The Journal of The DuPage County Bar Association

Back Issues > Vol. 25 (2012-13)

New Legislation Gives Mechanics Lien Claimants Priority
By Michael T. Nigro and Howard M. Turner

On February 11, 2013 the Illinois Legislature passed an amendment to the Mechanics Lien Act granting Mechanics Lien Claimants a priority over mortgage companies on the value of the improvements and the right to the foreclosure sale proceeds.[1] This reverses the effect of LaSalle National Bank vs. Cypress Creek 1, LP decided by the Illinois Supreme Court in 2011. [2]

In Cypress Creek the Court ruled that Section 16 of the Mechanics Lien Act gave a mortgage (recorded prior to the contract between the general contractor and the owner) a shared priority with the Mechanics Lien claimants as to the value of the improvements.[3] (It was and is undisputed that Section 16 gives the prior recorded mortgage priority as to the value of the land.) Cypress Creek clarified a line of conflicting cases since 1895, some of which held that the Mechanics Lien creditor was to be preferred to the value of the improvements and other more recent cases that held there was a shared priority in the improvements.[4] Just as important as the ruling that the mortgage company had a shared priority, the Court also ruled that the mortgage company’s share included any payments it made to other contractors and subcontractors for their work on the improvements.

Thus, where the proceeds of the foreclosure sale were insufficient to pay the mortgage company and the Mechanics Lien Claimants in full, the court must allocate the proceeds of sale into two funds based upon the relative value of the land and the improvements.[5] The fund for the land is paid to the foreclosing mortgage holder. The fund for the improvement is paid to the mortgage holder and the Mechanics Lien claimants pro rata based upon their relative contribution to the improvements. Thus, the mortgage holder was to get credit for all payments it made to the other contractors and subcontractors for their work on the improvements. That total, compared to what is owed to the properly perfected Mechanics Lien claimants, was to be shared pro rata.[6]

The result of this decision was that where the mortgage company had made substantial payments to the other the contractors and subcontractors, the remaining unpaid, but perfected, Mechanics Lien claimants often obtained little or nothing from the foreclosure sale proceeds. The mortgage balance, interest and attorneys fees often far exceeded the balance owed the Mechanics Lien claimants. The prospect of such a small recovery often made any attempt at recovery uneconomic for the Mechanics Lien claimants.

Priority Means Payment to the Mechanics Lien Claimants

The new amendment to the Mechanics Lien Act reverses that decision. Now the Mechanics Lien claimants get the first dollars obtained from the Foreclosure sale that are attributable to the improvements. This will have a dramatic effect to the benefit of the Mechanics Lien claimants. Now, as long as they can show that they properly perfected their Mechanics Lien and improved the property, they can demand full payment to the extent of the improvement value at foreclosure sale. The practical effect, assuming that the value of the improvement exceeds the balance due the Mechanics Lien claimants, is that they can also demand payment of interest at 10% per annum and any court costs incurred to enforce their liens.[7]

Does the Amendment Apply to the Mechanics Lien Claims and Mechanics Lien Foreclosure Suits filed before the Amendment’s Effective Date.

The Amendment expressly provides that it is effective upon becoming law.[8] That means it was effective when the final legislative action was taken prior to its presentation to the Governor, which was February 11, 2013.[9]

But does it apply to the potential Mechanics Lien claims where the work is done but not recorded, the recorded Mechanics Lien claims, and pending lawsuits to foreclose the lien claims filed before the effective date? In the Senate debate, Senator Mulroe, arguing for the Amendment, stated that this was to apply to “future cases”.[10] Senator Dillard, also arguing for the Amendment, said he wanted the policy going forward to assure contractors that they would get paid.[11] Do these statements indicate a clear intention by the legislature to exclude potential and pending Mechanics Liens claims, and/or presently pending, but not decided, Mechanics Lien foreclosure actions?

Generally, any change in the law does not apply retroactively to a change in the substance of the law, but does apply to procedural changes in the law.[12] If the law is procedural, then it applies even if the procedure determines the outcome.[13] The Statute on Statutes also provides that if an amendment to an act does not expressly state that it is retroactive, it may not be applied retroactively to any substantive matters, but may be applied to “the proceedings” after the effective date.[14]

Illinois courts apply a three-tiered test to determine whether a statute should be applied retroactively.[15] First, what has the legislature intended? Second, is the amendment procedural or substantive? Third, if the legislature did not express a clear intent for prospective application, and the amendment is procedural in nature, then does it have a retroactive impact that adversely affects vested rights?[16]

In Schweickert v. AG Services of America, Inc.[17] the court explained how these rules are to be applied.  The court said:

In contrast, a substantive change in law establishes, creates, or defines rights. Ogdon, 415 Ill. 591, 114 N.E.2d 686. An example of an amendment which was characterized as substantive and applied prospectively involved a statutory amendment that allowed an income tax credit for subchapter S corporation shareholders that previously did not exist. Caveney v. Bower, 207 Ill.2d 82, 278 Ill.Dec. 1, 797 N.E.2d 596 (2003).

In this case, the 2002 amendment to section 9–316 is not part of the law which creates or defines the right. Ag Services has a perfected security interest in the crops pursuant to Section 9–322 of the UCC. Plaintiffs have landlord liens for the faithful performance of their cash rent lease created by the general provisions of Section 9–316 of the Code. The 2002 amendment to Section 9–316 did not alter those rights. The amendment merely altered the method by which a landlord could enforce that right. To have a superior priority, a landlord no longer needs to file a financing statement with the Secretary of State. The amendment changed the landlord's status as to the priority of his lien, but it did not change the lien. See Nelson v. Miller, 11 Ill.2d 378, 143 N.E.2d 673 (1957) (procedural amendment to long-arm statute merely established a new mode of obtaining jurisdiction over defendant to secure existing rights which were unaffected by amendment). Thus, we find that the 2002 amendment to Section 9–316 is a procedural, not a substantive, change.

Is the amendment to 770 ILCS 60/16 a procedural or substantive change? Remember the amendment only applies if: 1) the mortgage is recorded before the date of the contract between the contractor and the owner; and 2) the property sells for an insufficient sum to pay all the lienholders. Of course, that is only known after judgment and sale. So does the amendment modify a substantive right or merely modify the procedural remedy?  Applying the logic of Schweikert, it would appear that the change to 770 ILCS 60/16 is only procedural.  The change does not alter the fact that both mechanics lien claimants and mortgagees have liens on the real estate.  It only alters the procedures for allocating the proceeds of the sale of the real estate if there are not sufficient funds to satisfy both the mechanics lien claimants and the mortgagee.  But that is not the end of the inquiry.  The court in Schweikert went on to say[18]:

A finding that the statutory change is procedural in nature, however, does not end our inquiry. Even if a statutory amendment is procedural, it may not be applied retroactively if the statute would have a retroactive impact. An amended statute has a retroactive impact or effect if it; (1) impairs rights that a party possessed when it acted; (2) increases a party's liability for past conduct; or (3) imposes new duties with respect to transactions already completed. … A statute does not operate retrospectively merely because it upsets expectations based on prior law. Instead, we must consider whether the amendment attaches new legal consequences to events completed before the statute was changed.

Even if the amendment is only procedural rather than a substantive change, it still cannot be applied retroactively if it impairs some vested right or expectation, or increases liability for past conduct, or imposes new duties regarding transactions already completed.  The question is whether the mortgagee had a vested right to share in the proceeds of sale of the improvements at the time the amendment was adopted.  

In re Marriage of Duggan[19]  held that “[A] right has not vested until it is so perfected, complete, and unconditional that it may be equated with a property interest.”  The question is whether a mortgagee had such a vested right in the proceeds of the sale of the property that is allocable to the improvements when the amendment was adopted. 

This may depend upon the facts in the particular case.  If the sale has already occurred and there is no question that the portion of the proceeds allocable to the value of the property before the improvements were made is not sufficient to satisfy the mortgage, the mortgagee probably has a vested right.  Before that factual circumstance arises however, there may be no vested right.  It remains to be seen how the courts will deal with these issues.

[1] 770 ILCS 60/16

[2]  242 Ill. 2d 231 (2011)

[3] LaSalle Bank National Association v. Cypress Creek 1, LP, 242 Ill.2d 231 (2011)

[4] Id.  240 -243

[5]  Id. 248- 249

[6] Id.

[7] 770 ILCS 60/1

[8] 770 ILCS 60/16

[9] S.HS.A. Const. Art. IV, §9(a); 5 ILCS 75/3

[10] St. of Ill, 97th General Assembly, Senate Transcript, March 29, 2012, p 55

[11] St. of Ill, 97th General Assembly, Senate Transcript, March 29, 2012, p 63

[12] In re Marriage of Duggan, 376 Ill.App.3d, 725 , 728 – 729, 877 N.E.2d 1140(2 Dist.,2007)

[13] Id. 733

[14] 5 ILCS 70/4 (West 2006)

[15] Schweikert v AG Services of America, Inc., 355 Ill.App.3d 439, 441, 823 N.E.2d 213 (2005)

[16] Id.

[17] Id. 443-444

[18] Id.

[19] In re Marriage of Duggan, 376 Ill.App.3d 725, 729, 877 N.E.2d 1140(2 Dist.,2007)

Michael T. Nigro is a principal of Nigro & Westfall, P.C. Mike has focused his practice in commercial and construction law for over 30 years. He represents many construction equipment and material suppliers, subcontractors, and clients in commercial and contract disputes. He is an arbitrator for the construction panel for the American Arbitration Association.

Howard M. Turner is Of Counsel to Nigro, Westfall, & Gryska P.C.   He has 50 years  mechanics lien experience, has authored 10 mechanics liens publications, spoken numerous times on this subject,  helped draft the 2005 Illinois Mechanics Lien Act amendments and is a founding member of the Society of Illinois Construction Attorneys.

 
 
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