Mechanics’ Lien Enhancement Rule – Post-Cypress Creek

Section 16 of the mechanics lien statute (770 ILCS 60/17), which codifies the enhancement rule (please see prior post), was recently amended in the wake of 2011’s LaSalle National Bank v. Cypress Creek 1, LLP decision:

http://www.state.il.us/court/Opinions/SupremeCourt/2011/February/109954.pdf

In Cypress Creek, the Illinois Supreme Court severely diluted contractor’s lien rights by allowing a construction lender to trump contractors’ rights to sale proceeds.  The Court accomplished this by allowing the lender to take priority to the amount of property improvements it funded – even funds paid to contractors that didn’t record liens.  Essentially, as Justice Freeman said in his detailed dissent, the Court put lenders that fund property improvements on a par with contractor lien claimants and conferred lien creditor status on the lender by “judicial fiat”.  This resulted in the lender getting the lion’s share of sale proceeds while the contractors received only a  fraction of the monies. 

Another pro-lender, anti-contractor holding of the Cypress Creek was that lien claimants only took priority for the specific value of their individual improvements; as opposed to proportionally taking priority to the total value of all contractor improvements to the land. The result: banks and lenders were thrilled; contractors were furious.

After public outcry and warring legislative bills, the legislature passed H.B. 3636, and the bill was signed into law on February 11, 2013 as P.A. 97–1165.  It essentially reverses Cypress Creek and provides that a lender has priority only to the value of the land at the time of the owner-general prime contract and that lien claimants (contractors) take priority for the value of all improvements constructed after the prime contract (not just the specific improvements performed by an individual contractor).

770 ILCS 60/16 of the Act now reads:

When the proceeds of a sale are insufficient to satisfy the claims of both previous incumbrancers and lien creditors, the proceeds of the sale shall be distributed as follows: (i) any previous incumbrancers shall have a paramount lien in the portion of the proceeds attributable to the value of the land at the time of making of the contract for improvements; and (ii) any lien creditors shall have a paramount lien in the portion of the proceeds attributable to the value of all subsequent improvements made to the property.

 At this point it’s too early to tell what impact HB 3636 will have on construction lending and mechanics lien law in Illinois.  Stay tuned.

PBP