Effective January 1, 2016 the Illinois Mechanics Lien Act (“MLA”) was amended with the addition of Section 38.1 to the MLA which now permits a party in interest to a project to substitute an eligible surety bond in place of a claim for lien as security for said claim. Illinois is the last state in the country to adopt a lien bond statute.
- A surety will not have the customary defenses found in its performance or payment bonds. Rather, the only defenses available will be those defenses that its principal could assert under the lien claim such as the validity of the lien claim, the amount due under the claim and any defenses to the claim that could be asserted by either the owner or its bond principal.
- A controversial provision, which grants the prevailing party the right to recover its attorney’s fees. No such provision previously existed in the MLA, and this type of clause is always a source of concern. This provision is further compounded by the fact that it is somewhat ambiguous given that it permits the claim of the prevailing party to be reduced by any payments “received” by the claimant before entry of judgment but does not state whether payment must have been accepted by the lien claimant. Thus a party who has refused to settle a claim could arguably, on the eve of trial, tender payment to reduce the claim amount, even if not accepted, and thereby possibly escape or shift the prevailing party fee provision at the time a judgment is entered. There is an additional question as to whether separate bonds will be required for overlapping claims such as first and lower tier claimants. These ambiguities will need to be sorted out by either a statutory amendment or court interpretation.
Insuring a Lender
There is also a question as to whether a title company will insure a construction lender for draws between the recording of a lien claim and the entry of an order approving a petition for the issuance of a statutory lien bond. We are informed that title companies will require the posting of a separate traditional indemnity bond until replaced by the court approved lien bond.
Additional Key Provisions
- An owner, lender, other lien claimant, or a party having an interest in the subject property may apply for an eligible lien bond;
- An eligible bond must contain a provision that a final non-appealable judgment in favor of the lien claimant shall constitute a judgment against the principal and surety under the bond payable no later than 14 days after expiration of all appeal periods;
- The bond remains in effect until complete satisfaction of the adjudicated amount or a final determination that the lien is invalid has been released or the time to enforce lien has expired;
- Is in the amount of 175% of the amount of the lien claim;
- It is issued by an approved surety that must have an “A” financial strength rating and at least a “IX” Best rating and an outlook rating of either positive or stable;
- The application for a bond is triggered by the filing of a petition to substitute a bond with the Clerk of the Circuit Court where the property is located;
- If there is a pending action to enforce a lien claim, an applicant may file the petition to substitute a bond up to 5 months after the filing of a complaint or counterclaim by a lien claimant;
- Service may be had by personal service or certified mail to each person stated in the petition;
- The court will enter an order approving the petition if there is no objection to the petition within 30 days of service of the petition;
- Once the bond is approved by the court and a proceeding to enforce a lien claim is pending, the surety and principal shall become parties to the proceeding and all other parties may be dismissed from the pending proceeding;
- “Prevailing Party” is defined as a lien claimant who recovers at least 75% of the amount of its lien claim or the principal if the lien claimant recovers less than 25% of its lien claim.
This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
David L. Kabat | Employment, Complex Commercial Litigation, Real Estate Litigation and Bankruptcy Litigation
Dave concentrates his practice in commercial real estate law, construction law, financing and creditors’ rights. If you need assistance with a related matter, contact Dave.