Construction Law Today : Construction Lawyer & Attorney : Joshua Glazov : Design Build Contracts, Construction Bankruptcy

When both a mortgage lender and a mechanics lien holder foreclose against the same piece of property, who gets priority to the money paid at the foreclosure sale?  One recent Illinois judicial decision, LaSalle Bank, N.A. v. Cypress Creek 1, LP, says they both do, depending on what part of the property you're talking about:

• The lender's mortgage gets priority on the value of the property before improvement by designers and contractors
   
• The mechanics lien gets priority on value added to the property by improvements from designers and contractors
   
• Then, to the extent the lender pays off someone who holds a properly perfected mechanics lien, the lender succeeds to the priority of that mechanics lien claim too.  But that's only to the extent the lender pays off someone who holds a perfected mechanics lien.  The lender doesn't succeed, and doesn't get more senior priority, just because they pay money to a designer or builder who provided lienable work, but didn't perfect a mechanics lien for that money against the property

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Judges to owner: demanding that your contractor foreclose their mechanics lien within 30 days or lose it forever waives your right to require arbitration.

 

The Backstory of Illinois Concrete-I.C.I., Inc. v. Storefitters, Inc.

Unfortunately, the Illinois Appellate Court (Second District) decision in Illinois Concrete-I.C.I., Inc. v. Storefitters, Inc. (PDF) doesn't give us too many background details.  Here's what we can gather: an owner entered into a contract with a contractor to provide some type of construction work for the owner.  The contract had an arbitration clause, presumably one that says that if the owner and the contractor get into a dispute, they must submit the dispute to binding arbitration instead of resorting to the courts.

The owner and the contractor got into a dispute.  The owner didn't pay.  So the contractor recorded a lien against the property they'd worked on.

Under Section 34 of the Illinois Mechanics Lien Act (PDF) an owner (and others too) can serve a written demand on anyone holding a mechanics lien against their property (a "mechanics lien holder") demanding that the mechanics lien holder sue to foreclose their mechanics lien within 30 days (a "Section 34 demand").  And if the mechanics lien claimant doesn't go to the clerk of the court and file their foreclosure complaint before that 30 days expires, the mechanics lien claimant forfeits their lien.

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In this past post I mentioned a bill (HB344) in the Illinois legislature to amend the Illinois Contractor Prompt Payment Act putting caps on retainage under private construction contract and subcontracts.  The legislative session has ended and the bill did not emerge from the Illinois's Senate Executive Committee and will not be enacted this spring.  We'll see if the bill returns later this year or in the next legislative session.  Stay tuned.

Interested in construction related bills that did pass the Illinois legislature this session?  Check out the Illinois Construction Law Blog's report on HB236 amending the Illinois Mechanics Lien Act.  Both houses passed the bill and it's now with Governor Quinn waiting for him to sign it.

If Governor Quinn signs this bill, prime contractors must give homeowners written notice within 10 days after recording a mechanics lien informing the homeowner that the contractor has recorded the lien.  Here's a legislative staff summary of  HB236:

Amends the Mechanics Lien Act to provide that:

• A contractor for improvements of an owner-occupied single-family residence must give the owner written notice within 10 days after recording a lien against any property of the owner.
  
• The notice is served when it is sent or personally delivered.
  
• If timely notice is not given and, as a result, the owner has suffered damages before notice is given, the lien is extinguished to the extent of the damages.
  
• The mere recording of the lien claim is not considered damages. These changes do not apply to subcontractors and only apply to contracts entered into after the effective date.

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