Constructive Fraud in IL Mechanics’ Lien Suits: A Case Study

ACHere’s one from the vault.  While dated, the case is still relevant for its cogent discussion of important and recurring mechanics’ lien litigation issues.  In Springfield Heating and Air Conditioning, Inc. v. 3947-55 King Drive at Oakwood, LLC, 387 Ill App 3d 906 (1st Dist. 2009), the First District examined the concept of constructive fraud and discussed when a subcontractor can bring alternative unjust enrichment and quantum meruit claims in a lien suit.

The plaintiff was a subcontractor who installed HVAC materials on a construction project consisting of two adjoining properties  for a total contract sum of about $400,000.  When the general contractor fired it, the plaintiff liened both parcels each for $300,000 – the total amount plaintiff was then due for its HVAC work.  The result was a “blanket lien” on the properties for a total of about $600K – double the proper amount.

The plaintiff sued to foreclose its liens and filed companion (and alternative) claims for quantum meruit and unjust enrichment against the general contractor and owner defendants.  The trial court granted the defendants’ motion to dismiss the plaintiff’s claims.  The court held that the lien claim was constructively fraudulent since it was inflated by almost two times the actual lien amount and because the lien wasn’t apportioned among the two property parcels.  The Court dismissed the plaintiff’s quantum meruit and unjust enrichment claims because it held that a subcontractor’s only remedy against an owner is a mechanics lien foreclosure action.

Held: Affirmed in part; reversed in part

 Constructive Fraud

The First District found there was no evidence of constructive fraud by the subcontractor; noting that Section 7 of the Lien Act aims to protect honest lien claimants who make a mistake rather than claimants who intentionally make a false statement or who knowingly inflates their lien.  That’s why someone must show an intent to defraud in order to nullify a lien.

While acknowledging that the plaintiff subcontractor’s lien totaled about $600K – nearly double of the amount it was actually owed – the Court looked beyond the liens’ numerical overcharge and found no additional evidence of fraudulent intent. 

This holding amplifies the First District’s Cordeck Sales, Inc. v. Construction Systems, Inc. (382 Ill.App.3d 334(1st. Dist. 2008)) ruling – a case viewed with near-Biblical reverence in Illinois mechanics lien circles – that a mechanics lien won’t be invalidated for constructive fraud simply because its inflated.  There must be an overstatement “in combination” with other record evidence that allows the court to infer fraudulent intent.  Here, there was no additional fraud evidence and the Court reinstated the subcontractor’s lien claim.

Quantum Meruit/Unjust Enrichment

The Court sustained the trial court’s dismissal of the plaintiff’s equitable counts of quantum meruit and unjust enrichment.  The general rule is that a subcontractor like plaintiff can’t recover for unjust enrichment where the entire work to be performed by the subcontractor is under a contract with the general contractor.  See Premier Electrical Construction Co. v. La Salle National Bank, 132 Ill. App. 3d 485, 496 (1st Dist. 1985). 

In such a case (no privity between owner and subcontractor), the general contractor has the power to employ whom he chooses and the owner is entitled to presume that any subcontracting work is being done for the contractor; not the owner.  Since there is normally no direct contract between a subcontractor and the owner, a subcontractor can’t claim that its work unjustly enriched the owner.

So, unless the subcontractor proves that it dealt directly with a property owner, its exclusive remedy against an owner is a statutory, mechanics lien suit.  Swansea Concrete Products, Inc. v. Distler, 126 Ill. App. 3d 927, 932 (5th Dist. 1984).  If the subcontractor misses the time deadlines to record its lien (four months, usually) or fails to timely file suit to foreclose the lien (two years post-completion of job), the subcontractor can’t then try to recover against the property owner under quantum meruit or unjust enrichment. 

Here, since the plaintiff’s contract was with the general contractor and not the owner, the plaintiff’s remedy against the general contractor was for breach of contract and its remedy against the owner was a mechanics’ lien suit.  As a result, the plaintiff’s quantum meruit and unjust enrichment claims were properly dismissed.

Afterwords: Even though the case is now several years old, Springfield Heating has continued relevance in construction lien litigation because it is the First District’s most recent word on the showing a property owner must make to prove a subcontractor’s constructive fraud when attempting to defeat a lien on the owner’s property.  Clearly, a numerical overcharge isn’t enough to defeat a lien. 

The owner must show additional “plus factors” which signals  fraudulent intent by the lien claimant.  The case also further supports the black-letter proposition that a subcontractor’s sole remedy against a property owner is a mechanics’ lien suit.  This rule will always apply unless the subcontractor can prove that the owner specifically requested or induced the subcontractor’s labor and materials on the owner’s property.

 

 

Implied Warranty of Habitability Waiver Doesn’t Bind Second Home Buyer: Deconstructing Fattah v. Bim (IL 1st Dist.)(Part I of II)

Fattah v. Bim, 2015 IL App (1st) 140171 will likely be viewed as a significant victory for homeowners (and a correlative loss for builders) in residential construction disputes.

The plaintiff bought a million-plus dollar home in Chicago’s northern suburbs from the defendant homebuilder “as-is” and subject to an earlier waiver of the implied warranty of habitability signed by a prior purchaser (“Buyer 1”) who sold the house to the plaintiff.

In reversing a bench trial judgment for the defendants, the court answered some important questions concerning the scope and enforceability of disclaimers contained in the sale of real property in Illinois.

Facts:

The sale of the home from defendant to Buyer 1 included a written waiver of the implied warranty of habitability that specifically provided it was binding on the seller, the purchaser, and any successors.

The plaintiff bought the property from Buyer 1 “as is” three years after Buyer 1 bought it.  The contract’s as-is rider provided, among other things, that the seller (Buyer 1) shall not be responsible for “the repair, replacement or modification of any deficiencies, malfunctions or mechanical defects on the Property or to any improvements thereon” and that Buyer 1 makes no representation or warranty to plaintiff concerning the Property’s condition, zoning or suitability for its intended use.

Despite this broad Rider’s language, the contract still required Buyer 1 to disclose known material latent defects.

Four months after plaintiff moved in, the patio collapsed and plaintiff sued the defendant homebuilder.  The trial court found for defendant at trial on the basis that Buyer 1’s implied warranty waiver extended to the plaintiff.  Plaintiff appealed.

Result: Reversed:

Rules/Reasoning:

The appeals court found that the earlier implied warranty of habitability waiver did not bind the plaintiff.  The court’s reasoning:

– the implied warranty of habitability is a creature of public policy that aims to protect innocent purchasers of new houses who discover latent defects in their homes;

– the implied warranty of habitability recognizes that the purchaser, who is generally not knowledgeable in construction practices, has to rely n the integrity and the skill of the builder-vendor, whose business is home building;

– it (the implied warranty of habitability) applies not only to builder-vendors, but also to subcontractors and developer-vendors;

– subsequent home buyers can be protected by the implied warranty of habitability.  This is because a “subsequent purchaser is like the initial purchaser in that neither is knowledgeable in construction practice and must rely on the expertise of the person who built the home to a substantial degree.”

– the warranty of habitability exists independently of a contract between the builder and twice-removed buyer and extends only to “latent defects which manifest themselves within a reasonable time after the purchase of the house.”

– despite the strong public policy reason behind the implied warranty of habitability, a “knowing disclaimer” of the warranty doesn’t violate Illinois public policy;

– one who seeks to benefit from a disclaimer has the weighty burden of establishing that the disclaimer is (1) conspicuous, (2) fully disclosed (along with its consequences) to the buyer, and (3) mutually agreed on by the parties.

(¶¶ 23-25).

With these principles in mind, the court found that Buyer 1’s waiver of the implied warranty of habitability was valid as it appeared prominently in the sales materials and recited the waiver’s impact of the Seller’s rights.

The court then considered whether Buyer 1’s waiver of the implied warranty was binding on plaintiff – a subsequent purchaser who lacked knowledge of the earlier waiver.

Finding that Buyer 1’s waiver did not bind plaintiff, the court noted there was no agreement between plaintiff and defendant and the waiver of the implied warranty of habitability never was brought to plaintiff’s attention.

The court held that an implied warranty of habitability can only be waived where it’s done so “knowingly.”  Here, the plaintiff wasn’t party to Buyer 1’s waiver and testified she wasn’t aware of the waiver when she (plaintiff) bought the house.  Since defendants didn’t refute plaintiff’s testimony, it failed to prove plaintiff knowingly bought the property subject to Buyer 1’s waiver of the implied warranty.  As a result, the waiver didn’t bind the plaintiff.

(¶¶ 28-31)

Take-aways:

1/ The implied warranty of habitability extends to subsequent home purchaser for latent (not overt) defects;

2/ A disclaimer or waiver of an implied warranty offered by a prior buyer won’t bind a subsequent buyer where that later buyer offers evidence that she lacked knowledge of the disclaimer or waiver and that the disclaimer’s importance wasn’t pointed out to her.

Mechanics’ Lien Doesn’t Secure Attorneys’ Fees and Costs – Utah Supreme Court

Q: Does a mechanics lien secure payment of attorneys’ fees and costs (in addition to the amount of improvements) incurred by a lien claimant under the Utah mechanic’s lien statute?

A: No.

In an earlier article (http://paulporvaznik.com/contractors-attorneys-under-illinois-mechanics-lien-law/502) I tried to harmonize some Illinois cases that discuss whether attorneys’ fees can be added to a mechanics lien amount.  It’s an important question since mechanics’ lien attorneys’ fees often end up astronomical; especially where there’s multiple litigants and the case drags on for several years.  

In Illinois, attorneys’ fees can only be assessed against a property “owner” but only after a finding that its failure to pay was “without just cause or right.” 770 ILCS 60/17.  Today’s post features a case from Utah, a place I’ve never practiced.  I deemed the case post-worthy because it highlights a lien issue likely to recur in mechanics’ lien cases.

2 Ton Plumbing, Inc. v. Thorgaard, 2015 WL 404592 (Utah 2015), involves the reversal of a contractor’s lien award of nearly $50K that included fees incurred over the course of a circuitous lien case involving multiple property owners and lenders.  In reversing the lien judgment, the Court expands on Utah’s lien statute (Utah Code Section 38-1a101-804 (the “Lien Act”)), as well as the philosophy underpinning mechanics lien law.

Under Utah’s Lien Act, a lien attaches to the value of services, labor, materials or equipment furnished or rented on an improvement or structure. It also allows a “successful party” to recover a “reasonable attorneys’ fee” which the court taxes as “costs” on the losing party. The Lien Act also allows the successful claimant to recover “costs” of preparing and recording the lien including reasonable attorneys’ fees incurred in preparing and recording the lien notice.

In gutting much of the lien amount, the Utah appeals court held that attorneys’ fees are normally only allowed by statute or contract.  If a lien claimant could always augment his lien amount with his attorneys’ fees, the amount claimed would be a “moving target” (the amount would keep going up indefinitely) and so frustrate the Lien Act’s purposes. ¶¶ 25, 35, 42.

The court also noted that since a party has no obligation to pay an opposite side’s attorneys’ fees in a lien case unless that party has lost the case, fees, by definition, can’t be included in a lien amount. Otherwise, it would be tantamount to putting the proverbial “cart before the horse” by allowing a lien claimant to tack on (future) fees before he was deemed a successful party. ¶¶ 38-42.

Afterword:

A decision worth noting for its universal applicability.  Since lien case fees are often substantial, it’s important to know what amounts can and can’t be included in a lien claim.  As 2 Ton shows, a failure to lien for the proper amount can have unfortunate fiscal ramifications.