Archives for May 2013

Mechanics Lien Attorneys’ Fees Only Binds Owner, Not Lender – IL Court

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Action Plumbing v. Bendowski, 402 Ill.App.3d 681 (2nd Dist. 2010), discusses Section 17(b) of the Mechanics Lien Act (the “Act”), 770 ILCS 60/17(b) – the section that allows a lien claimant to recover its attorneys’ fees from an owner in some circumstances.

The plaintiff plumbing contractor recorded mechanics liens against 16 residential properties and sued to foreclose the liens.

The contractor named the original owner of the parcels as well as the subsequent purchasers as defendants.

After a bench trial, the court entered a foreclosure judgment and awarded plaintiff contractor its full lien amount, interest plus attorneys’ fees against all defendants, including the subsequent purchasers (now, the current owners).

Reversing the fee award, the Second District held that the contractor can only recover allows attorneys’ fees against the “owner who contracted to have the improvements made”…”but not any other party“.  770 ILCS 60/17(b).

Since the subsequent purchaser defendants were not owners at the time plaintiff entered into his contracts, they couldn’t be responsible for plaintiff’s attorneys’ fees.

The Court also looked to Section 17’s legislative history which contains clear congressional statements that mechanics’ lien attorneys’ fees can only be awarded against owners – not subsequent purchasers. 

In ThyssenKrupp Elevator Corp. v. Community Investment Corp., 2012 IL App (2d) 101172-U, the Second District also disallowed lien claimant attorneys’ fees against a non-owner.

There, the issue was whether the plaintiff elevator could assert lien priority (including its attorneys’ fees) over a prior mortgage lender where that lender was defaulted for failing to appear during trial. 

The trial court vacated the default on lender’s motion and held that the contractor only took priority over the lender for the base lien amount plus interest and costs but NOT for its fees – which were substantial after several years of litigation.

Affirming, the Second District cited Section 17’s clear language that a contractor’s lien fees can only be taxed against an owner.  Since the lender wasn’t an owner by definition, the contractor’s attorneys’ fees didn’t bind the lender.  ¶¶ 26-30.

The Court also rejected the contractor’s argument that fee-shifting language in the underlying contract (between plaintiff and the owner) gave plaintiff’s fees primacy over the lender’s mortgage.

The reason: the lender was not a party to the underlying contract and so the plaintiff’s fees couldn’t prime the prior mortgage.  ¶¶ 31-32.    

EpilogueActon Plumbing and ThyssenKrupp make it clear that – at least in the Second District – a contractor’s mechanics’ lien attorneys’ fees can only be assessed against an owner – not a subsequent purchaser, mortgage lender, or other lien claimant. 

Even if a prior mortgage lender defaults and the owner-general contractor agreement has fee-shifting language (in addition to Section 17’s attorneys’ fee provision), the contractor’s attorneys’ fees are still only be taxable to owner – no one else.

 

Liquidated Damages Provisions in Illinois: Specific Amount for Specific Breach = Good; Optional or Penalty = Bad

imageLiquidated damages clauses appear frequently in a variety of commercial contracts and similar agreements. Several Illinois cases – some old and some very recent – examine liquidated damages clauses in multiple factual settings.

Here are some bullet-point liquidated damages rules, gleaned from the caselaw:

– Liquidated damages clauses are enforceable where:  (1) the parties intended to agree in advance to the settlement of damages that might arise from a breach;(2) the amount provided as liquidated damages was reasonable at the time of contracting, bearing some relation to the damages which might be sustained; and (3) the actual damages would be uncertain in amount and difficult to prove

– Damages must be in a specific amount for a specific breach – they may not be a penalty to punish nonperformance or a threat to secure performance:

– The key issue is whether the liquidated damages amount is a reasonable forecast of possible loss at the time of contracting.  Parties are not required to make the “best” damages estimate, just one that is reasonable.

Recent cases in which liquidated damages provisions were upheld:

Dallas v. Chicago Teachers Union 408 Ill.App.3d 420, 424 (1st Dist. 2011)(held: liquidated damages clause setting $100K as minimum damages if either party breached a confidential settlement agreement was valid.  $100K was reasonable figure based on plaintiff’s pre-settlement agreement salary history and desire for future employment with Chicago Teachers Union)

Karimi v. 401 N. Wabash Venture, LLC, 2011 IL App (1st) 102670; and Burke v. 401 N. Wabash Venture, LLC, 2013 WL 1442280 (7th Cir. 2013).

In Karimi and Burke, the First District and Seventh Circuit (Burke was a diversity case) respectively, enforced liquidated damages clauses in Trump Tower condo purchase contracts which stated that if buyer breached, seller’s remedy was retention of the buyer’s earnest money deposit – 15% of the condo unit’s sale price.  The courts held that this amount was both specific and reasonable enough to be enforced against the breaching buyer.

Three cases with  unenforceable liquidated damages clauses:

Med+Plus Neck & Back Pain Center v. Noffsinger, 311 Ill.App.3d 853 (2000).

 – liquidated damages clause in two-year employment contract invalid where (a) it’s a penalty to secure performance and (b) damages bore no relationship to possible damages if employee prematurely breached.  Evidence of the penal nature of the provision was the fact that employer’s damages decreased the longer the defendant employee worked for employer and increased the earlier employee breached).  

Grossinger Motorcorp, Inc. v. American National Bank & Trust Co., 240 Ill.App.3d 737 (1992)

– liquidated damages clause in a real estate contract struck down due to its optional nature: plaintiff could either (a) recover liquidated damages (keep the earnest money) or (b) at plaintiffs option, exercise other remedies.

H&M Driver Leasing v. Champion, 181 Ill.App.3d 28 (1st Dist. 1989)

– liquidated damages clause in truck driver services contract clearly a penalty to secure performance where contract provides for baseline liquidated damage amount AND actual damages:

Now What??

– If you are trying to enforce a contractual liquidated damages provision (LDP) in the Illinois courts, Karimi, Burke and Dallas should prove useful.  If you’re opposing and trying to defeat an LDP, you should try to analogize your case’s facts to those of the Med+Plus, Grossinger and H&M Driver Leasing cases.

– If a contract sets forth a specific amount for a specific breach, and it’s a reasonable forecast of possible damages (based on objective data to support the liquidated amount – see Dallas – plaintiff’s salary history provided a quantifiable basis to support minimum damage figure), the liquidated damages term will likely be enforced.

– But, if the provision contains indicators of a penalty or threat to secure performance or is optional (contains the word “option” or gives the non-breaching party the option of pursuing actual damages OR liquidated damages), it will likely be struck down.

 

Misnomer vs. Mistaken Identity – More Than Semantic Hairsplitting?

The misnomer and mistaken identity doctrines apply where a plaintiff sues a defendant too late.

Misnomer occurs when the plaintiff has the wrong name of the right party (ex: I intend to sue Donald Trump but instead name “Ronald Trump” as Defendant). 

Mistaken identity is involved where the plaintiff has named the wrong party. (I sue and serve Marla Maples but later realize I should have served Mr. Trump all along.)

Misnomer is basically a spelling error and the proper party defendant’s name can be corrected at any time, even after judgment.  735 ILCS 5/2-401(b).  

With mistaken identity, Code Section 2-616(d) controls. 

Determining whether misnomer or mistaken identity applies turns on the intent of the plaintiff as established by his objective manifestations of that intent including who the plaintiff actually named in the original complaint.  Maggi v. RAS Development, Inc., 2011 IL App (1st) 091955, ¶ 23. 

In Maggi, a construction negligence case, the First District affirmed the trial court’s ruling that an amended complaint that named the right general contractor (but not until after the statute of limitations ran) – related back to the original complaint’s filing date. 

Maggi followed the US Supreme Court in Krupski v. Costa Crociere, 130 S. Ct. 2485 (2010) and held that the contractor should have known that it was the intended target of plaintiff’s suit; noting the relation-back test is what the defendant to be added knew; not what the adding plaintiff knew.

Code Section 2-616(d)’a three mistaken identity elements are:

(1) whether the original complaint was timely filed;

(2) the defendant to be added – within the time that an action might have been brought against him plus the time for service under Supreme Court Rule 103(b) – received notice of the commencement of the action such that (a) he will not be prejudiced in defending the case and (b) knew or should have known that but for mistaken identity, the action would have been brought against him; and

(3) the original and amended pleadings grew out of the same transaction.  Maggi, ¶ 35.

In finding the amended complaint against the general contractor related back to the original complaint, the Maggi Court analyzed factor (2) above and focused on whether the proper defendant knew or should have known that it would have been named a defendant but for plaintiff’s error and did not focus on what the plaintiff knew (or should have known) .  (¶ 37). 

The Court pointed to evidence that the general contractor defendant knew it was the intended target of plaintiff’s suit.  The plaintiff engaged in extensive discovery to determine the correct identities of the defendants and the general contractor didn’t produce the prime contract (which specifically confirmed the general contractor’s identity) until after the four-year construction repose period lapsed despite repeated requests from the plaintiff. (¶¶ 5, 38). 

Finally, Maggi emphasized that under the Supreme Court Krupski decision, the plaintiff’s speed in moving to amend a complaint (once it has proper defendant info in its possession) is not a factor to consider under Section 2-616(d).  ¶ 39. 

The take-away:

It’s clear that when determining whether a time-barred complaint relates back, the focus is on what the defendant knew or should have known, not on plaintiff’s knowledge, diligence or speed with which he tries to amend a pleading. 

Clearly, the courts are giving primacy to the policies of deciding cases on the merits over a defendant’s competing interest in repose and finality.  

My guess is that cases that follow Maggi and  Krupski will result in more denials of Section 2-619 motions to dismiss based on untimeliness grounds.