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Construction Law Today

Mechanics Lien Priority: Contractor vs. Lender – Part 1

Posted in Attorneys Fees and Costs, Illinois, Mechanics Liens, States

Contractor and Banker Looking at Construction ProjectWhen 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 a designer or conractor who holds a properly perfected mechanics lien (each a "Payee"), the lender succeeds by subrogation to the priority of the Payee’s mechanics lien.  By paying a Payee, the lender essentially buys the Payee’s mechanics lien.  But that works only to the extent the lender pays off a Payee who holds a properly perfected mechanics lien.  The lender doesn’t succeed, and doesn’t get priority, just because they pay money to a designer or builder who provided lienable work, but didn’t perfect a mechanics lien to secure payment

LaSalle Bank, N.A., v. Cypress Creek 1, LP

Judges from the Illinois Appellate Court (Third District) addressed these priority issues in their Cypress Creek decision.  They focused on who, among two rivals, gets priority to the purchase money paid at a foreclosure sale.  Precisely, money from the foreclosure sale of property with a partially completed construction project. 

The rivals for priority:

  • The construction lender with a mortgage against the property (the "Lender")
     
  • Two unpaid contractors, each with a perfected mechanics lien against the property (the "Perfected Contractors")    

Priority Basics

Before we get into the details of the Cypress Creek decision and who got what, we must first divert our attention to a short introduction on the basics of priority and why it was important enough for the Lender and the Perfected Contractors to go to court over it. 

"Priority" is about who gets something first (the word is actually derived from the Latin word meaning "first").  And priority becomes especially important when there’s not enough of something to go around.

Children Queued Up At A Lemonade StandBecuase it’s so abstract, it’s helpful to visualize priority. Imagine it’s a sweltering summer’s day. You’re thirsty, really thirsty! Then you find salvation: neighborhood kids selling ice cold lemonade.  Beads of condensation drip down the side of the cool lemonade pitcher. The ice glistens in the afternoon sunlight and you hear it crackle.  You approach and draw your wallet.

But there’s trouble.  There’s only one pitcher of lemonade left.  And there’s a lot of other thirsty customers thinking the same thing too.  There’s not going to be enough lemonade!

So you and the other erstwhile customers form up in a queue to fill your cups.  These kids sell on a "first come, first served" basis.  So when the lemonade runs out, whoever’s still in the queue goes away with their vessel less than full.  Odds are they’re going to go away thirsty, disappointed, and grumpy too.  

This is where "priority" starts to matter.  Priority sets the order of where you and everyone else stands in the queue.  The more "senior" your priority, the closer to the front you stand.  And the closer to the front you stand, the better your odds for a full cup of lemonade. 

So everyone wants the most senior priority.  And whether it’s lemonade, or money from a foreclosure sale, they’re often willing to fight over it. And that’s what priority is all about.

Coming Up Next

In Mechanics Lien Priority: Contractor vs. Lender – Part 2, we’ll talk about the backstory of the Cypress Creek decision 

 

  • Interesting post Josh. Virginia specifically provides the lender gets first priority on the ground, the contractor gets first priority on the improvements.
    Of particular note is that mechanic’s liens survive foreclosure in Virginia. Do they in Illinois as well?

  • ^ Tim,
    Illinois is similar but not exactly the same on who gets priority to the land and who gets priority to the improvements.
    Usually under Illinois law, a senior lien can foreclose out a junior lien regardless of whether the junior lien is a mechanics lien or some other type of lien (e.g., a commercial real estate broker’s lien). And that often intensifies the controversy over who has priority over who.

  • Peter

    Josh, I am curious as to what impact an FDIC takeover has on the mechanics liens of sub-subcontractors, if any?