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Construction Law Today

No Mechanics Lien For Pre-Purchase Due Diligence Consultants

Posted in Claims, Environmental, Illinois, Mechanics Liens, States

synthetic fuel engineerFees for property purchase feasibility consulting are not secured by a mechanics lien. That’s what a panel of Illinois Appellate Court Justices held in Mostardi-Platt Associates v. Czerniejewski.

Backstory

Power Holdings of Illinois wants to build a new synthetic fuel plant that processes coal into gas. They need land for the proposed plant. So, as principal they hire ADA Resources as an agent to scout locations. The agent’s role includes analyzing whether a particular piece of land will suit Power Holdings’ proposed plant. And so the agent hires Mostardi-Platt Associates to consult on feasibility, particularly, feasibility of of regulatory approvals.

In their search for suitable land, the agent comes across the Czerniejewski farm. The Czerniejewskis grant the agent—and so Power Holdings as principal too—an option to buy their farm. Afterwards—as part of deciding whether to exercise the option and buy the farm—the agent has the consultant study the feasibility of getting regulatory approvals for a plant on the Czerniejewskis’ farm.

Cut to the chase: Power Holdings doesn’t buy the farm, and neither they—nor ADA Resources as their agent—pay the consultant. (Why? The justices don’t tell us.) But with a debt for consulting fees unpaid, the consultant records a mechanics lien claim against the Czerniejewskis’ farm to secure that debt. Then the consultant sues both Power Holdings (as principal) and ADA Resources (as Power Holdings’ agent) to collect the debt. And the consultant also sues the Czerniejewskis to foreclose the mechanics lien claimed against their farm to secure that debt.

The Czerniejewskis move early to dismiss the consultant’s mechanics lien foreclosure. They contend that fees for pre-purchase feasibility study services for a buyer (who didn’t buy their farm) don’t qualify to be secured by a mechanics lien. Judge Robert Lewis hearing the case agrees. He grants the motion and dismisses the consultant’s mechanics lien foreclosure claim.  The consultant appeals.

No Consultant Mechanics Lien

The three appellate court justices hearing the appeal agree with the Czerniejewskis and affirm Judge Lewis’s decision: under the Mechanics Lien Act, the debt to the consultant for pre-purchase feasibility study services doesn’t qualify to be secured by a mechanics lien against the Czerniejewskis’ farm.

Two features animate the justices decision:

  • These services didn’t enhance the value of the Czerniejewskis’ farm
  • The Czerniejewskis received no benefit from the consultants’ services

The farm was the same after the consultants performed their study and reported to their client—Power Holdings, through their agent ADA Resources—as before the study began. And the Czerniejewskis—being in the agricultural instead of synthetic fuel business—reaped no benefit from whatever the consultants’ study said about the feasibility of their farm as a synthetic fuel plant.

Your Property: Collateral for Someone Else’s Debt

This decision reveals something that runs in the background behind many mechanics lien disputes: under the Mechanics Lien Act, an owner’s property becomes collateral securing someone else’s debt to a stranger. We usually see this when a prime contractor doesn’t pay a subcontractor, or a subcontractor doesn’t pay a material supplier. The owner does not know, and did not contract with, the unpaid subcontractor or supplier. Yet most mechanics lien statutes allow that subcontractor and supplier to claim—and foreclose—a mechanics lien against the owner’s  property.

The background assumption: the subcontractor’s work,and the supplier’s materials, improve the owner’s property. The owner reaps the benefit of  improvement through greater property value. And so it’s fair for the government—through a mechanics lien act—to place that property collateral for the debts owed to the subcontractor and supplier respectively.

Generally, neither a stranger nor the government can pledge your property as collateral for someone else’s debt without your approval. But mechanics lien statutes are an exception to that general rule. They recognize improvement and greater value conferred as a substitute for the owner’s approval, and allow the owner’s property to become collateral for a prime contractor’s debt to a subcontract, or a subcontractor’s debt to a  material supplier. Essentially, the benefit the owner receives—or is often presumed to receive—is regarded as a substitute for the owner’s voluntarily pledging their property as collateral in the usual way, i.e., signing a mortgage. Agree or disagree philosophically, that’s one of the principal things mechanics lien statutes do. And as long as they do, those statutes are going to arouse controversies (with many becoming lawsuits).

Observations and Lessons

  • Debts for services that the owner doesn’t contract for and don’t improve the property, can’t be secured by a mechanics lien. Consultants providing pre-purchase services for erstwhile buyers should be wary. The Mechanics Lien Act will not secure their client’s unpaid debt. But there’s more than one way to secure a debt. And consultants providing those kinds of services might be want to consider them
  • Erstwhile sellers should be wary too. The Czerniejewskis successfully got the consultant’s mechanics lien foreclosure dismissed—and presumably got the claim of lien quiet-titled-off as a cloud against title to their property. But that probably didn’t happen for free. Title insurance doesn’t usually cover that cost. And if the Czerniejewskis’ option contract with Power Holdings didn’t oblige Power Holdings to indemnify them against lien claims by Power Holdings’ consultants, looking back, they probably wish it did
  • Last, one must wonder if the result would be different had Power Holdings exercised their option, bought the farm, and built a synthetic fuel plant? Had the consultant sued Power Holdings—not just as contract counterparty, but as owner or property whose value the consultant’s feasibility services presumably enhanced—would the justices have decided differently?