The Journal of The DuPage County Bar Association

Back Issues > Vol. 23 (2010-11)

Illinois Supreme Court Clarifies Owner’s Payment Obligations under the Mechanics Lien Act
by Benjamin W. Meyer

Typically speaking, a property owner enters into an agreement with a general contractor in order to complete a project on or for the owner’s property. Depending on the nature of the project, the general contractor then enters into agreements with certain subcontractors for specific services to be rendered, such as electrical services, framing services, plumbing services, mechanical services, etc. Throughout the course of the project, the general contractor oversees the subcontractors to ensure that they are completing the project in an acceptable manner. Periodically, the general contractor requests partial payment from the property owner to cover his own expenses and to cover the services and expenses of the subcontractors up to that point. Subsequently, the property owner and the general contractor then examine the partially completed work to ensure it is in keeping with the original agreement. If the work is acceptable, the owner pays the general contractor the partial payment, and the general contractor pays the subcontractors.

At the end of the project, barring any unforeseen costs or agreed upon changes to the contract, the property owner pays the general contractor the remaining amount of money originally agreed upon by the parties. In turn, the general contractor then pays the subcontractors the amount of money they originally agreed to in their respective contracts. In this way, the property owner typically is not required to pay more than that for which he bargained. According to the recent Illinois Supreme Court decision in Weather-Tite, Inc. v. University of St. Francis, however, uninformed, careless property owners who contract for services and improvements to be made to their property may find themselves paying up to twice the original contract price.

An Overview of the Mechanics Lien Act. Separated into various sections, the Act prescribes a set of guidelines and procedures that the property owner, general contractor, and subcontractor should follow in order to receive the full protection the Act affords. For example, section 5 of the Act dictates that during the course of the project, a property owner is required to request from the general contractor (who, in turn, is required to provide to the property owner) a sworn statement listing all the subcontractors who have provided services for the property owner, and the amount due or to become due to those subcontractors. In the event that the sworn statement is incorrect, section 24 of the Act instructs the subcontractor on how to protect his financial interests. Section 24 states that a subcontractor may, at any point from his signing the contract with the contractor to within ninety days after completing his work on the project, submit to the property owner a written notice that states the work to be completed and the amount due or to become due to the subcontractor. In Weather-Tite, Inc., the Illinois Supreme Court held that a section 5 sworn statement is essentially the same as a section 24 subcontractor’s ninety-day notice–an owner who receives either document is thereby put on notice, and is ordered to segregate a sufficient amount of funds shown as due or to become due the subcontractor.

Once the property owner receives a section 24 or section 5 notice of the subcontractors’ claims, section 27 of the Act dictates that the property owner "[S]hall retain from any money due or to become due the contractor, an amount sufficient to pay all demands that are or will become due such sub-contractor, tradesman, materialman, mechanic, or worker of whose claim he is notified, and shall pay over the same to the parties entitled thereto." If the owner fails to retain such funds and pays the general contractor the full amount listed in the sworn statement, the owner’s payment to the general contractor is considered illegal and made in violation of the subcontractors’ rights. At this point, section 21(d) activates, stating that the subcontractor, "[S]hall have a lien therefor to the extent of the amount named in such statements or notice," against the owner’s property, materials, fixtures, apparatus or machinery furnished, etc. In effect, the lien will force the property owner to again pay the subcontractor the amount owed even if the property owner already paid the general contractor the full contract price.

Facts of Weather-Tite, Inc. v. University of St. Francis. In March of 2005, The University of St. Francis (St. Francis) hired Stonitsch Construction, Inc. (Stonitsch) as the general contractor to remodel one of its dormitories. Stonitsch then subcontracted with Excel Electric, Inc. (Excel) to perform the necessary electrical work. As work progressed, St. Francis, in accordance with section 5 of the Act, requested periodic sworn statements from Stonitsch listing the amounts owed to the subcontractors for work completed and the amount of money due to the subcontractors after that particular payment was made; Stonitsch, in turn, provided St. Francis with the sworn statements.

Relying on the sworn statements, St. Francis paid Stonitsch the full amount listed. After receiving payment in full according to the first four sworn statements, Stonitsch paid the subcontractors their respective portions. Upon completion of the project, Stonitsch submitted in December of 2005 its fifth and final sworn statement listing the remaining amount of money due: $458,237.56, of which $130,948.48 was due to Excel. Relying on this sworn statement as it had done the previous four times, St. Francis submitted full payment electronically to Stonitsch’s bank in January of 2006. Upon receipt of the money, however, Stonitsch’s bank exercised its right of setoff, and applied the money to an outstanding debt of Stonitsch, thus effectively preventing Stonitsch from paying the subcontractors.

Realizing that they were not going to receive their payments from Stonitsch, several subcontractors served notices and claims for mechanics liens on St. Francis for the work they had completed on the project. Excel served notice and claim for a lien on St. Francis in February of 2006, and in June of that year moved to foreclose the lien.

At the trial level, St. Francis focused on section 5 of the Act to the exclusion of the other sections, and argued that, pursuant to section 5, St. Francis rightly relied on the general contractor’s sworn statement when it paid the remainder of the money owed. The trial court agreed with St. Francis’ arguments, and granted St. Francis’ motion for summary judgment, holding that Excel did not have an enforceable mechanics lien.

In reaching its decision, the trial court relied on Luczak Brothers, Inc. v. Generes, concluding that Excel was only entitled to a lien in the amount shown to become due on the last sworn statement for which payment was made. In St. Francis’ case, the sworn statement at issue was the last one, therefore, there was no amount to become due after St. Francis paid the total amount to Stonitsch. Moreover, because St. Francis did not receive Excel’s section 24 notice of lien and claim until after St. Francis had made final payment to Stonitsch, the court held Excel did not have an enforceable mechanic’s lien against St. Francis, and therefore must look to Stonitsch for its payment.

The appellate court reversed the trial court’s judgment, however, and remanded the case back down for entry granting Excel’s motion for summary judgment, holding that Excel did have an enforceable mechanics lien against St. Francis. In so doing, the appellate court pointed out that the trial court had misquoted Luczak. The trial court quoted the Luczak court as stating that the subcontractor was, "[E]ntitled to a lien only in the amount shown to become due on the last statement for which payment was made . . . ." The appellate court pointed out that the Luczak court had actually stated that the subcontractors were, "[E]ntitled to a lien only in the amount shown to be due on the last statement for which payment was made." In this way, the appellate court held that Excel was entitled to a lien for $130,948.48 as shown to be due on the last sworn statement, as opposed to a lien for $0 as shown to become due on the last sworn statement.

Additionally, the appellate court relied on Contractors’ Ready-Mix, Inc. v. Earl Given Construction Company, Inc. in which First Midwest Bank (First Midwest) contracted with Earl Given Construction (Given) to build a Wal-Mart. Given then subcontracted with Ready-Mix, Inc. (Ready-Mix) for services and materials. After Ready-Mix delivered materials and services to the building site, Given submitted a sworn statement to First Midwest indicating that Ready-Mix was owed $127.25, when in reality, Ready-Mix was owed $77,102.77. Relying on the sworn statement, First Midwest paid Given the full amount listed. Ready-Mix subsequently submitted to First Midwest a section 24 notice listing the actual amount due. The appellate court held that Ready-Mix was only entitled to a lien in the amount listed on the sworn statement–$127.25–because it was this amount that First Midwest had failed to withhold. The court additionally held that since Ready-Mix’s section 24 notice came after First Midwest’s payment had already been made, the payment was not rendered wrongful by that notice.

The Illinois Supreme Court’s Decision. Pointing out that the Mechanics Lien Act should be "[R]ead as a whole and construed so that no part of it is rendered meaningless or superfluous," the Illinois Supreme Court affirmed the decision of the appellate court. The supreme court stated that, "The purpose of the Act is to permit a lien on premises when the owner has received a benefit, and the furnishing of labor and materials have increased the value or improved the condition of the property. . . . In other words, the purpose of the Act is to protect contractors and subcontractors providing labor and materials for the benefit of an owner’s property." In this way, the Act balances the rights and duties of owners, general contractors, and subcontractors alike.

Based on the Illinois Legislature’s original intent in framing the Act, the Illinois Supreme Court then prescribed an orderly method to follow during the course of the project to protect subcontractors’ claims. First, the owner and general contractor enter into an agreement for the work to be completed. Second, during the course of the project, the general contractor submits a section 5 sworn statement to the property owner that must list all subcontractors and the amount due or to become due to them. Third, section 24 requires that when the section 5 sworn statement lists an amount due or to become due a subcontractor, the property owner must retain sufficient funds to pay the subcontractor. Finally, in accord with section 27, a property owner must make payment to the subcontractor upon notice of a subcontractor claim as listed in a section 5 sworn statement.

The court went on to hold that a section 5 sworn statement does not simply require an owner to pay the general contractor and the listed subcontractors. Rather, section 5 states that the owner has a duty to require the sworn statement before paying the general contractor, which puts the owner on notice of any subcontractor claims.

How a Property Owner May Protect Himself. In light of the Weather-Tite, Inc. decision, it is apparent that a property owner needs to make informed decisions when undertaking a project. On the one hand, it doesn’t seem realistic to expect a property owner to request a credit report from every prospective general contractor to be sure that the contractor is diligently paying his bills. Nor does it seem reasonable that a property owner should, when taking out a bank loan for the planned project, request double the portion of money actually needed for the project in order to protect himself against the possibility that the contractor will fail to give the subcontractors their portion of the payment.

On the other hand, it wouldn’t be practical to completely get rid of the role of the general contractor; the general contractor is the liaison between the property owner and the subcontractors. The general contractor monitors the quality and substance of the subcontractors’ work, and relays to the owner when the subcontractors are entitled to another portion of earnings. It would be somewhat dangerous for the property owner–a layperson–to take on this role of overseeing the subcontractors’ work; the property owner doesn’t have the expertise to be sure the subcontractor is doing that which he claims. Yet, how should a property owner proceed in order to protect himself from having to pay more than the contracted price for the project?

The simple solution to the problem would be for the property owner to pay the subcontractors directly as opposed to relying on the general contractor to responsibly pay them. The property owner would still employ a general contractor to manage the project and oversee the subcontractors; however, the general contractor would no longer be the conduit for payment. This procedure would still be in accordance with section 5 of the Act, which dictates that the owner is required to request from the general contractor a sworn statement listing all parties who have furnished services to the project, and the general contractor is required, in turn, to furnish that statement to the owner. Moreover, contrary to St. Francis’ argument, the purpose of section 5 is not simply to prescribe an orderly method for the property owner to pay the general contractor the money owed to the subcontractors. In fact, nowhere in section 5 does it say that the property owner must or should pay the general contractor the money owed to the subcontractors. Rather, section 5 states that before the property owner pays to the contractor or his order any moneys or consideration due or to become due, the owner shall request the statement and the general contractor shall provide the statement.

Additionally, an owner can adequately protect himself from having to pay double by following the instructions of the Act and the court. For instance, the appellate court has made it clear that the property owner acts at his own peril who, after being put on proper notice, pays the general contractor the full amount due without retaining sufficient funds for the subcontractors’ claims. Should the property owner insist on paying the general contractor the money owed the subcontractors, section 21(c) of the Act and the supreme court instruct the property owner to ask for lien waivers from the subcontractors before making payment to the general contractor. The supreme court’s phrasing of the instruction–"[T]he owner can require a lien waiver by every subcontractor when paying the contractor"–suggests an arms-length transaction–the property owner hands the check to the general contractor as the general contractor hands the lien waivers to the property owner. Note, however, section 21.02 of the Act mandates that whoever requests the lien waiver in exchange for payment must hold in trust the funds subject to that lien waiver. Therefore, it would seem prudent for the property owner to request lien waivers from the general contractor who would then request lien waivers from the individual subcontractors. Otherwise, it would again seem necessary for the property owner to retain sufficient funds in case the general contractor fails to pay the subcontractors.

Furthermore, property owners should know that subcontractors have duties to the property owner under the Act. Section 21 and 5 both require a subcontractor working on an owner-occupied single family residence, to inform the property owner within sixty days of his first day on the job that he, the subcontractor, is performing services for the property owner. In this way, the property owner is notified that the subcontractor’s name should appear on the section 5 statement provided by the general contractor. Those same sections of the Act also require the subcontractor to inform the property owner that he should request lien waivers from the general contractor before making any payments for services rendered. Should the subcontractor fail to do so within sixty days of the start of work, he is still entitled to a lien against the property owner, but only to the extent that the property owner has not been prejudiced by payments made before he received notice of the subcontractor’s provision of services to his property.

In the same vein, section 27 of the Act and the appellate court answer the question regarding what would happen if the general contractor submits to the property owner a section 5 sworn statement that either omits a subcontractor’s name or mistakenly lists the wrong amount due to the subcontractor. In such a case, the appellate court stated that, according to section 24 of the Act, the subcontractor must notify the owner in writing of its outstanding claim no later than ninety days after the subcontractor completes his work, and before the property owner makes payment according to the mistaken sworn statement. If the property owner receives a section 24 notice before making payment, the property owner must retain enough funds to pay the subcontractor, otherwise, the subcontractor may rightfully foreclose its mechanic’s lien against the owner.

Conclusion. The goal of the Mechanics Lien Act is to reach a fair result in each case. Losses are not always placed on property owners, nor are losses always placed on subcontractors. However, it is important for a property owner to protect himself by knowing and understanding his rights and responsibilities under the Act, particularly when the property owner is about to make payment to the general contractor. Weather-Tite, Inc. v. University of St. Francis made clear how a property owner should proceed when he receives a section 5 sworn statement from the general contractor. Unless the property owner receives lien waivers from the general contractor and/or subcontractors, the property owner is required to keep sufficient funds in reserve for the subcontractors’ claims; failing to retain these funds would be illegal and against the rights of the subcontractors, and allows the subcontractor to foreclose its mechanics lien against the property owner.

 
 
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