Best Practices Business Law

Illinois Mechanics Liens

If you’re not careful about how you pay your contractors, you could end up paying twice.

Tom had been working for many years as a machinist, and wanted to open his own shop someday.  He had finally saved enough money to buy a small building and the equipment he needed to get started.  After closing on the building, he hired a general contractor to upgrade the building’s electrical and plumbing systems, and to build out a small office.  Tom put half the money down, and the work began.

The day the work was completed, Tom walked through the building with the general contractor.  Everything looked great, and Tom was excited to open the business and get to work.  He wrote the general contractor a check for the second half of the contract price, and after receiving a written letter showing how the funds would be used to pay all the subcontractors, Tom handed over the check.

The next month, however, Tom received a letter from the plumbing contractor telling him that the general had never paid the final bill, and demanding that Tom pay up or the plumber would line the building.  Tom wrote back, assuring the plumber that the general had been paid.  Tom even sent him a copy of the cancelled check and the general contractor’s letter showing how the funds were supposed to have been distributed.  The plumber returned the favor by following through on his threat to lien the building.

Tom then came to us, furious that the plumber had liened his building when it was clear that he had followed through on his obligation to pay.  We had to explain to Tom that, while he was good to get a letter detailing how the funds would be used, the letter did not comply with Section 5 of the Illinois Mechanics Lien Act.  That requires, among other things, that the contractor’s statement detailing who is left to be paid be notarized and made under oath.  What Tom received was close, but did not meet the Act’s requirements.  So while he had a claim against the contractor for breach of contract for failing to pay his plumbing sub, Tom was going to have to pay the subcontractor in order to have the lien released, and then go after the general contractor in a separate action to recover the money already paid.

Mechanics liens can be very tricky animals.  Before doing any significant work on your home or business, give us a call to discuss ways to avoid a dispute with those working on your property, thereby keeping title to your property clean.

The Illinois Mechanics Lien Act protects contractors from many different scenarios—if they follow the Act’s procedures.

Phil was the general manager of a large commercial and residential electrical company.  During the height of the real estate bubble, Phil’s crews worked on hundreds of residential homes in various new subdivisions that sprung up in Chicago’s collar counties.

Over time they came to know the developers well, doing work for them on all kinds of projects.  While Phil usually gave releases of liens for payments, when the money was flowing Phil accepted some payments without delivering the releases.  In 2009 and as the bubble was bursting, one large developer, for whom Phil had done lots of work, filed for bankruptcy.  Phil was not worried, however, because after checking with his bookkeeper he learned that this developer had paid all their bills shortly before the bankruptcy petition was filed.

Just over a year later, Phil’s company was named as the defendant in a case filed in federal court as part of the contractor’s bankruptcy.  The trustee was trying to recover from Phil’s business money that the general contractor had paid out within the 90 days prior to the contractor filing for bankruptcy—called the preference period.

After looking at the Mechanics Lien Act, we realized that we could avoid the preference for any payments that the company received and for which Phil could prove that the company had given the contractor a release of the lien (even if the lien was still incohate, or unrecorded).  But any payments received for which we could not produce a lien release, Phil’s company would likely have to return the money.  We then worked with Phil to put in place a set of procedures that the company could follow to make sure that a lien release went out for all payments that came in.

Don’t get caught holding the hot potato when a debtor’s trustee comes looking to recover preference payments.  Give us a call today to discuss how you can avoid having to return money to a trustee or creditor’s committee in bankruptcy court for work you’ve already performed and been paid for.

 

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Charles Wentworth

Charles is an attorney in Glen Ellyn, Illinois.After graduating from the University of Utah, he clerked for Chief Justice John T. Broderick of the New Hampshire Supreme Court. He then became a litigation associate at Kirkland & Ellis LLP before opening his own office and partnering with Rick Lofgren. He lives just outside of Chicago, where he participates in community activities, including Boy Scouts and little-league baseball.
Charles Wentworth
Charles Wentworth
Charles Wentworth
Charles is an attorney in Glen Ellyn, Illinois. After graduating from the University of Utah, he clerked for Chief Justice John T. Broderick of the New Hampshire Supreme Court. He then became a litigation associate at Kirkland & Ellis LLP before opening his own office and partnering with Rick Lofgren. He lives just outside of Chicago, where he participates in community activities, including Boy Scouts and little-league baseball.