Full Subcontractor Payment Defeats
Lower Tier Sub's Timely Lien Claim

By John S. Mrowiec

General contractors typically owe an indemnity to the project owner from subcontractor and lower-tier mechanics lien claims (or, in Wisconsin, "construction lien.")

A frustration for general contractors comes when, after payment to a subcontractor, a lower-tier subcontractor or supplier serves a timely lien notice demanding payment.

If the subcontractor had advised the general contractor of the sub-subcontractor or supplier, the general contractor almost certainly would have demanded a lien waiver for that claimant prior to payment to the subcontractor. Now, the general contractor is being asked to "pay twice," once to the subcontractor and again to the lower-tier lien claimant.

A 60- or 90-day payment delay is not uncommon especially for final payment.

Understandably, most suppliers and subcontractors - like first tier subcontractors and general contractors - are not anxious to rush to serve a notice or to record a lien. There is expense involved and customer relations to consider.

Most construction project participants understand that there are deadlines for the service of notices of subcontractor and lower-tier lien claims. These deadlines are understood, in most cases, as establishing the outside time by which the subcontractor or lower-tier claimants may legally claim a lien on project funds or real property.

Consequently, subcontractor and lower-tier sub-subcontractors and suppliers believe they "can wait" until just near the deadline to serve a notice and still preserve the right to a lien.

Is meeting the statutory deadline a guarantee that a properly prepared lien claim will protect a sub-subcontractor when the subcontractor has not paid the sub-subcontractor? Does the answer depend on whether the general contractor fully paid the subcontractor (who owes the lower-tier clamant) before the claimant serves its timely notice? What if the general contractor "might have known" of the sub-subcontractor's existence and potential claim before the general contractor paid the subcontractor in full?

Those were the questions in the new decision in Lazar Brothers Trucking, Inc. v. A & B Excavating, Inc., 2006 Ill. App. LEXIS 277 (1st Dist. April 7, 2006). No doubt, the result was surprising to the sub-subcontractor lien claimant and welcomed by the general contractor.

Liens Waived

Unknown Sub Hired

Despite the sworn statements from the excavator, the excavator had engaged a trucking firm, Lazar Brothers Trucking Inc., to remove excavated materials for the excavator. On April 14, 2003, the trucking firm recorded a notice of mechanics lien against the property and on April 16, 2003, served the owner and general contractor with notice of the lien. The trucking firm contended it was owed $29,200.

Under the Illinois Mechanics Lien Act, a subcontractor or lower-tier claimant must serve its notice to the owner (and owners) within 90 days of that claimant's last labor or material supplied for which the claim is made. (Otherwise, a subcontractor claimant may rely on the general contractor's statement to the owner as providing the notice required, but only to the extent of the amount listed as remaining due to the subcontractor.)

The trucking firm claimed its last work was on Jan. 17, 2003. Accordingly, the trucking firm's lien notice was timely.

At the time of service of the trucking firm's notice, the general contractor had paid the excavator in full, the owner had paid general contractor for its own line items and $53,000 remained owing for the work of the subcontractors for landscaping, paving, curb and gutter work.

The trucking firm sued to foreclose its lien claim. The owner/general contractor moved to dismiss, contending the trucking firm could maintain no lien because the excavator had been paid in full.

In support of its motion, the owner/general contractor provided an affidavit stating that the excavator had not informed the general contractor of a subcontract with the trucking firm and that the general contractor did not learn of the trucking firm's work until the trucking firm's service of the notice of lien.

In response, the trucking firm submitted its own affidavit which stated that the custom and usage in the industry is that the trucking and removal of debris is the more expensive part of the excavation work, when compared to excavation site work, and is typically performed contemporaneously with the excavation. The trucking firm's affidavit continued that the general contractor knew that the trucking firm was providing the trucking and removal of debris because (a) the trucker operated approximately 40 trucks, all with the name on the doors, over a two-day period, and (b) "upon best information and belief" the general contractor's agents or employees were on site at the time of the trucking and removal of debris.

Ruling for General Contractor

The trial court ruled in favor of the owner/general contractor and dismissed the trucking firm's complaint.

On appeal, the trucking firm argued that the trial court should not have dismissed its complaint because the owner/general contractor was obligated to establish facts that proved that the owner/general contractor acted in good faith when it paid the excavator.

The appellate court first set out the basic rules. To protect itself from paying twice for the same work, the owner must demand from the contractor, prior to payment, a sworn statement listing all subcontractors providing labor and materials to the contractor (770 ILCS 60/5). The contractor's affidavits and lien waivers do not protect the owner if the owner has notice that the affidavits are false, Lazar Bros. Trucking, 2006 Ill. App. LEXIS 277, * 6, citing Knickerbocker Ice Co. v. Halsey Bros. Co., 262 Ill. 241, 245, 104 N.E. 665 (1914).

If a subcontractor wishes to protect its rights, the subcontractor must provide timely written notice to the owner of the amount owed to the subcontractor for work on the project (770 ILCS 60/24). The subcontractor has the right to file its lien once it agrees to work on the project (770 ILCS 60/24). If the owner makes proper payments to the contractor prior to receiving notice of the subcontractor's claim, even timely notice from the subcontractor may not protect the subcontractor. Lazar Bros. Trucking, 2006 Ill. App. LEXIS 277 * 7, citing 770 ILCS 60/5, 21; Contractors' Ready-Mix, Inc. v. Earl Given Construction Co., 242 Ill. App. 3d 448, 458, 611 N.E.2d 529 (4th Dist.) app. denied, 152 Ill. 2d 556 (1993).

Reviewing the facts, the Lazar Bros. Trucking appellate court agreed with the trial court that the owner/general contractor had demanded and received the statutory sworn statement from the excavator. The excavator's sworn statement falsely failed to list the trucking firm as a subcontractor. At the time of the sworn statements from the excavator, the trucking firm had not served notices of its right to payment for any work related to excavation.

Unable to contest those facts, the trucking firm argued that the owner/general contractor was obligated to present evidence proving that it relied on the affidavits in good faith.

The court disagreed. The sworn statements from the excavator gave the owner/general contractor "a prima facia defense," Lazar Bros. Trucking, 2006 Ill. App. LEXIS 277 * 8, citing William Aupperle & Sons, Inc. v. American National Bank & Trust Co., 28 Ill. App. 3d 573, 576, 329 N.E.2d 458 (3d Dist. 1975). Once the owner had raised the sworn statements as a defense, the trucking firm claimant had the burden to avoid the effect of those waivers.

To avoid the dismissal in the face of the sworn statements, the trucking firm needed to present evidence of a genuine issue of material fact as to whether the owner/general contractor reasonably relied on the sworn statements, Lazar Bros. Trucking, 2006 Ill. App. LEXIS 277 * 8, citing Merchant's Environmental Industries, Inc. v. SLT Realty Ltd. Partnership, 314 Ill. App. 3d 848, 866, 731 N.E.2d 394 (1st Dist. 2000).

The trucking firm argued that the owner/general contractor actually had paid the excavator $20,000 of the original $25,000 contract price in advance of work. The appellate court did not find that advance payment to represent any knowledge by owner/general contractor that excavator falsely swore it had no subcontractors.

Similarly, the trucking firm's arguments that the owner/general contractor must have known of the trucking firm based on custom and usage in the industry did not apply in this case. The trucking firm's affidavit that the owner/general contractor saw the trucks was "on best information and belief." That is not "personal knowledge" and, therefore, insufficient to raise the necessary question of fact to avoid dismissal.

The trucking firm contended that it still was entitled to a lien because the owner had not paid the general contractor in full at the time of service of the claimant's notice. The Lazar Bros. Trucking appellate court said that "it was unrebutted" and that the owner made no payments to its general contractor after March 2003. The general contractor's own sworn statement showed no balance due on the general contractor's fee line item.

However, the appellate court did not address the $53,000 owed to other trades at the time of service of the trucking firm's notice.

Instead, the Lazar Bros. Trucking court held that the sworn statements, because owner/general contractor had "fully paid for excavation work before [claimant trucking firm] filed its mechanics lien, established a defense to the foreclosure action," Lazar Bros. Trucking, 2006 Ill. App. LEXIS 277, * 12.

Thus, the trucking firm had no lien claim even though it had timely served its notice and recorded its claim and even though the owner/general contractor owned other trades. The key was that the subcontractor through whom the claimant claimed had been paid in full with proper sworn statements from the general contractor to the owner without owner knowledge of the trucking firm's right to payment.

The lesson is that a lower-tier lien claimant in Illinois who waits too long, even though not as long as the statutory deadline, might be too late to claim a lien.