Construction Law Today : Construction Lawyer & Attorney : Joshua Glazov : Design Build Contracts, Construction Bankruptcy

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:

• The lender's mortgage gets priority on the value of the property before improvement by designers and contractors
   
• The mechanics lien gets priority on value added to the property by improvements from designers and contractors
   
• Then, to the extent the lender pays off someone who holds a properly perfected mechanics lien, the lender succeeds to the priority of that mechanics lien claim too.  But that's only to the extent the lender pays off someone who holds a perfected mechanics lien.  The lender doesn't succeed, and doesn't get more senior priority, just because they pay money to a designer or builder who provided lienable work, but didn't perfect a mechanics lien for that money against the property

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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.

 

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Judges to owner: demanding that your contractor foreclose their mechanics lien within 30 days or lose it forever waives your right to require arbitration.

 

The Backstory of Illinois Concrete-I.C.I., Inc. v. Storefitters, Inc.

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.

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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.

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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.

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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.

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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:

• FDIC officials secretly reviewing bids to buy the targeted bank through a Purchase and Assumption Transaction
• The FDIC bank closure crew preparing to go in and take over each branch on a Friday evening after the last customer leaves
• Explaining what's happening to the bank's president and employees at each branch
• Taking an inventory of the bank's assets, books, and records
• Re-opening the bank Saturday morning under the new banner of the purchaser: MB Financial
• FDIC specialists greeting depositors and reassuring them that their money is safe

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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....

And if you're in Chicago at sunset, stop and gaze at how the sun and other edifices of the South Loop's skyline reflect off the the Legacy's mirror-like glass curtain wall. You might find yourself agreeing with me that it's one of the most captivating views in the city.

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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.

Well, Ashley Brandt over at the Illinois Construction Law Blog has done a great job analyzing two more recent decisions that go the other way:

• Artisan Design Build, Inc. v. Bilstrom from the Illinois 2nd District Appellate Court hearing an appeal from DuPage County
• K. Miller Construction Company, Inc. v. McGinnis from the Illinois 1st District Appellate Court hearing an appeal from Cook County

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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.   

This bill stalled in the spring.  But it's active again.  It's been assigned to the Senate's Assignments Committee and will then go for further action from there.

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In this past post I mentioned a bill (HB344) in the Illinois legislature to amend the Illinois Contractor Prompt Payment Act putting caps on retainage under private construction contract and subcontracts.  The legislative session has ended and the bill did not emerge from the Illinois's Senate Executive Committee and will not be enacted this spring.  We'll see if the bill returns later this year or in the next legislative session.  Stay tuned.

Interested in construction related bills that did pass the Illinois legislature this session?  Check out the Illinois Construction Law Blog's report on HB236 amending the Illinois Mechanics Lien Act.  Both houses passed the bill and it's now with Governor Quinn waiting for him to sign it.

If Governor Quinn signs this bill, prime contractors must give homeowners written notice within 10 days after recording a mechanics lien informing the homeowner that the contractor has recorded the lien.  Here's a legislative staff summary of  HB236:

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.

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The Illinois Senate is considering a bill to amend the Illinois Contractor Prompt Payment Act (the "Act") affecting when and how (1) owners pay prime contractors and (2) prime contractors pay their subcontractors.

If enacted, this bill (HB 0344) will:

• Limit retainage on private construction projects to a maximum of 5 percent of payments to prime contractors and subcontractors.
• Limit retainage after 50 percent completion to a maximum of 2.5 percent.

This bill has already passed in the Illinois House. The Senate Assignments Committee is now considering this bill.

If enacted into law, this bill will limit how much retainage owners and prime contractors may hold and when they may withhold it. This bill will also affect (1) construction lenders' relationships with their borrowers and (2) sureties' relationships with the contractors and subcontractors they bond.

If you would like to comment on this bill:

• Contact your Illinois State Senator and the members of the Senate Assignments Committee; and
• Contact the government affairs staff of interested trade associations like these:
• Associated General Contractors of Illinois
• The Builders Association
• Illinois Construction Industry Committee
• Building Owners and Managers Association International
• International Council of Shopping Centers

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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:

• An architect, other design professional, or one of their insurers.
• A prime contractor, subcontractor, one of their insurers, or a subcontractor default insurer.
• An Owner.

How Could This Case Affect You?

• If you're an Architect or other design professional. Those sections in your architects agreement imposing an early start on statutes of limitations will probably work. This is a big benefit because the Illinois statute of repose on design and construction defects is 10 years after the defective act or omission. But if those sections of your agreement work you turn the 4 year statute of limitations into a 4 year statute of repose. With only the most extraordinary exceptions, once 4 years passes after substantial completion, you're scott free. There's no compelling reason to think this would not apply to other design professionals like engineers. And because cases like this reduce the time that their insureds can be sued, this case benefits design professional errors and omissions liability insurers too.

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When an owner and a contractor enter into a construction contract using a form from the American Institute of Architects (the "AIA"), they usually agree to special terms that limit how the amount of time either side can pursue a claim against the other. I often wonder how courts react to these kinds of terms and whether they'll really enforce them.

One court said yes today. It was the Illinois First District Court of Appeals (an intermediate appellate court sitting in Chicago) in the case of Federal Insurance Company v. Konstant.

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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