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The Trusted Adviser

November 2010 | Volume 3 • Number 10

Real Estate and Title Insurance News

Mechanics' Liens

 

 

by Frederic Deraiche, ATG Law Clerk

Since its passage, the Home Repair and Remodeling Act (HRRA), 815 ILCS 513/1et seq., has caused a significant headache for the courts of Illinois due to certain ambiguities in its language. The HRRA provides that contractors performing work on residential homes must prepare written contracts and provide homeowners with a consumer rights brochure if the work is valued at more than $1000. Initially, the Act only provided that any violations are "unlawful." This led to a series of cases attempting to define the effect of this language.

In May 2010, the Illinois General Assembly passed a bill amending Section 30 of the HRRA, striking the "unlawful" language and replacing it with language creating a private cause of action for violations that directly lead to damages for the homeowner. How does this affect the legal landscape surrounding the HRRA? Does this change solve the problems associated with adjudication of the Act?

Monetary Recovery

Contract Recovery
The courts of Illinois disagreed as to whether a violation of the HRRA would be an immediate bar to any breach of contract recovery. A great deal of the analysis on this point directly relied on the "unlawful" language in the Act — a contract that is unlawful is unenforceable — so the courts often centered their analysis on this point.

The Second District Appellate Court had concluded that recovery under the contract was possible. The First and Fourth District Appellate Courts disagreed and found that recovery under the contract is not possible if the Act has been violated.

The first case on the issue of contract recovery under the HRRA isSmith v Bogard, out of the Fourth District of the Illinois Appellate Court. 879 NE2d 543 (4th D, 2008). InSmith, the contractor had no written contract and did not provide the homeowners with a brochure before performing the work. He filed a mechanic's lien for $10,515.85 for unpaid labor and materials.Id.at 545. The court reasoned that the violations of the HRRA were sufficient to prevent recovery, judging any remedy to the contractor to be against public policy by rewarding contractor wrong-doing.Id.at 547-48. The court concluded that the only way to protect the public from unscrupulous contractors was to prevent recovery, both legal and equitable, to any contractor who did not follow the statute to the letter.Id.

InArtisan Design Build, Inc v Bilstrom, 922 NE2d 361 (2nd D, Sept 2009), the Second District concluded that "to hold that a failure [to follow the Act] allows the consumer to defeat all legal and equitable claims by the contractor would lead to mischief the legislature could not have intended." However, the court showed itself reluctant to extend its ruling.

InBilstrom, a contractor entered into a written contract with a homeowner.Id.at 363. The contractor did not provide the homeowner with the required pamphlet.Id.The homeowner made some payments and eventually stopped, locking out the contractor and hiring another contractor to finish the work.Id.When the contractor recorded and then attempted to foreclose a mechanic's lien and recover under a breach of contract claim, the homeowner alleged that this was barred by the contractor's violation of the Act.Id.

TheBilstromcourt found that the failure to provide the brochure alone was not sufficient to prevent remedy for the contractor.Id.at 371. The court's main reasoning was that there was no language specific to the brochure requirement that made the failure to provide a brochure directly unlawful.Id.at 370. By contrast, the statutory provision requiring written contracts does include such language.Id.The court used this discrepancy to determine that the intended consequences for failure to provide the brochure did not include voiding the contract as an illegal agreement.Id.Furthermore, the court was deliberate in differentiating this case from theSmithcase, noting that the contractor's violation in that case, which included failing to provide a written contract, and the resulting bar on recovery theSmithcourt instituted were consistent with its decisions.Id.at 371. The court inBilstromfurther explicitly stated that it refused to follow any reading ofSmiththat barred all recovery for fear of illogical results and abuse by homeowners.Id.

In near simultaneous decision-making with theBilstromcourt, the First District also handed down an opinion on this issue in the early fall of 2009. InK Miller Construction Company, Inc v McGinnis, the 1st District of the Appellate Court issued a decision that similarly rejectedSmith, offering a different reasoning and a different solution to the HRRA problem than theBilstromdecision did. 913 NE2d 1147 (1st D, August 2009). InK Miller, the homeowners contacted a contractor and hired him to perform work on their home, ultimately valued at more than half a million dollars.Id.at 1150. The contractor filed claims for a mechanic's lien, as well as recovery on breach of contract andquantum meruit.Id.The court concluded that the lack of written contract was, by the clear language of the statute, a complete and total bar on a breach of contract recovery, but chose to allowquantum meruitrecovery.Id.at 1152.

Quantum Meruit Recovery
The court inK Millerwas uncomfortable letting the homeowner go scot free with half a million dollars' worth of free labor and materials.Id.at 1153. In a line of reasoning similar to that used inBilstrom, the First District decided thatquantum meruitrecovery could be allowed, so as to avoid extreme windfalls to homeowners.Id.at 1157. Particularly, the court feared that a sophisticated homeowner could in fact purposely trick an unsuspecting contractor, so as to not have to pay for the contractor's services at all.Id.This is no doubt a result of the fact that the facts ofK Millerwere much more extreme than those of the cases faced by the other courts. The amount inK Millerwas extremely large for a home remodeling - over $500,000 - and the homeowner in question was a real estate lawyer who was, or should have been, well aware of the HRRA requirements and did not need any brochures to be educated on his rights.Id.

InSmith, the court refused to allowquantum meruitrecovery as a matter of public policy. 879 NE2d at 548. The Fourth District determined, as it had with contract recovery, thatquantum meruitwould be against public policy.Id.The Fourth District opined that the legislature had intended to severely punish contractors who failed to follow the consumer protection measures of the Act.Id.The Fourth District went so far as to imply that mere violation of the Act - regardless of the remedial provision within it - could be sufficient to prevent recovery under theories of both contract andquantum meruitrecovery.Id.

The New Section 30

Some of the courts barred recovery on the basis of the word unlawful. Decisions in cases such as K. Miller are now undoubtedly overturned, given the removal of the offending word from the statute.Smith v Bogard, however, did not specifically rely on the "unlawful" language but instead read a general bar on recovery from any violation of the statute for reasons of public policy. 879 NE2d at 548.

Smithdid not directly rely on the "unlawful" language.Id.Instead, it relied on legislative intent and public policy as grounds for barring all recovery.Id.This appears to mean that, for the time being, the case remains valid and applicable in the Fourth District. However, given the court's finding that the legislature intent to bar recovery,Id., the change in statutory language would likely cause the court to reconsider its approach in a case governed by the new Section 30. Despite this, there is still no guarantee that this will be the case, given that the court never relied on the altered language to begin with and may continue to believe that public policy requires any violation of the Act to bar recovery. It is also important to note that other decisions, including ones that relied on "unlawful" to bar contract recovery, have already been extremely critical of theSmithdecision. SeeK Miller, 913 NE2d at 1157.

Viability of Mechanic's Liens

The question of whether mechanic's liens where there is a violation of the HRRA remain valid has also been studied at length by the courts.

The court inK Millerdetermined that lack of a valid contract precluded the existence of a mechanic's lien, which requires a contract of some form.Id.Similarly,Roberts v Adkinsconcluded that the validity of a lien is dependent on the validity of the underlying contract. 397 Ill App 3d 858, 921 NE2d 802, 808-09 (3rd D, 2010).Robertsinvalidated mechanic's liens in cases of violations of the HRRA because of the invalidity of any resulting contracts.Id.There are two reasons why this decision may still be good law. For one, the court found that the Act required written contracts in cases of home repair and remodeling.Id.Second, the court relied heavily onSmith, which is arguably still good law.Id.Therefore, it is possible that this decision still apply in the wake of the amendment.

However, the court inFandel v Allen, also of the Third District, concluded that the unlawful language was not sufficient to invalidate the contract and the lien. 398 Ill App 3d 177 (3rd D, 2010). TheFandelcourt concluded that a contract is only void for illegality if it necessarily involves illegal acts that are beyond slight violations of law.Id.The simple use of the word "unlawful," the court found, did not make an otherwise slight violation sufficient to invalidate a contract or its resulting lien.Id.Fandeltherefore found that "unlawful" was irrelevant for the purpose of mechanic's liens and concluded that violations of the rest of HRRA are not sufficient to bar liens.Id.Therefore, this decision is likewise still good law despite the amendment.

To complicate matters further, the Second District'sBilstromdecision, also unattached to the "unlawful" language, directly counters theSmithcourt's position that public policy and legislative intent require a bar to recovery.Bilstrom922 NE2d at 371. In fact,Bilstromstands for the fact that a bar to recovery is directly against public policy because it allows for homeowners to receive windfalls the legislature could not have anticipated or intended.

Conclusion

Several of the cases on the HRRA did rely on the "unlawful" language found in the old version of the statute. Many of the appellate decisions barring breach of contract recovery were thus overturned. However, the Fourth District'sSmithdecision appears to continue to control in its jurisdiction despite the amendment and continues to bar any recovery after a violation of the HRRA.

In the Third District, theRobertsdecision furthered theSmithline of cases and appears likewise to be unaffected by the amendment. However, the Third District's own, contemporaneousFandelcase as well as the Second District'sBilstromcase also continue to apply and offer a diametrically opposed body of law.

It appears that, despite the amendment to the law, the HRRA may well continue to be a source of litigation and judicial disagreement for some time given the number of opposed cases that appear to be unaffected by the change in the law.

 

 

 

 

 

 

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