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There is a friction within the mechanics lien laws in every state as statutes struggle to balance the power between property owners, general contractors, subcontractors, and suppliers. A variety of mechanisms are employed by state laws to both protect property owners against hidden or unknown claims, but to also protect subcontractors and suppliers against non-payment. One popular balancing tool is the preliminary notice concept, and another is the subject of this post and the subject of a recent case from the Illinois 4th Circuit Court of Appeals: Full Price v. Unpaid Balance lien rules.

In Gerdau Ameristeel US, Inc. v. Broeren Russo Constr., May 2013, the court was confronted with timely and properly filed mechanics lien claims by sub-subcontractors. All parties agreed that the liens were timely filed and that the underlying work was satisfactory. The sole issue before the court was whether the property owner had any financial liability.

As discussed in this post, Illinois is an “Unpaid Balance” state, whereby the property owner can be protected against many subcontractor claims so long as certain rules are followed. In the Gerdau Ameristeel case, the sub-subcontractors argued that those rules were not followed and that the property owner could not side-step their claims.

Full Price v. Unpaid Balance Mechanics Lien Rules

A post from earlier this year analyzing a proposed law change in Pennsylvania discussed the difference between “Full Price” and “Unpaid Balance” mechanics lien states, as follows:

States have different ways to apportion risk between parties in a construction project related to concepts of fairness, and the parties’ relative positions in the project. Many states are “full-price” lien states, which means that if the state-specific notice and lien law requirements are met an unpaid subcontractor is entitled to a lien for the full price of the labor and/or materials furnished to the project — whether or not the property owner has already paid the general contractor. Some states, on the other hand, are “unpaid balance” lien states, in which an unpaid subcontractor is limited in his lien claim to the amount left unpaid to the general contractor at a statutorily determined time (either when notice was given, or when the lien was filed).

This tiny theoretical difference in a state’s mechanics lien laws can make a big difference to a party’s mechanics lien claim. It’s one reason why filing your mechanics lien claim sooner, rather than later, is important. If you’re working in an “unpaid balance” state, filing your lien on time may not be soon enough. Instead, “on time” means getting your lien filed before the deadline and before the property owner has spent her contract funds.

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Illinois’ Unpaid Balance Rule Protects The Owner Even When GC Misrepresents Payments

At a high level, Illinois is an “Unpaid Balance” state. However, the “Unpaid Balance” rule only applies if the property owner qualifies for that protection. This is explained quite nicely by the Illinois 4th Circuit in Gerdau Ameristeel:

The Act attempts to balance the rights and duties of owners, subcontractors, and materialmen.

To protect itself from paying twice for the same work, the owner must demand from the contractor, prior to payment, a sworn statement listing all subcontractors providing labor and materials to the contractor…If the owner pays the contractor before receiving the sworn statement, the owner may be compelled to pay subcontractors even if he or she has paid the contractor in full.

In other words, the property owner must specifically request and receive a “sworn statement” from the general contractor before making payments. If the owner does this, the owner will be protected against paying twice pursuant to a mechanics lien claim. This protection applies even if the general contract makes misrepresentations or omissions on the sworn statement, so long as the owner is unaware of the misrepresentation or omission.

This was a small discussion in the Gerdau Ameristeel case because the sub-subcontractors there were not disclosed to the property owner prior to payment. Citing the longstanding Bricks Inc. v. C&F Developers, Inc. decision, however, the court sympathized with the apparent unfairness, but concluded that “an owner is entitled to rely upon a contractor’s affidavit in making payment and is protected as against unidentified subcontractors so long as he has no knowledge or notice that the affidavit contains false or incomplete information.”

What Qualifies As A “Sworn Statement?”

The sub-subcontractors in Gerdau Ameristeel also argued that the owner could not circumvent their claims because the owner did not actually receive any “valid section 5 affidavits.”  This reference to “Section 5 Affidavits” refers to §770 ILCS 60/5 – part of the Illinois Mechanics Lien Act – which sets forth the protective rule in favor of property owners. The sub-subcontractors’ arguments required the court to contemplate what does and does not qualify as a valid section 5 affidavit.

The court’s decision provides:

Section 5 does not specify any particular form for the contractor’s sworn statement. it also does not require the form to be labeled in a specific manner. Moreover, that certain principals may have been unfamiliar with the phrase “section 5 affidavit” does not correlate to an inability to file a proper sworn statement under section 5 of the Act.

The court also rejected the sub-subcontractors’ argument that the sworn affidavit documents in question were never actually delivered to the property owner, but were instead delivered to a third party handler – Chicago Title – who in deposition testimony stated they “never considered it” when asked whether they considered Chicago Title to be the agent of the property owner. The court concluded simply that “it’s hard to fathom what role Chicago Title played if not [the owner’s] agent.”