Obviously Overstated Lien Claim Survives Motion for Dismissal

By John S. Mrowiec

Mechanics lien claims are created by state statutes. Overstatement of the claim sometimes—but not always—invalidates the entire lien even for the valid amount due.

In Illinois, the statute provides that a lien will not be defeated to the extent of the proper amount owing “because of an error or overcharging” by claimant, “unless it shall be shown that such error or overcharge is made with intent to defraud” 770 ILCS 60/7. In Illinois, the courts have established the doctrine of “constructive fraud” to invalidate an overstated lien claim where the claimant “knowingly makes a false statement regarding a material matter . . . giv[ing] the appearance of a greater encumbrance on the property than that to which he is entitled,” Lohmann Golf Designs, Inc. v. Keisler, 260 Ill. App. 3d 886, 891, 632 N.E.2d 121, 125 (1st Dist. 1994).

If a claimant sues to foreclose a lien claim that is obviously overstated, can the claim be defeated by a motion to dismiss or must the opponent submit separate evidence to show intent to fraud?

A Timely Case Type

A specialized mechanics lien court dismissed a foreclosure complaint on motion to dismiss in that situation; the appellate court reversed, saying the trial court first had to receive separate evidence showing intent to defraud in Springfield Heating & Air Conditioning, Inc. v. 3947-55 King Drive at Oakwood, LLC, 2009 Ill. App. LEXIS 26 (Jan. 15, 2009).

An entity, 3947-55 King Drive at Oakwood, LLC, owned two parcels of land. The owner contracted with Southeast Contractors LLC as general contractor to construct a building on the two parcels. The general contractor subcontracted HVAC work to Springfield Heating & Air Conditioning Inc.

The general contractor terminated the subcontract before the subcontractor had completed the work.

At the time, the unpaid amount due (before offsets) was $289,302. After the termination, the subcontractor recorded two claims of lien, one on each parcel, for the same $289,302 amount claimed. Thus, the subcontractor claimed liens totaling $578,604 but was owed half that, at best.

The conventional way to record under the situation would have been to file a single lien claim for the $289,302 against both parcels, possibly allocating the amount due between the two if there was a legal need to do so.

When the subcontractor sued to foreclose the lien claims, the general contractor moved to dismiss the foreclosure count on the grounds of “constructively fraudulent overstatement,” citing Lohmann Golf. In Lohmann Golf, the lien claimant had recorded three lien claims on three parcels each for the same single amount due. The effect was to triple the amount claimed against that owner’s property.

Apparently, the general contractor in Springfield Heating relied on the fact that the filing of two lien claims for the same single amount due obviously was fraudulent.

Relying on Lohmann Golf, also a 2-619 motion to dismiss case, the trial court dismissed it. By filing two claims for the single amount due, the subcontractor had created an appearance of a right to encumber the owner’s property with twice the amount owed.

Error or Intention?

The subcontractor appealed contending its claims should survive because of “inadvertent error,” Springfield Heating, 2009 Ill. App. LEXIS at *8. The appellate court first emphasized that the statute required an “intent to defraud” to invalidate the entire lien claim.

The general contractor responded that Illinois caselaw finds constructive fraud where the “amount in error was too significant to be considered a mere mistake” citing Marsh v. Mick, 159 Ill. App. 399 (1911).

The Springfield Heating appellate court looked to more recent cases. Quoting the reasoning of Cordeck Sales, Inc. v. Construction Systems, Inc., 382 Ill. App. 3d 344, 373, 887 N.E.2d 474, 513 (1st Dist. 2009), where the lien claim was not invalidated, the Springfield Heating court stated “in most cases, ‘the intent to defraud [is] shown by executed documents that on their face overstate the amount due in combination with some other evidence of record from which intent could be inferred,’” Springfield Heating, 2009 Ill. App. LEXIS at *13-14 quoting Cordeck Sales, 382 Ill. App. 3d at 373 (emphasis in original), quoting Peter J. Hartmann Co. v. Capitol Bank & Trust Co., 353 Ill. App. 3d 700, 708 (1st Dist. 2004).

Springfield Heating distinguished Lohmann Golf on the ground that there was a false affidavit in addition to the overstated lien claims, Springfield Heating, 2009 Ill. App. LEXIS at *12. Actually, the “affidavit” in Lohmann Golf was the very “sworn affidavit attached to each lien” as required by the mechanics lien statute to be part of a lien claim, See Lohmann Golf, 260 Ill. App. 3d at 892.

The Springfield Heating appellate court reversed, concluding “an express showing of an intent to defraud must be established by evidence in addition to and apart from an overstatement included in a lien,” Springfield Heating, 2009 Ill. App. LEXIS at *16-17. It would seem that the Springfield Heating claims would have had the same affidavits attached found sufficient to show constructive fraud in Lohmann Golf but the appellate court never mentions any.

Just because the subcontractor won a reversal on appeal does not mean the subcontractor’s lien claim will survive summary judgment or trial. The Springfield Heating court remanded for “further proceedings” and was careful to note that the court “express[es] no opinion on the merits of the case and instead limit our conclusion within the scope of deciding the issue under a motion to dismiss analysis,” Springfield Heating, 2009 Ill. App. LEXIS at *17.

In other words, the owner or general contractor are free to present, by summary judgment motion or at trial, “evidence in addition to and apart from” the overstatement in the lien claims to show actual or constructive fraud to invalidate the lien claims. The consequence is a longer—and more expensive—court case.