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Amendment to Illinois Mechanics Lien Act Allows “Bonding Over” For The First Time In Illinois
by Kendall E. Woods
On July 29, 2015, Illinois enacted Public Act 99-0178, which amended the Illinois Mechanics Lien Act by allowing, for the first time in Illinois history, an interested party to petition for an order allowing a surety bond in place of any mechanics lien rights in the property. New Section 38.1 provides interested parties with a mechanism to immediately clear title on their property without having to wait to resolve any mechanics liens filed against the property without prejudicing the rights of the lien claimants. While this amendment addresses a long-time concern of property owners, certain provisions — particularly the imposition of the mandatory award of attorneys’ fees to the prevailing party — must be considered when contemplating this option. This amendment is effective as of January 1, 2016.
Section 38.1 of the Illinois Mechanics Lien Act (770 ILCS 60/38.1) entitled “Substitution of bond for lien,” applies to all liens arising under Sections 1 or 21 of the Mechanics Lien Act and to claims or actions arising under Sections 9, 27 or 28 of the Mechanics Lien Act, and allows an interested party to petition for a surety bond on both the improved real property and any other money to become due from the owner to the contractors.
Requirements of Surety Bond:
To ensure that lien claimants are not prejudiced by the substitution of a surety bond, Section 38.1(a) sets forth specific criteria for the surety bond. To be eligible, the surety bond must meet all of the following requirements:
(1) it must state that the principal and surety “submit to the jurisdiction of the county where the property being improved is located”;
(2) it must state that a final non-appealable judgment in favor of the lien claimant constitutes “a judgment against the principal and surety of the bond for the amount found due on the lien claim, including interest and attorney’s fees, limited as to the principal and surety to the full amount of the bond”;
(3) it continues in effect until (i) “complete satisfaction of the adjudicated amount”; (ii) “payment of the full amount of the bond”; or (iii) final adjudication “that the lien claim is invalid”;
(4) “it is in an amount equal to 175% of the amount of the lien claim”;
(5) it has been issued by a surety that is certified by the Department of Insurance to execute surety bonds; and
(6) it has been issued by a surety with a “financial strength rating of not less than A . . . , an outlook which is either positive or stable, and a financial size category of not less than IX”;
Further, if the property is in a judicial district with a list of approved sureties, “the bond shall be issued by a surety company specifically authorized to issue surety bonds for that circuit court.”
Procedure to Petition for Substitution for Bond:
The right to file a petition to substitute a bond arises when (A) “a notice or amended notice of claim for lien under Section 24 of [the Mechanics Lien] Act has been served”; (B) a contractors’ lien under Section 7 of the Mechanics Lien Act is recorded; or (C) “a suit to enforce a lien under [the Mechanics Lien] Act has been filed.”
Upon the happening of one of these events, an interested party may file a petition for substitution of a surety bond with the clerk of the court of the county in which the property against which the lien claim is asserted or located. If there is a pending action to enforce the lien claim, the interested party may file a petition in the case at any time prior to five months after the filing of the complaint or counterclaim.
Section 38.1(c) explicitly sets forth the requirements of the petition and mandates that the petition be served personally or via certified mail, return receipt requested, to each person whose name and address is stated in the petition (requirements set forth in Section 38.1(c)) and his or her attorney of record in a pending action on the lien claim.
If there is no objection to the substitution within the time period for filing an objection, the circuit court will enter an order allowing the substitution. If there is an objection, the moving party must request a hearing and establish that the proposed surety bond is an eligible surety bond. If the court finds that the proposed surety bond is an eligible surety bond, it shall enter an order allowing the substitution.
If the surety bond is approved, the action on the bond shall be in equity against the principal and surety of the bond. If an action to enforce the lien claim is pending, by approval of the bond, the principal and surety shall become parties to the proceeding and all other parties to the lien claim may be dismissed. 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 [the Mechanics Lien] Act if no surety bond had been furnished.”
Mandatory Attorney’s Fees Provision:
One of the most interesting provisions in Section 38.1 is the imposition of a mandatory attorneys’ fees provision. Before the enactment of this Section, the Mechanics Lien Act only provided for an award of attorneys’ fees against the owner of the property or the lien claimant if the court found that the owner or lien claimant acted without just cause or right. Historically, attorneys’ fees were rarely awarded in a mechanics lien claim. This prior law is not impacted by the amendment unless a party invokes Section 38.1.
Pursuant to Section 38.1, a “prevailing party in an action brought under this Section shall be awarded” reasonable attorney’s fees. A prevailing party is defined by the Act as a lien claimant who is awarded a judgment equal to at least 75% of the amount of its lien claim, or the principal of the bond if the lien claimant is awarded judgment equal to less than 25% of the amount of its lien claim. Otherwise, no party is a prevailing party. The Act limits the award of attorneys’ fees to the lien claimant to the “amount remaining on the bond after payment of the claim and interest” and limits the award of attorneys’ fees to the bond principal to 50% of the amount of the lien claim.
Other Considerations:
As discussed above, Section 38.1(i) states that “the principal and surety of a surety bond shall be jointly and severally liable to the lien claimant for the amount that the lien claimant would have been entitled to recover under [the Mechanics Lien] Act if no surety bond had been furnished . . . .” Consideration should be given to whether this language could impose liability that would not otherwise exist if the bonding over option is not chosen.