‘Expensive, Yes’; Impossible, No’ – Massive Wind Turbine Tower A Trade Fixture, Not Lienable – IL Second Dist.

Q: Does a multi-story wind turbine tower that can only be removed by detonating several bombs at a cost of over half a million dollars qualify as a lienable property improvement?

A: Not if it’s a “trade fixture” that remains the personal property of its manufacturer.

Source: AUI Construction Group, LLC v. Vaessen, 2016 IL App (2d) 160009, a recent Second District case that examines, among other things, the property improvement vs. trade fixture dichotomy and just how impractical structure removal must be to fall outside mechanics lien protection.

Facts: The property owner and turbine seller signed an easement agreement for the seller to install a turbine on defendant’s land for an annual fee.  The easement specifically provided the turbine would remain the seller’s property and required the seller to remove the structure on 90 days’ notice.  The easement also obligated the seller to remove the structure from the defendant’s property upon termination of the easement.

The turbine seller then contracted with a general contractor to install the turbine who, in turn, subcontracted out various aspects of the installation.

The contract between the owner and general contractor and the various downstream subcontracts all referenced the easement and made clear that the property owner was not the turbine system’s owner.

When the plaintiff sub-subcontractor didn’t get paid, he sued its subcontractor, ultimately getting an arbitration award of over $3M.  When that proved uncollectable after the subcontractor’s bankruptcy, the plaintiff sued the property owner to foreclose a mechanics lien based on the amount of its judgment against the bankrupt contractor.

Trial Court Result: The trial court dismissed the suit on the basis that the turbine was a removable trade fixture that was non-lienable as a matter of law.

Appellate Result: Affirmed

Reasons: The Court first noted that the purpose of the Mechanics Lien Act (770 ILCS 60/0.01 et seq.) is to protect those who, in good faith, furnish material or labor for the improvement of real property.  The Act allows a lien where a benefit has been received by the owner and where the property’s value has increased or improved by the furnishing of labor or materials.  In Illinois, real estate improvements are lienable; trade fixtures are not.

The factors considered in determining whether equipment is lienable includes (1) the nature of attachment to the realty, (2) the equipment’s adaptation to and necessity for the purpose to which the premises are devoted, and (3) whether it was intended that the item in question should be considered part of the realty.  Crane Erectors & Riggers, Inc. v. LaSalle National Bank, 125 Ill.App.3d 658 (1984).

Intent (factor (3)) is paramount.  Even where an item can be removed from land without injuring it, it will not categorically destroy lienability.  As long as the parties manifest an intent to improve the realty, a removable item can still be lienable.

Parties are also free to contract that title to equipment furnished to property does not pass to the land owner until fully paid for.  Such an agreement will be enforceable so long as no rights of third parties are unfairly affected.

Applying the three-factored fixture test, the court found that the first two factors – nature of attachment, and necessity of the item or production of wind energy on the defendant’s property – weighed in favor of finding that the turbine system was lienable.   However, the all-important intent factor suggested the opposite.

The easement agreement made it clear that the turbine seller retained its ownership interest in the turbine and could (and had to) remove it at the easement’s end.  The court wrote: “the easement agreement establishes that the tower was a trade fixture.”  (¶ 20)

The Court also found that plaintiff’s “third party” rights were not impacted since plaintiff’s contract with the subcontractor referred to both the easement and the general contract and each document established that the property owner did not own the turbine. (¶ 23)

The Court then dove deeper and examined some additional factors as part of its improvement-versus-fixture calculus.  From a patchwork of Illinois cases through the decades, the Court looked at (1) whether the turbine provided a benefit or enhancement to the property, (2) whether the turbine was removable without material damage to the property, (3) whether it was impractical to remove the item, (4) whether the item (turbine) was used to convert the premises from one use to another, and (5) the agreement and relationship between the parties.

According to the Court, the lone factor tilting in favor of lienability was the fourth factor – that the turbine was instrumental in converting the defendant’s land from farmland to harnessing wind energy.  All other factors pointed to the turbine being a nonlienable trade fixture.

The Court first found that the property owner didn’t derive a benefit from the turbine other than an annual rent payment.  Rent is generally not regarded as a lienable benefit under the law.  The Court next noted that the tower could be removed even though doing so was an expensive and cumbersome exercise.  Lastly, and most importantly, the parties’ intent was that the turbine was to remain seller’s personal property and for it not to be a permanent property improvement. (¶¶ 38-39)

The Court then rejected the subcontractor’s remaining arguments that the Illinois Property Tax Code evinced a legislative intent to view wind turbines as lienable improvements and that it’s unfair to disallow the plaintiff’s lien claim since it could not have a security interest in the turbine under Article 9 of the Uniform Commercial Code (UCC).

On the tax issue, the Court held that Illinois taxes turbines to ensure that wind turbines do not escape taxation.  It is purely a revenue generating device.  The mere fact that the State assesses taxes against turbines is not tantamount to a legislative intent that turbines are permanent property improvements. (¶¶ 43-44)

The Court then agreed with plaintiff that under UCC Section 9-334, security interests do not attach to “ordinary building materials incorporated into an improvement on land.”  Since the turbine was replete with building materials (e.g. concrete, rebar, electrical conduit), the UCC didn’t give the plaintiff a remedy.  But even though the UCC prevented plaintiff’s security interest, this didn’t mean that plaintiff should be given mechanics lien rights instead.  Again, the key inquiry was the parties’ clear intent that the turbine remain the seller’s personal property.

This case strikes a blow to contractors who play a role in installing behemoth-size equipment on real property.  Even something as massive as a turbine system, which one would think has a “death grip”- level attachment to land, can be nonlienable as long as there is clear intent that it remain personal property and removable by the system owner.

Another case lesson is for contractors to be extra diligent and insist on copies of all agreements referenced in their contracts to ensure their rights are protected from ancillary agreements to which they’re not privy.

The case also portrays some creative lawyering.  The court’s discussion of the taxability of wind turbines, UCC Article 9 and the difference between a lease (which can be lienable) and an easement (which cannot) and how it impacts the lienability question makes for interesting (if not mostly academic) reading.

 

Tacking Unsigned Change Orders On To Contractors’ Lien Not Enough For Constructive Fraud – IL Court

Constructive mechanics lien fraud and slander of title are two central topics the appeals court grapples with in Roy Zenere Trucking & Excavating, Inc. v. Build Tech, Inc., 2016 IL App (3d) 140946.  There, a commercial properly developer appealed bench trial judgments for two subcontractor plaintiffs – a paving contractor and an excavating firm – on the basis that the plaintiffs’ mechanics liens were inflated and fraudulent.

The developer argued that since the subcontractors tried to augment the lien by adding unsigned change order work to it – and the contracts required all change orders to be in writing – this equaled that voided the liens.  The trial court disagreed and entered judgment for the plaintiff subcontractors.

Affirming the trial court’s judgment, the appeals court provides a useful summary of the type of proof needed to sustain constructive fraud and slander of title claims in the construction lien setting and when attorneys’ fees can be awarded to prevailing parties under Illinois’ mechanics lien statute, 770 ILCS 60/1 (the Act).

Section 7(a) of the Act provides that no lien shall be defeated to the proper amount due to an error of overcharging unless it is shown that the error or overcharge was made with an “intent to defraud.”  Constructive fraud (i.e., fraud that can’t be proven to be purposeful) can also invalidate a lien but there must be more than a simple overcharge in the lien claim.  The overage must be coupled with other evidence of fraud.

Slander of title applies where (1) a defendant makes a false and malicious publication, (2) the publication disparages the plaintiff’s title to property, and (3) damages.  “Malicious” in the slander of title context means knowingly false or that statements were made with a reckless disregard of their truth or falsity.  If a party has reasonable grounds to believe it has a legal or equitable claim to property, even if it’s later proven to be false, this won’t amount to a slander of title.

Here, the appeals court agreed with the trial court that there was no evidence to support a constructive fraud or slander of title claim.  The defendant property owner admitted that the subcontractor plaintiffs performed the contract as well as the extra change order work.

While the Court excluded the unsigned change order work from the lien amount, there was still insufficient constructive fraud or slander of title evidence to sustain the owner’s counterclaims.  Though unsuccessful in adding the change orders to the lien, the Court found the plaintiffs had a reasonable basis to recover the extra work in their lien foreclosure actions based on the parties’ contracting conduct where the owner routinely paid extras without signed change orders.

The Court then examined whether the subcontractors could add their attorneys’ fees to the judgment.  Section 17(b) of the Act allows a court to assess attorneys’ fees against a property owner who fails to pay “without just cause or right.”  This equates to an owner raising a defense not “well grounded in fact and warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law.”  770 ILCS 60/17(b), (d).

The evidence at trial that the subcontractors substantially performed the paving and excavation work cut in favor of awarding fees to the plaintiffs.  There was no evidence to support the owner defendant’s failure to pay the subcontract amounts.  The Court held that this lack of a colorable basis not to pay the subcontractors was “without just cause or right” under the Act.

Afterwords:

1/ Constructive fraud requires more than a computational error in the lien amount.  There must be other “plus-factor” evidence that combines with the overcharge;

2/ Where a contractor has reasonable basis for lien claim, it will be impossible for plaintiff to meet the malicious publication requirement of a slander of title claim;

3/ This case is pro-contractor as it gives teeth to the Mechanics’ Lien Statute’s fee-shifting section.

 

 

Lien Inflation and “Plus Factors” – Constructive Fraud in Illinois Mechanics Lien Litigation

The contractor plaintiff in Father & Sons Home Improvement II, Inc. v. Stuart, 2016 IL App (1st) 143666 was caught in several lies in the process of recording and trying to foreclose its mechanics lien.  The misstatements resulted in the nullification of its lien and the plaintiff being on the hook for over $40K in opponent attorneys’ fees.

The plaintiff was hired to construct a deck, garage and basement on the defendant owner’s residence.  Inexplicably, the plaintiff recorded its mechanics lien 8 months before it finished its work. This was a problem because the lien contained the sworn testimony of plaintiff’s principal (via affidavit) that stated a completion date that was several months off.

Plaintiff then sued to foreclose the lien; again stating an inaccurate completion date in the complaint.  The owner and mortgage lender defendants filed separate summary judgment motions on the basis that the plaintiff committed constructive fraud by (1) falsely stating the lien completion date and (2) inflating the dollar value of its work in sworn documents (the affidavit and verified complaint).

Affirming summary judgment and separate fee awards for the defendants, the Court distilled the following mechanics lien constructive fraud principles:

  • The purpose of the mechanics lien act (Lien Act) is to require someone with an interest in real property to pay for property improvements or benefits he encouraged by his conduct.  Section 7 of the Lien Act provides that no lien will be defeated because of an error or if it states an inflated amount unless it is shown that the erroneous lien amount was made with “intent to defraud.”  770 ILCS 60/7;
  • The intent to defraud requirement aims to protect the honest lien claimant who simply makes a mistake in computing his lien amount.  But where there is evidence a lien claimant knowingly filed a false lien (either in completion date or amount), the lien claim will be defeated.  (¶¶ 30-31);
  • Where there is no direct proof of a contractor’s intent to defraud, “constructive fraud” can negate a lien where there is an overstated lien amount or false completion date combined with additional evidence;
  • The additional evidence or “plus factor” can come in the form of a false affidavit signed by the lien claimant that falsely states the underlying completion date or the amount of the improvements furnished to the property.  (¶ 35).

Based on the plaintiff’s multiple false statements – namely, a fabricated completion date and a grossly exaggerated lien amount based on the amount of work done – both in its mechanics lien and in its pleadings, the court found that at the very least, the plaintiff committed constructive fraud and invalidated the lien.

Attorneys’ Fees and Rule 137 Sanctions

The court also taxed the property owners’ attorneys’ fees to the losing contractor.  Section 17 of the Lien Act provides that an owner can recover its attorneys’ fees where a contractor files a lien action “without just cause or right.”  The Lien Act also specifies that only the owner – not any other party involved in the chain of contracts or other lienholders – can recover its attorneys’ fees.  A lien claim giving rise to a fee award is one that is “not well grounded in fact and warranted by existing law or a good faith argument for the extension, modification or reversal of existing law.”  770 ILCS 60/17(d).

Based on the contractor’s clear case of constructive fraud in filing a lien with a false completion date and in a grossly excessive sum, the court ordered the contractor to pay the owner defendants’ attorneys’ fees.

The lender – who is not the property owner – wasn’t entitled to fees under Section 17 of the Lien Act.  Enter Rule 137 sanctions.  In Illinois, Rule 137 sanctions are awarded to prevent abuse of the judicial process by penalizing those who file vexatious and harassing lawsuit based on unsupported statements of fact or law.  Before assessing sanctions, a court does not engage in hindsight but instead looks at what was objectively reasonable at the time an attorney signed a document or filed a motion.

Because the plaintiff contractor repeatedly submitted false documents in the course of the litigation, the court awarded the mortgage lender its attorneys’ fees incurred in defending the lien suit and in successfully moving for summary judgment.  All told,  the Court sanctioned the contractor to the tune of over $26,000; awarding this sum to the lender defendant.

Afterwords:

This case serves as an obvious cautionary tale for mechanics lien plaintiffs.  Plainly, a lien claimant must state an accurate completion date and properly state the monetary value of improvements.  If the claimant realizes it has made a mistake, it should amend the lien.  And even though an amended lien usually won’t bind third parties (e.g. lenders, other lienholders, etc.), it’s better to correct known lien errors than to risk a hefty fee award at case’s end.