LaSalle Bank National Association v. Cypress Creek 1

Docket No.109954.
IN THE
SUPREME COURT
OF
THE STATE OF ILLINOIS
LaSALLE BANK NATIONAL ASSOCIATION, Appellant, v.
CYPRESS CREEK 1, LP (Edon Construction et al., Appellees).
Opinion filed February 25, 2011.
JUSTICE GARMAN delivered the judgment of the court, with
opinion.
Chief Justice Kilbride and Justices Thomas, Karmeier, and Theis
concurred in the judgment and opinion.
Justice Freeman dissented, with opinion, joined by Justice Burke.
OPINION
The issue in this case is how to distribute foreclosure sale
proceeds between a mortgagee and mechanics lien claimants when
the mortgage predated the liens, the foreclosure sale proceeds are
insufficient to satisfy all claims, and the mortgagee has paid for
several improvements to the property through construction loan
disbursements under section 16 of the Mechanics Lien Act. 770 ILCS
60/16 (West 2006). The circuit court of Will County subrogated the
mortgagee and gave it priority with respect to those improvements for
which it paid and gave the mechanics lien claimants priority with
respect to the value of their individual improvements. The appellate
court reversed, holding that the mortgagee was entitled to subrogation
for payment of perfected mechanics liens, but that the value of those
improvements paid for by the mortgagee where no lien was filed and
perfected was to be first applied to the satisfaction of the mechanics
liens. 398 Ill. App. 3d 592, 600. For the following reasons, we reverse
the appellate court on this point and hold that the value of the
foreclosed property that is attributable to those improvements paid for
by the mortgagee should be applied first toward the satisfaction of the
mortgage.
BACKGROUND
LaSalle Bank loaned $8,018,151 to Cypress Creek, LLP, for the
development of 13.79 acres of land in Bollingbrook, Illinois, into
senior apartments. The loan was secured by a mortgage and security
agreement, which were recorded on June 13, 2003. Construction
began on the development and Cypress hired appellees, Eagle
Concrete and Edon Construction, to perform work on the
development. LaSalle funded a total of eight construction draws
before June 2005, when it determined that there was no longer
enough money in the trust to complete the project. In July 2005,
LaSalle filed to foreclose on the mortgage. The following November,
Eagle and Edon recorded mechanics liens for $63,478 and
$285,825.80, respectively.
In April 2006, a judgment of foreclosure and sale was entered
against Cypress. The trial court found that the balance due on the
mortgage totaled $8,621,110. The order of judgment was
subsequently amended to reflect payment of $5,577,540, leaving an
amount due on the mortgage of $3,043,570. LaSalle bought the
property at a sheriff’s sale in May 2006 for $1.3 million. Edon and
Eagle filed to foreclose their mechanics liens and their actions were
consolidated with the mortgage foreclosure proceeding.
In September 2007, a trial was held to determine the priority of
lienholders and to distribute the proceeds of the sheriff’s sale. At trial,
Edon, Eagle, and three other mechanics lien claimants argued for
priority of their liens over the mortgage. The court heard testimony
that, through the loan disbursements, LaSalle paid $99,917 in
engineering costs, $2,842.50 for environmental reports, and $8,538
for utilities. LaSalle also paid $30,000 to Basic Development in
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satisfaction of their lien, which predated the mortgage by one month.
In an order dated October 30, 2007, the court found that the value of
the land before any improvements were made was $1,360,000, or
40% of the total value of the property, and that the value of
enhancements, including those paid for by LaSalle, totaled
$2,068,699, or 60% of the total value. Based on these findings, the
court determined that 40% of the proceeds of the sheriff’s sale should
go to the mortgagee in satisfaction of the mortgage and the remaining
60% should be divided among those who had improved the land. The
court conducted a proportionality analysis and allocated sale proceeds
according to the following table:
Expense of sale: $1,542
Receiver’s fees and expenses: $746,244
Remaining proceeds ($552,214):
Value attributable to land: $215,100
Value attributable to all improvements: $331,328.40
The court applied the $215,100 attributable to the land toward the
satisfaction of the mortgage and subrogated LaSalle Bank to the
amounts it paid for construction costs, engineering costs,
environmental reports, and utilities, as well as the amount it paid
toward the satisfaction of Basic Development’s perfected lien. It then
found the proportion of the total value of the improvements to which
each party was entitled by dividing the value of each party’s
improvements by the total value of the improvements, $2,068,699.
The court concluded that Eagle’s lien for $63,478 accounted for
approximately 3% of the value of the improvements and Edon’s lien
for $285,827 accounted for approximately 15%. LaSalle was entitled
to credit for 76% of the value of the improvements, and the three
other lienholders, with liens amounting to a total of $131,629, were
credited with a total of 5.8% of the improvements. The court
therefore awarded $50,000 and $7,300 to Edon and Eagle,
respectively. LaSalle was subrogated to $256,514 for the
improvements it funded and the remaining lienholders were awarded
a total of $20,300. In total, LaSalle was awarded $471,614, with
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$215,100 attributable to the value of the land before any
improvements were made and $256,614 attributable to those
improvements it funded. Edon and Eagle filed motions for
modification of judgment, which were denied in January 2008.
Edon appealed the allocation of sale proceeds and Eagle joined
the appeal. Edon and Eagle first argued that the mechanics lien
claimants have full priority over a mortgagee under section 16 of the
Mechanics Lien Act and that, therefore, the trial court should have
satisfied their liens in total before disbursing any funds to LaSalle as
mortgagee. 398 Ill. App. 3d at 596. They also argued that the trial
court erred in subrogating LaSalle to the status of a mechanics lien
claimant for amounts it paid for lienable work. Id. at 596-97. LaSalle
cross-appealed the trial court’s denial of its request for attorney fees.
Id. at 594. The appellate court, with majority, concurring, and
dissenting opinions, affirmed LaSalle’s priority as mortgagee to those
foreclosure sale proceeds attributable to unimproved land (id. at 598),
but reversed the trial court’s subrogation ruling, holding that LaSalle
was only entitled to be subrogated to the extent that it paid perfected
mechanics liens (id. at 600). The court therefore ordered that the
remaining construction and development costs to which the trial court
subrogated the bank be allocated proportionally between the
mechanics lien claimants. Id. The appellate court also reversed the
trial court’s denial of LaSalle’s request for attorney fees. Id. at 601.
LaSalle filed a petition for rehearing on the subrogation ruling and
the application of that ruling to the three lien claimants which had not
appealed the trial court’s decision. The petition was granted and, on
January 15, 2010, the appellate court filed its second opinion with
majority, concurring, and dissenting opinions. The court retained its
ruling on the subrogation issue, but ordered that the value attributable
to the improvements paid with loan disbursements be allocated
proportionally only between the two appellants, Edon and Eagle.
This court granted LaSalle’s petition for leave to appeal. Ill. S. Ct.
R. 315 (eff. Feb. 26, 2010).
ANALYSIS
The issue before this court concerns the apportionment of
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foreclosure sale proceeds as between a mortgagee and mechanics lien
claimants when the proceeds are insufficient to satisfy the mortgage
and the mechanics liens. Apportionment is governed in this situation
by section 16 of the Mechanics Lien Act (770 ILCS 60/16 (West
2006)). Questions of statutory construction are questions of law and
reviewed de novo. People v. Perry, 224 Ill. 2d 312, 324 (2007).
In matters of statutory construction, we endeavor to “ascertain and
give effect to legislative intent.” Id. at 323. We first must look to the
plain language of the statute as the best indicator of legislative intent,
considering the statute in its entirety. Id. Where the language is clear
and unambiguous, we will apply it as written. Id. Only where the
language is ambiguous do we resort to extrinsic aids to determine
legislative intent. Id. at 323-24.
Plain Language
The Mechanics Lien Act affords some protection to contractors
who contribute labor or materials to a construction project or who
provide services such as an architect or engineer by giving them a lien
on the subject property. 770 ILCS 60/1 (West 2006). The Act
modifies the common law first-in-time, first-in-right rule (see 27A Ill.
L. and Prac. Mortgages §50 (2003)) by affording lienholders partial
priority over pre-existing mortgages when the proceeds of a
foreclosure sale are insufficient to satisfy all claims:
“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
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creditors, may be set aside by the court, and the premises
freed and discharged from such fraudulent incumbrance.” 770
ILCS 60/16 (West 2006).
Historically, this provision has been interpreted by the appellate court
to give each mechanics lien claimant priority only to the extent of the
increased value of the property due to that claimant’s improvements
on the property. See, e.g., Commercial Mortgage & Finance Co. v.
Woodcock Construction Co., 51 Ill. App. 2d 61, 64-65 (2d Dist.
1964); Moulding-Brownell Corp. v. E.C. Delfosse Construction Co.,
304 Ill. App. 491, 500 (1st Dist. 1940). Edon and Eagle urge us to
adopt the Third District’s decision in this case and hold that section
16 of the Mechanics Lien Act entitles mechanics lien claimants to be
preferred to the added value of all lienable improvements on the land
made subsequent to the time the mortgage was entered into. The
mortgagee, then, would be entitled to priority only with respect to the
value of the land at the time the mortgage was contracted and,
through subrogation, to the value of any improvements made by
perfected lienholders paid by the mortgagee.
With respect to priority determinations, section 16 directs that
“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 ***.” 770 ILCS
60/16 (West 2006).
Eagle argues that, by creating two groups, lien creditors and
incumbrancers, and subsequently giving the “lien creditor,” singular,
priority with respect to the value of “improvements,” plural, that the
statute unambiguously gives as few as one lien creditor preference to
the value of all improvements erected on the premises after the date
that the mortgage attached. We disagree.
First, “the time of making the contract” must be understood in the
context of the entire statute. The language here does not refer to the
date the mortgage is entered into, but rather the time when the lien
creditors in question entered into their contracts with the property
owner. This is evident from the beginning of the section, which refers
to an encumbrance “created before or after the making of the contract
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under the provisions of this act,” clearly referring to the contracting
for the provision of lienable services and materials. 770 ILCS 60/16
(West 2006).
Further, the use of “improvements” in the plural simply
acknowledges that a single lienholder could have made multiple
improvements that, combined, give rise to the lien creditor’s claim.
The phrase “the lien creditor shall be preferred to the value of the
improvements erected on said premises” must also be understood in
context. Because prior incumbrancers have priority with respect to
any improvements on the land which predate the lien claimant’s
contract, “improvements” cannot mean all improvements.
Additionally, because the statute acknowledges the possibility of
multiple lien claimants, it is only logical that each claimant would
have priority with respect to his own improvements. “A statute is
ambiguous if it is capable of being understood by reasonably well-
informed persons in two or more different ways.” Krohe v. City of
Bloomington, 204 Ill. 2d 392, 395-96 (2003). We find this statute
clearly and unambiguously prioritizes lien creditors only to the value
of their improvements and the prior incumbrancer to the value of the
land at the time the contract with the lien holder was made. We note,
however, that our reading today is consistent with prior case law as
well as the purposes of the Act and the practicalities of construction
lending.
The History of the Mechanics Lien Act and Prior Case Law
The current version of section 16 was enacted in 1903. 770 ILCS
60/16 (West 2006). The language at issue in this case tracks section
20 of the Liens Act of 1845 and section 17 of the Liens Act of 1874
with the exception of the clause “and the lien creditor shall be
preferred to the value of the improvements erected on said premises.”
See Albrecht v. Buelow, 191 Ill. App. 481, 487 (1915); see also Gaty
v. Casey, 15 Ill. 189, 192 (1853). In 1895, the Mechanics’ Liens Act
provided in section 16 that lien creditors had priority to the extent that
the value of the land was “enhanced” by reason of the improvements
and that where the owner has paid for labor or material, “the
enhanced value thereby given shall be treated as a fund in which the
mortgagee and lien-holder shall participate pro rata.” Albrecht, 191
Ill. App. at 487. The Mechanics Lien Act of 1903 substantially
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reenacted the aforementioned sections of the 1845 and 1874 Acts,
specifying that “the lien creditor shall be preferred to the value of the
improvements.” See id.
This court has applied the provision “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” on several occasions. With respect to section
20 of the Act of 1845, this court noted that “the statute gives the
mechanics and material men liens, paramount to the trust deed, upon
the improvements made by them upon the premises.” (Emphasis
added.) Raymond v. Ewing, 26 Ill. 329, 343 (1861); see also Smith v.
Moore, 26 Ill. 392, 396 (1861) (noting that the prior incumbrancer
“must look alone to the property as it was, before the mechanic’s or
material man’s lien attached, and [the lienholder] must look to the
improvement or materials” for satisfaction of their claims (emphasis
added)); Croskey v. Northwestern Manufacturing Co., 48 Ill. 481,
484–85 (1868) (“[trial] court should have ascertained at what time the
improvements were commenced for which the materials of
complainants were furnished, and should have given to the prior
mortgagees a paramount lien on the property as it stood when such
improvements were commenced, and to the complainants a paramount
lien on the improvements towards which they furnished materials”
(emphases added))1; Howett v. Selby, 54 Ill. 151 (1870); Clark v.
Moore, 64 Ill. 273 (1872). The language added to this provision in
1903 merely codifies the interpretation of the courts. This was the
1
Eagle argues in its brief to this court that Croskey “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 lien claimants are preferred as to the improvements supplied
thereafter.” This is a misstatement of the holding in Croskey. While the
opinion does say that “land,” as used in the statute, must mean “the land
with such improvements as there are upon it at the time of the execution of
the mortgage,” the court directed that the security of the mortgagee is
protected by being “preferred to the extent of the value of the land at the
time the contract is made with the mechanic or material man,” and that the
lien claimants are only entitled to “a paramount lien on the improvements
towards which they furnished materials.” Croskey, 48 Ill. at 483, 485. We
find that, read as a whole, Croskey supports our reading of the statute.
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conclusion of the appellate court in1915. In Albrecht v. Buelow, the
appellate court summarized the operation of section 20 of the Act of
1845: when a mechanics lien attaches to a property previously
encumbered by a mortgage, “such lien is paramount to the lien of the
mortgage to the extent of the increased value of the premises by
reason of the improvements or repairs.” Albrecht, 191 Ill. App. at
490. With respect to the earlier decisions of this court, the appellate
court concluded, “[i]nasmuch as section 16 of the present Act does
not differ materially from section 20 of the Act of 1845, *** these
rulings are applicable to the present act.” Id. at 491.
In almost every subsequent instance, courts have found that the
statute gives lienholders priority only with respect to the added value
of the property attributable to those improvements forming the basis
for the lien in question and gives the mortgagee priority with respect
to the value of the land at the time the contract is entered into
between the owner and the contractor. See, e.g., Commercial
Mortgage & Finance Co. v. Woodcock Construction Co., 51 Ill. App.
2d 61, 64-65 (1964); Moulding-Brownell Corp. v. E.C. Delfosse
Construction Co., 304 Ill. App. 491, 500 (1940); see also Fair Play
Development Organization v. Sarmach, 263 Ill. App. 593, 597 (1931)
(noting that a subsequent mechanics lien was “inferior to the lien of
the mortgagee to the extent of the value of the premises at the time
when the mechanic’s lien attached”).
Eagle cites, and we have found, only one case that has held
otherwise. In Mitchell v. Robinovitz, the appellate court affirmed an
order that gave the prior mortgagees priority only with respect to the
value of the vacant land and four mechanics lien claimants priority
with respect to the entire improvement. Mitchell v. Robinovitz, 272
Ill. App. 414, 416-17, 424 (1933). The court rejected the mortgagees’
arguments that, “[a]s against a prior mortgagee[,] a contractor is
preferred only to the value of the improvements erected by him, and
the mortgagee is preferred to the extent of the value of the land,
including in that term the enhanced value produced by labor and
materials furnished by other contractors who have been paid, or who
have waived, released or failed within the necessary time to assert
their liens.” (Emphases in original.) Id. at 418. The Mitchell court,
however, “fail[ed] to find evidence of the owner of the premises
involved [in] making such payments.” Id. at 423. To the extent that
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Mitchell affords priority to lienholders for work done by other
contractors and paid for either by or on behalf of the owner of the
property, we find it is in error and overrule it.
The courts have thus applied this statute repeatedly and
consistently since its adoption over one hundred years ago and the
legislature has had ample time to contravene our understanding. This
consistent judicial interpretation of the language in section 16 is
considered a part of the statute until the legislature amends it contrary
to that interpretation. See People v. Woodard, 175 Ill. 2d 435, 444
(1997) (citing Miller v. Lockett, 98 Ill. 2d 478 (1983)).
Purpose of the Act and Practical Considerations
Our reading is also consistent with both the purpose of the Act
and the practicalities of construction lending. The Mechanics Lien
Act aims to “protect those who in good faith furnish material or labor
for construction of buildings or public improvements.” Lawn Manor
Savings & Loan Ass’n v. Hukvari, 78 Ill. App. 3d 531, 532 (1979). By
giving lienholders priority only with respect to their improvements,
the Act protects both the contractors and the prior encumbrancers. In
its brief to the court, Edon argues that the Act is predicated on the
theory “that an owner should pay for the benefit derived from the
labor and materials provided by a contractor” by providing “an
equitable balance of the rights of owners, lenders and contractors.”
We find that this is accomplished by prioritizing lien claimants to the
value of their improvements, instead of the value of all
improvements. Were the lien claimants to be preferred to the value of
all improvements, the lien claimants would be unjustly enriched, to
the detriment of an owner or mortgagee who funded improvements
other than those that form the basis for the liens. This would
discourage lenders from lending more than the property is worth at
the time the mortgage is issued, hindering developers’ access to
financing.
Further, LaSalle argues that if, as under the appellate court’s
decision, the only way a mortgagee could get “credit” for the value of
improvements it has funded is to be subrogated to a valid, perfected
mechanics lien, lenders would have every reason to require
contractors to file mechanics liens and to then evaluate their validity
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before paying the contractor for work done on the property. This
would significantly increase the paperwork and the cost of financing
any construction project. If every contractor had to file a lien before
getting paid, this would also defeat one of the purposes of the
recording requirement in the Act. Eagle notes that the notice and
filing provisions give third parties “notice of the existence, nature and
character of lien claims,” and allow them to gauge the enforceability
of such claims. Eagle argues that these filings are important to
contractors to give them an opportunity to review the public record
and determine whether a project is “in trouble” based on the liens
filed against a property. However, if a mortgagee were only entitled
to be preferred to the value of the land at the time the mortgage was
contracted into and not to any of the improvements the mortgagee has
funded unless it is subrogated to a perfected mechanics lien, there
would be multiple mechanics liens on every project, whether or not
the project was “in trouble” and this signaling function of the
recorded liens would be lost.
For the foregoing reasons, we hold that section 16 of the
Mechanics Lien Act gives mechanics lien claimants priority only with
respect to the value of the property attributable to those improvements
for which they furnished material or services. To the extent that the
appellate court gave the lienholders priority with respect to all
improvements made subsequent to the mortgage, we find that this
was in error.
Priority As to the Value of Paid-For Improvements
We turn now to one remaining question: if the mortgagee is
preferred to the value of the land at the time the owner contracts with
the lien claimants, and the lien claimants are preferred only to the
value of those improvements that form the basis of their liens, what
becomes of any value attributable to those improvements that have
been made by contractors after the contracts in question were entered
into but who were paid for their work and therefore never filed liens?
In Clark v. Moore, 64 Ill. 273 (1872), this court addressed the
apportionment of proceeds as between mortgagees and mechanics
lien claimants when the foreclosure sale proceeds were insufficient
to satisfy both claims. In that case, the trial court found that, before
any improvements were made, the property was worth $3,500, the
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lienholders contributed $14,000 in improvements, and the owner of
the property paid $9,000 to other contractors for improvements to the
property. Id. at 282. The parties disputed whether the mortgage or the
mechanics liens had priority with respect to the enhanced value paid
for by the owner. Id. This court held:
“[W]here, as in this case, there is a large proportion of the
enhanced value of the property produced by the owner paying
for labor and material furnished by others than the parties to
the suit, *** the enhanced value produced by the payment of
money by the owner, whilst the work was progressing, should
be applied to the satisfaction of the mortgages on the
property; and if any portion of the fund thus created shall
remain, to be applied to the satisfaction of the liens for labor
and materials. It has always been recognized the true rule to
hold all improvements placed by the mortgagor on the
premises as being embraced in and subject to the mortgage.
We can not suppose that they were intended, when made, to
be for the benefit of other lien holders.” Id. at 282-83.
Rejecting interpretations that would give lienholders priority to or
would give mortgagees and lienholders pro rata shares in the value
attributable to these improvements, the Clark court further reasoned
that the lienholders “have their lien on the enhanced value they have
given to the property, but have advanced neither money nor materials
for which the owner has paid; and the subsequent mortgages may
have been given to secure the very money paid by the owner for the
labor and materials.” Id. at 283. Though the Mechanics’ Liens Act of
1895 provided that when the owner paid for such improvements, “the
enhanced value thereby given shall be treated as a fund in which the
mortgagee and lienholder shall participate pro rata,” in 1903 the
legislature substantially reenacted the earlier language that Clark
interpreted. See Albrecht, 191 Ill. App. at 491.
The logic of the Clark decision applies equally to this case, and
we see no reason to depart from it. In this case, the trial court found
that LaSalle paid $1,587,765 in lienable expenses2 over the eight
2
In its brief to this court, Eagle questions the lienability of some of the
expenses LaSalle was subrogated to by the trial court. Neither Eagle nor
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draws funded from Cypress’s construction loan. The value of these
improvements was thus paid by the owner or, at a minimum, on the
owner’s behalf. We fail 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. We find that neither Edon
nor Eagle has made a compelling case for treating the payments made
by LaSalle as anything other than payments made by the owner and
applying that portion of the enhanced value of the property to the
satisfaction of the mortgage held by LaSalle.
Eagle argues that because “in 1845, *** a contractor who
provided labor or material became a perfected lien claimant as soon
as it provided services or material,” Clark “in essence held that a
mortgagee or owner should get the benefit of payments made to
perfected mechanics lien claimants who, at that time, was anyone
who had provided labor or materials.” Even if we presume this to be
the case, the Clark court nowhere relied on principles of subrogation
or the idea that the contractors paid by the owner in that case were
perfected lien creditors. Instead, the court appeared to recognize that
improvements paid for by the owner to property subject to a mortgage
would presumably be paid for out of the proceeds of the mortgage,
and therefore it is the mortgagee, not the lienholders, that should take
priority with respect to the added value attributable to those
improvements. Clark, 64 Ill. at 83 (noting that “subsequent mortgages
may have been given to secure the very money paid by the owner for
the labor and materials”).
Subrogation
In distributing the proceeds of the foreclosure sale, the trial court
conducted a proportionality assessment. Two methods have been used
Edon contested the lienability of these expenses at trial nor in the appellate
court. This issue is, therefore, forfeited. E&E Hauling, Inc. v. Pollution
Control Board, 107 Ill. 2d 33, 38 (1985).
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by courts to determine the value of a mechanics lien–the market value
approach and the contract approach. The trial court determined that,
because the improvements are not complete, it is difficult if not
impossible to determine their market value, and thus employed the
contract approach, valuing each mechanics lien at the contract price
agreed upon by the owner and the mechanics lien claimant. None of
the parties have argued that this was in error.
The trial court determined that the land, prior to the start of
construction, was worth $1,360,000. It then determined that the value
of all improvements made on the land (including those paid for
through draws on the construction loan), valued at their contract
price, amounted to $2,068,699. The trial court held that LaSalle was
entitled to be subrogated to the extent it paid construction costs,
engineering costs, environmental reports, utilities, and the lien of
Basic Development, which predated the mortgage.
Our analysis above makes subrogation unnecessary in a case like
this, with the exception of the payment of Basic Development’s lien.
Because the trial court used the contract method of determining the
value of the mechanics lien claimants’ improvements to the property,
it was correct to apply the same method to value all other lienable
improvements–those paid for by the eight draws made on LaSalle’s
loan to Cypress. The value of these improvements, paid for with
mortgage proceeds, should thus go toward the satisfaction of the
mortgage without a question of subrogation arising.
The end result, however, is the same. By subrogating LaSalle to
the value of the improvements, the trial court conducted the same
type of analysis as would be required if it had valued those
improvements that formed the basis for the mechanics liens and then
valued the rest of the land and given LaSalle credit in a
proportionality determination for the latter.
We note that LaSalle paid $30,202 to Basic Development for a
lien that predated the mortgage. The parties do not dispute that
LaSalle was properly subrogated to this claim. See Detroit Steel
Products Co. v. Hudes, 17 Ill. App. 2d 514 (1958). They have not
presented any arguments regarding the priority this claim should take
with respect to the claims arising out of the mortgage or the
subsequent mechanic’s liens, and therefore, we take no position with
regard to this issue.
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CONCLUSION
For the reasons discussed above, we hold that, in a proportionality
determination under section 16 of the Mechanics Lien Act, the value
of the property attributable to improvements paid for with proceeds
of a mortgage and construction loan should be attributed toward the
satisfaction of the mortgage. We therefore find that the appellate
court erred when it reversed the trial court’s distribution of proceeds.
Accordingly, we reverse the judgment of the appellate court on this
point and remand to the trial court for further proceedings consistent
with this opinion. Because Edon and Eagle have not appealed the
appellate court’s award of LaSalle’s attorney fees (398 Ill. App. 3d at
601), we affirm the appellate court on that point. We additionally
overrule Mitchell v. Robinovitz, 272 Ill. App. 414 (1933), to the
extent that it is inconsistent with this opinion.
Appellate court judgment affirmed in part and reversed in part;
cause remanded.
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, L.P., 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
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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
3
Edon filed its complaint to foreclose its mechanics lien in August 2006.
The various lien claimants actions were consolidated with the mortgage
foreclosure proceeding.
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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
4
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.
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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 lien 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 (slip op. at 11-12), 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,
5
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.
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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 a loan. In either case, the payments
were presumably not made for the benefit of other
lienholders.” Slip op. at 13.
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 lien 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
6
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 lien 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
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broad powers that existed when this court decided Clark in 1872.
Today’s opinion does not acknowledge this important change to 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
lien claimants, in constructing the building on the land, enhanced the
value “by reason of their labor and materials furnished” in the amount
of $6292. 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.
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.
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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 lien
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.) Slip op. at 7.
Moreover, and contrary to the court’s interpretation (id. at 8 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 lien claimants are preferred as
to the improvements supplied thereafter.” Id. The statute
contemplates that lien 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 lien 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
“lien creditors” (mechanics lien 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 lien creditors (each mechanic lien 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
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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% (63,478/1,840,934), 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. Slip op.
at 14. 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 liens, 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 lien law is
“technical and complex”). Contributing to the real possibility of
confusion is the court’s reference to equitable subrogation.8 The
7
This represents the sum of the lien 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.
8
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
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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. Slip op. at
14. 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.
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.
9
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 lien claimants paid with
trust funds.” In its answer and affirmative defenses to Edon’s complaint to
foreclose on Edon’s mechanics lien, 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 sheriff’s sale. It appears that lien 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 line for payment behind LaSalle.
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