I'm an attorney, more of a litigator than a transactional guy, but interested in becoming more of the latter as I get old and want to stop fighting with all those young turks.Anyway, my question is I am looking to form an entity with a close friend.

If I was personally the PM, I would try to stay out of the litigation as much as possible (even if it means losing the owner as a customer).

And a litigation in IL will use IL laws. 

I am looking for best advise to shut done this bogus claim without having to go through extended/expensive litigation.

That is just the criminal penalty, then you could have civil liabilities on top of that.

I've paid a little on mine but not consistently since it hasn't been mandatory yet(I'm a civil engineer major btw).

If there has been a death of an owner, I can think of several reasons why a lis pendens might have been filed.Lis pendens is a legal method to cloud title by filing notice of on going litigation relating to real property in deed records.

I graduated from Iowa State with my Masters in Civil Engineering 3 years ago. 

And while setting it up is fairly easy, maintaining complete separation of money (separate bank accounts, credit cards, money draws and deposits) can be rather difficult - any mistakes could disregard LLC status in events of litigation.

You should have some kind of forced buy/sell mechanism so that you don't have to resort to litigation to split up the business.