Section 38.1: A New Era on Illinois Mechanics Lien Law
On January 1, 2016, the Illinois Mechanics Lien Act (the “Act”) will be amended to include section 38.1, which will permit a lien claimant, housing association, owner, or any person or entity that may be liable for a lien claim, to file a petition to substitute a surety bond for the lien claim. In other jurisdictions the substitution is known as “bonding over”. The following will explain how to initiate and effectuate the bonding over process.
How to Initiate the Substitution of the Bond Claim
The surety bond may be obtained after a lien claim is initiated. The substitution of a surety bond for a lien claim will act as security for the claim, not result in its release. A petition may be filed within the two year time limit to file suit under the Act or within 5 months from the date of filing the complaint. However, before a petition can be filed the lien claim has to be properly perfected, i.e. a subcontractor’s 90 day notice issued, and recording of the lien within 4 months of the last day worked. A failure to properly perfect the lien will also bar the filing of a petition to substitute the bond claim.
A petition may be filed pre-suit. Under that scenario the petition should be filed with the clerk of the county where the property subject to a lien claim is located.
Section 38.1 spells out specifically what the petition must include. Chief among the requirements of the petition is that the surety bond has a financial strength rating of an ‘A’ or greater, that it be in the amount of 175% of the lien claim, and that the principal and surety be jointly and severally liable for the amount due the lien claimant.
The person filing the petition shall personally serve or send via certified mail, return receipt requested, to each person whose name or address is stated in the petition and his or her attorney of record in a pending action on the lien claim. The notice to each interested party should also contain language specifically set forth in Section 38.1.
Proceeding on the Petition.
Each party receiving notice of the petition has 30 days after receipt of the notice or 33 days after the notice is mailed to object to the petition. A failure to object will be deemed a waiver. If there are no objections to the petition, then the court upon an ex parte motion of the petitioner shall substitute the eligible surety bond for the property securing the lien claim, and the lien claimant’s right to recover under section 9, 27, or 28 of the Act. If there is an objection to the petition, a hearing will be set to determine whether the proposed surety bond is an eligible surety bond.
If no action has been commenced at the time the bond has been substituted in, the principal and surety of the bond will become parties to the action in equity. If an action has already been commenced at the time the bond has been substituted in, the principal and surety of the bond will become parties to the action without the need to intervene and all other parties to the action may be dismissed.
A unique characteristic of Section 38.1 is that it permits the prevailing party of the claim to recover its attorney fees. However, the attorney fees for the lien claimant will be limited to the amount remaining under the surety bond after satisfaction of the judgment, and the principal will not be able to recover its attorney fees in excess of 50% of the lien claim. The prevailing party means a lean claimant awarded at least 75% of its lien claim or a principal awarded a judgment equal to less than 25% of the amount of lien claimant’s claim. For purposes of determining the prevailing party, the amount of the lien claim shall be reduced by any payments received by the lien claimant before the entry of judgment.
The amendment should help streamline the process of proceeding on a mechanics lien; making the procedure simpler and involving fewer parties. And with the addition of the attorney fee provision, may assist in mechanics lien matters being resolved pre-suit or pre-petition.