Lien Inflation and “Plus Factors” – Constructive Fraud in Illinois Mechanics Lien Litigation

The contractor plaintiff in Father & Sons Home Improvement II, Inc. v. Stuart, 2016 IL App (1st) 143666 was caught in several lies in the process of recording and trying to foreclose its mechanics lien.  The misstatements resulted in the nullification of its lien and the plaintiff being on the hook for over $40K in opponent attorneys’ fees.

The plaintiff was hired to construct a deck, garage and basement on the defendant owner’s residence.  Inexplicably, the plaintiff recorded its mechanics lien 8 months before it finished its work. This was a problem because the lien contained the sworn testimony of plaintiff’s principal (via affidavit) that stated a completion date that was several months off.

Plaintiff then sued to foreclose the lien; again stating an inaccurate completion date in the complaint.  The owner and mortgage lender defendants filed separate summary judgment motions on the basis that the plaintiff committed constructive fraud by (1) falsely stating the lien completion date and (2) inflating the dollar value of its work in sworn documents (the affidavit and verified complaint).

Affirming summary judgment and separate fee awards for the defendants, the Court distilled the following mechanics lien constructive fraud principles:

  • The purpose of the mechanics lien act (Lien Act) is to require someone with an interest in real property to pay for property improvements or benefits he encouraged by his conduct.  Section 7 of the Lien Act provides that no lien will be defeated because of an error or if it states an inflated amount unless it is shown that the erroneous lien amount was made with “intent to defraud.”  770 ILCS 60/7;
  • The intent to defraud requirement aims to protect the honest lien claimant who simply makes a mistake in computing his lien amount.  But where there is evidence a lien claimant knowingly filed a false lien (either in completion date or amount), the lien claim will be defeated.  (¶¶ 30-31);
  • Where there is no direct proof of a contractor’s intent to defraud, “constructive fraud” can negate a lien where there is an overstated lien amount or false completion date combined with additional evidence;
  • The additional evidence or “plus factor” can come in the form of a false affidavit signed by the lien claimant that falsely states the underlying completion date or the amount of the improvements furnished to the property.  (¶ 35).

Based on the plaintiff’s multiple false statements – namely, a fabricated completion date and a grossly exaggerated lien amount based on the amount of work done – both in its mechanics lien and in its pleadings, the court found that at the very least, the plaintiff committed constructive fraud and invalidated the lien.

Attorneys’ Fees and Rule 137 Sanctions

The court also taxed the property owners’ attorneys’ fees to the losing contractor.  Section 17 of the Lien Act provides that an owner can recover its attorneys’ fees where a contractor files a lien action “without just cause or right.”  The Lien Act also specifies that only the owner – not any other party involved in the chain of contracts or other lienholders – can recover its attorneys’ fees.  A lien claim giving rise to a fee award is one that is “not well grounded in fact and warranted by existing law or a good faith argument for the extension, modification or reversal of existing law.”  770 ILCS 60/17(d).

Based on the contractor’s clear case of constructive fraud in filing a lien with a false completion date and in a grossly excessive sum, the court ordered the contractor to pay the owner defendants’ attorneys’ fees.

The lender – who is not the property owner – wasn’t entitled to fees under Section 17 of the Lien Act.  Enter Rule 137 sanctions.  In Illinois, Rule 137 sanctions are awarded to prevent abuse of the judicial process by penalizing those who file vexatious and harassing lawsuit based on unsupported statements of fact or law.  Before assessing sanctions, a court does not engage in hindsight but instead looks at what was objectively reasonable at the time an attorney signed a document or filed a motion.

Because the plaintiff contractor repeatedly submitted false documents in the course of the litigation, the court awarded the mortgage lender its attorneys’ fees incurred in defending the lien suit and in successfully moving for summary judgment.  All told,  the Court sanctioned the contractor to the tune of over $26,000; awarding this sum to the lender defendant.

Afterwords:

This case serves as an obvious cautionary tale for mechanics lien plaintiffs.  Plainly, a lien claimant must state an accurate completion date and properly state the monetary value of improvements.  If the claimant realizes it has made a mistake, it should amend the lien.  And even though an amended lien usually won’t bind third parties (e.g. lenders, other lienholders, etc.), it’s better to correct known lien errors than to risk a hefty fee award at case’s end.

 

 

 

 

Constructive Fraud in IL Mechanics’ Lien Suits: A Case Study

ACHere’s one from the vault.  While dated, the case is still relevant for its cogent discussion of important and recurring mechanics’ lien litigation issues.  In Springfield Heating and Air Conditioning, Inc. v. 3947-55 King Drive at Oakwood, LLC, 387 Ill App 3d 906 (1st Dist. 2009), the First District examined the concept of constructive fraud and discussed when a subcontractor can bring alternative unjust enrichment and quantum meruit claims in a lien suit.

The plaintiff was a subcontractor who installed HVAC materials on a construction project consisting of two adjoining properties  for a total contract sum of about $400,000.  When the general contractor fired it, the plaintiff liened both parcels each for $300,000 – the total amount plaintiff was then due for its HVAC work.  The result was a “blanket lien” on the properties for a total of about $600K – double the proper amount.

The plaintiff sued to foreclose its liens and filed companion (and alternative) claims for quantum meruit and unjust enrichment against the general contractor and owner defendants.  The trial court granted the defendants’ motion to dismiss the plaintiff’s claims.  The court held that the lien claim was constructively fraudulent since it was inflated by almost two times the actual lien amount and because the lien wasn’t apportioned among the two property parcels.  The Court dismissed the plaintiff’s quantum meruit and unjust enrichment claims because it held that a subcontractor’s only remedy against an owner is a mechanics lien foreclosure action.

Held: Affirmed in part; reversed in part

 Constructive Fraud

The First District found there was no evidence of constructive fraud by the subcontractor; noting that Section 7 of the Lien Act aims to protect honest lien claimants who make a mistake rather than claimants who intentionally make a false statement or who knowingly inflates their lien.  That’s why someone must show an intent to defraud in order to nullify a lien.

While acknowledging that the plaintiff subcontractor’s lien totaled about $600K – nearly double of the amount it was actually owed – the Court looked beyond the liens’ numerical overcharge and found no additional evidence of fraudulent intent. 

This holding amplifies the First District’s Cordeck Sales, Inc. v. Construction Systems, Inc. (382 Ill.App.3d 334(1st. Dist. 2008)) ruling – a case viewed with near-Biblical reverence in Illinois mechanics lien circles – that a mechanics lien won’t be invalidated for constructive fraud simply because its inflated.  There must be an overstatement “in combination” with other record evidence that allows the court to infer fraudulent intent.  Here, there was no additional fraud evidence and the Court reinstated the subcontractor’s lien claim.

Quantum Meruit/Unjust Enrichment

The Court sustained the trial court’s dismissal of the plaintiff’s equitable counts of quantum meruit and unjust enrichment.  The general rule is that a subcontractor like plaintiff can’t recover for unjust enrichment where the entire work to be performed by the subcontractor is under a contract with the general contractor.  See Premier Electrical Construction Co. v. La Salle National Bank, 132 Ill. App. 3d 485, 496 (1st Dist. 1985). 

In such a case (no privity between owner and subcontractor), the general contractor has the power to employ whom he chooses and the owner is entitled to presume that any subcontracting work is being done for the contractor; not the owner.  Since there is normally no direct contract between a subcontractor and the owner, a subcontractor can’t claim that its work unjustly enriched the owner.

So, unless the subcontractor proves that it dealt directly with a property owner, its exclusive remedy against an owner is a statutory, mechanics lien suit.  Swansea Concrete Products, Inc. v. Distler, 126 Ill. App. 3d 927, 932 (5th Dist. 1984).  If the subcontractor misses the time deadlines to record its lien (four months, usually) or fails to timely file suit to foreclose the lien (two years post-completion of job), the subcontractor can’t then try to recover against the property owner under quantum meruit or unjust enrichment. 

Here, since the plaintiff’s contract was with the general contractor and not the owner, the plaintiff’s remedy against the general contractor was for breach of contract and its remedy against the owner was a mechanics’ lien suit.  As a result, the plaintiff’s quantum meruit and unjust enrichment claims were properly dismissed.

Afterwords: Even though the case is now several years old, Springfield Heating has continued relevance in construction lien litigation because it is the First District’s most recent word on the showing a property owner must make to prove a subcontractor’s constructive fraud when attempting to defeat a lien on the owner’s property.  Clearly, a numerical overcharge isn’t enough to defeat a lien. 

The owner must show additional “plus factors” which signals  fraudulent intent by the lien claimant.  The case also further supports the black-letter proposition that a subcontractor’s sole remedy against a property owner is a mechanics’ lien suit.  This rule will always apply unless the subcontractor can prove that the owner specifically requested or induced the subcontractor’s labor and materials on the owner’s property.

 

 

Contractor’s Legal Malpractice Suit Can Go Forward In Case of (Alleged) Misfiled Mechanics’ Lien: IL 1st Dist.

Construction Systems, Inc. v. FagelHaber LLC, 2015 IL App (1st) 141700, dramatically illustrates the perilous consequences that can flow from a construction contract’s failure to identify the contracting parties and shows the importance of clarity when drafting releases intended to protect parties from future liability.

The plaintiff contractor sued its former law firm (the Firm) for failing to properly perfect a mechanics lien against a mortgage lender on commercial property.  The plaintiff alleged that because of the Firm’s lien perfection failure, the plaintiff was forced to settled its claim for about $1.3M less than the lien’s worth (about $3M). 

In the underlying lien case, the plaintiff and defendant Firm got into a fee dispute and the Firm withdrew.  The Firm turned over its file to the plaintiff after the plaintiff made a partial payment of the outstanding fees (owed to defendant Firm) and signed a release (the “Release”). The Release, which referenced “known and unknown” claims and contained “without limitation” verbiage, was signed by the plaintiff in 2004.  Plaintiff filed the current malpractice suit in 2009.

The trial court entered summary judgment for the Firm on the basis that the Release immunized the Firm from future claims.  Plaintiff appealed.

Held: Reversed

Rules/Reasons:

Reversing summary judgment for the Firm, the First District first applied the relevant rules governing written releases in Illinois.

a release is a contract and is governed by contract law;

– a release will be enforced as written where it’s clearly worded

– the scope and effect of a release is controlled by the intention of the parties;

– the intention of the parties is divined by reference to the words of the release and a release won’t be construed to defeat a claim that was not contemplated by the parties when they signed it;

– A “general” release will not apply to specific claims where a party is unaware of other (specific) claims;

– Where one party to a release owes the other a fiduciary duty (e.g. lawyer-client), the party owing the fiduciary duty has the burden of showing that it disclosed all relevant information to the other party.

(¶¶ 25-28).

Here, the court gave the Release a cramped construction.  It held that it didn’t apply to the malpractice suit since that case wasn’t filed until 5 years after the Release was signed and there was no evidence that the plaintiff knew that the Firm possibly flubbed the lien filing when it (the plaintiff) signed the Release.  This lack of evidence on the parties’ intent raised a disputed fact question that required denial of summary judgment.

Next, the court turned to the Firm’s judicial estoppel argument – that the plaintiff couldn’t sue for malpractice since it obtained a benefit in the underlying lawsuit (a settlement payment of $1.8M from the competing lender) by claiming it was an original contractor and not a subcontractor.  Judicial estoppel applies where (1) a party takes two positions under oath, (2) in separate legal proceedings, (3) the party successfully maintained the first position and obtained a benefit from it; and (4) the two positions are inconsistent.  (¶ 37).

The issue was paramount to the underlying lien case because if the plaintiff was a subcontractor, it had to comply with the 90-day notice requirement of Section 24 of the Lien Act.  But if it was a general or original contractor, plaintiff was excused from the 90-day notice requirement.  Based on this factual uncertainty, the court found the plaintiff had a right to pursue alternative arguments to salvage something of its approximately $3M lien claim.

The court also agreed with the plaintiff that it could recover prejudgment interest on the legal malpractice claim.  Since that claim flowed from the underlying allegation that the Firm failed to perfect plaintiff’s lien, and since Section 21 of the Illinois Mechanics Lien Act allows for prejudgment interest (770 ILCS 60/21), the plaintiff could add the interest it would have recovered to the damage claim versus the Firm. (¶ 48).

Afterwords:

1/ A broad release can still be narrowly interpreted to encompass only those claims that were likely in the release parties’ contemplation.  If a claim hadn’t come to fruition at the time a release is signed, the releasing party can argue that an expansive release doesn’t cover that inchoate claim;

2/ Judicial estoppel requires more than alternative pleadings or arguments.  Instead, the litigant must take two wholly contradictory statements and obtain a benefit from doing so.  What’s a “benefit” is open to interpretation.  Here, the plaintiff received $1.8M on its lien claim in the earlier litigation.  Still, this wasn’t a benefit in relation to the value of its lien – which exceeded $3M;

3/ If the underlying claim – be it common law or statutory – provides for pre-judgment interest, then the later malpractice suit stemming from that underlying claim can include pre-judgment interest in the damages calculation.