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

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