Illinois Court: LLC Member Can File Mechanics’ Lien Against Property Owned by That LLC

How meta is this fact pattern? Peabody-Waterside v. Islands of Waterside, LLC, 2013 IL App (5th) 120490, examines the distinction between LLC entity liability and an LLC member’s personal liability through the lens of a mechanics lien claim filed against an LLC by one of its own members.

Recall that Illinois law recognizes a clear line of demarcation between the LLC entity and its constituent members.

A judgment against a limited liability company (LLC) doesn’t equate to a judgment against an LLC member.  805 ILCS 180/10-10.  Similarly, a judgment against an LLC member isn’t binding on the LLC.  805 ILCS 180/30-20(a), (b).

A judgment creditor of an LLC member cannot look to LLC assets to satisfy the judgment.  Instead, the creditor must seek a “charging order” against the LLC’s distribution to the member – the member’s “distributional interest.”

In Peabody, the defendant LLC owned real estate that had a $7.5M mortgage on it.  That LLC was itself comprised of two separate LLCs, each holding a 50% interest in the defendant.  The plaintiff was one of the LLC members.

Plaintiff recorded a contractor’s lien against the LLC’s property for about $4.5M after the plaintiff did site preparation and grading work on the site under a written cost-plus construction contract with the LLC owner.  Plaintiff sued naming the owner LLC and the lender as defendants.

The prior lender moved for summary judgment on the plaintiff’s lien claim.  It (the lender) argued that since the plaintiff – as 50% member of the owner entity – was in effect a “joint owner” of the property, it couldn’t lien its own property.  The trial court agreed and entered judgment for the lender. The plaintiff appealed.

Result: Reversed.

Q: Why?

A: The general rule is that a contractor can’t lien its own property. ¶ 8.  For example, a joint venturer can’t lien property owned by the joint venture.  That’s because joint venturers are each viewed as co-owners of the joint venture’s property and the law doesn’t allow a co-owner to lien his own property.

Not so with an LLC.  Where property is titled in an LLC, the members do not have ownership interests in the property.  An LLC has an independent legal existence from its members and managers.  Any real or personal property that an LLC owns is owned by the LLC; not its members.

Membership in an LLC does not confer an ownership interest in the LLC’s real or personal property.  An LLC member is not a co-owner of LLC property and has no transferable interest in it.  805 ILCS 180/30-1.

Here, since the liened property was owned by the LLC, plaintiff – a member – wasn’t a joint owner of the property.  In addition, contrary to the lender’s argument, there was no evidence of fraud or collusion between the plaintiff, the other LLC’s other member and the LLC property owner.  ¶¶ 10-11.  As a result, plaintiff’s mechanics lien was valid.

Take-aways: Peabody-Waterside provides solid example of a court recognizing the separate, independent existence of an LLC from its members.

The Court also shows a willingness to look at “policy” reasons or equitable concerns in reaching its holding: it discussed how the plaintiff had a standard cost-plus contract with the owner, that it performed over $4.5M worth of services that enhanced the land and wasn’t paid.

Taken together, these factors weighed in favor of allowing the plaintiff’s lien.

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PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.

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