A recent case provides a primer on mechanics lien law in Illinois. Cordeck Sales, Inc. v. Construction System Inc., 2008 Ill. App. LEXIS 272 (1st Dist., March 31, 2008). The appellate court addressed a number of relevant issues that arise in mechanics lien cases, most importantly, the issue of when a lien waiver is enforceable. The case involved five subcontractors and one construction manager filed claims to foreclose on their respective mechanics liens. First Midwest Bank held a mortgage on the property and also filed a claim to foreclose on its lien.
The trial court found that each of the mechanics lien claimants had a priority over the mortgage lien of the bank, based on the fact that the date of the general contractor’s contract predated the date the bank’s mortgage was recorded. The court also granted summary judgment to each of the mechanics lien claimants.
The appellate court addressed the enforceability of amended mechanics liens. In this case, one of the claimants recorded multiple amended liens reflecting additional work on the project. The appellate court held the amended liens were enforceable against the owner, but not third parties, like the bank. The claimant only had a priority over the bank as to the amount identified in its original mechanics lien.
The appellate court also addressed the bank’s defense that the lien claimants had signed waivers of their lien rights. The claimants argued that the bank failed to provide evidence that it relied on their respective lien waivers in making payments. The court observed that a clear, unambiguous waiver of a lien right bars an action under the Mechanics Lien Act. This rule, however, is only applicable when an innocent party relies on the waiver in making payments. Whether an innocent party relied on a lien waiver is a question of fact. Once the lien waiver is produced, the burden of proof shifts to the party against whom the waiver is asserted to avoid the effect of the waiver.
The senior construction escrow officer who processed the lien waivers testified that she could not say she personally relied upon any claimant’s waiver. However, this witness testified that her practice was to rely on lien waivers in general when making the payments. The court found this testimony insufficient to establish reliance on a lien waiver. The court also reasoned that affidavits which reflected a substantial balance due the claimant raised a genuine issue over whether anyone could reasonably believe that a claimant would waive all lien rights for less than the balance due. In other words, the recipient of the waiver could not reasonably believe the lien claimant would forego its right to recover a substantial payment in exchange for a relatively small payment.
What is most interesting about this case is that the court clarified that the party seeking to enforce a lien waiver not only has to produce a signed copy of the lien waiver, but also has to establish that the owner or its agent in fact relied upon that waiver at the time of payment. It is not sufficient to establish a general practice of such reliance; the owner or its agent has to establish actual reliance on the document itself. Owners and construction escrow agents should keep detailed logs establishing the date of receipt of the waiver and date of payment thereafter, to prove actual reliance on the lien waiver. Otherwise, an owner who pays a general contractor, who runs off with the money, may find himself paying twice for the same work.
