Constructive Fraud In Mechanics Lien: Why the Contractor Must Accurately State Its Completion of Wor
A recent Illinois case (Father & Sons Home Improvement II, Inc. v. Stuart, 2016 IL App (1st) 143666) starkly illustrates the negative ramifications of inflating a mechanics lien or of misstating the completion date of construction work. The contractor in that case not only had its lien defeated but it also had to pay over $40K in the property owner’s and lender’s attorneys’ fees.
The basis for the court’s ruling was the constructive fraud concept. The purpose of the Illinois mechanics lien act is to require someone with an interest in real property to pay for property improvements or benefits he encouraged by his conduct.
Section 7 of the Lien Act provides that no lien will be defeated because of an error or if it states an inflated amount unless it is shown that the erroneous lien amount was made with “intent to defraud.” 770 ILCS 60/7.
The intent to defraud requirement aims to protect the honest lien claimant who simply makes a mistake in computing his lien amount. However, where there is evidence a lien claimant knowingly filed a false lien (either in completion date or amount), the lien claim will be defeated.
Where there is no direct proof of a contractor’s intent to defraud, “constructive fraud” can negate a lien where there is an overstated lien amount or false completion date combined with additional evidence.
The additional evidence or “plus factor” can come in the form of a false affidavit signed by the lien claimant that falsely states the underlying completion date or the amount of the improvements furnished to the property.
In Father & Sons, based on the plaintiff’s multiple false statements – a fabricated completion date and an exaggerated lien amount – both in its mechanics lien and in its pleadings, the court found that the plaintiff committed constructive fraud and invalidated the lien.
The court also taxed the property owners’ attorneys’ fees to the losing contractor. Section 17 of the Lien Act provides that an owner can recover its attorneys’ fees where a contractor files a lien action “without just cause or right.” The Lien Act also specifies that only the owner – not any other party involved in the chain of contracts or other lienholders – can recover its attorneys’ fees. A lien claim giving rise to a fee award is one that is “not well grounded in fact and warranted by existing law or a good faith argument for the extension, modification or reversal of existing law.” 770 ILCS 60/17(d).
Based on the contractor’s clear case of constructive fraud in filing a lien with a false completion date and in a grossly excessive sum, the court ordered the contractor to pay the owner defendants’ attorneys’ fees.
This case serves as a cautionary tale for mechanics lien plaintiffs. A lien claimant must state an accurate completion date and properly state the monetary value of improvements. If the claimant realizes it has made a mistake, it should amend the lien. And even though an amended lien usually won’t bind third parties (e.g. lenders, other lienholders, etc.), it’s better to correct known lien errors than to risk a hefty fee award at case’s end.