Tag: section 24 notice

Possible Problematic Lien Notice Starts Limitations Clock in Lawyer ‘Mal’ Case

In Construction Systems, Inc. v. FagelHaber LLC, 2019 IL App (1st) 172430, the First District affirmed the time-barring of a legal malpractice suit stemming from a flubbed contractor’s lien filing.

Several months after a lender recorded its mortgage on a commercial project, the law firm defendant, then representing the plaintiff contractor, served a Section 24 notice – the Illinois mechanics’ lien act provision that governs subcontractor liens. 770 ILCS 60/24.  While the notice was served on the project owner and general contractor, it didn’t name the lender.  In Illinois, where a subcontractor fails to serve its lien notice on a lender, the lien loses priority against the lender.

After the contractor settled its lien claim with the lender’s successor, it sued the defendant law firm for malpractice. The contractor plaintiff alleged that had the law firm properly perfected the lien, the plaintiff would have recovered an additional $1.3M.

Affirming summary judgment for the defendant law firm, the First District agreed with the trial court and held that plaintiff’s legal malpractice suit accrued in early 2005. And since plaintiff didn’t sue until 2009, it was a couple years too late.

The Court based its ruling mainly on a foreboding February 2005 letter from plaintiff’s second counsel describing a “problematic situation” – the lender wasn’t notified of plaintiff’s subcontractor lien. The court also pointed out that plaintiff’s second attorney testified in her deposition that she learned of possible lien defects in February 2005; some four years before plaintiff filed suit.

Code Section 13-214.3(b) provides for a two-year limitations period for legal malpractice claims starting from when a plaintiff “knew or reasonably should have known of the injury for which damages are sought.” [⁋ 20]

A plaintiff’s legal malpractice case normally doesn’t accrue until he/she sustains an adverse judgment, settlement or dismissal. An exception to this rule is where it’s “plainly obvious” a plaintiff has been injured as a result of professional negligence.

The court rejected plaintiff’s argument that it never discovered the lien defect until 2007 when the lender’s successor filed its summary judgment motion (which argued that the lien was defective as to the lender). According to the court “the relevant inquiry is not when [Plaintiff] knew or should have known about the lack of notice as an actual defense, but when [Plaintiff] should have discovered [Defendant’s] failure to serve statutory notice of the mechanic’s lien on [the prior lender] prompting it to further investigate [Defendant’s] performance.” [⁋ 24]

The court again cited the above “problematic situation” letter as proof that February 2005 (when the letter was sent) was the triggering date for plaintiff’s claim. Another key chronological factor was the plaintiff’s 2005 payment of attorneys’ fees.

In Illinois, a malpractice plaintiff must plead and prove damages and the payment of attorneys’ fees can equate to damages when the fees are tied to a former counsel’s neglect. Since plaintiff paid its second counsel’s fees in 2005 for work she performed in efforts to resuscitate the lien’s priority, 2005 was the limitation period’s triggering date. [⁋ 25]

Construction Systems cites Nelson v. Padgitt, 2016 IL App (1st) 160571, for the proposition that a plaintiff does not have to suffer an adverse judgment to sustain legal malpractice injury. In Nelson, an employment contract dispute, the Court held that the plaintiff should have discovered deficiencies in his employment contract (it provided for the loss of salary and commissions in the event of for-cause termination) in 2012 when he sued his former employer, not in 2014 when the employer won summary judgment.

The Court also rejected plaintiff’s argument that its damages were unknown until the lien litigation was finally settled and that it couldn’t sue until the lien dispute was resolved. The court held that the extent and existence of damages are different things and that it’s the date a plaintiff learns he/she was damaged, not the amount, that matters.

Lastly, the court nixed plaintiff’s judicial estoppel concern – that plaintiff couldn’t argue the lien was valid in the underlying case while arguing the opposite in the malpractice suit. According to the court, the plaintiff could have entered into a tolling agreement that would suspend the statute of limitations pending the outcome of the underlying case.

Conclusion

Construction Systems reaffirms that a legal malpractice claim can accrue before an adverse judgment is entered or an opponent files a formal pleading that points out claim defects.  Moreover, the payment of attorneys’ fees directly attributable to a former counsel’s neglect is sufficient to meet the damages prong of a legal malpractice case.

This case and others like it also make clear that the limitations period runs from the date a plaintiff learns she has been injured; not when financial harm is specifically quantified.

To preserve a possible malpractice claim while a plaintiff challenges an underlying adverse ruling, practitioners should consider tolling agreements to suspend any statutes of limitation and guard against possible judicial estoppel concerns (taking inconsistent positions in separate lawsuits).

Illinois Mechanics’ Lien General Contractor Doesn’t Morph Into a Subcontractor When Property is Sold Before Recording

imageQ: Does a general contractor transform into a subcontractor where a property owner sells its property to a third party AFTER the general contractor completes its improvements but BEFORE it records its mechanics lien?

A:  No.

Q: Does it matter?

A: Yes.  Because unlike a general contractor, a subcontractor must serve a 90-day notice to the new owner in order to preserve its lien rights under Section 24 of the Mechanics’ Lien Act (the Act).  770 ILCS 60/24.  If the subcontractor doesn’t serve the 90-day notice, the lien is invalid against the third party buyer.

Those are the key questions and answers distilled from Dirtwerks Excavating, Inc. v. Koritala, 2013 IL App (2d) 130329-U, a December 2013 Second District case where real estate was sold by the original owner to various purchasers after a paving general contractor completed its work but before it timely filed its mechanics’ lien.

Facts:

Plaintiff general contractor timely recorded his lien against several properties within the four month time period required by Section 7 of the Mechanics’ Lien Act (the “Act”), 770 ILCS 60/7.  But before the contractor recorded its lien, the owner sold the properties to various home buyers.

Those home buyers successfully moved to dismiss the lien on the basis that the plaintiff converted to a subcontractor once the properties were sold.  And since the plaintiff contractor never sent a 90-day notice (per 770 ILCS 60/24), the contractor’s lien wasn’t enforceable against the defendants.

Held: Trial court reversed.  Plaintiff’s lien was proper, timely and valid against the homeowner defendants.

Reasoning:

Illinois Mechanics’ Lien Act: ‘Contractor’ v. ‘Subcontractor’

The Act’s purpose is to protect those who in good faith furnish material or labor for the improvement of real estate.  The Act permits a lien on the property where a (a) benefit has been received by the owner and (b) where the property’s value or condition has been increased or improved by the furnished labor or materials. ¶ 5. 

A “contractor” under the Act is any person who contracts with a land owner or someone authorized by the owner to enter a contract with the contractor.  A “subcontractor” is one who performs construction work for the contractor.  770 ILCS 60/1(a)(contractor def.); 770 ILCS 60/21(a)(subcontractor def.).  A subcontractor must serve the owner with written notice of its lien within 90 days after completion of the work.  770 ILCS 60/24.  A contractor does not have to comply with the 90-day notice requirement.  He (a contractor) only has to file his lien within 4 months of completion. 770 ILCS 60/7.

Can Unverified Pleading Come Back to Haunt You?

No.  A complicating factor in Dirtwerks was that plaintiff alleged in its original complaint that it was a subcontractor.  But in later complaint amendments, it alleged it was a general contractor.   But since the original complaint wasn’t verified, it was superseded by the later filed complaints. 

A verified complaint that is amended remains a part of the record and can be used to impeach the pleader.  Not so with an unverified pleading.  Once an unverified pleading is amended, it’s erased from the record.  Even so, the plaintiff’s allegation in the first complaint that it was a subcontractor wasn’t a binding admission since it was a legal conclusion (and not a factual allegation). (¶¶ 6-7).

Lien Claimants’ Status Is Determined by the Original Contracting Parties

The Court’s key holding is that the plaintiff’s status (general contractor or subcontractor) was determined by the original contracting parties.  Plaintiff originally contracted with an entity that owned the properties.  That the properties were later sold to third parties didn’t change plaintiff from a general contractor to a subcontractor (who was required to send a 90-day notice). (¶ 9).

The court pointed to cases dating back more than a century for the proposition that once a lien attaches on the date of the owner-general contractor contract, a property buyer takes the property subject to the lien – so long as the lien is recorded/perfected within the four-month window.  

In fact, Section 7 of the Act expressly binds subsequent property buyers.  That section states that a timely recorded lien binds a creditor, incumbrancer or purchaser.   (¶10); 770 ILCS 60/7.

Take-away: This seems like a fair result.  The contractor shouldn’t be penalized just because a prior owner happens to transfer the property to a new buyer before the contractor records its lien.  Dirtwerks also solidifies lien law axioms that a plaintiff’s status – be it contractor, subcontractor, or sub-subcontractor, is determined by the original contracting parties and a timely recorded lien will bind subsequent purchasers.