General Contractor’s Bankruptcy Filing Means Extra Time For Subcontractor To File Lien Suit

Section 34 of the Illinois Mechanics Lien Act (770 ILCS 60/34) presents a way for an owner to quickly dispose of a contractor’s lien recorded against his/her property. Typically, the owner serves the Section 34 notice and the contractor must either sue to foreclose its lien within 30 days or it loses the lien.

But what if after the owner sends a Section 34 notice, the general contractor (who hired the subcontractor) files bankruptcy before Section 34’s notice period ends?  Does the clock stop or does it keep running?

According to Lesniak v. Wesley’s Flooring, Inc., 2013 IL App (1st) 122146-U, the clock stops until the bankruptcy case is resolved.

The subcontractor defendant was hired by a general contractor to do flooring work on plaintiff’s Chicago residence.

After completing the flooring work, the subcontractor liened the home to secure payment.  The homeowners sent the subcontractor a Section 34 notice.  The general contractor filed for bankruptcy protection during the 30-day notice period.

When the subcontractor failed to sue, the homeowners sued the sub to quash its lien.

The trial court granted plaintiffs’ summary judgment motion on the basis that defendant subcontractor failed to file suit within Section 34’s thirty-day period forfeited its lien. 

Held: Summary judgment for homeowners affirmed; but for a different reason.  

Reasoning:

The Court held that the general contractor’s bankruptcy filing does toll the subcontractor’s 30-day period to file suit.  This is because of the automatic stay that applies once a party files bankruptcy. 

Since a general contractor is a necessary party to a subcontractor’s lien action (770 ILCS 60/28), the subcontractor would violate the automatic stay by suing to foreclose its lien after the general contractor filed bankruptcy.  ¶¶ 20-23.  The subcontractor must wait until the general contractor’s bankruptcy stay ends or is lifted to sue on its lien. 

But the Court did affirm summary judgment for the plaintiffs-homeowners under Section 5 of the Act (770 ILCS 60/5).  Section 5 aims to protect an owner from paying twice for the same work.  It requires the owner to demand from the contractor – prior to payment – a sworn statement that details all subcontractors who worked on a given project.  ¶ 14. 

Section 5 imposes a reciprocal duty on the contractor to provide an owner with a sworn statement as a condition to payment.  An owner is entitled to rely on a contractor’s affidavit when making payment and is insulated from unknown subcontractor claims so long as the owner had no knowledge the contractor’s affidavit is false. ¶ 24; 770 ILCS 60/27. 

Here, the bankrupt general contractor provided the plaintiffs with sworn statements that failed to list defendant/sub’s identity or amounts owed it.  Moreover, according to the plaintiffs’ uncontested affidavit, they never received notice of subcontractor’s lien until several months after they paid the general contractor in full.  The Court found that because plaintiffs had fully paid the contractor and had a zero balance on the prime contract  when they received the sub’s lien notice, the sub’s lien claim was invalid.  ¶ 26.

Take-aways:

1/ A general contractor’s bankruptcy stays a subcontractor’s 30-day time period to sue on his lien after receiving a Section 34 notice;

2/ Subcontractors must be vigilant to ensure a general contractor is providing an owner with accurate sworn statement information.

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PaulP

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