Tag: exclusive remedy

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.

 

 

Illinois Partnership Law, Exclusive Remedy Provisions and Federal Judgment on the Pleadings Standards (IL ND)

Allied Waste Transportation v. Bellemead Development Corp., 2014 WL 4414510 (ND.Ill. 2014), examines the reach of liability under a decades-old partnership agreement for millions of dollars in environmental clean-up costs.

The plaintiff and defendant were partners in an entity that ran a landfill in suburban Chicago. The partnership agreement gave each party 50-50 responsibility for paying litigation costs and any fines levied against the  partnership.  If either party failed to pay under this cost-sharing section, the paying party would have his partnership share increased while the non-payer’s share would correspondingly lessen.

After plaintiff paid about $125M to end several years of environmental litigation filed by State and local governments related to the landfill, it sued for damages under CERCLA (the Federal environmental statute) and for breach of the  partnership contract.  The defendants counter-sued for breach of the partnership agreement’s indemnification provision – the section that required either partner to indemnify the other for litigation costs incurred in defending a lawsuit.

Defendants moved for judgment on the pleadings on all claims on the dual grounds that the partnership agreement’s share adjustment section was the exclusive remedy for a partnership violation and that plaintiff’s suit was premature since it failed to first seek a formal accounting.

Held: Defendants’ motion for judgment on the pleadings denied.

Reasons:

The Court held that the defendants failed to meet their burden of establishing that the plaintiff could never state a valid breach of partnership or a statutory CERCLA Claim.

A party can move for judgment on the pleadings after pleadings are closed. FRCP 12(c). The same standards that govern a Rule 12(b)(6) motion govern judgment on the pleadings motions.  A Court views allegations in the light most favorable to the non-moving party and the motion will be granted where it appears beyond a doubt that the non-movant cannot prove any set of facts sufficient to support his claim for relief.  On a judgment on the pleadings motion, the Court considers only the complaint, answer and any exhibits.

Applying these standards, the Court held that the plaintiff made out both a CERCLA claim and a cause of action for breach of the partnership agreement.  

On the breach of partnership agreement count, the Court found that the agreement’s profit and loss adjustment section was not an exclusive remedy. In Illinois, limitation of remedy provisions are enforceable but they aren’t favored. Contracting parties are not required to put all potential remedies in a document in order to make those remedies available, and providing for one specific remedy won’t always preclude another remedy.  Also, a contract doesn’t have to use the word “exclusive” for a remedy to be deemed exclusive. Instead, the remedy will be found exclusive where the contract text warrants such a finding. (*4-5).

Here, the interest adjustment section that the plaintiff argued was the exclusive remedy only applied to situations where the partnership needed an infusion of extra capital and one partner didn’t timely contribute his share. There was no language, in either the adjustment section or in the partnership agreement as a whole, to justify a finding that an increase or reduction in partnership interest was the sole remedy for a breach. (*6).

The Court also rejected defendant argument that a formal accounting was a required precursor to a partnership suit by the plaintiff. In Illinois, the general rule is that one partner can’t sue another until there has been a settlement of partnership affairs via an accounting.  An exception to this rule is where a partner’s claim can be decided without a full review of the partnership accounts.  Also, see 805 ILCS 206/405 (partner can sue partnership or a co-partner with or without an accounting) (**6-7).

Here, since the amount plaintiff paid for the environmental clean-up costs was easily calculable (as was the defendants’ share of the costs), no accounting was necessary as a precondition to plaintiff’s suit.

Afterwords: If contracting parties intend for there to be an exclusive remedy for a breach – they should say as much.  This case also makes clear that a formal accounting isn’t always required first before a partner can sue another partner or the partnership entity; especially if the suing partner can easily compute his damages.