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Construction Law Today

No Mechanics Lien For Pre-Purchase Due Diligence Consultants

Posted in Claims, Environmental, Illinois, Mechanics Liens, States

synthetic fuel engineerFees for property purchase feasibility consulting are not secured by a mechanics lien. That’s what a panel of Illinois Appellate Court Justices held in Mostardi-Platt Associates v. Czerniejewski.

Backstory

Power Holdings of Illinois wants to build a new synthetic fuel plant that processes coal into gas. They need land for the proposed plant. So, as principal they hire ADA Resources as an agent to scout locations. The agent’s role includes analyzing whether a particular piece of land will suit Power Holdings’ proposed plant. And so the agent hires Mostardi-Platt Associates to consult on feasibility, particularly, feasibility of of regulatory approvals.

In their search for suitable land, the agent comes across the Czerniejewski farm. The Czerniejewskis grant the agent—and so Power Holdings as principal too—an option to buy their farm. Afterwards—as part of deciding whether to exercise the option and buy the farm—the agent has the consultant study the feasibility of getting regulatory approvals for a plant on the Czerniejewskis’ farm.

Cut to the chase: Power Holdings doesn’t buy the farm, and neither they—nor ADA Resources as their agent—pay the consultant. (Why? The justices don’t tell us.) But with a debt for consulting fees unpaid, the consultant records a mechanics lien claim against the Czerniejewskis’ farm to secure that debt. Then the consultant sues both Power Holdings (as principal) and ADA Resources (as Power Holdings’ agent) to collect the debt. And the consultant also sues the Czerniejewskis to foreclose the mechanics lien claimed against their farm to secure that debt.

The Czerniejewskis move early to dismiss the consultant’s mechanics lien foreclosure. They contend that fees for pre-purchase feasibility study services for a buyer (who didn’t buy their farm) don’t qualify to be secured by a mechanics lien. Judge Robert Lewis hearing the case agrees. He grants the motion and dismisses the consultant’s mechanics lien foreclosure claim.  The consultant appeals.

No Consultant Mechanics Lien

The three appellate court justices hearing the appeal agree with the Czerniejewskis and affirm Judge Lewis’s decision: under the Mechanics Lien Act, the debt to the consultant for pre-purchase feasibility study services doesn’t qualify to be secured by a mechanics lien against the Czerniejewskis’ farm.

Two features animate the justices decision:

  • These services didn’t enhance the value of the Czerniejewskis’ farm
  • The Czerniejewskis received no benefit from the consultants’ services

The farm was the same after the consultants performed their study and reported to their client—Power Holdings, through their agent ADA Resources—as before the study began. And the Czerniejewskis—being in the agricultural instead of synthetic fuel business—reaped no benefit from whatever the consultants’ study said about the feasibility of their farm as a synthetic fuel plant.

Your Property: Collateral for Someone Else’s Debt

This decision reveals something that runs in the background behind many mechanics lien disputes: under the Mechanics Lien Act, an owner’s property becomes collateral securing someone else’s debt to a stranger. We usually see this when a prime contractor doesn’t pay a subcontractor, or a subcontractor doesn’t pay a material supplier. The owner does not know, and did not contract with, the unpaid subcontractor or supplier. Yet most mechanics lien statutes allow that subcontractor and supplier to claim—and foreclose—a mechanics lien against the owner’s  property.

The background assumption: the subcontractor’s work,and the supplier’s materials, improve the owner’s property. The owner reaps the benefit of  improvement through greater property value. And so it’s fair for the government—through a mechanics lien act—to place that property collateral for the debts owed to the subcontractor and supplier respectively.

Generally, neither a stranger nor the government can pledge your property as collateral for someone else’s debt without your approval. But mechanics lien statutes are an exception to that general rule. They recognize improvement and greater value conferred as a substitute for the owner’s approval, and allow the owner’s property to become collateral for a prime contractor’s debt to a subcontract, or a subcontractor’s debt to a  material supplier. Essentially, the benefit the owner receives—or is often presumed to receive—is regarded as a substitute for the owner’s voluntarily pledging their property as collateral in the usual way, i.e., signing a mortgage. Agree or disagree philosophically, that’s one of the principal things mechanics lien statutes do. And as long as they do, those statutes are going to arouse controversies (with many becoming lawsuits).

Observations and Lessons

  • Debts for services that the owner doesn’t contract for and don’t improve the property, can’t be secured by a mechanics lien. Consultants providing pre-purchase services for erstwhile buyers should be wary. The Mechanics Lien Act will not secure their client’s unpaid debt. But there’s more than one way to secure a debt. And consultants providing those kinds of services might be want to consider them
  • Erstwhile sellers should be wary too. The Czerniejewskis successfully got the consultant’s mechanics lien foreclosure dismissed—and presumably got the claim of lien quiet-titled-off as a cloud against title to their property. But that probably didn’t happen for free. Title insurance doesn’t usually cover that cost. And if the Czerniejewskis’ option contract with Power Holdings didn’t oblige Power Holdings to indemnify them against lien claims by Power Holdings’ consultants, looking back, they probably wish it did
  • Last, one must wonder if the result would be different had Power Holdings exercised their option, bought the farm, and built a synthetic fuel plant? Had the consultant sued Power Holdings—not just as contract counterparty, but as owner or property whose value the consultant’s feasibility services presumably enhanced—would the justices have decided differently?

No Setoff for FDIC Contract Repudiation Damages Under Placida v. FDIC

Posted in Attorneys Fees and Costs, FDIC & Bank Failures, Florida, States, Uncategorized

Bank With a Closed Sign PostedWhen a bank fails and the FDIC repudiates a construction loan—ending further “draws” or disbursements—the borrowers can’t setoff damages they suffer because of repudiation to reduce the amount of debt they owe under the loan. That’s what a panel of judges from the US Court of Appeals for the 11th Circuit decided in Placida v. FDIC.

Placida v. FDIC Backstory

This case starts with a construction loan from Freedom Bank to borrower, project owner, and developer Placida Professional Center, LLC. The loan documents comprise a promissory note, a construction loan agreement, a mortgage against the project, and personal guarantees from two of the borrower’s principals.

Freedom Bank fails while construction is still underway, and while one of the borrower’s monthly draw requests is still pending. Then—about a week after appointment as Freedom Bank’s receiver—the FDIC repudiates the construction loan under 12 USC § 1821(e). The result: as Freedom Bank’s successor, the receiver will not fund any more draws, including the one that was pending on the Appointment Date. With the flow of monthly construction loan disbursements cut off, the project soon grinds to a halt as unpaid builders and suppliers stop providing work and material and start recording mechanics lien claims against the project.

The borrower files administrative claims with the receiver for:

  • Damages caused by loan repudiation, and
  • A declaratory judgment, declaring that the note, the mortgage, and each guarantee is “of no further force or effect”

The receiver denies the borrower’s administrative claims and sends the borrower a notice of denial. That notice explains how the borrower may seek judicial review of the claim denial: file a lawsuit in federal court. And the notice also identifies the borrower’s deadline for filing that lawsuit.

The borrower files that lawsuit in the Middle District of Florida. About three months later, the receiver sells the loan to a joint venture limited liability company composed—60/40—of the FDIC and a private investor. Then the case goes to trial before Judge James S. Moody, Jr. Continue Reading

Construction Contract Requires Written Invoice Before Owner Must Pay Contractor: Kasinecz v. Duffy

Posted in Completion, Illinois, Mechanics Liens, States, Uncategorized

Chute removing demolition debris from high window out to dumpsterA panel of Illinois Appellate Court justices recently reminded contractors: if you want to get paid, comply with your contract. That reminder—along with some other interesting things to remember—comes in this decision: Kasinecz v. Duffy (PDF).

Kasinecz v. Duffy Backstory

Kasinecz v. Duffy starts as an owner and prime contractor contract to renovate a building. Their contract says that interim—monthly—payments are due from owner to contractor “upon invoicing.”

As often happens, as the renovation work progresses, things start to go badly, fostering suspicion, polarizing owner from contractor, and vice-versa. A principal polarizing force: the owner’s response to contractor payment requests—the owner stops paying. The owner contends that the contractor hasn’t submitted invoices as the contract requires, and so the owner isn’t obliged to to pay. Payments stop. The contractor gathers-up tools, equipment, and material, then abandons the work still in progress.

Contractor Claims

Departed and still unpaid, the Contractor sues the owner:

  • For breaching their contract

  • For quantum meruit (a contract substitute imposed by judicial equity)

  • To foreclose a mechanics lien securing the debts represented by the the breach of contract and quantum meruit claims

At a bench trial, Judge Bonnie Wheaton hears evidence and decides for the owner. She finds the contractor breached the contract first, by insisting on payment but not submitting the contractually mandated invoices. The contractor appeals. Continue Reading

Illinois House Votes to Pass HB3636 to Amend Mechanics Lien Act

Posted in Bills and Proposed Legislation, Illinois, Mechanics Liens

Illinois House FloorThis afternoon, the Illinois House voted to pass (PDF) HB3636, a bill to amend the Illinois Mechanics Lien Act and overturn the Illinois Supreme Court’s Cypress Creek v. LaSalle Bank (PDF) on the priority of construction mortgages vs. mechanics liens.

Already passed by the Illinois Senate, this bill now goes to Governor Quinn for him to consider—the last stop before it can become law.

Want more on what HB3636 does, why, and how it might affect you? Navigate to this video and press play.

 

FDIC vs. Construction Lenders Jury Verdict: IndyMac Bankers Liable for $169 Million

Posted in California, Construction Finance and Insolvency, FDIC & Bank Failures, States

Jurors awarded this $169M verdict (PDF) against three former IndyMac Bank executives for originating dubious construction and development loans. It happened last Friday in Los Angeles at the US District Court for the Central District of California.

$169M Verdict Against Former Indyac Bank Executives

In their original complaint (PDF), the FDIC alleged:

  • That the former bank executives were too permissive in underwriting and originating a host of development and construction loans
  • Their permissiveness was negligent
  • And their permissiveness breached the fiduciary duty of care each executive owed to the bank before it failed

The jurors agreed with the FDIC on the 21 loans that went to trial. The result: a verdict for the FDIC on every count—and, in one combination or another, against each former executive respectively—totaling about $169M in damages.

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Arbitration: Supreme Court Reaffirms It’s Mandatory For State Law Claims Under Federal Arbitration Act

Posted in Alternative Dispute Resolution, Arbitration, Oklahoma, States, Uncategorized

The US Supreme Court just issued another decision reaffirming that the Federal Arbitration Act compels state—as well as federal—courts to recognize and enforce contractual arbitration provisions, even when the focus of the litigants’ dispute is violation of state law. The decision: Nitro-Lift v. Eddie Lee.

 

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Video: Plain Language Explanation of Cypress Creek and House Bill 3636

Posted in Mechanics Liens

Do you get a headache trying to navigate through the Illinois Supreme Court’s Cypress Creek decision on mechanic lien vs. mortgage priority and Illinois House Bill 3636 to seeking to overturn that decision? Here’s relief.

The Illinois House Judiciary Committee held hearings on House Bill 3636 yesterday in Chicago. At hearings last spring the committee asked stakeholders and witnesses to return later and explain—simply—what the Cypress Creek decision does, what House Bill 3636 proposes to change, and the effect those changes would have. And because it’s impossible to simply explain using only words, the Illinois Bankers Association produced and presented this video at yesterday’s hearing…..  

Personal disclaimer: I worked on production of this video and presented in testimony before the committee yesterday.

 

Fraud Claim Killer: The Contract Non-Reliance Clause–It’s Not Just For Securities Anymore (Part 2)

Posted in Limitation of Liability and Exculpatory Clauses

Man Pointing Finger in Viewer's FaceIn Episode 1 of Fraud Claim Killer we talked about how the contractual non-reliance clause just became a lot more potent in the Schrager v. Bailey (PDF) decision. And at the end I promised to fill you in on:

  • Limits on non-reliance clauses
  • When judges are reluctant to enforce them
  • What makes them reluctant
  • Tips to make your non-reliance clause useful and enforceable

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Fraud Claim Killer: The Contract Non-Reliance Clause–It’s Not Just For Securities Anymore (Part 1)

Posted in Limitation of Liability and Exculpatory Clauses

Fraud Complaint Non-Reliance clauses: language in a contract where one (or more) of the parties affirms that in making their decision to enter into the contract, they’re relying exclusively on what’s written on the paper in the contract, and nothing else. Why have them? To cut off claims. Particularly the kind that involve a lot of “he said, she said” About what one side said they’d do, or wouldn’t do, but what they’re alleged to have said didn’t make it into the contract. It’s a situation that comes up most often in misrepresentation claims.

Judges have long enforced non-reliance clauses to nip misrepresentations claims in the bud and early in a case. But that’s usually been in securities fraud cases. Recently though, a panel of Illinois Appellate Court judges expanded non-reliance clause enforcement far beyond securities cases, in a way that suggests they’ll be just as potent in contracts used in the design and construction industries. The decision: Schrager v. Bailey (PDF), where the judges applied a non-reliance clause to summarily dismiss misrepresentation claims in a legal malpractice case.

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How to Stop a Bank Run

Posted in FDIC & Bank Failures

Laundromat that was formerly Bronx Branch of Bank of the United StatesThe recent trouble surrounding banks in Greece got NPR’s Planet Money team to produce piece on how to stop a bank run. There’s 3 traditional tools. To learn about them we have to go back to the bank failures in the Great Depression and before. The story starts at this laundromat, once the Bronx branch of the Bank of the United States, site of a 1930 bank and continues in this podcast…….