AUI Construction Group, LLC v. Vaessen, 2016 IL App (2d) 160009 wrestles with whether a massive wind turbine tower that can be removed only by detonating several bombs at a cost of over half a million dollars qualifies as a lienable property improvement or is a non-lienable trade fixture under Illinois law.
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 provided the turbine would remain the seller’s property and that the seller must remove the structure on 90 days’ notice. The seller also had to remove the turbine when the easement ended. The turbine seller then contracted with a general contractor to install the turbine who, in turn, subcontracted out various aspects of the installation.
The owner-general contractor agreement and the downstream subcontracts referenced the easement and stated the turbine system remained the seller’s property.
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 it previously recorded to recover the unpaid judgment. 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.
Affirming, the Second District first noted that Illinois’ Mechanics Lien Act (770 ILCS 60/0.01 et seq.)(MLA) protects those who furnish material or labor for the improvement of real property. The MLA allows a claimant to record a lien where its labor, materials or services improves the property’s value. 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, doesn’t mean the item isn’t lienable. So long as the parties manifest an intent to improve the realty, a removable item can still be lienable. Moreover, parties are free to specify in their contract that title to equipment furnished to property will not pass to the land owner until its fully paid for.
Applying the three-factored fixture test, the court found the nature of attachment, and necessity of the item for production of wind energy weighed in favor of finding the turbine lienable. However, the all-important intent factor (factor number 3 above) suggested the opposite.
The easement agreement specified 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 sub-subcontract specifically referenced the easement and prime contract – both of which stated the turbine would remain seller’s property. (¶ 23)
The Court examined additional factors to decide whether the turbine was lienable. 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.
The sole factor tilting (no pun intended) in favor of lienability was factor 4 – that the turbine was essential to converting the defendant’s land from farmland to harnessing of wind energy. All other factors pointed to the turbine being a nonlienable trade fixture.
The Court noted the property owner didn’t derive a benefit from the turbine other than an annual rent payment it received and rent is typically not lienable under the law. The Court also pointed out that the tower could be removed albeit it through a laborious and expensive process. 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 also rejected the subcontractor’s remaining arguments that (1) the Illinois Property Tax Code evinced a legislative intent to view wind turbines as lienable improvements and (2) it is 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 and is purely a revenue-generating device. Taxation of a structure is not a proxy for lienability. (¶¶ 43-44)
The Court agreed with that the subcontractor plaintiff did not have a security interest in the turbine under UCC Section 9-334 since, under that section, 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. The Court allowed that this was a harsh result but the parties’ clear intent that the turbine remain the seller’s personal property trumped the policy arguments.
This case strikes a blow to contractors who install large structures on real estate. Even something as immense as a multi-piece turbine system, which seemingly has a “death grip”- level attachment to land, can be nonlienable if that’s what the parties intended.
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 in other agreements to which they’re not a party.
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 reading.