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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.
“The safety of the people shall be the highest law.”
Marcus Tullius Cicero
New Law Changes Exemption for Safety Companies
On June 5, 2014, Governor Pat Quinn signed SB 3287 into law and it became Public Act 98-633, which is effective immediately. It modifies section 5 of the Illinois Worker’s Compensation Act (820 ILCS 305/5) to remove from the Act the limitation of liability for companies that provide safety consulting and other safety services– unless those companies are wholly-owned by the employer, insurer or insurance broker. Despite strong opposition from the business community, the bill hastily passed along party lines in both chambers of the legislature and was swiftly signed by Governor Quinn. The politically potent Illinois Trial Lawyers Association was the principal proponent of the bill.
Illinois business groups, including construction industry associations and, specifically, the Illinois Mechanical & Specialty Contractors Association or IMSCA are concerned about the impact of the new law on insurance rates and workplace safety. Because safety consultants are now exposed to greater liability in the event of a workplace accident, it is predicted that insurance rates for those companies will increase and, therefore, they will charge considerably higher fees for their work. In addition, some of those service companies may now be unable or unwilling to provide consulting services and, therefore, the use of safety consultants by businesses may decline. Smaller companies especially use consulting firms to provide this expertise and to assist in keeping their business compliant with OSHA standards. Some have opined that the new law will especially hurt small employers who typically cannot afford and do not require a full-time safety professional on their staff to address safety issues. There is a concern about what consequences will arise from the unavailability of affordable safety consultants. Still others in the construction industry are concerned with the impact the new law will have on safety seminars and the giving of advice related to safety issues in an educational context.
The Role of Safety Service Companies in the Workers Compensation System
As a general matter, the workers compensation laws in Illinois and elsewhere hold employers liable for work related injuries of their employees without requiring the employee to prove any fault by the employer or its agents. What the employer gets in return for this benefit to its employees is a limitation on the amount it must pay to compensate an injured employee. Section 5 of the Illinois Workers Compensation Law provided that the limitation of liability enjoyed by employers was also extended to safety service companies whom the employer hired. The new law takes that liability limitation away, except if the safety company is owned by the employer, its insurer or broker. Most are not.
SB 3287 was promoted as a means of legislatively overturning an Illinois Appellate Court decision which dismissed third party service and maintenance companies from a negligence lawsuit by an injured employee. In the case of Mockbee v. Humphrey Manlift Co., Inc., 973 N.E.2d 376 (1st Dist. 2012), Brenda Mockbee sued Harris (two related companies) and Humphrey Manlift Company after she was injured in a fall through a floor opening in a manlift platform system at Quaker Oats Company plant in Danville, Illinois, where she worked. There was no guardrail at the floor opening of the manlift. The severe injuries rendered Ms. Mockbee a paraplegic. The workers compensation case reportedly settled for $200,000, not including payment for medical treatment and lost time. Ms. Mockbee sought additional compensation in the Circuit Court for her injuries from Harris and Humphrey, who were responsible for safety inspection and maintenance of the manlift. Ms. Mockbee contended Harris and Humphrey owed her an independent duty of care and breached that duty when their inspections failed to note the need for a safety guardrail required by OSHA.
The Appellate Court agreed with the Circuit Court that Harris and Humphrey were both immune from liability for injuries sustained by Mockbee under section 5(a) of the Illinois Workers Compensation Act, as providers of safety services to the employer. The Mockbee case held that a safety engineer or inspector stood in the shoes of an employer when it provided safety services or maintenance and, therefore, it would be entitled to the same limitation of liability as the employer. It is important to note that another recent case involving a paraplegic that went to a jury trial in Illinois resulted in a verdict of $64 million. So, obviously, the limitation of liability in the workers compensation system to a settlement of $200,000 was greatly significant.
Concerns with the New Law
With the new changes to the Workers Compensation Act, concerns have been expressed that there will be a “flood of new lawsuits” or a “cottage industry of new litigation” for all significant injuries in the workplace. Some warn that safety consultants and safety inspectors will likely get sued anytime they have been consulted by an employer prior to a significant injury. Of course, it is unavoidable that some injuries will occur, even if the services provided by safety consultants and inspectors are perfect, and they will not always be perfect. So there will be some suits.
Those who opposed the law pointed out that an exemption for safety companies promoted workplace safety and that Illinois has seen some success in reducing workplace injuries. The Illinois’ injury rate is 16% lower than the national median, according to the Illinois Workers’ Compensation Commission 2012 Annual Report. The injury rate in Illinois is lower than most states, declining significantly since 2009. The new law likely will make it more expensive for Illinois employers to utilize the services of safety companies. If that occurs, it will result in decreased workplace safety, resulting in more workers’ injuries. Many businesses are right to be concerned that the added cost of this change could cripple some small businesses and result in unnecessary and unproductive litigation. Both proponents and opponents of the change to the Act should agree that there will be more litigation against safety consultants and inspectors in the wake of this change to the Workers Compensation Act.
Plaintiffs’ lawyers would argue that holding negligent safety service companies responsible for severe injuries to Illinois workers is a worthy goal for our legal system. Arguably, making people and organizations responsible for their own deficient behavior is a principle with which there can be little disagreement. Further, making service companies responsible for their own carelessness may cause them to perform their duties more carefully, and that will, in turn, result in safer, not less safe, workplaces.
What Can be Done to Minimize Exposure?
To remedy the harmful effects of this change in the law, some companies might want to hire a full or part time safety consultant as an employee rather than an independent contractor. Of course, just calling the consultant an employee will not make him one. It will be necessary to consider the attributes of the relationship between the consultant and the employer to assure it is truly an employment relationship. Another possible outcome is that some safety companies might require indemnification agreements from the companies to which they provide services, obligating the employer to pay any damages incurred by the safety company if it is sued by one of the employer’s employees. Unfortunately, for the employer, this will have the same financially disastrous outcome caused by the so called “Kotecki” debacle, which arises when an employer indemnifies third parties against claims by its own employees. In both situations, the employer is contractually sacrificing its liability limitation under the Workers Compensation Act and risking financial ruin in doing so. The loss likely would not be covered under many commercial liability policies purchased by employers.
A Chilling Effect on Safety Training and Education
To the extent that the new law makes it possible to sue providers of safety training and education courses, it has gone too far. The construction industry heavily relies for safety compliance education and training on the Joint Apprentice Training Committees and The Chicago Construction Safety Council and other organizations offering safety training. These not-for-profit groups provide training in such areas as OSHA certifications, first aid, CPR, fall protection, working in confined spaces and more. A trade association conducting a general safety seminar for its member companies to explain how to maintain safety standards and comply with OSHA requirements is a long way from the fact scenario in the Mockbee case that the new law was intended to address. Safety training and education should be promoted, not curtailed with the threat of liability from lawsuits. The not-for-profit groups are understandably alarmed that they now must be concerned about liability if a seminar attendee has a workplace accident following a training session. The chilling effect of this presumably unintended consequence is a troubling turn that does not promote positive public policy.
One possible remedy to curb the new law’s potential overreach would be an amendment to clarify that merely providing safety education services or training seminars would not result in liability beyond the limitations in the Workers Compensation Act. The proponents of SB-3287 presumably did not intend to discourage safety training or education seminars. Further, it would be difficult to argue that a seminar sponsored by a union group or a trade association at its offices should not be encouraged as a means of helping companies and their workers reduce accidents in the workplace. The amendment could be accomplished by adding a phrase to section 5 of the Workers Compensation Act to include among those exempted from liability outside of the Act “… organizations that provide safety training or safety education ….” Trial Lawyers, the business community and other interested parties might all find such a modest change acceptable.
In conclusion, the business community is right to be concerned about the elimination of this exemption for safety companies, especially given how quickly it became law without significant deliberative consideration by the legislature. However, it is too early to predict that the change will be financially catastrophic to large numbers of Illinois businesses. The impact of the new law will only be determined after assessing the reaction of Illinois insurers, safety service firms and the courts. Meanwhile, a modest amendment to the law that assures education and training seminars are exempt would be advisable.
This past Tuesday, I testified before the Illinois Senate Judiciary Committee on behalf of the construction industry in support of SB-3023. SB-3023 proposes new legislation making provisions in construction contracts to agree to subordinate mechanics lien rights unenforceable and against public policy. You can read more about SB-3023 in a prior blog post.
After over an hour’s worth of testimony and many questions from the senators on the committee, I am very pleased to report that the bill passed out of the committee and will be heard on the Senate floor for a vote. I was impressed by how knowledgeable the senators were and how willing they were to spend time to understand this issue.
Here’s how the Committee voted:
Senator Kwame Raoul (Chairman) – PRESENT
Senator John Mulroe (Vice Chair, Sponsor) – YES
Senator Haine – YES
Senator Don Harmon – YES
Senator Michael Hastings – YES
Senator Toi Hutchinson was absent. However, Sen. Terry Link was subbed in for her and voted – YES
Senator Michael Noland – YES
Senator Ira Silverstein – YES
Senator Kirk Dillard – absent from committee
Senator Jason Barickman – NO
Senator Darin LaHood – NO
Senator Dale Righter – YES
If any of the above senators who voted Yes or PRESENT is your state senator, I ask that you please email or call him or her and thank them for supporting the construction industry. SB-3023 is still far from becoming law and we will need their ongoing support!
Please check back here regularly for continued updates on the status of SB-3023 as well as other legislation affecting the Illinois construction industry.
SB-3023 – A Proposal to Clarify the Mechanics Lien Act’s Prospective Prohibition of Mechanics Lien Subordination
This is another article on the important topic of lien subordination and pending bill SB-3023 about which partner James Rohlfing testified on behalf of the construction industry on March 4, 2014 before the Illinois Senate Judiciary Committee.
According to Wikipedia, “Subordination is the process by which a creditor is placed in a lower priority for the collection of its debt from its debtor’s assets than the priority the creditor previously had. In common parlance, the debt is said to be subordinated but in reality, it is the right of the creditor to collect the debt that has been reduced in priority.”
SB-3023 addresses a practice by some construction lenders to insist on provisions in their lending agreements which obligate borrowers to insert in any construction contract a clause subordinating the priority of mechanics lien claimants to that of mortgages that secure the construction loan. The current Mechanics Lien Act prohibits waiving any lien rights prospectively (as part of the contract for construction). 770 ILCS 60/1. An agreement to prospectively waive the priority of a mechanics lien (subordination) is the waiver of a mechanic lien right and, therefore, it too should be seen as prohibited by the Act. The purpose of SB-3023 is to make the Act clear on that point. Neither SB-3023 nor the current Act prohibits subordination of lien rights except as part of the contract for construction. So, subordinating lien rights in exchange for payment after the work is done is allowed by the Act and would still be allowed if SB-3023 becomes law. It is only the waiver or subordination of any lien rights at the time of contract creation (before any work has been done) that is prohibited by the Act.
A review of the legislative history of the Mechanics Lien Act and an important Illinois Supreme Court opinion supports the conclusion that the legislature intended to prohibit prospective subordination. In 1991, the Illinois legislature passed a law that declared agreements that waive, as part of the contract for construction, anymechanics lien rights to be invalid and unenforceable. H.B. 859 was passed by the Illinois legislature on September 9, 1991 resulting in Public Act 87-361, effective January 1, 1992. P.A. 87-361 was codified in Sections 1.1 and 21 of the Mechanics Lien Act. Later, the Act was amended to change Section 1.1 to subsection (d) of Section 1 of the Act. 770 ILCS 60/1 and 770 ILCS 60/21. The new law provided, inter alia:
§ 1.1. An agreement to waive any right to enforce or claim any lien under this Act where the agreement is in anticipation of and in consideration for the awarding of a contract or subcontract, either express or implied, to perform work or supply materials for an improvement upon real property is against public policy and unenforceable. This Section does not prohibit subordination or release of a lien granted under this Act.
Though the 1992 amendment to the Mechanics Lien Act prohibited prospective waiver of lien rights, it expressly permitted, in the last sentence quoted above, subordination or release of a lien otherwise permitted by the Act. Subordination of a lien continues to be permitted in a variety of situations. For example, it could be a useful tool for a subcontractor and supplier to agree that only one of them will pursue lien rights for both of them. In addition, subordination could be a practical solution when a partial payment is made for a contractor’s work, giving a lender an incentive to continue funding and permitting a lien claimant to compromise a claim after work is complete.
By invalidating the prospective waiver of any lien rights, the legislature understood that there are a number of circumstances under which lien rights might be waived. The legislature has acted to provide that, while liens might be voluntarily released or waived under the Act after the work is done, to preserve the Act’s fundamental purpose of providing Illinois builders with a viable secured interest to obtain payment for their work, lien rights should not be waived before the work. For example, the priority of lien rights was recently revisited by the legislature in a 2013 amendment to section 16 of the Act when it passed HB-3636. 770 ILCS 60/16. That amendment restored the priority of mechanics lien claimants to parity with construction lenders after that priority had been undermined by a recent Illinois Supreme Court decision. A construction lender’s insistence upon the execution of subordination agreements as a condition precedent to issuance of a construction loan operates, as a practical matter, to achieve the lien priorities that the legislature forbade lenders when it enacted HB-3636. An agreement to subordinate one’s lien rights is a waiver of a lien right – one that gives it the priority set forth in amended section 16 of the Act. Therefore, subordinating a lien prospectively (as these kinds of subordination agreements indisputably do) amounts to a prospective waiver of a lien right which is prohibited by section 1(d) of the current Mechanics Lien Act.
The distinction between a prospective lien waiver that is prohibited by the Act and a release of lien that the Act permits was discussed by the Illinois Supreme Court a few years after the 1992 law became effective. In R.W. Dunteman Co. v. C/G Enterprises, Inc., 181 Ill.2d 153, 692 N.E.2d 306 (1998), the Illinois Supreme Court upheld Public Act 87-361 in the face of a challenge that it was unenforceable because it was unconstitutionally vague. In that case, the City of DesPlaines entered into a construction contract with R.W. Dunteman Company which provided, in part, that R.W. Dunteman waived and released any lien rights for work to be performed under the contract and, if it subcontracted a portion of the work, the subcontractors too would be prohibited from asserting liens for the work. One of the subcontractors, C/G Enterprises , Inc. was not paid for its work and it filed a lien against public funds, as did some of its sub-subcontractors. R.W. Dunteman filed a complaint in court asking for a declaration that the liens were invalid because, among other reasons, they violated the no-lien provision in the City of DesPlaines contract. The trial court found the no-lien law vague and therefore unconstitutional, so it struck down the liens which it held were in violation of the City’s contract with R.W. Dunteman.
The Illinois Supreme Court disagreed with the trial court and upheld the liens and the new law. It quoted the pertinent section of the Act:
An agreement to waive any right to enforce or claim any lien under this Act where the agreement is in anticipation of and in consideration for the awarding of a contract or subcontract … is against public policy and unenforceable. (Emphasis in court opinion) 770 ILCS 60/1.1.
R.W. Dunteman, 181 Ill.2d at 164. The Supreme Court then observed:
It is evident from the language of the statute that the legislature intended to prohibit provisions waiving the right to a mechanic’s lien because such provisions are against public policy. This intent is consistent with the overall purpose of the Mechanics Lien Act and, more importantly, with section 23 of the Act, which is applicable to this case.
Id. The Court further pointed out that the no-lien waiver law was consistent with the purpose of the Mechanics Lien Act:
As stated earlier, the public policy behind the Act is to protect subcontractors who have, in good faith, expended labor and materials to improve real property at the direction of the owner or a general contractor. Section 23 is the sole vehicle through which subcontractors may claim liens on funds for public projects as an effective means to compelling payment. The surrender of such protective rights through lien waivers as a prerequisite to obtaining a contract or sub-contract contravenes the purpose of the Act.
R.W. Dunteman, at 165. Next, the Court focused on the heart of the argument that there was an ambiguity, by distinguishing between lien releases before the work is done and those given after the work is done and payment is received. The Court wrote:
As earlier stated, section 1.1 voids, as against public policy, lien waivers that are executed in anticipation of and in consideration for obtaining construction contracts. However, lien waivers would not be prohibited if a party agrees to waive a lien claim after work has been completed.
The reasoning in R.W. Dunteman applies with equal force to a prospective subordination of lien rights as it does to a prospective lien waiver. Both are prohibited in advance as part of the contract for construction, but both are permitted after the work is done and when payment for the work is being made. Therefore, subordination of a lien is permitted after work is done, but not before. Thus, because the current Mechanics Lien Act already prohibits subordination as part of the contract for construction, SB-3023 is merely a clarification of existing law.