West Palm Beach Partner’s Column on Construction Defect Litigation Costs Runs in Daily Business Review

Atlas_Joshby Joshua M. Atlas

This was published as a column called, “Construction Defects: Will the Florida Supreme Court End the Battle?” on November 23, 2016, in the Daily Business Review. 

The Florida construction industry will wait to find out if state law requires general liability insurers to defend contractors from claims during the pre-litigation defect process outlined in Chapter 558, Florida Statutes.

That is because a recent decision by the U.S. Court of Appeals for the Eleventh Circuit certified to the Florida Supreme Court the issue of whether the notice and repair process is considered a “suit” within the meaning of a standard insurance services office commercial general liability, or CGL, policy.

Enacted in 2003, Chapter 558 provides a process for a property owner, before filing a lawsuit, to give notice of construction or design defects and allow the responsible parties to inspect. Parties receiving this notice must then either make an offer to voluntarily resolve the defect claim or deny liability.

If there is no resolution, the owner can then proceed to court. The goal of the statute is to reduce the amount of litigation over construction defects.

For larger projects like condominiums, the process usually takes months and involves multiple inspections by different designers, contractors and subcontractors. This process was instituted by the Florida Legislature in response to the pre-recession construction boom that flooded Florida courtrooms with complex multi-party lawsuits.

At least 30 other states have similar statutes because defect cases are costly to the parties and taxing to the judiciary’s limited resources.

Suit Or Not?

In Altman Contractors v. Crum & Forster Specialty Insurance, the Eleventh Circuit was asked to consider a contractor’s appeal of a summary judgment order finding in favor of the insurer and determining that the Chapter 558 process was not a “suit” within the meaning of the standard ISO CGL policy.

The U.S. District Court for the Southern District of Florida found that the CGL policy required the insurer to defend the contractor from any “suit” seeking damages that the insured was obligated to pay caused by bodily injury or property damage but ruled that because the Chapter 558 process does not provide for a means to reach an ultimate decision on disputed liability, it does not fall within the policy definition of a “suit.”

In the district court and again on appeal, the contractor argued that the Chapter 558 process is part of a “suit” because under Florida law it is a mandatory step that must be completed before a lawsuit can be filed. Because it is part of the larger action of bringing a lawsuit, the contractor asserted that the Chapter 558 process should be considered a “civil proceeding” that falls within the policy definition of a “suit.”

The Eleventh Circuit held that the contractor and insurer both presented reasonable interpretations of the term “suit” but did not find an ambiguity in the policy. Under Florida law, that would have required the court to accept the contractor’s interpretation and reject the insurer’s.

Instead, after noting the lack of clear case law to guide it and determining that its decision would have significant practical and policy implications, the Eleventh Circuit decided that the issue was of such importance that the Florida Supreme Court should resolve it.

Impact

As noted by the Eleventh Circuit, there may be a significant impact on the Florida construction industry depending on where the Florida Supreme Court comes down. For example, a contractor receiving a Chapter 558 notice may simply decide to not respond and wait to be sued so its insurer will pick up the cost of defense.

Project owners wanting to trigger a contractor’s insurance coverage and bring an additional source of settlement money to the table may also just file suit without complying with Chapter 558 (and may even do so with the contractor’s cooperation). Under the statute, the only penalty would be a limited stay of the owner’s lawsuit while the process is completed.

Alternatively, parties may also contractually agree that the Chapter 558 process does not apply to their project with much more regularity than is common now. Under Chapter 558, the only way to opt out of the otherwise mandatory pre-litigation process is to agree by contract that a project is exempt.

If the Florida Supreme Court determines that a “suit” includes the Chapter 558 process, insurers may react by increasing insurance rates to cover the cost of what they contend are increased risks and obligations.

It is questionable though whether insurer costs would actually increase as even before the Altman Contractors case, carriers typically participated in the Chapter 558 process if there was otherwise coverage. If rates do increase, those additional costs will likely be passed on to owners and developers making projects more expensive.

Regardless of how the Florida Supreme Court rules, the likely effect may be an increase in defect litigation in Florida. Since that contradicts the Florida Legislature’s express purpose for enacting Chapter 558, it is easy to see why the Eleventh Circuit concluded that the Florida Supreme Court should decide this issue of state law. Now, Florida contractors and insurers must simply wait a little longer to find out how they will be impacted.

Joshua M. Atlas is a partner in the firm’s West Palm Beach office and a member of the construction law and commercial litigation practice groups.

Chicago Partners Co-Present Mason Contractors Webinar on Mechanics Liens

W. Matthew BryantJames T. RohlfingChicago partners James Rohlfing and W. Matthew Bryant  presented an educational webinar called, “Protecting Contractors with Mechanics Liens and Related Rights.” It summarized the Mechanics’ Lien Act and basic terms to help contractors understand conversations about liens with customers and attorneys.

This event was recently featured in the Chicago Daily Law Bulletin‘s “In the News” section and can be viewed here.

The webinar was hosted by the Mason Contractors Association of America live on November 16, 2016, but the recorded version can be viewed on www.masoncontractors.org under On Demand Education. The webinar is filed under “Ethics & Business Practices.” MCAA members have the opportunity to log in, register, and view the on-demand version of the presentation by clicking here.

Chicago Partner Published in ABA Forum November 2016 Newsletter

W. Matthew Bryantby W. Matthew Bryant

This was published as an article called, “Extended Warranties in Bonded Contracts: Effects on Bond Obligations, Costs and Negotiating Tips” in the ABA Forum on Construction’s November 2016 newsletter, Insurance, Surety & Liens. Mr. Bryant co-authored it with Ciara C. Young of Kinsley Construction, Inc.

Extended warranty periods are becoming increasingly common in construction contracts. Contractors can no longer assume the customary one year warranty or repair/maintenance period. The frequency of 18 month, two year and even five year warranties is growing. So, what does this mean and how does it impact the construction contract and any performance bonding obligations?

From bid time, the contractor must be aware of the warranty requirements of the bid documents. On bonded projects, the duration of the warranty period can substantially impact the bid price and contract sum. Most performance bonds guarantee performance of all obligations under the contract. The AIA A312 Performance Bond form provides as follows: “The Contractor and Surety, jointly and severally, bind themselves, their heirs, executors, administrators, successors and assigns to the Owner for the performance of the Construction Contract, which is incorporated herein by reference.” Other proprietary bonds are even more unequivocal and expressly state that the surety is obligated for all extended warranties.

Where a performance bond incorporates the underlying construction contract by reference, the provisions of the contract become provisions of the bond. For example, in Tudor Development Group, Inc. v. U.S. Fidelity & Guar. Co., 692 F. Supp. 461 (U.S.D.C. — M.D. Pa. 1988), the court held that where a plaintiff owner alleged that a contractor violated a warranty provision contained in the construction contract, the surety could be held responsible under the terms of the bond it supplied for the construction contract. Id. at 465. See also Sweetwater Apartments, 5 P.A., LLC v. Ware Construction Services, Inc., 2012 WL 3155564 at *5 (U.S.D.C. – M.D. Ala. 2012) (collecting cases). Similarly, when a contract including a warranty provision of 18 months, two years, or five years is incorporated into a performance bond, the surety guarantees performance of the contract obligation for the full contract warranty term. The surety’s obligation normally remains limited by the penal sum of the bond.

Typically, bond premiums are based on the bond remaining in place for one year from substantial completion. However, if the bond needs to stay in place for two years or more to cover extended warranties, the bond premium will increase accordingly. Sureties know that the longer the contractor’s obligations extend, the more risk the contractor and the sureties are taking on.

Unfortunately, contractors often just assume a one year period and fail to ensure the bond pricing used on bid day or in a negotiated contract covers the applicable warranty period for the project. If an extended warranty and the associated additional premium is missed in a hard bid or a negotiated contract, a contractor can find itself in the difficult predicament of either absorbing the costs, or going back to the owner and telling it that the bond costs will actually be much more, and asking it to cover the costs.

Contractors can use this knowledge to be creative in the negotiation process with owners in an effort to be the low bid and win the work. One option is to provide alternate pricing at bid time. For example, if the contract documents require a two year warranty, it may be beneficial to provide alternate pricing for a one year warranty. Also, in contrast to extended-term performance bonds priced on the full contract sum, owners may be willing to consider separate maintenance bonds that are typically based on only 10% of the contract sum as the repair or correction of a portion of the work is expected to be less than the cost of performing the whole of the contract work. This could be a value engineering option presented to an owner desiring the protection of extended warranties.

Also, if the contractor has subcontractor default insurance, it might be able to persuade an owner to not require performance bonds for more than the typical one year, thereby allowing the contractor to provide a savings to the owner that its competitors may not be able to provide. With subcontractor default insurance, a contractor can assure the owner that coverage exists to allow the contractor to address any deficiencies of the subcontractors’ work, and that performance bonds for the duration of the warranties are not necessary.

Owners are seeking longer warranty coverage for the work they ask contractors to perform. Contractors will provide the warranties their customers demand. Sureties will provide performance bonds that cover the contracts presented to them, at a price. Being aware of the implications of a warranty beyond the customary one year duration will allow owners, contractors, and sureties to consider the amount of assurance appropriate to guarantee performance of extended warranty obligations. The assurance needed can then be priced consistently with the risk undertaken by a surety, and all the parties can reach an efficient balance of risk and cost for a guarantee of extended warranty performance.

W. Matthew Bryant is a partner in the Chicago office of Arnstein & Lehr LLP. Mr. Bryant focuses his practice on construction and commercial litigation and dispute resolution. He has represented owners, architects, engineers, contractors, and subcontractors in lawsuits relating to construction defects, mechanics liens, bond claims, delay claims, change order disputes and fraud. To contact Mr. Bryant, please email wmbryant@arnstein.com.

The Miller Act Trap: How to Protect Your Rights

Patrick Johnsonby Patrick J. Johnson

The Miller Act 40 U.S.C. § 3131 – § 3134, requires that any contractor performing construction on a federal building or public work over $100,000 furnish bonds guaranteeing payment to subcontractors and completion of the project. Under the Act the party having a contractual relationship with a subcontractor but no contractual relationship with the contractor furnishing the payment bond may bring an action on the payment bond following written notice within 90 days from the last date on which the party last supplied labor or materials for which the claim is made 40 U.S.C. § 3133(b)(2).

The Act contains an unexpected trap – the 90-day notice requirement is not tolled if payment remains past due for some labor or material, but payment is received for more recently supplied materials or labor which, if had gone unpaid, would have permitted a claim under the Act. In ABC Supply[1], a subcontractor supplied roofing materials on three different dates in October 1995. Subsequently, one additional shipment was made on January 11, 1996, which the defendant paid in full, leaving the three shipments from 1995 unpaid. ABC Supply gave notice to the defendant within 90 days of the January 11 shipment[2]. The court held that the notice was not timely as the “act requires notice be given within 90 days from the date on which materials were supplied….for which said claim is made[3]. Since the claim related to the unpaid shipments in 1995, the 90-day period began to run from the last shipment in 1995 and the notice was untimely.

Thus, to protect rights under the Miller Act, a subcontractor or supplier must be certain to send a notice under the Act within 90 days of when work was last performed AND unpaid for, even if subsequent payments are received that might lull the claimant into a false sense of security. Moreover, when pursuing an action against a payment bond under the Miller Act, be certain to know, specifically for the claim being made, the date on which labor or materials were last supplied for that claim to avoid a defense that the notice is inadequate.

Please contact the attorneys at Arnstein & Lehr so we can help you protect your Miller Act rights.

[1] United States ex rel. American Builders & Contrs. Supply Co. v. Bradley Constr. Co., 960 F. Supp. 145 (N.D. Ill. 1997).

[2] 960 F. Supp. 145, 147 (N.D. Ill. 1997).

[3] Id. at 148.

Patrick J. Johnson is an associate in the Chicago office of Arnstein & Lehr LLP, with experience in reviewing contracts for construction projects and negotiating agreements with opposing counsel at Fortune 500 companies, as well as smaller energy conglomerates.

West Palm Partners Co-Author Daily Business Review Column on Downtown Condo Projects

Joshua M. AtlasSteveDanielsby Steven L. Daniels and Joshua M. Atlas

This was published as a column called, “Downtown West Palm Condos Compete With New Luxury Units,” on August 11, 2016, in the Daily Business Review. 

Now that the Great Recession has been officially over for several years, many new residential projects are either under construction or on the drawing boards throughout Palm Beach County, particularly in and around downtown West Palm Beach.

As a result of these new projects coming online in the immediate and not too distant future, existing condominiums are facing a different problem than they faced 10 years ago: stiffer competition from their newer and more modern neighbors for buyers. The new challenge is demanding condo associations to take a proactive approach to mitigate the impact of new luxury condos being delivered in a relatively small market. Not taking action is not an option if condo owners want to protect and grow the value of their condos by remaining competitive in the market.

Many of the condo associations we represent, especially in downtown West Palm Beach, are preparing for this new competition and the resulting pressure on property values by upgrading their exterior appearance, modernizing their amenities and improving the infrastructure of their buildings. They want to be ready to compete when downtown West Palm Beach begins to deliver a significant number of new luxury condo units.

Between Bristol Condominium on Flagler Drive and Park Palm Beach in the Northwood-Curry Park section of downtown, 174 units are expected to be delivered during this real estate cycle. That’s nothing compared with the over 1,600 combined units planned between the Icon Palm Beach, Eighty Points West and Transit Village projects, none of which have broken ground yet. Development in the North Flagler-Riviera Beach neighborhoods, the Northwood-Currie Park area and the South Dixie corridor also promise to bring additional options to condo buyers seeking the urban living experience.

Unlike the Miami condo market, with the influx of foreign buyers looking to protect their wealth with investment in Miami real estate, Palm Beach County condo buyers are often northerners or existing residents looking to upgrade their existing units, downsize their residences or trade in the gated community golf club scene for an urban living experience. As such, the pressure to buy is not as great, and they can be more discriminating in their purchase. As is often the case in Palm Beach County, many buyers (condos and noncondos alike) seem to gravitate to newer projects. So with all of these new units coming online, how does an existing 20- to 30-year-old condominium compete? They do so in several ways.

Curb Appeal

First and foremost, they improve the “curb appeal” of their building. At the Waterview Condominium on Flagler Drive, the exterior has just been painted with clean-looking white as opposed to a brown color that was popular in the 1970s. With the blue water of the Intracoastal Waterway and white hulls of the boats docked behind the building, the white exterior softens the look of the building and creates a more modern and appealing appearance. The Waterview also recently renovated their fitness area along the Intracoastal.

On South Flagler Drive just next to the Sunfest concert area, Trump Tower Condominium will soon be undergoing the process of completely renovating their lobby area, freshening up the exterior landscape and upgrading their fitness area. The takeaway from such extensive common area renovations is that no matter how much a unit owner renovates their unit to protect and enhance its market value, if the exterior and lobby of a building does not have an inviting look, potential buyers may not even make it to the elevator.

In some cases, condos like Trump Plaza have also made major repairs and upgrades to the guts of their building. They recently replaced their vertical HVAC piping and connections to units in both towers and are in the process of replacing their emergency generator. These upgrades may not be visible, but to a savvy buyer who is concerned about a condominium building’s physical condition and the potential of significant special assessments in the near future, these improvements are a great selling point.

When undergoing these types of improvements, it is not enough to simply extend competitive bids to contractors and vendors. In many cases, the size and complexity of these improvements extend beyond the more common contracts handled by condominium boards and managers. A degree of expertise is necessary in order to ensure that the correct work is bid, the right contractor selected, and the appropriate contract is negotiated and executed.

Preparing good and accurate bid instructions and clear construction specifications should be done by those who perform those tasks on a regular basis. Condominium building improvements can often cost in the high six figures or even higher, and having the wrong person or person overseeing the process can result in devastating results, whether in needless delays, cost overruns or design and construction defects.

Once the decision and effort are made to enhance their building and protect and increase the value of their units, the last thing an older condominium association needs is to be embroiled in construction litigation.

Steven L. Daniels is the managing partner in the West Palm Beach and Boca Raton offices of Arnstein & Lehr concentrating in real estate and condominium/community association law. Joshua M. Atlas is a partner in the firm’s West Palm Beach office and a member of the construction law and commercial litigation practice groups.

DOL Announces Final FLSA Overtime Regulations

Jason Tremblayby E. Jason Tremblay

This was published as a Feature Story in the June 2016 edition of SubStance Magazine, which is distributed by the Illinois Mechanical & Specialty Contractors Association.

On Wednesday, May 18, 2016, the U.S. Department of Labor’s (DOL) Wage and Hour Division released its final updated FLSA overtime regulations. While some of the changes were expected, there are a number of surprises.

First, the new salary threshold for exempt executive, administrative and professional employees will be $47,476.00 per year (or $913.00 per week). That is more than double the current $455.00 per week but less than the original proposal, which would have boosted the minimum annual salary threshold to over $50,000.00 per year.

Second, the salary basis test has also been amended to clarify that employers may use nondiscretionary bonuses and incentive payments (such as commissions) to satisfy up to 10% of the new salary threshold. This may allow certain employees who do not have an annual salary of at least $47,476.00 to still satisfy one of the overtime exemptions.

Third, in another deviation from the initially proposed regulations, the final regulations require an update of the salary threshold every three years, as opposed to every year, as originally proposed by the DOL.

Fourth, the final regulations also increase the “highly compensated employee” (HCE) exemption to an annual salary threshold of $134,004.00, an upward adjustment from what was anticipated to be an annual threshold of $122,148.00.

Finally, these new regulations will take effect on December 1, 2016, which will provide employers a longer period of time to comply with them, as prior indications were that the final regulations would take effect in July 2016.

In light of the foregoing, all employers must immediately analyze whether current “exempt” employees will satisfy the new FLSA regulations and, if not, develop FLSA-compliant pay plans for employees who have previously been treated as exempt but who will now not be exempt under the new overtime regulations.

Should you have any questions regarding the final FLSA regulations, or should you need assistance complying with the regulations, please do not hesitate to contact E. Jason Tremblay at 312-876-6676 or your designated Arnstein & Lehr LLP attorney.

E. Jason Tremblay is a partner in the Arnstein & Lehr Chicago office. He is the chair of the Employment & Labor Practice Group, as well as a member of the firm’s Litigation Group. Mr. Tremblay focuses his practice in employment and commercial litigation. In the commercial area, he represents parties in a broad range of complex business and tort litigation matters, including matters involving breach of contract, breach of fiduciary duty, fraud, interference with contract, shareholder disputes and insurance coverage. To contact Mr. Tremblay, please email ejtremblay@arnstein.com.

An Ounce of Prevention is Worth a Kilo of Corybantic Cure

MalitzSteve_webby Steven N. Malitz

This was published as a Feature Story in the June 2016 edition of SubStance Magazine, which is distributed by the Illinois Mechanical & Specialty Contractors Association.

Jethro and Wally owned Twisted Mechanical Contractors for 20 prosperous years, on a “hand-shake deal.” Jethro started an unrelated, non-competitive business – a plumbing company. Claiming that Jethro deserted Twisted, Wally barred Jethro from Twisted, eliminated his compensation, canceled his benefits and emptied the business bank accounts. Jethro then sued Wally to dissolve Twisted so he could start his own mechanical contracting business, without Wally.

Unfortunately, the partnership agreement for Twisted was oral. 20 years of harmony resulted in disaster. No more combined family parties for Wally and Jethro. Costly litigation may very well have been avoided with the following inexpensive steps taken at the beginning of the business with the assistance of an attorney:

1. Forming a corporation or limited liability company for tax benefits and creditor protection. (Your lawyer can assist you in deciding which entity is right for your business)

2. Shareholders Agreement (for a corporation) or operating agreement (for a limited liability company), with provisions relating to (a) ownership percentage for each owner; (b) buy-sell in case one partner wants to sell, becomes disabled or dies; (c) valuation of the business in case of sale; (d) wind-up/dissolution—who gets paid in what order; (e) fiduciary duties owed by each owner to each other and the business; (f) deciding deadlock An Ounce of Prevention is Worth a Kilo of Corybantic Cure issues if the partners cannot decide on major business issues; and, (g) rights of the partners to engage in other entrepreneurial activities.

3. Stock certificates evidencing ownership and number of shares owned by each shareholder (for a corporation).

4. By-laws setting forth the rights and powers of shareholders, directors and officers, and how those in charge are elected. By-laws also help settle any disputes among the owners.

5. Resolutions or consents reflecting and authorizing the involvement of business owners, in this case Jethro, in other businesses, or otherwise documenting other, general business decisions made from time to time in their construction business.

Although litigation finally resolved all issues between Jethro and Wally, the emotional and financial cost was great. Consider drafting or updating the agreement with your fellow partner. Not only will it help to resolve litigation with less expense, but, more importantly, good documentation will minimize the likelihood of litigation in the first place by letting the business owners know in advance what they are permitted to do and what the consequences will be of their actions.

We would be happy to send you a checklist with the basic terms in any shareholder agreement or operating agreement. Documentation creates business freedom!

Steven N. Malitz is an attorney with the Chicago-based law firm of Arnstein & Lehr LLP. He represents subcontractors, twisted and untwisted, and other business owners. To contact Mr. Malitz, please email snmalitz@arnstein.com

Modified Law Not Enough to Protect Lien Rights

James T. RohlfingW. Matthew Bryantby W. Matthew Bryant and James T. Rohlfing

This was published as a Feature Story in the June 2016 edition of SubStance Magazine, which is distributed by the Illinois Mechanical & Specialty Contractors Association.

IMSCA drafted, promoted and successfully passed an amendment to section 34 of the Illinois Mechanics Lien Act that became effective in 2013. Section 34 of the Act permits property owners to make a written demand on lien claimants to either file suit to enforce within 30 days or, alternatively, release their mechanics lien claims. In common parlance – “put up or shut up.” The amendment that passed in 2013 tightened up the notice provision so a lien claimant would know what needed to be done so as not to lose lien rights. The amendment was a big help for contractors who, in the past, could easily overlook the notice and lose their rights.This appeared as the Feature Story in SubStance Magazine’s June 2016 issue. SubStance Magazine is published by the Illinois Mechanical & Specialty Contractors Association. 

The new requirement provides: (b) A written demand under this Section must contain the following language in at least 10 point bold face type: “Failure to respond to this notice within 30 days after receipt, as required by Section 34 of the Mechanics Lien Act, shall result in the forfeiture of the referenced lien.”

Unfortunately, a recent case demonstrates that lien claimants must still be wary of section 34 and carefully preserve their mechanics lien Matthew is a partner in the Chicago office of Arnstein & Lehr LLP. Mr. Bryant focuses his practice on construction and commercial litigation and dispute resolution. He has represented owners, architects, engineers, contractors, and subcontractors in lawsuits relating to construction defects, mechanics liens, bond claims, delay claims, change order disputes and fraud. wmbryant@arnstein.com rights, even with the new protection. The federal district court in Chicago pointed out the need to observe state lien law requirements even when suing to enforce a lien in federal court. In Faith Technologies, Inc. v. Arlington Downs Residential, LLC, no. 15 C 7903 slip op. (U.S.D.C. – N.D.Ill., Feb. 26, 2016), an electrical contractor and the owner disputed whether the contractor was entitled to payment for its work because of delays in completion of the electrical work. The contractor recorded a lien against the property for the amount it claimed it was due for its work. The owner won the “race to the courthouse” and filed its complaint against the contractor in federal court on September 8, 2015. The owner alleged among other things that the court should declare the lien invalid because the electrical contractor was not entitled to payment.

Two days after filing its suit, the owner sent the contractor a separate notice under Section 34 of the Illinois Mechanics Lien Act. The notice required the electrical contractor to file suit to enforce its lien within thirty days or else forfeit the lien. The owner sent this notice with a copy of the complaint it had filed two days before, and the notice complied with the new stricter requirements contained in section 34.

Under federal court pleading rules, a defendant can have up to sixty days (instead of thirty days) to file an answer and counterclaim to a complaint if it waives formal “service of summons”. The electrical contractor agreed to waive service of summons. A little more than fifty days after the contractor received the demand to file suit, it filed a denial of the owner’s claim, and also for the first time filed Modified Law Not Enough to Protect Lien Rights its own counterclaim for the court to enforce the lien.

In the absence of the demand to commence suit, the electrical subcontractor’s counterclaim to enforce its lien would have been timely. However, the extension of time to file an answer and counterclaim under the federal court rule did not extend the separate state-law requirement to commence suit within thirty days. The court held that the contractor had forfeited its lien for failure to commence its suit within thirty days of the state-law demand under section 34 to commence suit, even though the answer and counterclaim had been timely under the federal rules. The court dismissed the electrical contractor’s lien claim.

Where a contractor seeks to use the remedy of a mechanics lien, it must pay particular attention to the requirements of the Illinois Mechanics Lien Act, including amended section 34. Failure to meet those requirements may result in the lien being unenforceable, even if the action might otherwise be timely under federal procedural rules.


W. Matthew Bryant is a partner in the Chicago office of Arnstein & Lehr LLP. Mr. Bryant focuses his practice on construction and commercial litigation and dispute resolution. He has represented owners, architects, engineers, contractors, and subcontractors in lawsuits relating to construction defects, mechanics liens, bond claims, delay claims, change order disputes and fraud. To contact Mr. Bryant, please email wmbryant@arnstein.com.

James T. Rohlfing is a partner in the Chicago based law firm of Arnstein & Lehr LLP. He serves as chair of the firm’s Construction Practice Group. Mr. Rohlfing is a Martindale-Hubbell AV rated attorney, whose practice is focused in the areas of construction law and business litigation. He is the editor and a chapter author of the West Publication Illinois Construction Law Manual. To contact Mr. Rohlfing, please email jtrohlfing@arnstein.com.

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Bonding Over in Illinois – New Law Allows for Lien Release with Surety Bond

On July 29, 2015, Illinois Governor Bruce Rauner signed into law Public Act 99-0178, which adds section 38.1 to the Illinois Mechanics Lien Act (the “Act”). 770 ILCS 60/38.1. The new law, which takes effect on January 1, 2016, permits interested parties to furnish a surety bond in exchange for the release of a mechanics lien; it provides for “bonding over” a mechanics lien and it sets forth a means and procedures for litigating over the bond which replaces the rights of a claimant under the mechanics lien act. All or almost all other states already had some procedure in place to bond over liens. Previously, in Illinois, title companies would sometimes agree to insure over mechanics lien claims. Also, some trial courts in Illinois would infrequently allow bonding over even though there was no specific law authoring it.

A broad group of people are eligible to file a petition to substitute a bond for a lien under Section 38.1; including all persons who have an interest in the property and all persons who may be liable for payment of the lien claim. A party who is authorized to file a petition to substitute a bond for the lien claim may do so at any time after: i) service of a subcontractor’s 90-day notice under Section 24; ii) recording of a lien claim; or iii) the filing of a suit to enforce a mechanics’ lien (but not more than five months after such a suit is filed).

The bond must meet certain requirements to be permitted to substitute for the lien claim. The surety must be licensed to issue surety bonds in Illinois and have a specified financial strength. The bond must be in an amount equal to 175% of the principal lien amount. The surety and principal on the bond must submit to the jurisdiction of the court and agree to pay a judgment if one is entered for the lien claimant.

Bonding over will be a useful tool to property owners and others faced with the need to clear a lien claim against property but who, for whatever reason, do not have the time, ability or desire to promptly resolve the underlying lien claim. There will be situations when it is the best available remedy. There will be many times, however, when bonding over is undesirable and litigation on the lien claim is preferable. For example, an owner might not want to pay the cost of the bond. Presumably, the surety company will require a payment or the posting of an asset equal to at least 175% of the lien amount, plus a premium for the bond to issue. Moreover, a party considering a bond might not want to lose the leverage that comes in lien litigation when the owner asserts there is no equity in the property. In addition, if an owner is attempting to prolong the litigation, the downside is that attorney’s fees must be paid to the prevailing party. A prevailing party is simply defined as either a lien claimant that recovers 75% or more of the lien claim or a bond principal, when the amount of the lien claim recovered is less than 25%. Previously, attorney’s fees were only rarely awarded under Section 17 of the Act when the court found that the owner or lien claimant acted without just cause or right.

In addition, subsection (i) provides that “the principal and surety … shall be jointly and severally liable to the lien claimant for the amount that the lien claimant would have been entitled to recover under this Act if no surety bond had been furnished, subject to the limitation of liability of the surety to the face amount of the bond.” Therefore, a party who becomes a bond principal may become personally liable when such liability would not have been imposed under the Act without a bond. Finally, an action on a bond does not exclude other claims, such as breach of contract and quantum meruit.

Thus, the new law provides benefits to lien claimants and bond principals, but it also exacts a price against both. Many lien claimants would still rather have a lien claim, despite the additional cost to litigate and the additional avenue of recovery under a bond, simply because they believe there is more leverage in a lien – a cloud on title cannot easily be ignored. For an owner or other party who simply must remove a lien claim as a cloud against title, the new law is a benefit, but they must be wary of the additional costs and the potential for having additional liability, including attorney’s fees.

By James T. Rohlfing