Archives for October 2014

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.

No Commercial Disparagement Or Non-Compete Equals Denial Of Injunction – IL Court

In Xylem Dewatering Solutions, Inc. v. Szablewski, 2014 IL App (5th) 140080-U,  the plaintiff corporation sued some of its ex-employees after they joined a competitor and started raiding plaintiff’s office staff.

The trial court denied plaintiff’s request for an injunction and then it appealed.

Result: Trial court’s order upheld. Plaintiff loses.

Reasons: To get a preliminary injunction, a plaintiff must establish (1) a clearly ascertained right in need of protection; (2) irreparable injury; (3) no adequate remedy at law; and (4) a likelihood of success on the merits.

The plaintiff must establish a “fair question” on each of the four elements. A preliminary injunction is an extraordinary remedy that is only granted in extreme, emergency settings. (¶¶ 20-21).

Irreparable harm can result from commercial disparagement of a plaintiff’s product but the plaintiff must show the defendant repeatedly made false or misleading statements of fact regarding the plaintiff’s goods and services to establish irreparable harm.  Statements of opinion (“their services suck!”, e.g.) don’t qualify as commercial disparagement. 

Here, the Court found that there were no repeated factual statements made by the defendants.  In addition, all statements that were attributed to the defendants were purely interpretive: they weren’t factual enough to be actionable.  (¶¶ 23-24).

In finding that the plaintiff lacked a protectable interest in its employees or customers, the court pointed out that neither individual defendant signed a non-compete and didn’t violate any fiduciary duties to the employer.

In Illinois, absent a non-compete, an employee is free both to compete with a former employer and to outfit a competing business so long as he doesn’t do so before his employment terminates.  And while a corporate officer owes heightened fiduciary duties not to exploit his position for personal gain, the ex-employee defendants were not corporate officers. (¶ 26).

Plaintiff also failed to establish a protectable interest in its pricing and bid information.  The Illinois Trade Secrets Act, 765 ILCS 1065/1 et seq. (“ITSA”) extends trade secret protection to “information” that is (1) sufficiently secret to derive economic value, from not being generally known to others who can obtain economic value from its use, and (2) that is the subject of reasonable efforts to maintain the information’s secrecy (i.e., “kept under lock and key”)

Information that is generally known in an industry – even if not to the public at large – isn’t a trade secret. Also, information that can be readily copied without a significant outlay of time, effort or expense is not a trade secret. 

The pricing data the plaintiff was trying to protect was several years old and the defendants testified that the bidding information was well known (and therefore not secret) in the pumping industry.  In combination, these factors weighed against a finding of trade secret protection for the pricing and bidding information. (¶¶ 29-31).

Afterwords:

(1) Stale data likely won’t qualify for trade secret status – no matter how arcane the information;

(2) If information is well known or can be easily accessed within an industry, it won’t be given trade secret protection;

(3) Noncompete agreements can serve vital purposes.  If a business fails to have its workers sign them, the business risks having no recourse if an ex-employee joins a competitor and later raids the former employer’s personnel.

Sub-subcontractor Recovers From General Contractor Under Implied Contract/Unjust Enrichment Theory

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C. Szabo Contracting v. Lorig Construction, 2014 IL App (2d) 131328’s plaintiff  sub-subcontractor (it contracted with a subcontractor, tried to use unjust enrichment to recover against a twice-removed general contractor on a highway construction job.

The plaintiff installed underground pipes under a subcontract.  When the subcontractor didn’t pay, the Plaintiff sued the general contractor to recover over $200K worth of work under a breach of an implied contract theory.

The general contractor defended on the basis that there was no contractual relationship between it and plaintiff and that plaintiff’s sole remedy was against the subcontractor.

After a bench trial, the trial court entered judgment for the plaintiff for over $200,000 and the general contractor appealed.

Held: Affirmed

Reasons:  Siding with the plaintiff, the Court discussed the rules that govern whether and when a party can sue another for damages where there is no express contract between them:

–  Unjust enrichment is not a standalone cause of action but a remedy based on quasi-contract or contract implied-in-law

–  A contract implied-in-law is one in which there is no express contract but the court imposes a duty to prevent unjustness;

–  A plaintiff must show he furnished valuable services or materials and the defendant received them under circumstances making it unfair for the defendant to retain the benefits;

–  Normally an express contract will preclude quasi-contractual recovery.  So, if A has a contract with B, and B breaches, A can’t then sue C.  A can only look to B for recovery – even if C benefits from A’s services;

–  Simply because a third party benefits from a plaintiff’s work isn’t enough to make that third party responsible to the plaintiff;

–  In the construction context, where a contract is placed by an owner under a general contractor who has power to employ whom it wishes, the owner is justified in presuming that the work is being done for the contractor and not the owner;

–  The policy reasons that underlie the rule that only a party to a contract can sue and be sued for its breach is to avoid double-recovery for a plaintiff or forcing a non-party into a “forced exchange” (i.e. where a third party is paying for something it never received)

–   A plaintiff can sue a non-party to a contract in situations where the non-party entices or encourages a plaintiff to perform;

(¶¶ 25-41).

Finding for the plaintiff, the Second District ruled that principles of fairness weighed in favor of allowing recovery from the general contractor even though there was no contractual relationship between it and plaintiff.

The record showed that plaintiff and defendant had multiple oral and written conversations before, during and after completion of the job.  The plaintiff sent correspondence to the defendant concerning the scope of the project and invoices after the piping work was finished.  This evidence supported plaintiff’s theory that the defendant actively encouraged the plaintiff’s work.

The Court also noted that the general contractor received over $200K worth of plaintiff’s piping work for which it didn’t pay and was fully paid over $40M by the project owner.  (¶¶ 16, 42).

In addition, the Court found that there was no risk of double-recovery for the plaintiff since it was proceeding against the general contractor alone (not the subcontractor) and there was no risk of double liability for the defendant since it wasn’t being sued by the subcontractor who hired the plaintiff.  Combined, these factors created a climate that justified the defendant general contractor paying the plaintiff for its project pipe-installation work.

Afterwords:

The case presents a good example of a court refusing to rigidly follow strict rules of privity of contract and quasi-contract recovery in favor of a more relaxed, fact-specific standard.  The fact that the defendant was paid $40M and was refusing to pay $200K worth of piping work figured prominently in the Court’s decision.

Going forward, if an owner or contractor receives the benefit of what it contracted for, is fully paid and there’s evidence that the owner (or general contractor) communicated directly with the performing subcontractor (or sub-subcontractor) during the course of the subcontractor’s work, a strong argument can be made that a sub or sub-subcontractor can recover under an implied contract theory.