Limitations on the Rights of Fringe Benefit Funds to Collect in a Lien Foreclosure Action
By Charles B. Lewis and Adam L. Gill
Charles B. Lewis
Adam L. Gill
A recent decision by the Circuit Court of Cook County clarifies a Fringe Benefits Funds’ standing to record and foreclose upon a mechanics lien against property for work performed by union members. The Chicago District Council of Carpenters, et al., v. Ten East Delaware, LLC, et al. (10 CH 46222) litigation arose from the failure of a union subcontractor, Millennium Concrete Construction, LLC (“Subcontractor”), to make fringe benefit contributions to the Chicago District Council of Carpenters and its various benefit trust funds (the “Funds”) for the benefit of Subcontractor’s union employees, during the construction of a 36-story, 115-unit luxury condominium building in Chicago (“Project”). The Project was developed by the Prime Group and designed by well-known architect, Lucian Lagrange. The general contractor was Evans Construction Services (10 East Delaware Project) LLC (“General Contractor”), which was not a signatory to any Collective Bargaining Agreement and did not provide payment and performance bonds for the Project.
Following trial, the Court held that the Funds had no independent right of recovery. In other words, the Funds can recover for the benefit of its union members and this right arises only from the Funds’ obligations to their members. Therefore, the Funds were required to prove that each member for whom recovery was sought worked at the Project within 90 days of receipt by the Owner, Ten East Delaware, LLC (“Owner”), of notice (“Notice”) pursuant to Section 24 of the Mechanics Lien Act, 770 ILCS 60/24. The Funds sought to recover on behalf of 43 union members but the Court found that the evidence established that only 10 had worked on the Project within 90 days of the service of the Notice. However, the Court further held that the Funds’ recovery was limited to amounts owed to the Subcontractor on the date that the Notice was served.
On October 5, 2007, the Owner entered into a construction contract with the General Contractor for general construction services for the Project. The General Contractor then entered into a subcontract with the Subcontractor, whereby the Subcontractor was to provide services, material and labor to complete the concrete superstructure for the Project. Subcontractor employed union laborers and carpenters during the course of the Project between July and October, 2008.
At some unidentified time in July, 2008, Subcontractor ceased making its required fringe benefit contribution payments on behalf of all of its employees, including the carpenters employed at the Project. The Funds knew of Subcontractor’s delinquency but failed to formally notify the Owner or General Contractor of the alleged delinquent payments until January 19, 2009.
On September 11, 2008, Subcontractor submitted its monthly Application for Payment to the General Contractor. On or about September 16, 2008, the General Contractor submitted a notarized “Sworn Statement for Contractor and Subcontractor” to the Owner, which incorporated Subcontractor’s Application for Payment. On three separate occasions in October (October 9, October 15 and October 22, 2008), Subcontractor provided signed and notarized Waivers of Lien to Date and Contractor’s Affidavits to the construction escrowee, Chicago Title, in exchange for payment. The Subcontractor’s Affidavits did not disclose that fringe benefit payments for the Subcontractor’s employees were not paid to the Funds.
In October, 2008, Chicago Title paid Subcontractor $380,000 in reliance on the Subcontractor’s Waivers of Lien to Date and Subcontractor’s Affidavits. On October 30, 2008, Subcontractor ceased providing construction services, material or labor to the Project. On November 19, 2008, the General Contractor terminated Subcontractor’s subcontract, after providing proper notice. On January 19, 2009, the Funds served their Section 24 Notice on the Owner, asserting that the Funds were owed $919,319.78, an amount later reduced by the Funds to $445,517.25.
Issues at Trial
In order to prevail, the Funds needed to prove (1) that their Notice of Intention to File Mechanics’ Lien was properly served within 90 days of the date of last work for each of the 43 individual carpenters for whom recovery they sought, (2) the actual hours worked by each of the 43 individual carpenters on the Project, and (3) the amount, if any, that was due and owing to Subcontractor when the Funds served their Notice on January 19, 2009. With respect to the first issue, the Funds argued that they should be considered a subcontractor. Therefore, they only needed to prove that at least one carpenter had performed work on or after October 21, 2008, 90 days before the Notice was served on Owner on January 19, 2009.
With respect to the first issue, the Funds argued that they should be considered a subcontractor. Therefore, they only needed to prove that at least one carpenter had performed work on or after October 21, 2008, 90 days before the Notice was served on Owner on January 19, 2009.In response, the Owner (both the Owner and General Contractor made virtually the same arguments throughout trial) argued that the Funds should not be considered a subcontractor under the Mechanics Lien Act and the Funds could not establish that each of the 43 individual carpenters was working at the Project on or after October 21, 2008.
As to the second issue, the Funds argued that they could prove damages and the number of hours worked based on the testimony of Subcontractor’s owner and subcontractor’s monthly contribution reports, which were submitted to the Funds. The Owner argued that the Funds would not be able to prove the hours worked for each carpenter as the Funds admitted that they did not have timecards for each carpenter. Similarly, Subcontractor did not maintain daily logs or reports that established the number of hours each carpenter worked at the Project. As to the contribution reports, the Owner argued that these reports reflected the hours worked by carpenters on multiple projects and were unreliable because the reports did not identify how many hours were worked at the Project in this litigation. Because the Funds had no independent right to recover under the Mechanics Lien Act, they needed to establish an accurate record of the hours each carpenter worked on the Project during the period that Subcontractor allegedly failed to make contribution payments, July 2008 through October 2008.
As to the third issue, the Funds argued that they were entitled to recover, pursuant to Section 21 of the Mechanics Lien Act, because when it served the Notice on January 15, 2009 there was an outstanding balance on the contract between the Owner and General Contractor. The Owner would owe these amounts to the General Contractor for work to be performed, and the Owner paid these amounts after it received the Notice. The Funds argued that these payments were wrongful pursuant to Section 27. In response, the Owner argued that it was entitled to rely on the General Contractor’s Section 5 sworn statements and the Subcontractor’s statements provided under Section 22, which were submitted in October 2008. (See 770 ILCS 60/5 and 60/22.) Subcontractor’s sworn statements did not disclose that any amounts were due or to become due to the individual carpenters or Funds. The Owner argued that it and Chicago Title reasonably believed that there were no payments “due or to become due to any person” or the Funds at the time that Subcontractor submitted its sworn statements. Chicago Title paid the Subcontractor directly in reliance on Subcontractor’s sworn statements. Therefore, Subcontractor was owed nothing for its service, material or labor it provided to the Project, having failed to advise the Owner of any amounts due.
Finally, the Funds alternatively argued that the Owner had actual knowledge of the Funds’ lien claim when the Subcontractor received payments in October, 2008. In response, the Owner argued that there was no evidence to support this theory and therefore the Funds’ recovery was limited to the amounts due and owing to Subcontractor when the Notice was served on January 19, 2009.
The Court’s Findings and Ruling
Judge Curcio issued a fourteen-page written ruling and found in favor of the defendants (the Owner and General Contractor) and against the Funds on all issues. During the trial, the Funds asserted that they had an independent right of recovery under the Mechanics Lien Act because the union provided the carpentry labor to the Project. As noted above, the Funds argued that they should be recognized as a subcontractor and need not prove the hours that each union member worked on the Project. The Court held that the Funds right to recover arises from Section 21, which defines every laborer as a subcontractor. (See 770 ILCS 60/21.) The Court found that the Funds cannot be considered a subcontractor but are entitled to enforce the rights of their members and have the exclusive right to collect contributions on behalf of their members. Therefore, the Funds must establish the date on which every union carpenter last provided work to the Project, and the Funds could only recover for carpenters that provided labor on or after October 21, 2008, ninety (90) days after when Notice was received by the Owner.
Regarding the Funds’ witnesses, the Court found that the testimony of the individual owner of Subcontractor was unreliable because he had limited knowledge of the individual carpenters who actually worked on the Project. In fact, he could not name a carpenter who worked on the Project during the relevant time period, he could not identify the other projects at which individual carpenters worked, and he could not testify regarding Subcontractor’s payroll records or the reports submitted to the Funds. Based on this testimony, the Court could not determine when carpenters actually worked on the Project and if Subcontractor owed the Funds for delinquent benefits contributions related specifically to the Project.
The Funds offered their investigation file, which the Court accepted into evidence. However, this file was incomplete. The Funds typically provide employers, including Subcontractor, with forms to indicate the number of workers and fringe benefits contributions to be paid. However, these forms do not request that the employers identify specific projects on which the union members worked or the time when each member worked at that project. The Court found that the Funds’ investigation file provided support that 10 carpenters worked on the Project after October 21, 2008, and not the 43 for whom the Funds sought recovery. These 10 carpenters worked approximately 1,700 hours. Therefore, the Court determined that the Funds had proven that they were entitled to a lien in the amount of $25,946.10. However, the Funds’ ability to recover this amount from the Owner was limited to the amount due and owing to Subcontractor at the time that the Owner received the Funds’ Notice on January 19, 2009.
With respect to the amounts due and owing, the Funds made two arguments. First, the Funds were entitled to recover because amounts were due and owing to the General Contractor at the time that the Notice was served. In response, the Owner argued that since Subcontractor was paid directly, the proper analysis was whether amounts were due to Subcontractor at the time of Notice.
The Court first addressed whether amounts were due and owing to Subcontractor when the Notice was served and found that no funds were due. Subcontractor had ceased providing labor to the Project in October, 2008, and pursuant to the terms of the subcontract, the General Contractor properly terminated Subcontractor. The General Contractor then retained a replacement subcontractor and incurred costs greater than Subcontractor’s contract balance to complete the Subcontractor’s work. As a result, when the Owner received the Funds’ Notice, the subcontract balance had been properly reduced to zero on the General Contractor’s sworn statement. Based on the holding in Season Comfort Corp. v. Ben A. Borenstein Co. (281 Ill. App. 3d 7 648 (1st Dist. 1995)), the trial Court ruled that the Funds’ recovery was limited to the amounts that the General Contractor owed to Subcontractor and not amounts the Owner owed or would owe to the General Contractor. Therefore, the Funds were not entitled to recover on their lien for $25,946.10.
Finally, the Funds argued that the Owner had actual knowledge of the Funds’ claim as of October, 2008. In its written opinion, the Court quickly dispatched the Funds’ argument in this respect. The Court found that none of the documents submitted by Subcontractor for payment (the Subcontractor’s Sworn Statements and Affidavits) (1) identified individual carpenters employed at the Project or (2) disclosed that the Funds were owed for past due fringe benefit contributions. The Court specifically found that the Notice, served on January 19, 2009, was the first actual notice that the Owner had of the Funds’ claim. Finally, the Court relied on the holding in Gerdau Ameristeel US, Inc. v. Broren Russo Construction, Inc. (2013 IL App (4th) 120547 (4th Dist., May 23, 2013)) for the proposition that “the mere presence of a workman on a job does not constitute notice to the owner on which a mechanic’s lien may be based.” The Funds presented no evidence that the Owner had actual knowledge of the Funds’ claim and the Funds’ claim in this respect was denied.
Important Takeaways For Owners and General Contractors
The Funds presented some unique legal arguments (e.g. that the union is a subcontractor and that the Owner had actual knowledge of the delinquency), for which there is little case law on either side, and the Court’s ruling was not a foregone conclusion. This case and ruling raise several issues that an owner and general contractor must keep in mind. First, when a general contractor terminates a subcontractor, the general contractor needs to assess whether the subcontract balance should be reduced and by what amount. If a deductive Change Order is justified, the general contractor should issue the change and reduce the contract balance as soon as possible after termination. In the case detailed in this Article, if the general contractor did not retain a replacement subcontractor or failed to issue a deductive Change Order before the Notice was served, the Owner may have been liable for an amount that the Funds’ could prove. Second, the Contractor’s Sworn Statement and Affidavit remain extremely important documents to protect the owner. Owners must insist on these documents with every Application for Payment and must review the contents to ensure that subcontractors are paid in order to protect the owners’ interest.
This case did not address whether an owner’s actual knowledge of a delinquency would open it to liability. The Court in this case specifically found that the Owner did not have actual knowledge before it was served with the Notice. Illinois case law and the Mechanics Lien Act support a position that actual knowledge is irrelevant, if it was not provided in a Section 24 Notice. However, subcontractors can make reasonable arguments that an owner’s payments made after it received actual knowledge were “wrongful”, pursuant to Section 27. As a result, an owner should not be willfully blind if it suspects that a subcontractor has unlisted suppliers or has paid its employees. Your authors recommend that practitioners read Judge Curcio’s cogent and persuasive Memorandum Opinion and Order and counsel their clients accordingly.
This article originally appeared in the September 2016 Illinois State Bar Association Building Knowledge newsletter. Reprinted with permission.