Perfecting Your Mechanic’s Lien Rights – It’s Important
I recently settled a matter for a client about two weeks before a trial was to begin. The case involved construction work at a northwest suburban shopping center. The settlement I obtained was very good. I negotiated a settlement for 100% of the amount owed plus $50,000 of accrued interest. The situation that existed shows why it’s so important to perfect your mechanic’s lien rights within the time limits provided by Illinois law.
The client is an out of state general contractor. There were two contracts involved. One to build a store in the shopping center and the other for outside work.(sidewalks, landscaping etc.) Both of the contracts were with the owner of the shopping center. As is usual the owner was a limited liability company formed for the purpose of developing the property. In other words a shell entity with no assets other than the shopping center being constructed. A money judgment against an entity such as this is usually uncollectible.
After my client finished building the store the owner did not make the final payment and strung my client along with continued promises of payment. This went on for several months. Unknown to my client, the owner was in financial trouble with its bank and needed to sell the center in order to pay off the construction loan and reduce the loan that had been obtained to purchase the land. While my client was trying to get paid for the work it did to build the store, it began the outside work. Without my client knowing about it the owner sold the shopping center to an investment group who obtained a new mortgage to purchase the property. After months of trying to get paid this general contractor contacted me having gotten my name from one of its subcontractors who I represent.
By the time I got the case work on the store had been completed more than four months before. The last day worked on the outside contract before the contractor pulled off the job was still within the four month period. I took action to prepare and record two mechanic’s liens. One for the work done to build the store and the other for the outside work. The liens were for over two hundred thousand dollars each.
The Illinois Mechanic’s Lien Act provides that in order to perfect a lien as to all parties it has to be recorded within four months of your last day worked. In this case one lien was within the four months and one was outside four months. Unfortunately for my client there is a quirk in the Appellate Court decisions that interpret the mechanic’s lien act that allows a third party to purchase property and ignore a lien if it is recorded outside the four month period. This is the situation my client was in.
I filed a lawsuit and so did a number of other contractors who did other work for the owner at this shopping center. All the cases were consolidated before one Judge. Not long after the lawsuit was filed the owner and its lender brought a motion to dismiss that part of the lawsuit involving the lien claim recorded outside the four month period. They also tried to dismiss the claim in the lawsuit for the amount owed for the outside work.
While I made a sound argument why the lien claim for the work done to build the store which was the lien recorded beyond the four month period should not be dismissed the trial court did not accept the argument and this lien claim was dismissed. The trial court rejected the argument to dismiss the claim for lien involving the outside work. The lien for this work was recorded within four months of the last day worked.
With regard to the lien for the outside work my client was in an excellent position. Since the lien was timely recorded it had an absolute priority over the ownership interest of the new owner and also its lender. A title company had insured the owner’s interest and the first position of its mortgage lender. How the original owner ever got the sale closed without obtaining final waivers from my client and all the other contractors remains a mystery. However, I knew that if I could prove my client’s claim the title company would have no choice but to pay since it had issued a policy of title insurance guaranteeing to the new owner its title and the first position of its mortgage lender. Fortunately my client kept good records on this part of the job and I felt confident that we could prevail. The mechanic’s lien act does provide that interest accrues on the amount owed at ten percent per annum from the last date worked. As I said above this aspect of the case was settled right before trial for the entire amount owed and a significant amount of the interest that had accrued.
The lesson to be learned is how important it is to timely perfect your lien rights. In this case not doing so with regard to the amount owed to build the store was very costly. The contractor failed to timely perfect a $200,000 claim.. While I understand the conflict between sales/customer relations and collections, you need to be aware of what it might cost if you don’t act to perfect your lien rights. In this case with regard to the work done to build the store the client lost over two hundred thousand dollars. On the other hand you can see what leverage we had for the lien claim regarding the outside work. The title company was on the hook and I knew it. The fact the lien had been properly perfected gave me great leverage in negotiating an excellent settlement.. The title company was in a bad situation and I capitalized upon it to the benefit of my client. Remember once you properly perfect your lien rights you don’t have to rush into a lawsuit and have time to negotiate a compromise. However, once you fail to perfect your lien rights you are going to be at the mercy of a third party purchaser and its lender. I think you know what is the better position.