‘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.