In 2015, the Illinois Governor signed a law into effect that allows certain parties to replace a mechanics lien with a payment bond. A lot of people think the Illinois mechanics lien statutes are engraved in granite, immovable and inviolate for time. But nothing could be further from the truth. With lots of people with conflicting goals tugging at the lien laws like a gigantic taffy roll, it can get twisted into unrecognizable shapes.
Here’s what the new rule means for construction payment disputes in Illinois.
Illinois law allows bonds to replace liens
Effective January 1, 2016, Illinois added Section 38.1, ‘Substitution of bond for lien’ to the statutes. It means exactly what it says: Anyone with an interest in a property can wipe out a valid mechanics lien claim by substituting it with a payment bond.
Yep, wipe it out. Totally dust.
The argument made for this law was that a mechanics lien claim can muck up the works in an ongoing construction project, so by eliminating the lien everyone else can be paid and construction can continue. Everyone’s happy, right?
Well, no, because, unfortunately, this leaves the mechanics lien claimant with the prospect of continuing his claim, not with a foreclosure, and not by everyone putting pressure on the GC and owner — but by bringing a suit against a bonding company. His lien will simply be gone.
Bonds vs. Liens: Who wins?
Banks love bonding off liens because the title is clear. Attorneys will love it because few bonding companies will voluntarily pay without a lawyer getting involved. General contractors will probably end up loving it because they will certainly include clauses in their subcontractor contracts requiring the subcontractors to take responsibility for bonding over any of their supplier or sub-sub liens, regardless of whether they’ve been paid.
Though, strangely, my attorney told me that title companies didn’t like it, but I think they’re crying crocodile tears, because they get a clean title, which is what they want.
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When I file a lien, I want everything to come crashing to a halt. I want the bank and the GC and the owner freaking out, scrambling to resolve matters. But now? They can eliminate my lien at their leisure.
It will also have ramifications for smaller lien claims. Small claims of $2,000, $3000 or $5000 can get removed by the bond — and since the lien won’t be holding up any payments, the GC and title company or whomever can simply ignore the lien claimant, who has to somehow find a way to get the bonding company to pay his claim without incurring legal fees that could exceed his lien claim.
But here’s a potential bright spot: While a collection agency which handles cases on a contingency might not want to get involved in mechanics lien foreclosures, it might be willing to accept claims to chase a bond that has to pay out if litigation is successful, especially since the law requires the bond to be for 175% of the lien claim and awards legal fees and interest to the successful litigant.
And to be totally fair to the new bill (which I don’t want to be, but, well, you know), it’s just as easy now to remove small liens by sending Section 34 demands to the lien claimant. A Section 34 demand gives the lien claimant thirty days to commence suit on the lien or release it – subject to a $2,500 fine if they don’t file suit and voluntarily file a release. So if they file a bond rather than sending a Section 34 demand, they may have done the lien claimant a favor.
What happens with multiple lien claimants?
One thing the new lien law isn’t clear on is what happens when there are multiple lien claimants. As it is now, once one lien claimant begins foreclosure, all other lien claimants are named party defendants, and then they have to join in the foreclosure themselves.
With bonds, this won’t automatically be the case, and there is nothing in the law stating what will happen. The likelihood is a judge would end up consolidating the cases, but it might get confusing because maybe one lien is bonded over by the general contractor, while another lien on the same job is bonded over with a different bond by a subcontractor, while a third lien might be bonded over by the owner.
For this one hypothetical project, there are three different bonds, and nine different parties (the three bonding companies, the three lien claimants and the three parties who posted the bonds).
Another thing unclear in the changed statute is what role a judge plays prior to suit being filed. The law itself says that if there is no objection filed by the lien claimant to the legitimacy of the bond, then ‘the court’ will enter an order substituting the surety bond. This means judges will get involved very early in the lien stage, while currently judges aren’t involved until after the lien claimants file suit to foreclose on their liens, action that can be suspended for up to two years after last shipment or labor on the project.
The new law has a few other important components:
- The bond must be by a surety rated no less than an A by A.M. Best
- Venue for any litigation must be the same county as the property
- The bond must last as long as the lien would (two years by Statute)
- The amount of the bond must be 175% of the lien amount
- The prevailing party is awarded reasonable attorney fees
The attorneys’ fees available to be awarded to the prevailing party have certain statutory limits, depending on the identify of the prevailing party. If the prevailing party in the action is the lien claimant, the attorneys’ fees award is “limited to the amount remaining on the bond after the payment of the claim and interest.”
Since the bond is required to be 175% of the lien amount, the attorneys’ fees available depend on the amount of interest due and awarded, but in no case could the fees exceed 75% of the lien claim amount. If the prevailing party is the bond principal, the award of attorneys’ fees is limited to “50% of the amount of the lien claim.”
Will Section 38.1 end up hurting the lien claimant? I’ve taken the position that it will, but only time will tell. Preliminary notices may still cause shock and awe in Illinois, which could intimidate the owner/GC into paying your claim. But the effectiveness of the lien itself will be reduced because they know the cost of litigation may cause lien claimants to simply drop or not pursue their claims.
Still though, for the lien claimant, the bill is pretty clear about attorney fees and interest. The judge might enforce this more against sureties than they do with the provisions currently provided for in the Statutes.
And remember, if you do pursue and win your claim against the bond, there’s some satisfaction in knowing the sureties then have to collect from the party that furnished the bond. So they aren’t off the hook.
Still, overall, I can’t say I’m happy with it, but we’ll see how it shakes out.