Mechanics Lien Priority: Contractor vs. Lender - Part 3
Back in Mechanics Lien Priority: Contractor vs. Lender - Part 2 we talked about the backstory of the LaSalle Bank, N.A. v. Cypress Creek 1, LP (PDF) decision: who was involved, what started the dispute, what was at stake, and how the first judge hearing the case decided. Now it's time to talk about the appeals court judges' decision and why they decided the way they did. This won't be easy or brief. So we'll break it into a series of several posts.
The Perfected Contractors' First Request: Full Priority
The Perfected Contractors first asked the appeals court judges to grant each of their perfected mechanics liens full priority over the Lender's mortgage. Requested result: the Perfected Contractors get paid in full from the foreclosure sale money before the Lender gets a penny. Naturally, the Lender opposed this.
Section 16 of the Mechanics Lien Act
So, the first step in the judges work flow was deciding what gets priority, at least initially: the Perfected Contractors' perfected mechanics liens or the Lender''s mortgage? They looked to Section 16 of the Illinois Mechanics Lien Act for the answer. Section 16 says:
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.
Frustrated trying to find the answer in there? It's not easy. The operative part of Section 16 - the first sentence - is 126 words long, has a Flesch Reading Ease Score of 0, and a Flesch-Kincaid Grade Level Score of 52.4. It's no wonder the annotations to the Mechanics Lien Act are littered with judicial decisions about what Section 16 means. You have to read at above a 52nd grade level to comprehend it!
Luckily, the judges hearing this appeal were able to muddle through Section 16 and provide an answer:
- If the Lender recorded their morgatge before the Perfected Contractors entered into their contract with the Owner to provide Work on the project, the Lender's mortgage gets priority
- But if the Perfected Contractors entered into their contracts with the Owner before the Lender recorded their mortgage, than the Perfected Contractors' mechanics liens get priority. Note too that the Perfected Contractor may also get priority if they started providing work before the Lender recorded their mortgage. But that wasn't an issue in this case so the judges didn't mention it
Priority For Now Goes To The Lender
Recall from last post that the Lender recorded their mortgage before the Perfected Contractors entered into their respective contracts with the Owner. Result: at least initially, the Lender's mortgage get priority. So, for now, the Lender drinks their fill of lemonade before either Perfected Contractor gets a sip.
Coming Up Next
In Mechanics Lien Priority: Contractor vs. Lender - Part 4, we'll talk about the second step in the judges' workflow:
- Segregating the value of the project's land from the value of improvements provided by the Perfected Contractors and others
- How that segregation affects distribution of the foreclosure sale money among the Lender and the Perfected Contractors. This arouses intense controversy and disagreement when there isn't enough money to pay what everyone is owed. The judges hearing this appeal even disagreed amongst themselves. It's worth tuning-in next time to see how they come out.
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