Massive Wind Turbine Tower A Trade Fixture, Not Lienable Property Improvement – IL Second Dist.

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

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

Source: AUI Construction Group, LLC v. Vaessen, 2016 IL App (2d) 160009, a recent Second District case that examines the property improvement vs. trade fixture dichotomy and just how impractical removal (of a structure) 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 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.

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 Mechanics Lien Act (770 ILCS 60/0.01 et seq.) protects those who 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 the property’s value has increased by the labor or materials’ presence. 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.  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 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 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 and rent is usually not a lienable benefit under the law.  Then the Court pointed out 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 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’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 and is purely a revenue-generating device.  Taxation of a structure is not a proxy for lienability. (¶¶ 43-44)

The Court agreed with plaintiff that under UCC Section 9-334, security interests do not attach to “ordinary building materials incorporated into an improvement on land.”  And 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.

Afterwords:

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.

 

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.

 

 

Faulty Service on Defunct LLC Spells Trouble for Judgment Creditor – IL 1st Dist.

In a case whose procedural progression spans more than a decade, the First District in John Isfan Construction v. Longwood Towers, LLC, 2016 IL App (1st) 143211 examines the litigation aftershocks flowing from a failure to properly serve a limited liability company (LLC).

The case also illustrates when a money judgment can be vacated under the “substantial justice” standard governing non-final judgments.

The tortured case chronology went like this:

2003 – plaintiff files a mechanics lien suit against LLC for unpaid construction work on an 80-unit condominium development;

2005 – LLC dissolves involuntarily;

2005 – lien suit voluntarily dismissed;

2006 – plaintiff breach of contract action filed against LLC;

2009 – default judgment entered against LLC for about $800K;

2011 – plaintiff issues citations to discover assets to LLC’s former members and files complaint against the members to hold them liable for the 2009 default judgment (on the theory that the LLC made unlawful distributions to the members);

2014 – LLC members move to vacate the 2009 judgment. Motion is denied by the trial court and LLC members appeal.

Holding: The appeals court reversed the trial court and found that the 2009 default judgment was void.

The reason: Plaintiff’s failure to properly serve the defunct LLC under Illinois law. As a result, a hefty money judgment was vacated.

Q:           Why?

A:            A defendant must be served with process for a court to exercise personal jurisdiction over him.  A judgment entered against a party who is not properly served is void.  

Section 50 of the LLC Act (805 ILCS 180/1-50) provides that service of process on an LLC defendant must be made on (a) the LLC’s registered agent or (b) the Secretary of State if the LLC doesn’t appoint a registered agent or where the LLC’s registered agent cannot be found at the LLC’s registered office or principal place of business.

In the context of a dissolved LLC, the LLC Act provides that an LLC continues post-dissolution solely for the purpose of winding up.  This is in contrast to the corporate survival statute that provides that a dissolved (non-LLC) corporation continues for five years after dissolution (This means the defunct corporation can be sued and served for up to five years after dissolution.)  805 ILCS 5/5.05.

Here, the plaintiff sued the LLC’s former registered agent over a year after the LLC dissolved.  This was improper service under the LLC Act.  By failing to serve the Secretary of State in accordance with the LLC Act, the court lacked jurisdiction over the LLC.  (¶¶ 37-40)

The Court also rejected the plaintiff’s argument that the erstwhile LLC members waived their objection to jurisdiction over the LLC by participating in post-judgment proceedings.

Since a party who submits to a court’s jurisdiction does so only prospectively, not retroactively, the party’s appearance doesn’t activate an earlier order entered in the case before the appearance was filed. (¶¶ 40-42)

Another reason the Court voided the default judgment was the “substantial justice” standard which governs whether a court will vacate a judgment under Code Section 2-1301(e). 

The reason Section 2-1301 applied instead of the harsher 2-1401 was because the judgment wasn’t final.  It wasn’t final because at the time the judgment was entered, the plaintiff had a pending claim against another party that wasn’t disposed of.  ((¶¶ 46-47)

Under Illinois law, a default judgment is a drastic remedy and Illinois courts have a long and strong policy of deciding cases on the merits instead of on procedural grounds.  In addition, when seeking to vacate a non-final default order, the movant does not have to show a meritorious defense or diligence in presenting the defense.

Applying these default order guideposts, the Court found that substantial justice considerations dictated that the default judgment be vacated.  Even though the judgment was entered some five years before the motion to vacate was filed, it wasn’t a final order. 

This meant the LLC member movants did not have to show diligence in defending the action or a meritorious defense.  All the members had to demonstrate was that it was fair and just that they have their day in court and that they should be able to defend the plaintiff’s unlawful transfers allegations. (¶¶ 49, 51)

Afterwords: This case provides a useful summary of the key rules that govern how to serve LLC’s and particularly, dissolved LLC’s.  The case’s “cautionary tales” are to (i) serve corporate defendants in accordance with statutory direction; and (ii) always request a finding of finality for default judgments where there are multiple parties or claims involved.

Had the plaintiff received a finding of finality, the LLC members’ motion to vacate would have been untimely under Section 2-1401 – which requires a motion to attack a final judgment to be brought within two years and has a heavier proof burden than a 2-1301 motion.  Still, it wouldn’t have mattered here. The plaintiff’s failure to properly serve the LLC meant the judgment was void and could have been attacked at any time.