Contractors’ Honest Mistake in Lien Completion Date And Amounts Doesn’t Doom Mechanic’s Lien Case (IL Law)

imageThe First District recently validated the mechanics liens of two “ma and pa” construction companies against a competing lienholder’s argument that the  liens contained a flawed completion date and an exaggerated lien amount.

North Shore Community Bank v. Sheffield Wellington LLC, 2014 IL App (1st) 123784 is a priority dispute between mortgage lenders and mechanics lien claimants on commercial property.  In examining the parties’ competing claims, the Court addresses what consequences flow from a contractor’s failure to accurately state and prove its completion date under the Illinois Mechanics’ Lien Act, 770 ILCS 60/1 et seq. (the “Lien Act”) and whether that failure defeats its lien claim.

The lender sued to foreclose its mortgage and two contractors counterclaimed to foreclose their mechanics liens on the site.  One lien claimant – who built an office at the site – misstated its completion date by about a week while a roofing contractor couldn’t prove (in its deposition testimony and documents) that it actually performed on its stated completion date.  In addition, the office builder’s principal admitted in his deposition that the lien amount could be off by as much as 10%.  Based on the completion date and lien amount discrepancies, the lender moved for summary judgment against both contractors.  The trial court granted the lender’s motion and found that the mortgage lien trumped the mechanics’ liens.

Held: Summary judgment reversed.

Rules/Reasons:

Reversing summary judgment for the lender, the Court expanded on the Lien Act’s purpose and discussed whether misstated recorded lien information was a binding judicial admission:

The Mechanics’ Lien Act’s Purpose

– The Lien Act’s purpose is to allow someone who has improved property by furnishing labor or materials to lien that property;

– Section 7 of the Lien Act requires a contractor to file its lien  within 4 months after completion in order to enforce his lien against third-party creditors or other lienholders;

While the Act is silent on completion date, the courts have interpreted Section 7 to require a lien claimant to include a completion date in order to be enforceable;

– Section 24 of the Act governs subcontractors and requires them to serve notice of their lien to the lender (“lending agency”) within 90 days after the completion date;

– Completion date under Section 7 and 24 doesn’t mean completion of the project in total; it just means completion of the work sought to be liened;

– The purpose of Section 7 (which governs contractors) and 24 (which governs subs) is to provide notice to third parties of the existence of a lien claim.

Overstated Liens – What Is ‘Intent to Defraud’?

– An overstated lien can be deemed fraudulent only where an “intent to defraud” is shown (770 ILCS 60/7a);

– A lien will be defeated where it contains a (1) knowing and (2) substantial overcharge;

– An intent to defraud can be proven by executed documents that overstate the amount in combination with some other evidence (i.e. a “Plus Factor”) from which fraudulent intent can be inferred;

Section 7 of the Act is designed to protect the honest lien claimant who makes a mistake; not a dishonest claimant who knowingly makes a false statement;

Judicial Admissions – What Are They?

A judicial admission is a “deliberate, clear, unequivocal statement” by a party about a concrete fact within that party’s knowledge;

– The effect of a judicial admission is that is withdraws a fact from dispute and makes unnecessary any need to prove the fact at trial;

– A statement that is the product of mistake or inadvertence is not a binding judicial admission;

– Judicial admissions are designed to deter perjury; they aren’t designed to punish honest mistakes;

– A litigant can’t contradict a prior judicial admission in summary judgment proceedings or at trial;

(¶¶ 81-90, 101-103, 126).

Applying these rules, the Court found that plaintiffs’ incorrect completion dates didn’t impact the mortgage lender’s notice rights.  Both liens were facially valid since they were timely filed; even with a technically wrong completion date.  The office subcontractor served its lien notice on the lender within 90 days of the completion of its work and the roofing general contractor filed its lien within the four-month period required Section 7.

The Court also noted that any incorrect completion dates were the results of honest mistakes – they weren’t binding judicial admissions.  This was because the lien claimants were “ma and pa” companies with limited resources.  One claimant was a single-person entity while the other had two employees that operated from a home office.  The Court also credited testimony by one of the contractors that it had never filed a lien before and wasn’t sure what information was key to the completion date or lien amount questions.  (¶¶129-130).

Finally, the Court rejected the lender’s constructive fraud argument – premised on the subcontractor’s officer admitting in a deposition that the lien amount could be “about 10% off.”  There was no evidence that the subcontractor intentionally made a substantial overcharge and that any flawed numbering was the result of an honest mistake.  An inflated lien amount – without more – is not enough for a constructive fraud finding.

Now What?: This case serves as a strong example of a court refusing to elevate form over substance.  While a completion date is required, a minor error in that date won’t defeat the lien if its otherwise facially valid (i.e. timely filed).  Also, constructive fraud in the lien context is hard to prove.  If a lien claimant can show that a lien error is an honest mistake and not purposely exaggerated, that lien claimant may still be able to prosecute his lien foreclosure suit.

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PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.