Public Act 99-0178 (IL)

Substitution of a Bond for a Mechanics Lien

 

Effective Date: January 1, 2016

Statutes Amended: 770 ILCS 60/38.1 new

 

This new addition to the Mechanics Lien Act allows an applicant to file a petition to substitute a bond for the property subject to a lien claim with the clerk of the circuit court of the county in which the property against which the lien claim is asserted is located. 770 ILCS 60/38.1(c). The intent of the General Assembly in enacting this new addition is that the entry of an order under this Section substitutes an action on the bond for the actions the lien claimant would otherwise have under Sections 9, 17, 27 and 28 of this Act. 770 ILCS 60/38.1(l).

770 ILCS 60/38.1(a) defines the key terms, “applicant,” “eligible surety bond,” “lien claim,” “lien claimant,” and “prevailing party.”

In 770 ILCS 60/38.1(a)(1), “applicant” means an owner, other lien claimant, or other person having an interest in the property against which a lien claim under this Act is asserted or; an association representing owners organized under any statute or to which the Common Interest Community Association Act applies or; any person who may be liable for the payment of a lien claim, including an owner, former owner, association representing owners organized under any statute or to which the Common Interest Community Association Act applies, or the contractor or subcontractor.

770 ILCS 60/38.1(a)(2) defines an “eligible surety bond” to mean a surety bond that meets all of the following requirements:

  1. It specifically states that the principal and surety thereunder submit to the jurisdiction of the circuit court of the county where the property being improved is located and that a final non-appealable judgment or decree entered in a proceeding in favor of the lien claimant based on the lien claim that is the subject of an eligible surety bond shall constitute a judgment against the principal and surety of the bond for the amount found due to the lien claimant, including interest and attorney’s fees, limited as to the principal and surety to the full amount of the bond;
  2. It continues in effect until the complete satisfaction of the adjudicated amount due under the lien claim or the payment of the full amount of the bond or to a final determination, and the expiration of all appeal periods, that the lien claim is invalid, void, has been released by the lien claimant, or the time to enforce the lien claim has expired without the required action by the lien claimant;
  3. The bond should be in an amount equal to 175% of the amount of the lien claim;
  4. The surety company must have a certificate of authority from the Department of Insurance specifically authorizing the company to execute surety bonds;
  5. The surety company must also have a current financial strength rating of not less than A with no rating modifier, an outlook which is either positive or stable, and a financial size category or not less than IX, as rated by A.M. Best Company, Inc.; and
  6. If property affected by a mechanics lien is in a judicial circuit that has its own list of approved sureties, the bond shall be issued by a surety company specifically authorized to issue surety bonds for that circuit court by order or rule.

 

770 ILCS 60/38.1(a)(3) defines a “lien claim” to mean a claim, excluding interest and attorney’s fees, on account of which notice or amended notice of claim for lien under Section 24 of this Act has been served; a claim or amended claim for lien under Section 7 of this Act has been recorded; or a suit to enforce a lien under this act, including, but not limited to, an action under Section 9, 27, or 28 of this Act. Unless otherwise indicated, a “lien claim” is the lien claim to be affected by an eligible surety bond.

770 ILCS 60/38.1(a)(4) defines a “lien claimant” to mean the party whose lien claim is to be affected by an eligible surety bond.

770 ILCS 60/38.1(a)(5) defines the “prevailing party” as a lien claimant that is awarded a judgment equal to at least 75% of the amount of its lien claim, or the principal of the bond if the lien claimant is awarded a judgment equal to less than 25% of the amount of its lien claim; otherwise, no party is the prevailing party. For purposes of determining the prevailing party, the amount of the lien claim shall be reduced by any payments received by the lien claimant from any source before the entry of judgment or otherwise upon petition by the lien claimant, but only for good cause shown. If any party makes a payment to the lien claimant within 5 months of the filing of a complaint under this Section, the principal on the bond may petition the court for a reduction of the bond equal to the amount of the payment made.

770 ILCS 60/38.1(b) explains that this section applies to liens arising under Section 1 or 27 of this Act as well as to actions arising under Section 9, 27, or 28 of this Act.

770 ILCS 60/38.1(c) explains the procedure and requirements for the application to substitute a bond for the property. An applicant may file a petition to substitute a bond for the property subject to a lien claim with the clerk of the circuit court of the county in which the property against which the lien claim is asserted is located, or if there is a pending action to enforce a lien claim, an applicant may at any time prior to 5 months after the filing of a complaint or counterclaim by a mechanics lien claimant to enforce its mechanics lien claim. The petition must be verified and must include:

  1. The name and address of the applicant and the applicant’s attorney, if any;
  1. The name and address of the lien claimant;
  1. If there is a suit to enforce the lien claim, the name of the attorney of record for the lien claimant, or if no suit has been filed but a lien claim has been recorded by the lien claimant, the name of the preparer of the lien claim;
  1. The name and address of the owner of record of any real estate subject to the lien claim or the name and address of any condominium association or association to which the Common Interest Community Association Act applies representing owners of record if the association is an obligor under the bond;
  1. A description of the property subject to the lien claim and, if the property includes real estate, both a common and legal description of the real estate, including the address, if any;
  1. An attached copy of the lien claim which includes the date of its recording, where it was recorded, and the number under which it was recorded if there is no pending proceeding to enforce the lien claim;
  1. An attached copy of the proposed eligible surety bond;
  1. A certified copy of the surety’s certificate of authority from the Department of Insurance or other State agency charged with the duty to issue such a certification; and
  1. An undertaking by the applicant to replace the bond with another eligible surety bond in the event that the proposed eligible surety bond at any time ceases to be an eligible surety bond.

 

770 ILCS 60/38.1(d) defines the service requirements for a petition to substitute a bond for the property. The petitioner must personally serve or send via certified mail, return receipt requested, to each person whose name and address is stated in the petition and his or her attorney of record in a pending action on the lien claim, a copy of the petition attached together with the following notice:

PLEASE TAKE NOTICE that on ________ (date), the undersigned, ________, filed a petition to substitute a bond for property subject to a lien claim, a copy of which is attached to this notice.

 

PLEASE TAKE FURTHER NOTICE that if you fail to file an objection to the substitution of a bond for the lien claim with the clerk of the circuit court of ________ County under general number ________ or case number ________, within 30 days after you receive this notice or 33 days after this notice is mailed by certified mail, whichever date is earlier, you will have waived your right to object and an order will be entered substituting the security of the bond for the property securing the lien claim and discharging the property described in the petition as being subject to the lien, such as the real estate and the moneys or other considerations due or to become due from the owner to the contractor under the original contract giving rise to the lien claim.

 

770 ILCS 60/38.1(e) defines the ex parte procedures if there is no objection to a lien substitution petition. If no objection is filed within 30 days after all persons entitled to notice under subsection (d) of this Section have either received or waived notice, the court may issue an ex parte order: (1) substituting the eligible surety bond for the property securing the lien claim; and (2) substituting the lien claimant's right to recover on the bond for the lien claimant's causes of action that could be asserted by the lien claimant under Sections 9, 27, or 28 of this Act.

770 ILCS 60/38.1(f) defines the procedure if there is an objection to a lien substitution petition. If an objection is filed within 30 days of service of notice, the petitioner may move for a hearing as to the adequacy of the proposed eligible surety bond. The burden of proof is upon the petitioner to establish prima facie that the proposed surety bond is an eligible surety bond. If it is established prima facie that the bond is an eligible surety bond, the burden is on the objector to prove that a proposed surety bond is not an eligible surety bond.

If at the conclusion of the hearing the court finds that the proposed bond is in fact an eligible surety bond, it shall enter an order: (1) substituting the eligible surety bond for the property securing the lien claim; and (2) substituting the lien claimant's right to recover on the bond for the lien claimant's causes of action that could be asserted by the lien claimant under Sections 9, 27, or 28 of this Act.

770 ILCS 60/38.1(g) states that if the court allows an eligible surety bond to be substituted for the property, the petitioner must: (1) send copies of the order to the lien claimant and all persons who were to receive copies of the petition and, if there is a pending proceeding to enforce the lien claim, to all parties who have appeared in the proceeding; and (2) record a copy of the order, together with an executed copy of the approved eligible surety bond, with the recorder of deeds of any county where the property is located.

770 ILCS 60/38.1(h) states that if the eligible surety bond is approved either before or after any suit is brought to enforce the lien claim, the action on the bond shall be in equity against the principal and surety of the bond. If the eligible surety bond is approved and a proceeding to enforce the lien claim is pending, the bond principals and sureties shall, by approval of the bond, ipso facto become parties to the proceeding. All other parties to the lien claim count or counts may be dismissed. An action under this Section does not preclude a claimant from bringing any other actions that do not arise under this Act.

770 ILCS 60/38.1(i) sets out the criteria for the awarding of attorney fees based on which party is the “prevailing party.” Subject to the defenses allowable under subsection of this Section, the principal and surety of a surety bond shall be jointly and severally liable to the lien claimant for the amount that the lien claimant would have been entitled to recover under this Act if no surety bond had been furnished, subject to the limitation of liability of the surety to the face amount of the bond. The prevailing party in an action brought under this Section shall be awarded its reasonable attorney's fees, but the attorney's fees for a lien claimant that is a prevailing party shall be limited to the amount remaining on the bond after the payment of the claim and interest, and the attorney's fees awarded to a bond principal shall be limited to 50% of the amount of the lien claim. Judgment in favor of the lien claimant and against the principal and surety shall be entered for the amount of their liability to the lien claimant.

770 ILCS 60/38.1(j) defines the defenses available to the principal and surety of the bond. The principal and surety of the bond may assert only those defenses that could have been asserted against the lien claim by the principal of the eligible surety bond or the owner of record of the real estate at the time the contractor's contract under which the lien claimant is claiming was let as if no surety bond had been issued.

770 ILCS 60/38.1(k) states that liability of the principal and surety on a bond that has ceased to be an eligible surety bond shall continue until a court order is entered replacing the bond with another eligible surety bond. Even if a bond ceases to be an eligible surety bond, the original bond remains in effect as substitute security until it is replaced.

Bill Number: 
HB 2635
By: ATG Underwriting Department | Posted on: Mon, 04/18/2016 - 3:42pm