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In a recent decision, the United States Bankruptcy Court for the Northern District of Illinois gave out a first impression ruling on how to interpret a portion of the Illinois Mechanics Lien Act (IMLA). Specifically the Court interprets Section 21.02(a) of the IMLA.

The reason why this is important to contractors in Illinois is because it can affect a claim by a subcontractor who needs to be paid on a project where the general contractor has filed for bankruptcy.

The IMLA Statute

The dispute here involves money that is supposed to be protected and held in trust when a contractor files bankruptcy. This money is supposed to be held in trust for the subcontractor and is not subject to other liabilities in the bankruptcy claim.

Does the subcontractor get paid in full for its claim by creating a trust under the statute or does it get treated like all other claims and be subject to the statutory priority? If the statute is followed, the subcontractor can recover the full amount. Otherwise it is out of luck.

The statute reads in pertinent part:

Any . . . contractor . . . who requests or requires the execution and delivery of a waiver of mechanics lien by any person who furnishes labor, services, [or] material . . . for the improvement of a lot or a tract of land . . .

shall hold in trust the sums received … as the result of the waiver of mechanics lien, as trustee for the person who furnished the labor, services, [or] material ….”  Anchor Mech., Inc. v. Steege (In re ICM, Inc.), 2013 Bankr. LEXIS 3817, 9 (Bankr. N.D. Ill. Sept. 11, 2013)

This statute requires that two prongs be met. When both are met then a trust will be set up and the funds owed to the subcontractor will be placed in that trust for payment.

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The Court’s Decision

The Bankruptcy Court in this matter was able to look at the wording of the statute and the overall effect on the IMLA to determine this first impression of interpretation. This matter is a Federal Bankruptcy proceeding, therefore the relief requested under FRCP 12(b)(6) is dismissal of the complaint. The Court here properly granted the motion to dismiss.

The issue for discussion in this holding is whether the subcontractors filing of the statutorily required mechanics lien waiver is a prerequisite of the contractor requesting payment from the owner regarding the work of the subcontractor. The court concluded that it is absolutely required that the subcontractor file its lien waiver and the general contractor is paid as a result of the filing of the mechanics lien waiver.

What this means for the Illinois Mechanics Lien Act

Not a whole lot actually. There are some ramifications from this decision, but very specific circumstances must be met. First, the general contractor must file for bankruptcy, and leave subcontractors unpaid. However, prior to the general contractor filing bankruptcy, the subcontractor would have to file its lien claim or file a waiver of its lien claim in exchange for payment.

The Illinois Mechanics Lien Act is a little unique in that it allows for a lien waiver in exchange for a future payment. Often times waivers are given in exchange for payment. Because the IMLA allows for this in exchange for payment, subcontractors have slightly more protection.