Tag: completion date

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.

 

 

 

 

Contractors’ Honest Mistake in Lien Completion Date And Amounts Doesn’t Doom Mechanic’s Lien Case (IL Law)

imageThe First District recently validated the mechanics liens of two “ma and pa” construction companies against a competing lienholder’s argument that the  liens contained a flawed completion date and an exaggerated lien amount.

North Shore Community Bank v. Sheffield Wellington LLC, 2014 IL App (1st) 123784 is a priority dispute between mortgage lenders and mechanics lien claimants on commercial property.  In examining the parties’ competing claims, the Court addresses what consequences flow from a contractor’s failure to accurately state and prove its completion date under the Illinois Mechanics’ Lien Act, 770 ILCS 60/1 et seq. (the “Lien Act”) and whether that failure defeats its lien claim.

The lender sued to foreclose its mortgage and two contractors counterclaimed to foreclose their mechanics liens on the site.  One lien claimant – who built an office at the site – misstated its completion date by about a week while a roofing contractor couldn’t prove (in its deposition testimony and documents) that it actually performed on its stated completion date.  In addition, the office builder’s principal admitted in his deposition that the lien amount could be off by as much as 10%.  Based on the completion date and lien amount discrepancies, the lender moved for summary judgment against both contractors.  The trial court granted the lender’s motion and found that the mortgage lien trumped the mechanics’ liens.

Held: Summary judgment reversed.

Rules/Reasons:

Reversing summary judgment for the lender, the Court expanded on the Lien Act’s purpose and discussed whether misstated recorded lien information was a binding judicial admission:

The Mechanics’ Lien Act’s Purpose

– The Lien Act’s purpose is to allow someone who has improved property by furnishing labor or materials to lien that property;

– Section 7 of the Lien Act requires a contractor to file its lien  within 4 months after completion in order to enforce his lien against third-party creditors or other lienholders;

– While the Act is silent on completion date, the courts have interpreted Section 7 to require a lien claimant to include a completion date in order to be enforceable;

– Section 24 of the Act governs subcontractors and requires them to serve notice of their lien to the lender (“lending agency”) within 90 days after the completion date;

– Completion date under Section 7 and 24 doesn’t mean completion of the project in total; it just means completion of the work sought to be liened;

– The purpose of Section 7 (which governs contractors) and 24 (which governs subs) is to provide notice to third parties of the existence of a lien claim.

Overstated Liens – What Is ‘Intent to Defraud’?

– An overstated lien can be deemed fraudulent only where an “intent to defraud” is shown (770 ILCS 60/7a);

– A lien will be defeated where it contains a (1) knowing and (2) substantial overcharge;

– An intent to defraud can be proven by executed documents that overstate the amount in combination with some other evidence (i.e. a “Plus Factor”) from which fraudulent intent can be inferred;

– Section 7 of the Act is designed to protect the honest lien claimant who makes a mistake; not a dishonest claimant who knowingly makes a false statement;

Judicial Admissions – What Are They?

– A judicial admission is a “deliberate, clear, unequivocal statement” by a party about a concrete fact within that party’s knowledge;

– The effect of a judicial admission is that is withdraws a fact from dispute and makes unnecessary any need to prove the fact at trial;

– A statement that is the product of mistake or inadvertence is not a binding judicial admission;

– Judicial admissions are designed to deter perjury; they aren’t designed to punish honest mistakes;

– A litigant can’t contradict a prior judicial admission in summary judgment proceedings or at trial;

(¶¶ 81-90, 101-103, 126).

Applying these rules, the Court found that plaintiffs’ incorrect completion dates didn’t impact the mortgage lender’s notice rights.  Both liens were facially valid since they were timely filed; even with a technically wrong completion date.  The office subcontractor served its lien notice on the lender within 90 days of the completion of its work and the roofing general contractor filed its lien within the four-month period required Section 7.

The Court also noted that any incorrect completion dates were the results of honest mistakes – they weren’t binding judicial admissions.  This was because the lien claimants were “ma and pa” companies with limited resources.  One claimant was a single-person entity while the other had two employees that operated from a home office.  The Court also credited testimony by one of the contractors that it had never filed a lien before and wasn’t sure what information was key to the completion date or lien amount questions.  (¶¶129-130).

Finally, the Court rejected the lender’s constructive fraud argument – premised on the subcontractor’s officer admitting in a deposition that the lien amount could be “about 10% off.”  There was no evidence that the subcontractor intentionally made a substantial overcharge and that any flawed numbering was the result of an honest mistake.  An inflated lien amount – without more – is not enough for a constructive fraud finding.

Now What?: This case serves as a strong example of a court refusing to elevate form over substance.  While a completion date is required, a minor error in that date won’t defeat the lien if its otherwise facially valid (i.e. timely filed).  Also, constructive fraud in the lien context is hard to prove.  If a lien claimant can show that a lien error is an honest mistake and not purposely exaggerated, that lien claimant may still be able to prosecute his lien foreclosure suit.