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Construction Trust Funds
The Illinois Mechanics Lien Act contains a complicated set of rules and procedures for when an owner may make payment to a general contractor. In part, the Lien Act requires that an owner who has received proper notice of a subcontractor’s inchoate (not perfected) mechanics lien claim, must withhold sums from the general contractor sufficient to pay the subcontractor’s lien. One way that owners address this situation is to require the general contractor to provide partial waivers of the mechanics lien claim from the subcontractors for the amount of the payment that is being made to the subcontractors, thereby, theoretically freeing those sums for payment.
However, a subcontractor who provides a mechanics lien waiver before it actually receives payment of those sums from the general contractor could find itself in a precarious position. This is because consideration (receipt of money by the subcontractor generally) is not required for a lien waiver to be enforceable. As such, the subcontractor who provides a partial waiver of mechanics lien prior to receiving payment of those sums would likely be unable to assert a lien claim for those sums.
Perhaps recognizing the foregoing, the Lien Act includes what is known as the Construction Trust Fund Statute (770 ILCS 60/21.02). It provides that whenever an owner or general contractor requests or requires the delivery of a waiver of mechanics lien claim in exchange for payment or the promise of payment, the “sums received by such person as a result of the waiver of mechanics lien” are held in trust for the benefit of the person who gave the waiver of mechanics lien.
It is important for all parties who issue and receive lien waivers in connection with the payment process to be familiar with Section 21.02, as it may protect and enable the right to recover funds under a trust theory for those who gave lien waivers but did not receive the promised payment. This distinction may have significant ramifications in bankruptcy cases.