics liens for the ISBA, points out that every state has a bond procedure for mechanics liens; Illinois was the last state to adopt one. "As is true of Illinois mechanics liens in general, the remedy under the Illinois statute is far more protective of lien claimants than similar laws in other states," he says.

The new bond procedure makes it easier for lien claimants to enforce their claims because it limits the number of necessary parties and their defenses to the claim. Turner, who is of counsel to Nigro, Westfall, & Gryska, P.C., says that the proceedings on a bond claim will likely be shorter than those on a standard lien claim because the bond proceeding does not require the adjudication of the claims of other lien claimants. It only requires it of those who are subject to the bond.

W. Matthew Bryant, a partner at Arnstein & Lehr, says that the bond provision solves many problems related to payment disputes between contractors and subcontractors. When a mechanics lien is filed against a property, most construction lenders will not disburse further funds until the dispute is resolved. The bond provision "takes the lien off of the property and attaches to the bond." This keeps construction lenders secure and also helps contractors remain in compliance with their contracts, most of which contain provisions requiring the contractor to prevent liens from attaching to the property.

"What ended up happening was that someone up the chain would just pay the subcontractor to keep the project moving, regardless of the merit of the claim," he says. While the lien approach gives the subcontractor more leverage, the bond approach does have benefits for the subcontractor. For example, the subcontractor no longer has to sue every claimant, which lowers litigation costs by greatly simplifying the claim.

How the process works

In order to substitute a bond for a traditional lien claim, the statute requires that a petition be filed with the clerk of the circuit court where the real estate is located. The petition must provide for a statutorily sufficient bond. In order to be sufficient, a bond must be a surety bond for 175 percent of the value of the lien claim, issued by a top-rated bonding company.

The petition must be approved by a court after notice to the lien claimant. It must be filed within five months of the filing of a complaint or counterclaim to enforce the specific lien claim. If no complaint or counterclaim has been filed, the bond petition may be filed at any time.

The bond also provides security for the lien claimant, says Turner. A successful lien claimant recovers a judgment for what is due it against the principal and surety of the bond. The statute requires that the bond be for 175 percent of the amount of the lien claim. It is therefore very likely the bond will satisfy the lien claimant's judgment in full.

In a proceeding to foreclose the lien and sell the property under section 9 of the Mechanics Lien Act, or a joint action against the owner and contractor under section 28 of the Act, all of the lien claimants share the total amount the owner is required to pay. If the property is sold to satisfy lien claims, the proceeds of sale may also have to be shared with mortgage lenders and other non-mechanics lien claimants.

In these proceedings, even after the lien claimant gets a judgment, there is no assurance that the lien claim will be satisfied. If the suit is on a section 38.1 statutory bond, the lien claim will be resolved more quickly and it is more likely that the lien claimant's judgment will be paid in full.

Fee-shifting provision poses risks for claimants

Turner points out that the new provision is not without risk for lien claimants. Under the bond provision, a prevailing party is able to recover its attorney's fees. While this may be attractive to most parties, he notes that many subcontractors are "small companies with limited means."

When a bond principal prevails, the lien claimant is liable for its attorney's fees. Turner fears that this risk will "inhibit many [subcontractors] from pursuing legitimate claims." Although seeking redress in the courts is a fundamental right, he is concerned that the risks associated with an attorney's fee award "may inhibit small companies from exercising this right."

Bryant says that the fee-shifting provision of section 38.1 is less onerous than those of section 17 of the Act. The provision "allows parties to better predict risk with regard to attorney fees" because it is only triggered if the claimant recovers less than 25 percent of its claim. In that event, the attorney's fees are capped at 50 percent of the claim's value.

Turner and Bryant agree that section 38.1 greatly simplifies the process of disposing of mechanics lien claims.