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) is designed to force the hand of a contractor who records a lien on real estate.  Typically, an owner serves the Section 34 notice and the contractor must either sue to foreclose his lien within 30 days or he loses his lien rights.  It’s a relatively quick way for a property owner to try and clear title to his real estate.

But what if, after the owner sends a Section 34 notice, the general contractor (who hired the subcontractor) files bankruptcy before the 30-day period expires?  Does this suspend the 30-day period?

Lesniak v. Wesley’s Flooring, Inc., 2013 IL App (1st) 122146-U, answers “yes” to the question.

The subcontractor  was hired by a general contractor to do flooring work on a Gold Coast residence in Chicago.

After completing the flooring work, the subcontractor recorded its lien against the home.  The homeowners then sent a Section 34 notice to the subcontractor.  The general contractor, meanwhile, filed for bankruptcy protection.

When the subcontractor failed to sue on its lien within the 30-day window, the homeowners sued to remove defendant’s 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 if he filed suit to foreclose its lien after the general contractor filed bankruptcy.  ¶¶ 20-23.

The subcontractor has to wait until the general contractor’s bankruptcy stay ends or is lifted to foreclose his (the subcontractor’s) lien. 

The Court did affirm summary judgment for the plaintiffs-homeowners though 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 also imposes a reciprocal duty on the contractor to provide the sworn statement to the owner 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 has no knowledge that 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’s identity or any amounts owed to defendant.  In addition, according to the plaintiffs’ uncontested affidavit, they didn’t receive notice of defendant’s lien until several months after the plaintiffs 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 defendants’ lien notice, defendant’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;

2/ subcontractors must be hypervigilant to ensure that the general contractor is providing the owner with accurate sworn statement information.