Tag: sworn statement

Subcontractor’s Failure to Get Certified Mail ‘Green Cards’ into Evidence = Draconian Trial Loss in Lien Spat

The Second District appeals court recently affirmed a harsh result against a subcontractor who failed to properly serve a Section 24 notice in accordance with the strictures of the Illinois Mechanics Lien Act.

The earth-moving subcontractor recorded a lien against a nascent Starbucks in Chicago’s western suburbs seeking payment for various change orders. It sent its lien notice to the property’s lender by certified mail but not to the property owner.

After a bench trial, the trial judge reluctantly found for the property owner defendants and held that the subcontractor’s lien notice failed to follow the Act.  The subcontractor appealed.

Affirming judgment for the property owner, the Court first emphasized the oft-cited rule that since rights created by the Act are statutory, the statutory technical and procedural requirements are strictly construed. The burden of proving that each requirement of the Act has been satisfied is on the party seeking to enforce its lien – here, the subcontractor.  But where there is no dispute that an owner actually received notice, courts will overlook technical defects.

Section 24 of the Act requires a subcontractor to serve notice of its intent to lien by certified mail or personal delivery to the record owner and lender (if known)within 90 days after completing the work on the property. 770 ILCS 60/24(a).

An exception to this notice requirement is where a general contractor’s sworn statement provides the owner notice of the subcontractor’s work and unpaid amount.

While courts will uphold a lien notice sent only to an owner (and not to the lender) since there is no concern of the owner being prejudiced or having to pay twice, the reverse isn’t true. Citing to half-century-old case law, the Court held that since notice to an owner is the ‘very substance of the basis on which a mechanic’s lien may be predicated,’, the Court refused to excuse the subcontractor’s failure to serve the owner with its lien notice even though the lender was given proper statutory notice.

And while the plaintiff attached some certified mail green (return) card copies to its written response to Defendant’s directed verdict motion at trial, the plaintiff never authenticated the cards or offered them in evidence at trial. As a result, the appeals court refused to consider the green cards as part of the appellate record. (An appeals court cannot consider documents that were not admitted into evidence at trial.)

In addition, the plaintiff’s trial testimony was conflicting. The Plaintiff’s owner’s testimony conflicted with a 2014 affidavit of mailing prepared by one of Plaintiff’s employees.  This evidentiary dissonance failed to show the owner’s actual notice of the plaintiff’s lien notice.  As a result, the trial court found that the plaintiff failed to carry its burden of proving that it complied with its Act lien notice rules.

The court then rejected the subcontractor’s argument that the owner had actual notice of its work since it saw the plaintiff performing grading work on the property and the plaintiff sent regular invoices to the owner’s agent.  However, under Illinois law, the mere presence of or owner’s knowledge that a contractor on a job is not a valid substitute for the required statutory notice.

The court also nixed the subcontractor’s claim that the owner had actual notice of the subcontractor’s work based on the sworn statements submitted to the owner from the general contractor. While courts have upheld an otherwise deficient subcontractor lien notice where sworn statements in the record plainly show the subcontractor’s identity and amounts owed.  Here, there were no sworn statements in the record. A trial witness may only testify to matters on which he/she has personal knowledge. Ill. R. Evid. 602. Since the plaintiff didn’t call to testify the owner’s construction manager – the only one who supposedly received the GC’s sworn statements (that identified plaintiff) –  there was no competent evidence that the owner received and reviewed any sworn statements that referenced the plaintiff’s work and amounts owed.

Afterwords:

This case shows how unforgiving statutory notice requirements can be in the mechanics lien context.

In hindsight, the subcontractor plaintiff should have introduced certified mail receipts into evidence.

Failing that, it should have called the owner’s construction manager as an adverse agent to lock in testimony that the general contractor furnished the owner with sworn statements and those statements sufficiently identified the subcontractor plaintiff.

Mechanics’ Lien Claim Defeated Where Contractor Fails to Provide Proper Contractor Affidavit

Pyramid Development, LLC v. DuKane Precast, 2014 IL App (2d) 131131, vividly illustrates the importance of diligent record-keeping practices on construction projects and the dire financial consequences that can flow from a failure to do so.  It emphasizes how crucial it is for a contractor to comply with Section 5 of the mechanic’s lien act – 770 ILCS 60/5 (the “Act”) – the section that requires a contractor to give the owner a sworn statement that lists all persons providing labor and materials on a project.

The plaintiff contractor sued to foreclose a mechanics lien on several townhomes it was hired to build and also sued a subcontractor for defective concrete work supplied to the project.  After a bench trial, the court nullified the lien because it was negated by damage to the property.  Plaintiff appealed.

Result: Plaintiff’s lien is defeated because it didn’t comply with Section  5.

Reasons:

– The purpose of the Section 5 affidavit is to put the owner on notice of subcontractor claims;

– An owner has the right to rely and act upon a contractor’s section 5 affidavit unless the owner has reason to suspect the notice is false or knows that it’s false;

– An owner is protected from subcontractor claims where they’re not listed on the contractor’s affidavit unless the owner knows of the subcontractor omissions or has colluded with the contractor to exclude the subcontractors;

– Section 5 provides that it’s the owner’s duty to ask for and the contractor’s obligation to supply a sworn statement listing all parties furnishing lienable work on the property and the amounts owed to them;

– Where an owner doesn’t request a Section 5 affidavit, the contractor isn’t required to provide one;

– An owner’s previous acceptance of a flawed Section 5 affidavit doesn’t waive the contractor’s compliance with that section. (i.e., Just because an owner has accepted deficient affidavits in the past, doesn’t mean the contractor doesn’t have to comply with Section 5, e.g.)

(¶¶ 26-29).

Here, the property owner had a pattern of accepting faulty Section 5 affidavits. The plaintiff’s principal admitted that the names and amounts on the affidavits were often wrong and the amounts inflated.  Plaintiff also conceded that it routinely named itself as a subcontractor when it didn’t actually do any of the work on the townhomes.

The court held that since the plaintiff’s section 5 affidavits were facially erroneous, the lien claim was properly defeated.

The court also affirmed judgment against the plaintiff on its breach of contract claim. In a breach of contract suit involving construction services, a contractor is held to the “substantial performance” standard: he must perform in a workmanlike manner and a failure to do so is a breach of contract. (¶ 35).

A breach of contract plaintiff must also prove money damages.  And while he doesn’t have to do so with mathematical certainty, he still must offer some basis from which the court can compute the damage with reasonable probability. (¶ 37).

Here, the plaintiff didn’t meet his burden of proving damages.  Its record-keeping was scatter-shot and rife with discrepancies.  The plaintiff’s numbers didn’t match up and it couldn’t explain myriad invoice errors at trial.  This failure to carry its burden of proving damages doomed the plaintiff’s breach of contract claim.

Take-aways:

Accurate record-keeping is essential; especially on high dollar projects with multiple contractors;

Where an owner requests a section 5 affidavit, the contractor must supply one;

An Owner’s past acceptance of a faulty affidavit won’t excuse contractors duty to strictly adhere to section 5.

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.