State Law Now Allows Bond to Replace a Lien

Kenneth Davies
Heyl, Royster, Voelker & Allen, P.C.

In 2015, I received a call from a client regarding a construction project they were working on. It appears they were the general contractor on a project and had run into a dispute with the project owner concerning some of the work they undertook. They had been discussing the matter for quite some time with the owner. Eventually, discussions broke off and my client remained unpaid.

My client contacted me, and I reviewed the matter with them. Shortly thereafter, I filed a mechanics lien against the property that was subject of the project and sent copies to the proper parties per the Illinois Mechanics Lien Act (770 ILCS 60/1).

Within a short time, I received a call from a very upset individual who informed me he was one of the owners of the property and project, and also an attorney in New Jersey. After debating the issues and asserting my client’s right to payment, the attorney informed me that he was going to go to court in Illinois and remove the lien with a bond, thereby dragging out the litigation and making it financially painful for my client. I was happy to inform him that Illinois was the only state left of the 50 states that did not permit a party to come in and file a bond with the court and remove the lien.

I also told him that, as chairman of the Illinois State Bar Association Real Estate Section Council, I would welcome his input at our next meeting as this legislation was being debated. He declined my request, and within a week the lien was paid. It appears the lender had gotten very nervous and instructed the owner to settle the matter.

Those days may be gone.

A Lien Removed
Effective January 1, 2016, a new Section 38.1 was added to the Illinois Mechanics Lien Act authorizing interested parties in a mechanics lien matter to petition a court to remove a lien from the property in lieu of a surety bond. Section 38.1(c) provides:

“[A]n applicant may file a petition to substitute a bond for the property subject to a lien claim with the clerk of the circuit court of the county in which the property against which the lien claim is asserted is located, or if there is a pending action to enforce the lien claim, an applicant may at any time prior to five months after the filing of a complaint or counterclaim by a mechanics lien claimant to enforce its mechanics lien claim.”

With this language, Illinois joined the remaining 49 states in permitting an “owner, other lien claimant, or other person having an interest in the property against which a lien claim under this Act is asserted... an association representing owners organized under any statute or to which the Common Interest Community Association Act applies... or any person who may be liable for the payment of a lien claim” to proceed to court, seek a surety bond and remove the lien from the property.

The effect is to remove all other parties to the case, other than the parties to the contract and the surety company. Therefore, in the event a general contractor asserts a lien against the owner, the lender can be removed from the case and is not at risk of having its mortgage/lien rights impacted. In the case of a subcontractor claiming it has not been paid by the general contractor (and the dispute exists between the subcontractor and general contractor), the general contractor can utilize Section 38 to remove the lien from the property, and proceed solely on a contract action between the general contractor and the subcontractor (and the surety).

The overall effect of this legislation for subcontractors and contractors is significant. Recognizing the ability to assert a priority over a lender often caused the lender to exert pressure on the owner to settle the matter before trial. Now, if a general contractor, owner or lender is successful in removing the lien, the subcontractor (or general contractor) must, in many cases, bear the time, expense and risk of litigating the case.

When Seeking a Bond…
While it may appear all is lost, this is not the case. The ability to bond a lien out from a piece of property is not at all certain. Section 38.1(a)(2) requires that the bond be an amount equal to 175 percent of the lien claim, that the bond be issued by a surety with a current financial strength rating of not less than A (as rated by A.M. Best Company, Inc.), and that the bond remain in place during the pendency of the matter until all appeals have been waived or exhausted.

Beyond that, the ability to obtain a surety to remove a lien is subject to the strength of the party seeking the bond. In the case of general contractors or owners, this is not always a certainty. Sometimes disputes arise because the owner has cost overruns which may substantially impact the owner’s or general contractor’s ability to provide financial backing sufficient to induce a surety company to put up enough bond to remove the lien. Thus, the right to seek a bond does not always translate in the ability to obtain a bond.

Section 38.1 also provides additional clarity concerning the attorney’s fees recoverable should a bond be sought and approved by the court. Section 17 of the Illinois Mechanics Lien Act, Subsection B, expressly states, “If the court finds that the owner failed to pay any lien claimant the full contract price... without just cause or right,” the court may tax that owner the attorney’s fees of the lien claimant. Thus, some discretion is left to the court. However, in a Section 38.1 action, under which a bond is issued pursuant to court order, attorney’s fees shall be awarded to a prevailing party. Section 38.1(a)(5) defines a prevailing party as “a lien claimant that is awarded a judgment equal to at least 75 percent of the amount of the lien claim” or in the case of a party defending such a claim, a judgment equal to less than 25 percent of the lien claim.

The ultimate impact of the new section 38.1 of the Illinois Mechanics Lien Act remains to be seen. What is clear is that general contractors and subcontractors must investigate the projects and those involved to a greater degree before undertaking the work to ensure the financial viability of the parties or potential issues that may arise. iBi

Ken Davies is a lawyer in Heyl Royster’s Peoria office, whose practice involves all aspects of commercial law and corporate matters. Davies has extensive experience in mechanic liens, construction enforcement, performance bonds, and foreclosures and leasehold disputes.

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