Court Sets Aside Receiver Certificates Pursuant to Plea of Mechanics Lien Claimant

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Court Sets Aside Receiver Certificates Pursuant to Plea of Mechanics Lien Claimant

Avai Beck - Querrey & Harrow, Ltd. - Chicago - October 23, 2020

In the recent case of REEF-PCG, LLC v. 747 Properties, LLC, 2020 IL App (2d) 200193, the Illinois Appellate Court re-examined the application of the Illinois Mechanics Lien Act in foreclosure actions. There, a receiver filed a mortgage foreclosure action against the mortgagor and also sued mechanic’s lien holders alleging the mortgagor was in breach by failing to pay amounts due under the mortgage agreement and allowing mechanics liens to be placed on the property. The trial court granted receiver’s motion for receiver certificates and the mechanic’s lienholders filed an interlocutory appeal. The appellant court held that the trial court abused its discretion where it concluded, without sufficient evidence, that (1) making $12 million in receiver certificates a first lien, vis-à-vis the mechanic’s liens, was in the lienholders’ best interests or (2) doing so was “apparently necessary to preserve the property.”

In Reef-PCG, LLC, the developer borrowed approximately $16.9 million from a syndicate of individuals and corporations, including PCG Credit Partners LLC (PCG), who named REEF-PCG, LLC (REEF-PCG), as the agent. The purpose of the loan was to buy and remodel a four-story office building. Thereafter, 747 Properties entered into lease agreements with Pomeroy IT Sales for the first two floors and with the U.S. General Services Administration for the third and fourth floor.

Pomeroy hired a contractor to complete $15 million in repairs to both its leased space and common areas. Pomeroy allegedly breached its lease and defaulted on its payments to the contractor, resulting in $15 million in mechanics lien claims on the 747 property, filed by contractor and subcontractors. Pursuant to the Illinois Mortgage Foreclosure Act, the trial court had the equitable power to issue receiver certificates and prioritize them over the mechanic’s liens in order to secure the lease and allegedly maximize the financial return in the best interest of all parties.

The appellate court found there was not sufficient evidence supporting trial court’s decision to issue receiver certificates and prioritize them over the mechanics liens in order to secure lease and allegedly maximize the financial return in the best interest of all parties. There was no evidence from which to conclude that subordinating the lienholders to additional debt would be to their benefit. Specifically, there was no evidence as to the current value of the building, and there was no evidence as to what the value of the building would be with the General Services Administration as tenant. The appellant court stated that while it was not necessary that every lienholder agree to the subordination of its lien for the court to find it in the best interests of all the parties, the court has no power to authorize the receiver of a business to continue its business and to make recievers certificates superior to prior liens, without the consent of the holders of such liens, unless it be apparently necessary to do so in order to preserve the property.

Court Finds Mechanics Lien Valid Although Claimant Did Not Wait Ten Days to File

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Court Finds Mechanics Lien Valid Although Claimant Did Not Wait Ten Days to File

Amanda Bonanotte - Querrey & Harrow, Ltd. - Chicago - October 23, 2020

In Matteo Construction Co. v. Teckler Blvd Developmental Site, LLC, 2020 IL App (2d) 190766, the plaintiff sought to foreclose a subcontractor’s lien under Section 28 of the Mechanics Lien Act (770 ILCS 60/28) against the owner of the property. The plaintiff sent a copy of the claim of lien by certified mail on February 23, 2016. The Plaintiff recorded its claim of lien two days later, on February 25, 2016. The defendant did not receive the notice of claim until February 26, 2016. The plaintiff did not file its complaint for foreclosure on the lien until June 1, 2017. The trial court dismissed the plaintiff’s complaint stating that the plaintiff did not perfect its lien under the Act by failing to wait 10 days from the date of notice to the defendant to record the claim of lien.

The appellate court found that the trial court erred in dismissing the suit to foreclose on the lien because 770 ILCS 60/28 allowed the contractor 10 days after notice, to either file its claim of lien or file suit to enforce the lien and the contractor complied with the statute by waiting 10 days before filing suit. The language of Section 28 of the Act states specifically: “if any money due to the laborers, materialmen, or sub-contractors be not paid within 10 days after his notice is served as provided in Sections 5, 24, and 25, then such person may file a claim for lien or file a complaint and enforce such lien within the same limits as to time and in such other manner as hereinbefore provided for the contractor in Section 7 and Sections 9 to 20 inclusive of this Act…”

While the plaintiff did not wait 10 days to record its lien, it did wait more than 10 days to file suit to enforce it. The appellate court found that provided the subcontractor filed its complaint to enforce the lien more than 10 days after giving proper notice, the mere fact that subcontractor recorded its claim and sent notice less than 10 days from each other provided the court with no reason to invalidate the claim. The appellate court found that Section 28 specifically provides timing limitations using the term “or”, therefore, should a subcontractor not be paid within 10 days after serving notice, the subcontractor may file a claim for lien “or” file a complaint to enforce its lien under the Act.

Construction Law Quarterly - December 2015

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Construction Law Quarterly - December 2015

General Liability Policy Does Not Cover Waiver of the Kotecki Limitation

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Attorneys: Madormo, Anthony J.

The Illinois Supreme Court recently held that an employer's liability resulting from a waiver of the Kotecki limitation was not insurable under a commercial general liability policy (CGL). Virginia Surety Company v. Northern Insurance Company of New York, 2007 Ill. LEXIS 3 (2007). The contract between the general contractor and subcontractor usually has an indemnity provision, requiring the subcontractor to indemnify the general contractor. Illinois Courts have held that, the indemnity provision constitutes a waiver of the subcontractor's Kotecki limitation. The Kotecki limitation limits an employer's liability for injuries to its employees to the amount of the employer's liability under the Worker's Compensation Act, 820 ILCS 305. See Kotecki v. Cyclops Welding Corp. 146 Ill 155, 5 N.E. 10 (1991)

Most CGL policies exclude claims for damages to an employee of the insured, except where the employer's liability was assumed in an "insured contract." An "insured contract" was defined under the policy at issue as a contract or agreement pertaining to the insured's business by which the insured assumed the tort liability of another party to pay for bodily injury or property damage to a third party.

TheVirginia Surety court held that the indemnity provision in the contract was not an "insured contract" as that term was defined under the insurance policy. The court reasoned that under Illinois law, pursuant to the Illinois Contribution Act, 740 ILCS 100, a party is only liable for its pro rata share of the total liability. The court further reasoned that the waiver of the Kotecki limitation did not shift liability, but was a decision by the employer (subcontractor) to not assert an affirmative defense, and therefore, remain liable for a claim for which it had a legal defense. Based upon this reasoning, the Virginia Surety court concluded that the indemnity provision in the contract between the general contractor and subcontractor was not a true indemnity clause, but was a waiver of the right to raise an affirmative defense. The subcontractor did not agree to assume liability, it only agreed not to assert a defense to its liability.

TheVirginia Surety court concluded since the agreement was not an "insured contract" the exclusion for liability to the named insured's own employees applied, and no coverage existed. Therefore, there was no duty to defend or indemnify the named insured under the CGL policy. The Virginia Surety court rejected the assertion that the employer subcontractor assumed the joint and several liability of the general contractor.
The Appellate Court's decision in Christy-Foltz, Inc. v. Safety Mutual Insurance Casualty Corp., 309 Ill. App.3d, 686 (4th Dist. 2000), held that a worker's compensation/employer's liability policy did not apply to liability arising out of the waiver of the Kotecki limitation, because entering into an agreement to waive theKotecki limitation voided coverage because it voluntarily assumed a duty. We anticipate, in light of the Virginia Surety decision, the Christy-Foltz holding will be challenged in a subsequent lawsuit.