Mechanic’s Liens: Illinois Supreme Court Cypress Creek Decision
Last year the Illinois Supreme Court issued a decision that is causing a great deal of discussion in the construction industry and legislation has now been introduced to overturn the Court’s decision. The Supreme Court’s opinion was issued in the case of LaSalle Bank, N.A. vs Cypress Creek 1, LP. What was at issue was the competing interests of a prior mortgage and mechanic’s lien claimants when a development project went bust and the mortgage foreclosed.
In situations where you have the competing interests of a prior recorded mortgage and mechanic’s lien claimants you have to deal with the concept of enhancement, the increased value of the property due to the improvements that were made. The value of the land before the improvements were constructed is subtracted from the value as improved. The result is the enhanced value. Section 16 of the Mechanic’s Lien Act provides that prior encumbrancers (the mortgage holder) are preferred to the value of the land at the time of making the contract and the lien creditor (those providing the labor and materials) are preferred to the value of the improvements erected on the property. However, this is not how the Illinois Supreme Court interpreted Section 16 of the Act.
In Cypress Creek, LaSalle Bank paid certain of the contractors that performed work and argued that it should be subrogated to their position and given equal priority to mechanic’s lien claimants asserting their liens for work done and claiming the benefit of the enhanced value of the property. The majority opinion in Cypress Creek sided with the Bank and held that if construction disbursements are used to pay for lienable work the lender is subrogated and has equal priority to an enhancement claim under section 16. The effect of the Court’s decision is that now when you have an enhancement situation the mechanic’s lien claimant’s percentage of any sale proceeds is diluted.
There were two Supreme Court Judges that dissented and stated that the majority of the Court was not following the provisions of Section 16 of the Act and were impermissibly expanding the definition of the word “contractor” to include construction lenders. I happen to agree with the dissenting judges. Having litigated many cases that involved enhancement issues if the decision in Cypress Creek is left intact it will seriously hamper a contractor’s ability to be paid anything but a fraction of the claim. If a project has gone bust and a lender is given equal priority with mechanic’s lien claimants as to the enhanced value of the property the result is a serious dilution of the proceeds of a sale that would otherwise go to the contractors that constructed the improvements.
There is legislation pending in the Illinois legislature to in effect overrule the Illinois Supreme Court’s decision in Cypress Creek. The proposed legislation amends section 16 of the Act to make it clear that a mortgage holder is only preferred as to the value of the land at the time the contract is made and “shall not be preferred to the value of any subsequent improvements.” The proposed amendment further provides that each mechanic’s lien claimant is to be preferred to the value of “all subsequent improvements” whether or not they were provided by the lien claimant. If this legislation is passed, the adverse consequences of the Cypress Creek decision will be avoided.
I will keep you updated on whether this amendment to the Act is passed. I would suggest you may want to contact your State Senator and Representative and urge that they vote in favor of the proposed amendment. Also it would be a good idea to get your trade association behind this legislation. I know the Chicago Plumbing Contractor’s Association and the Illinois Mechanical and Specialty Contractors Association are actively pursuing passage of the proposed amendment to Section 16 of the Act. If you have any questions let me know.