All too often we hear stories of fraud in the construction industry. We see fraud at its worst following natural disasters, but the truth is that it can occur on any project. The laws surrounding fraud and mechanics lien claims can vary from state to state, but if you think a lien claim might be fraudulent, a good rule of thumb is “Don’t do it.” While there is a difference between a fraudulent and a frivolous lien claim, it’s best to avoid both. Penalties for filing frivolous or fraudulent lien claims can be harsh.
Disputed Amounts or Fraudulent Lien Claims?
Roy Zenere Trucking & Excavating, Inc. v. Build Tech, Inc. illustrates how an Illinois court will determine fraudulent lien claims.
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Oak Lawn and Alpine were two subcontractors hired to work on an Illinois Walgreens. Hiring on the project was done by a general contractor, and the project developer did not have contact with parties hired by the GC. In exchange for progress payments, the subs provided partial lien waivers. Throughout the project each time a payment was requested, the GC sent the claim to the developer along with the partial lien waiver for approval. Once approved by the developer, the funds were released. At the end of these progress payments, 10% of the contract price was retained until a final lien waiver was presented.
As construction went on, issues arose and change orders were necessary to continue toward completion. When Oak Lawn and Alpine submitted change orders to the GC, the GC ok’ed them but never passed them up the chain to the developer. When the subs reached the end of the project, they were still owed the amounts of their change orders as well as the 10% final payment.
Oak Lawn and Alpine both filed mechanics liens on the project, and the amount of their claims included the change orders. They also asked for attorney fees. In response, the developer argued that he had not authorized any change orders (as required under contract) and the subs had filed fraudulent liens and committed slander of title.
We’ve actually covered another Illinois fraudulent lien allegation. It did not go well for the claimant.
The trial and appellate courts found that the amounts of the lien claims could not include the change orders and that the liens had not been fraudulently filed. Under Illinois law, errors or overcharges will not constitute fraud (or constructive fraud) without some other intent to defraud present. Because both Alpine and Oak Lawn had performed the work and both reasonably believed that their claims were valid, the courts found no intent to defraud.
As for the attorney fees, Illinois law provides that the court may award fees when the contracting party fails to pay the full contract price. Both courts found that the contract amounts (excluding change orders) had been earned by the subs and the work had been satisfactorily done. Thus, the developer had no just cause to withhold amounts due under the contract. The trial court originally denied the fees, but the appellate court found that awarding attorney fees would be proper.
Most lien claims will include a “disputed amount.” After all, it is a payment dispute. When a party includes improper amounts, it might not automatically trigger fraudulent lien claims. The law will vary from state to state, but often some level of intent will be required when fraudulent behavior is alleged. Mistakes when filing may or may not amount to fraud, but they could absolutely make a claim invalid, so it is imperative to take care when filing a lien claim.
The best way to avoid filing fraudulent lien claims is knowing the law. Check out our Construction Payment Resources where we have information and FAQs on filing a lien in every state.