Welcome to the second article in a three-part series on Illinois surety bonds, compliments of guest author Danielle Rodabaugh. Danielle is a principal for SuretyBonds.com and is discussing the three basic types of construction bonds:
● Performance bonds
● Payment bonds
Today we will explore performance bonds.
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There are new developments in the saga of Krahl Construction. Recently, one of the owners Krahl provided work to sued what is now Krahl's estate under the company's assignment for the benefit of creditors. The owner's complaint (PDF) alleges that:
1. Krahl over-billed the owner by more than $3M to build a data center on the west side of Chicago
2. Krahl used white out to alter subcontractors' invoices before submitting them to the owner for payment under an AIA A111+ A201 cost-plus with guaranteed maximum price contract
But the most eye-catching allegation: this owner, suspecting that Krahl over-billed them, tipped off law enforcement. Perhaps that set things in motion for the dramatic search of Krahl's offices, seizure of the company's records, and closure a few days later back in January 2010?
Back in Mechanics Lien Priority: Contractor vs. Lender - Part 3 we talked about step 1 in the workflow of deciding priority, and dividing foreclosure sale money, between (a) a Lender's mortgage and (b) the mechanics liens of two Perfected Contractors. Initially, priority goes to whoever got there first. In LaSalle Bank, N.A. v. Cypress Creek 1, LP (PDF), the Lender initially won priority because they recorded their mortgage before either Perfected Contractor (a) contracted with the Owner or (b) started work on the project.
Now for step 2: changing priority based on "enhancement" to the project. Specifically, giving partial priority to the Perfected Contractors because their work added value to the project that, presumably, helped fetch a higher price at the foreclosure sale.
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Back in Mechanics Lien Priority: Contractor vs. Lender - Part 2 we talked about the backstory of the LaSalle Bank, N.A. v. Cypress Creek 1, LP (PDF) decision: who was involved, what started the dispute, what was at stake, and how the first judge hearing the case decided. Now it's time to talk about the appeals court judges' decision and why they decided the way they did. This won't be easy or brief. So we'll break it into a series of several posts.
The Perfected Contractors first asked the appeals court judges to grant each of their perfected mechanics liens full priority over the Lender's mortgage. Requested result: the Perfected Contractors get paid in full from the foreclosure sale money before the Lender gets a penny. Naturally, the Lender opposed this.
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Back in Mechanics Lien Priority: Contractor vs. Lender - Part 1 we talked about the basics of priority and why it’s important. At the end I promised to fill you in on the backstory of the Cypress Creek decision. Here it is.
It started when a developer (we'll refer to them as the "Owner") borrowed money from LaSalle Bank (the "Lender") to design and build a senior housing project outside of Chicago. To secure payment of principal, interest, and fees on the loan, the Owner gave to the lender, and the lender recorded, a mortgage against the project.
Later, the Owner entered into contracts with Eagle Concrete and the Edon Construction Company (together, the "Perfected Contractors"). Under these contracts, Eagle provided concrete and Edon provided carpentry. Each then provided work on the project under their respective contracts.
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When both a mortgage lender and a mechanics lien holder foreclose against the same piece of property, who gets priority to the money paid at the foreclosure sale? One recent Illinois judicial decision, LaSalle Bank, N.A. v. Cypress Creek 1, LP, says they both do, depending on what part of the property you're talking about:
Focusing locally today on my own hometown, this Crain's broadcast offers a sobering forecast for the Chicagoland residential real estate and construction markets. Do you agree? Watch the video, vote, and elaborate by posting a comment using the link below below.
Judges to owner: demanding that your contractor foreclose their mechanics lien within 30 days or lose it forever waives your right to require arbitration.
Unfortunately, the Illinois Appellate Court (Second District) decision in Illinois Concrete-I.C.I., Inc. v. Storefitters, Inc. (PDF) doesn't give us too many background details. Here's what we can gather: an owner entered into a contract with a contractor to provide some type of construction work for the owner. The contract had an arbitration clause, presumably one that says that if the owner and the contractor get into a dispute, they must submit the dispute to binding arbitration instead of resorting to the courts.
The owner and the contractor got into a dispute. The owner didn't pay. So the contractor recorded a lien against the property they'd worked on.
Under Section 34 of the Illinois Mechanics Lien Act (PDF) an owner (and others too) can serve a written demand on anyone holding a mechanics lien against their property (a "mechanics lien holder") demanding that the mechanics lien holder sue to foreclose their mechanics lien within 30 days (a "Section 34 demand"). And if the mechanics lien claimant doesn't go to the clerk of the court and file their foreclosure complaint before that 30 days expires, the mechanics lien claimant forfeits their lien.
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The latest Krahl Construction developments: Fifth Third Bank and Travelers Casualty and Surety Company of America each sued Krahl Construction's President in federal court last week.
Fifth Third Bank had loaned money to Krahl before Krahl closed for business earlier this month. Fifth Third's Complaint (PDF) alleges that Krahl's President personally guaranteed repayment of the loan but hasn't paid as required under the guaranty.
Travelers served as Krahl's surety providing payment and performance bonds on many of Krahl's projects. With Krahl's closing and assigning their assets for the benefit of creditors, odds are some owners are going make claims under the performance bonds and some subcontractors are going to make claims under the payment bonds. Travelers's Complaint (PDF) alleges that under an indemnity agreement between Krahl's President and Travelers, the President must reimburse Travelers for money that Travelers pays out to owners and subcontractors under the bonds. Travelers claims that Krahl's President hasn't paid.
And to try an ensure that Krahl's President's assets are available to pay future liability under the indemnity agreement, Travelers also asks the judge to enjoin the President from transferring, or encumbering, any of his money or other assets.
Crain's Eddie Baeb reported this morning that the Liquidation Process Starts For Krahl Construction.
Yesterday, the trustee of Krahl's assets, Howard Samuels of Rally Capital Services, LLC, sent this letter to Krahl's creditors announcing his appointment, providing a preliminary introduction to the assignment for the benefit of creditors process (frequently called an "ABC"), and asking Krahl's creditors to submit affidavits identifying their claims against Krahl and the amount of money Krahl owes them. Mr. Samuels's letter also gives a brief breakdown of Krahl's assets and liabilities. Krahl has significant assets, though most are intangible, like Krahl's accounts receivables for work they've provided. For more on recent Krahl Construction developments, go to last week's post announcing Krahl's ABC.
Serving search warrants earlier this month in a raid on Krahl Construction's headquarters, the FBI seized the Chicago company's computers and files. Several days later, company executives announced the company would shut its doors.
Then today Krahl set up a trust and assigned its assets into the trust for the benefit of its creditors. Howard Samuels of Rally Capital Services LLC will serve as assignee for the benefit of Krahl's creditors to oversee collection of debts owed to Krahl and payment of debts Krahl owes to others in what is akin to a private bankruptcy to wind up the company's affairs. More information is available in the Trust Agreement and Assignment available here.
This past week the Chicago Tribune reported that resuming work on the Chicago Spire is one step closers. The Spire is a 150-story mixed use tower in Chicago designed by Spanish architect Santiago Calatrava that, when complete, will be the tallest building in North America. The Great Recession forced the Spire's developer, Dublin, Ireland based Shelbourne Development Ltd., to temporarily suspend work on the project.
But Shelbourne recently announced new tentative financing in the form of bridge and mezzanine loans. This financing will become active if Shelbourne can secure about $170M more that's necessary to restart work.
Additional financing candidates include Union Labor Life Insurance Co. and two trusts of the AFL-CIO union pension funds. They could each benefit directly from on return on investments in the project, and indirectly from mobilizing their members to erect the remainder of the project too.
Shelbourne also reports that about 30% of the Spire's 1,200 residential condominium units are already under contract for sale.
This past spring 60 Minutes broadcast this segment on the failure of Heritage Community Bank in Chicago. Scroll down and watch CBS correspondent Scott Pelley take you through:
YoChicago's Joseph Askins reports in Construction Checkup: Legacy at Millennium Park on construction progress at Mesa Development's Chicago residential condominium project known The Legacy at Millennium Park.
I confess I'm biased. I worked on contracts for this project with architect Solomon Cordwell Buenz and prime contractor Walsh Construction. Regardless of my own partisanship, or problems that may crop up in the Legacy's design or construction, this building adds a superlative aesthetic complement to the Chicago skyline. Go see the photos and see for yourself. Better yet, watch this slideshow of construction through the end of September 2009....
There's been a lot of recent decisions by judges applying the Illinois Home Repair and Remodeling Act (the "Act"). The Act is that statute requiring contractors working on people's homes to: (a) have a written contract, (b) include certain terms in the contract (e.g. price, insurance, dispute resolution), (c) give the homeowners a special brochure, and (d) get a receipt for giving the brochure. The judges in one case, Smith v. Bogard, held that homeowners needn't pay a contractor who fails to comply with the Act.
In this past post and this past post too I mentioned a bill (HB344) in the Illinois General Assembly to amend the Illinois Contractor Prompt Payment Act
putting caps on retainage under private construction contract and
subcontracts. Amends the Mechanics Lien Act to provide that:
- A contractor for improvements of an owner-occupied single-family residence must give the owner written notice within 10 days after recording a lien against any property of the owner.
- The notice is served when it is sent or personally delivered.
- If timely notice is not given and, as a result, the owner has suffered damages before notice is given, the lien is extinguished to the extent of the damages.
- The mere recording of the lien claim is not considered damages. These changes do not apply to subcontractors and only apply to contracts entered into after the effective date.
In yesterday's post we talked about the recent case of Federal Insurance Company v. Konstant. That's the recent Illinois case upholding the section of an American Institute of Architects (the "AIA") architects agreement that imposes an early start to the statute of limitations on owner design defect claims. Today we'll talk about how that case could affect you if you're:
How Could This Case Affect You?
The Backstory
Thomas and Anita Croghan (the "homeowners") contracted with a Konstant Architecture Planning, Inc. (the "architect") to design a home in the Chicago suburb of Winnetka, Illinois using a standard form architects agreement from the AIA. Section 9.3 of that agreement said:
Causes of action between the parties to this Agreement pertaining to acts or failures to act shall be deemed to have accrued and the applicable statutes of limitations shall commence to run not later than either the date of Substantial Completion, or the date of issuance of the final Certificate for Payment for acts or failures to act occurring after Substantial Completion.
The contractor substantially completed the home in 1997. But in 2002 the home suffered water and mold damage. The homeowners submitted insurance claims for the damage to their insurer, Federal Insurance Company (the "insurer"). The insurer paid the claims and was subrogated to the homeowners' claims against the architect. Then in September of 2005 the insurer sued the architect for breach of the architects agreement seeking damages for the cost to repair the water and mold damage.
The architect asked the trial court to dismiss the the lawsuit because the four year statute of limitations expired before the insurer filed the lawsuit. The trial court: (1) applied a 4 year statute of limitations, (2) decided that based on Section 9.3 of the architects agreement, those 4 years started in 1997 and expired before the insurer filed the lawsuit in 2005, and (3) dismissed the lawsuit. The insurer appealed.
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