Court Opinion

ID: 9782830
Source: CourtListenerOpinion
Date Created: 2023-08-30 19:21:24.254531+00
Date Added: 2024-06-11T07:35:13.993825
License: Public Domain

JUSTICE FREEMAN, dissenting: I believe today’s opinion incorrectly construes section 16 of the Mechanics Lien Act. I therefore respectfully dissent. Background None of the relevant facts are disputed in this appeal. In 2003, LaSalle National Bank Association lent Cypress Creek 1, Ll^ a development group, $8,018,151 for construction of a housing development. The note was secured by a mortgage and security agreement, recorded in June 2003. This represents the only loan made by LaSalle to Cypress. Subsequently, Cypress entered into agreements with various contractors to build the development. Importantly, after the loan from LaSalle was in default, LaSalle continued to advance Cypress $1,557,563 from the loan proceeds. Cypress used this money to pay contractors for construction work performed at the development site. Eagle Concrete, however, was not paid for the concrete work it performed and thus recorded a mechanics lien for $62,478 in November 2005. Edon Construction Company was also not paid for its carpentry work on the project, and it recorded a mechanics lien for $285,826.80 in November 2005. In July 2005, LaSalle filed suit to foreclose on the mortgage. Eagle filed a complaint to foreclose on its mechanics lien on March 30, 2006.3 Judgment in the mortgage foreclosure case was entered in April 2006, with a finding that the balance due on the mortgage was $8,621,110, which included late fees, penalties, and costs. At some point thereafter, the order of judgment was amended to reflect payment on the judgment of $5,577,540, leaving $3,043,570 as the final judgment amount. In May 2006, the property was sold to LaSalle for $1.3 million. Analysis The question here is one of lien priority since the proceeds from the sale were insufficient to satisfy all of the parties who have liens against this property. Although the court recognizes that this question is to be decided under section 16 of the Mechanics Lien Act, the court’s analysis does not apply the statute’s plain language. Section 16 provides: “No incumbrance upon land, created before or after the making of the contract under the provisions of this act, shall operate upon the building erected, or materials furnished until a lien in favor of the persons having done work or furnished material shall have been satisfied, and upon questions arising between incumbrancers and lien creditors, all previous incumbrances shall be preferred to the extent of the value of the land at the time of making of the contract, and the lien creditor shall be preferred to the value of the improvements erected on said premises, and the court shall ascertain by jury or otherwise, as the case may require, what proportion of the proceeds of any sale shall be paid to the several parties in interest. All incumbrances, whether by mortgage, judgment or otherwise, charged and shown to be fraudulent, in respect to creditors, may be set aside by the court, and the premises freed and discharged from such fraudulent incumbrance.” 770 ILCS 60/16 (West 2006). Under this language, priority is determined by first looking at whether the lien claimants’ contracts were executed before or after the mortgage was recorded. 770 ILCS 60/16 (West 2006). Both Edon and Eagle entered into contracts with Cypress after LaSalle had recorded its mortgage. In such situations, section 16 directs that Eagle’s and Edon’s liens are preferred to the extent of the value of their improvements to the land (usually the price of their original contracts less any payments made),4 while LaSalle, as mortgagee, is preferred to the value of the land before those improvements. See 770 ILCS 60/16 (West 2006). Section 16 further provides that a proportionality analysis be used when the sale proceeds are insufficient to satisfy the liens and the mortgage in full. See 770 ILCS 60/16 (West 2006). This means that the parties share, pro rata, in their relative proportionate interests determined by using those numbers. The court interprets the plain language of section 16 so as to treat the $1,587,765 that Cypress paid to contractors from its loan with LaSalle, after the loan was already in default, as the equivalent of a mechanics lien claim. In other words, LaSalle’s role as the lender in this project put it on equal footing with the other unpaid claimants, such as Edon and Eagle. The effect of this is to improperly increase LaSalle’s pro rata percentage to more than it is entitled to under the Act. I disagree with this approach for several reasons. First, this court has long recognized that mechanics liens are created purely by statute and are in derogation of the common law. Norman A. Koglin Associates v. Valenz Oro, Inc., 176 Ill. 2d 385, 390 (1997); Koester v. Huron Development Co., 25 Ill. 2d 337, 340 (1962); North Side Sash & Door Co. v. Hecht, 295 Ill. 515, 519 (1920); Cronin v. Tatge, 281 Ill. 336, 337 (1917). Therefore, those seeking to assert the Act’s protections must bring themselves within the Act’s provisions. Charles A. Hohmeier Lumber Co. v. Knight, 350 Ill. 248 (1932). The Act is strictly construed with reference to those requirements upon which the right to a mechanics hen depends. First Federal Savings & Loan Ass’n of Chicago v. Connelly, 97 Ill. 2d 242, 246 (1983). This means that courts are to enforce mechanics liens whenever lien claimants meet the requirements of the Act, but cannot extend the Act’s protections to those who fall outside the Act’s provisions. Hoier v. Kaplan, 313 Ill. 448 (1924). Section 1 of the Act entitles any person who, in order to improve real estate, provides labor, services, materials or fixtures either under a contract with the owner or someone authorized by the owner to assert a lien under the Act if he or she is not paid. 770 ILCS 60/1 (West 2006). A contractor is defined as the party in privity with the owner of the real estate, the owner’s agent or anyone whom the owner has knowingly permitted to make improvements. Id. Subcontractors who provide labor, services, material, or fixtures for the improvement of real estate may also assert liens under the Act. Id.5 LaSalle is simply not a material provider as so defined and the court should not, by judicial fiat, confer that status on LaSalle. Second, the court relies on Clark v. Moore, 64 Ill. 273 (1872), to reach its result (242 Ill. 2d at 244-45), but Clark is of little help in resolving the issue. Clark concerned giving an owner of property priority for improvements to the property the owner made. The court treated the owner as a lien claimant because he paid for substantial improvements to the property. He was not an incumbrancer. The issues in the present case do not involve a priority claim by an owner, but a mortgagee, a critical difference under the Act. The court, however, states that it “fail[s] to find a meaningful distinction between an owner paying the contractor from his bank account with presumably borrowed funds (given that all owners have a preexisting mortgage on the property when this statutory provision is in question) and authorizing the mortgagee to pay the contractor directly through a draw on the loan. In either case, the payments were presumably not made for the benefit of other lienholders.” 242 Ill. 2d at 246. While the court might not see a meaningful distinction between owners and incumbrancers, the General Assembly does because the Act distinguishes between owners (770 ILCS 60/4, 27 (West 2006)), incumbrancers (mortgagees) (770 ILCS 60/16 (West 2006)), contractors (770 ILCS 60/1 (West 2006)), and subcontractors (770 ILCS 60/5, 21 (West 2006)). Indeed, the very section at issue in this case, section 16, distinguishes between incumbrancers and lien creditors — they are not treated alike. More importantly, this court in Clark, in granting the owner priority, relied primarily on then-section 23 of the Mechanics Lien Law, which vested courts in mechanics hen cases with sweeping equitable powers. Clark, 64 Ill. at 277-78. Section 23 was repealed when the Mechanics Lien Law was revised in 1874. See Ill. Rev. Stat. 1895, ch. 82, par. 54. Thus, it appears that the court, in granting the owner priority, relied on notions of equity in its construction of the lien law.6 There is no section in the current Act that gives courts the broad powers that existed when this court decided Clark in 1872. Today’s opinion does not acknowledge this important change to the Act. A simple illustration of the proportionality analysis that is contemplated by the Act and that should be used in this case can be found in Bradley v. Simpson, 93 Ill. 93 (1879), which is not cited in today’s opinion. In Bradley, the subject property was worth $3,200 before improvements were made to erect a building. The mechanics hen claimants, in constructing the building on the land, enhanced the value “by reason of their labor and materials furnished” in the amount of $6,292. Id. The mortgage on the property was $5,657. The property was sold for $3,338.91. The trial judge ruled that the mortgagee was entitled to the proportion of the net proceeds of the sale: “that the value of the property before the improvements were put upon it bore to the total value of the property after the improvements were made, that is, that she was entitled to 3200/9492 of $3338.91, being the sum of $1125.63.” Id. at 94. This court affirmed the trial court’s decision, rejecting the mortgagee’s claim that she was entitled to her full $3,200: “As between the mortgages and the mechanic’s liens, under the statute the mortgages were entitled to satisfaction out of the land, and the other liens out of the building. As the building could not properly be separated from the lots, in order to realize the benefit of the liens the whole property, land and building together, had to be sold, that it might be converted into money and the proceeds divided. The proceeds of the sale represent and stand in the place of the land and the building, and the parties have the same proportionate interest in the proceeds that they had in the property before it was sold.” (Emphasis added.) Bradley, 93 Ill. at 95. This analysis makes clear that all improvements are to be added to the value of the land before apportioning percentages to the sales proceeds when those proceeds cannot satisfy the mortgage and hen claimants. In Bradley, the mortgagee’s percentage from the sale was approximately 33.7% (3200/9492). The analysis in Bradley therefore demonstrates that the court today is incorrect when it states that “improvements” as used in the statute “cannot mean all improvements.” (Emphasis in original.) 242 Ill. 2d at 239. Moreover, and contrary to the court’s interpretation (id. at 241 n.1), Bradley teaches that Eagle correctly argues that this court’s decision in Croskey v. Northwestern Manufacturing Co., 48 Ill. 481 (1868), “leaves no doubt about the fact that the mortgagee is preferred to the value of the land and improvements at the time of the attachment of the mortgage and that the mechanics hen claimants are preferred as to the improvements supplied thereafter.” Id. The statute contemplates that hen claimants will be preferred to the proportionate value of the improvements they provided. LaSalle’s loan of its funds did not “enhance” the value of the property, under section 16, it is the work done by the mechanics hen claimants that “enhances” the value. Under the plain language of section 16, LaSalle, an “incumbrancer” (i.e., mortgagee) has priority with respect to only the value of the land before improvements. Everyone agrees in this case that the value of the land before any improvements were made was $1,360,000. According to the plain language of section 16, with respect to the priority as between “incumbrancers” (mortgagees) and “hen creditors” (mechanics hen-holders), all “previous incumbrances” (mortgagees) shall be preferred only to the extent of the value of the land (here, $1,360,000) “at the time of the making of the contract” and the hen creditors (each mechanic hen-holder) “shall be preferred to the value of the improvements erected on said premises [for Edon, $285,827; for Eagle $63,478].” 770 ILCS 60/16 (West 2006). Here, however, just as in Bradley, because “the building could not properly be separated from the lots, in order to realize the benefit of the liens the whole property, land and building together, had to be sold, that it might be converted into money and the proceeds divided. The proceeds of the sale represent and stand in the place of the land and the building, and the parties have the same proportionate interest in the proceeds that they had in the property before it was sold.” Bradley, 93 Ill. at 95. The improvements made to the property by the lien claimants in this case totaled $480,934.7 The sum of this figure plus the value of the land before improvements is $1,840,934. As demonstrated in Bradley, that number is to be used as the denominator in determining the pro rata interest each party is to receive under section 16. For example, LaSalle’s proportional share of the sale proceeds is 73.8% (1,360,000/1,840,934). Eagle’s proportional share of the sale proceeds is 3.4% (63,478/ I, 840,934), and Edon’s proportional share is 15.5% (285,827/1,840,934). The sale proceeds, once the expenses of the sale and receiver were paid, were $552,214.06. Of that, LaSalle should receive $407,533.98, Eagle should receive $18,775.28, and Edon should receive $85,593.18. This allocation more correctly reflects the intent of the legislature in enacting the Act, which was to extend statutory protection for unpaid work done, not for money lent. In light of the above, I have difficulty in ascertaining the basis for the court’s holding that it is the plain language of section 16 which allows LaSalle to be treated as the equivalent of a contractor. 242 Ill. 2d at 248. This conflicts with the analysis in Bradley, which postdates Clark and it thus appears that Bradley has now been overruled sub silentio. I am concerned that today’s opinion will add confusion to an area of Illinois law, mechanics hens, that has already been acknowledged by this court to be both “technical and complex.” Hermitage Corp. v. Contractors Adjustment Co., 166 Ill. 2d 72, 79 (1995); see also Hermitage, 166 Ill. 2d at 93 (Freeman, J. , dissenting, joined by Bilandic, C.J.) (agreeing that mechanics hen law is “technical and complex”). Contributing to the real possibility of confusion is the court’s reference to equitable subrogation.8 The opinion maintains that its result in increasing LaSalle’s pro rata share by the $1.5 million advanced (again after the loan was in default) is not achieved by applying equitable subrogation principles. 242 Ill. 2d at 248. But the plain language of section 16 does not otherwise permit LaSalle’s position as incumbrancer to be equated with that of a mechanics lien creditor, for reasons that I have already explained. That would leave subrogation as the only means for doing so, as both parties in the case argue.9  JUSTICE BURKE joins in this dissent. Dissenting Opinion Upon Denial of Rehearing  Edon filed its complaint to foreclose its mechanics lien in August 2006. The various lien claimants actions were consolidated with the mortgage foreclosure proceeding.   Illinois courts use two different methods in determining the value of the improvements, the “market value” approach and the “contract price” approach. See Lyons Savings v. Gash Associates, 279 Ill. App. 3d 742 (1996) (explaining differences in methods and noting that the market value approach is inappropriate in cases where sales proceeds are insufficient to satisfy both the mortgage and the mechanics liens). The parties do not dispute the methodology used in this case.   The Act defines subcontractors as parties who have contracts with the general contractor as opposed to the owner. 770 ILCS 60/21 (West 2006). This provision is not at issue in this case since it is undisputed that both Edon and Eagle contracted directly with Cypress.   With respect to its statutory construction, Clark is confusing. The opinion cites to the “12th section of the lien law,” stating that this section “declares that incumbrances on the property prior or subsequent to making the contract for erecting the building shall not operate upon the building or materials until the liens in favor of the workmen and the material-men shall be satisfied; and upon questions between previous incumbrancers and creditors, the previous incumbrance shall be preferred to the value of the land at the time of making the contract.” Clark, 64 Ill. at 282. However, at the time Clark was decided section 12 of the mechanics hen law stated no such thing. Rather, the section provided that “Upon the trial of causes under the provisions of this chapter, the court shall ascertain the amount due each creditor, and shall direct the application of the proceeds of sales to be made to each in proportion to their several amounts.” Ill. Rev. Stat. 1845, ch. 65, par. 12. At the time Clark was decided, language regarding “previous incumbrancers and creditors” could be found in section 20 of the lien law, which provided that “the previous incumbrance shall be preferred to the extent of the value of the land at the time of the making of the contract.” Ill. Rev. Stat. 1845, ch. 65, par. 20. This erroneous citation renders the opinion’s statutory analysis problematic at best, if not outright questionable.   This represents the sum of the hen claimants as found by the trial court: All American: $46,200; Eagle: $63,478; Gallagher: $46,506; Another Plumbing: $38,923; and Edon: $285,827.   Illinois courts recognize two forms of subrogation: equitable subrogation which is based in the common law and conventional subrogation which is based on an express provision contained in a contract. Aames Capital Corp. v. Interstate Bank of Oak Forest, 315 Ill. App. 3d 700, 706 (2000). Equitable subrogation, which is more rare, has been described by this court as a “creature of chancery *** [utilized] to prevent injustice and unjust enrichment.” Dix Mutual Insurance Co. v. LaFramboise, 149 Ill. 2d 314, 319 (1992). As one court has stated “no general rule *** can be laid down to determine whether a right of equitable subrogation exists, since the right depends upon the equities of each particular case.” Aames, 315 Ill. App. 3d at 706.   It bears mentioning that the doctrine of equitable subrogation confers priority, and priority is relief that must be pled. Norman A. Koglin Associates v. Valenz Oro, Inc., 176 Ill. 2d 385, 390-95 (1997). LaSalle, in its amended affirmative defenses to Eagle’s complaint stated the following: “By paying the trust which paid construction draws, LaSalle is subrogated to the trust’s position which has priority over the hen claimants paid with trust funds.” In its answer and affirmative defenses to Edon’s complaint to foreclose on Edon’s mechanics hen, LaSalle did not assert a similar priority claim, but rather maintained that Edon’s claim was barred by laches and that Edon’s interest in the property was limited to an interest in the proceeds of the sheriffs sale. It appears that hen priority is more properly alleged in a counterclaim (see 735 ILCS 5/2 — 608 (West 2006)), although there is case law that suggests that it can be alleged as an affirmative defense. See Mountain States Mortgage Center, Inc. v. Allen, 257 Ill. App. 3d 372, 381-82 (1993) (quoting Ill. Rev. Stat. 1991, ch. 110, par. 2 — 613(d)). An affirmative defense is something that “avoid[s] the legal effect of or defeat[s]” a claim, such as “payment, release, satisfaction,” and the like. 735 ILCS 5/2 — 613(d) (West 2006). Even if a lien has priority over another, that fact does not “avoid” or “defeat” the lien creditors’ foreclosure action, it would mean only that both were in Une for payment behind LaSalle.