September 2011 Vol. 4, No. 8



Mechanic's Liens

LaSalle Bank Natl Assoc v Cypress Creek 1, LP, 242 Ill 2d 231, 950 NE2d 1109, 351 Ill Dec 281 (Ill, 2011).

EDITOR'S NOTE: This case has been overruled by PA 97-1165. See ATG's legislative update. ISBA members: For more, see "A New Law Overturns Cypress Creek," written by ATG member Joseph R. Fortunato, Jr. and published in the April 2013 issue of the Illinois Bar Journal.

Facts: LaSalle Bank National Association (LaSalle) made a loan to Cypress Creek 1, LP (Cypress) of $8,018,151 to develop apartments on a 13-acre parcel of land. The loan was secured by a mortgage and security agreement on June 13, 2003. Subsequently, Cypress hired contractors to perform work on the development, including Eagle Concrete (Eagle) and Edon Construction (Edon). LaSalle made eight disbursements of loan proceeds to pay for construction, and then ceased disbursement upon finding that the construction loan was insufficient to complete the construction.

Cypress defaulted on the mortgage and LaSalle filed a complaint to foreclose in July 2005. In November 2005, Eagle and Edon filed and recorded mechanics' liens. A judgment of foreclosure was entered in April 2006. The balance due on LaSalle's mortgage was $3,043,570. LaSalle bought the property at the foreclosure sale for $1.3 million in May, 2006.

In September 2007, a bench trial was held to determine the priority of LaSalle and the mechanic's lien claimants in distributing the proceeds from the foreclosure sale. The court decided to subrogate the mortgage and give LaSalle equal priority to the lien claimants. Then the court found that, of the total value of the improvements, LaSalle had paid for 40%, and the contractors/lien claimants accounted for 60%, so the court prorated the foreclosure sale proceeds between LaSalle and the lien claimants accordingly. However, the court then prorated the 60% of the allocation for improvements, based on the amounts the Eagle and Edon claimed, as well as the amounts that LaSalle had disbursed for the construction. Out of that analysis, LaSalle ended up with 76% to Eagle's 3% and Edon's 15%. Eagle and Edon appealed, claiming that they should have full priority over a mortgagee under Section 16 of the Mechanics Lien Act (770 ILCS 60/1 et seq. 2006). LaSalle cross-appealed the trial court's decision not to prioritize its attorney's fees.

On appeal in the third district, the court affirmed LaSalle's priority as mortgagee as to the unimproved land, but reversed the trial court's allocations of sale proceeds as to the improvements. The appellate court held that LaSalle was entitled to subrogation only for payments to perfected mechanic's liens. The appellate court also reversed the trial court's denial of LaSalle's request for attorney fees, which Eagle and Edon did not appeal. LaSalle appealed the subrogation ruling.

Holding: Reversed and remanded. The court found that based on the plain language, history, and purpose of Section 16 of the Mechanics Lien Act (770 ILCS 60/16), mechanic's lien holders can claim foreclosure sale proceeds based on improvements made by them to the property. The court gave LaSalle have priority with respect to the unimproved value of the land and as to any improvements that LaSalle paid for with draws from its construction loan.

This serves the purpose of the Mechanics Lien Act, which is to protect improvements made by the mechanic; mechanics would be unjustly enriched if they could recover for all improvements on the property. The court overruled Mitchell v Robinovitz, which gave prior mortgagee priority only to the value of the vacant land and gave the mechanic's lien claimants priority with respect to the entire improvement. 272 Ill App 414 (1st D, 1933).

With regard to the improvements made by contractors who were paid for their work and thus never filed liens, the court followed Clark v Moore, 64 Ill 273 (1872), and applied the enhanced value from the improvements to the satisfaction of the mortgages on the property. Any remaining value would apply to the mechanics' liens.

Dissent: A dissent was filed, disagreeing with the majority's plain language interpretation of Section 16 of the Mechanics Lien Act. The dissent argued instead that LaSalle did not have the same position as the mechanic's lien claimants. First, LaSalle was not a material provider as defined under the Mechanics Lien Act and should not be placed on equal footing with the other mechanic's lien claimants. Second, the majority improperly applied Clark v Moore, which gave the owner of the property priority for improvements to the property the owner had made. There is a critical difference between an owner and a mortgagee (LaSalle). The dissent suggested following Bradley v Simpson, 93 Ill 93 (1879), which included all improvements to the property when apportioning sales proceeds.

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