Oct 25 2013

"Subcontract Price Defense" Limits the Recovery of Second Tier Subcontractors on Mechanics Liens where Owner Relied on General Contractor's Sworn Statement

“Subcontract Price Defense” Limits the Recovery of Second Tier Subcontractors on Mechanics Liens where Owner Relied on General Contractor’s Sworn Statement

 By Erik R. Nelson

In Gerdau Ameristeel US, Inc. v. Broeren Russo Construction, Inc., 2013 Ill. App. LEXIS 322 (4th Dist. May 23, 2013), two sub-subcontractors fully performed their work, timely mailed their 90-day notices of claim and timely recorded mechanics lien claims.  However, the sub-subcontractors were unable to fully recover on their mechanics lien claims because the owner and general contractor were protected by the “subcontract price defense.”

Campus Investors 309, LLC (“Owner”) entered into a contract with Broeren Russo Construction, Inc. (“General Contractor”) for the construction of a high-rise apartment tower in Champaign, Illinois.  General Contractor entered into a subcontract with Jacobsmeyer-Mauldin Construction Company (“Subcontractor”). Subcontractor, in turn, entered into second tier subcontractors with Ahal Contracting Co. (“Sub-Subcontractor A”) and Blager Concrete Company (“Sub-Subcontractor B”). 

Sub-Subcontractor A and Sub-Subcontractor B completed their work on August 22, 2008 and September 2, 2008, respectively.  In October 2008, Subcontractor submitted its waiver of lien to date and subcontractor’s affidavit to General Contractor indicating for the first time that Subcontractor owed substantially more to its second tier subcontractors, including Sub-Subcontractor A and Sub-Subcontractor B, than remained to be paid on the Subcontract.  Subcontractor listed $722,995.35 as owed to second tier subcontractors, but only $495,850 remained to be paid on the Subcontract.  Both Owner and General Contractor froze all payments relating to Subcontractor’s work pending a resolution. 

Sub-Subcontractor A and Sub-Subcontractor B timely served their 90-day notices of claim, timely recorded their mechanics lien claims and filed complaints to foreclose their mechanics lien claims.  The trial court entered judgment for Sub-Subcontractor A in the amount of $412,328.26 and for Sub-Subcontract B in the amount of $215,144.24 on their mechanics lien claims.  Presumably Subcontractor was judgment-proof by this time.  Because General Contractor owed an indemnity to Owner, General Contractor would need to pay an additional $131,622 to discharge the lien claims.

Owner and General Contractor appealed arguing that the trial court erred by not limiting Sub-Subcontractor A’s and Sub-Subcontractor B’s recovery to their pro rata share of the $495,850 amount of unpaid funds on the subcontract at the time they served their notices of lien.   The appellate court agreed. 

General Contractor had submitted sworn statements under Section 5 of the Mechanics Lien Act to Owner and a title company with each payment application.  General Contractor’s sworn statements listed Subcontractor and the subcontract balance but did not list sub-subcontractors. General Contractor and Owner were unaware that Subcontractor owed more to its second tier subcontractors than the amount remaining to be paid on the subcontract until Subcontractor submitted its subcontractor’s affidavit in October, 2008. 

The appellate court reasoned that Owner was entitled to rely on General Contractor’s sworn statements.  The appellate court explained that while one purpose of the Mechanics Lien Act is to allow subcontractors to protect their interests through mechanics liens, another purpose of the Mechanics Lien Act is to protect owners from the potential claims of unknown subcontractors.  Because Owner was entitled to rely on General Contractor’s sworn statements and should not be required to pay more than the amount for which Owner contracted, the court said the correct balance in this situation was for Sub-Subcontractor A’s and Sub-Subcontractor B’s recovery to be limited to their pro rata share in the $495,850 of unpaid subcontract funds.