Tag: lien

The Illinois Commercial Real Estate Broker’s Lien Statute: A Top 10 List

The Illinois Commercial Real Estate Broker’s Lien Act, 770 ILCS 15/1 (the “Act”), provides a broker whose owed commission money with a strong remedy against a breaching property owner, buyer or tenant. Here are some of the Act’s key provisions:

1. What It Applies To:

“Commercial real estate.”  This is defined as any real estate in Illinois other than (i) real estate containing one to six residential units, (ii) real estate on which no buildings or structures are located, or (iii) real estate classified as farmland under the Property Tax Code.  770 ILCS 15/15

2. What It Doesn’t Apply To:

Real estate that isn’t “commercial”, including single family residential units like condominiums, townhouses, or homes in a subdivision when sold conveyed on a unit-by-unit basis.

3. Is Written Agreement Required? Yes.  770 ILCS 15/10.

4. When Does it Attach?:
The lien attaches when two things happen: (1) the broker becomes entitled to a fee or commission under a written instrument signed by the owner, buyer, tenant (or their agent); and (2) the broker records a notice of lien in the Recorder’s Office of the county where the commercial real estate is located.

5. Does the Lien Relate Back? No.   Unlike mechanics liens, the broker lien does not relate back to the date of contract between broker and owner (or buyer or tenant).  770 ILCS 15/10.

6.  Timing/When To Record:  In the case of a lease, the lien must be recorded within 90 days after the tenant takes possession of the premises,  Exception: if broker is given written notice of the planned lease signing at least 10 days before the intended signing date, the lien claim must be recorded before the lease signing date.

For a purchase, the lien must be recorded before the property is transferred to a buyer. The broker has 10 days from the recording date to mail a copy of the recorded lien to the owner of the property by registered or certified mail, with return receipt requested, or to personally serve the notice on the owner.  The broker’s lien shall be unenforceable if mailing of the copy of the notice of lien recording does not occur at the time and in the manner required by this Act. 770 ILCS 15/15.

7.  How to Enforce the Lien:  The broker enforces the lien by filing suit to foreclose it.  The broker must sue in the Circuit Court for the county where the property is located by filing a complaint and sworn affidavit that the lien has been recorded.  The lawsuit must be filed within 2 years after recording the lien.

8. Contents of the Lien Notice:  The lien notice shall state the name of the claimant, name of the owner, a description of the property upon which the lien is being claimed, the amount for which the lien is claimed, and the real estate license number of the broker.

9.  Q: Can the Liening Broker Recover Her Attorneys’ Fees?  A: Yes. The losing party must pay the winning party’s attorneys’ fees, costs, and prejudgment interest.

10.  Q: What About Priority? A: Prior recorded liens and mortgages against the property shall have priority over a broker’s lien.  770 ILCS 15/15.  These prior recorded liens include mechanics liens recorded after the broker’s lien notice but which relates back to a date prior to the lien recording date and prior recorded liens securing revolving credit and future advances of construction loans as described in Section 15-1302 of the Mortgage Foreclosure Statute.

Land Trust Beneficial Interest is Personal Property; Related Realty Can’t Be Liened by Creditor (IL Law)

It’s easy to robotically parrot the “beneficial interest in a land trust is personal property” rule but First Clover Leaf Bank v. Bank of Edwarsville, 2014 WL 6612947 (5th Dist. 2014) actually examines the rule’s impact against the factual backdrop of a judgment creditor trying to lien a debtor’s residence.

The creditor plaintiff obtained a $400,000-plus judgment against a husband and wife (the “Shareholders”) on various commercial guaranties they signed.  A corporation that the Shareholders each held a 50% stake in was the beneficiary of a land trust that held title to the Shareholders’ home (the “Property”).

When plaintiff learned that the Shareholders were trying to sell the Property for over $700,000, it recorded a lis pendens based on its earlier breach of guaranty judgment.  The lis pendens filing dissuaded the Property’s contract purchaser from closing and a lender later sued to foreclose on the Property.

The plaintiff then filed suit against the land trust, the corporate beneficiary (the Shareholders’ company) and the Shareholders to impose a constructive trust over the foreclosure sale proceeds.  The trial court granted plaintiff’s summary judgment motion and imposed a constructive trust on the proceeds.  The court also held that the corporate beneficiary was the alter ego of the Shareholders and so plaintiff was entitled to a constructive trust on each Shareholder’s equitable interest in the foreclosure sale proceeds.  The land trust appealed.

Held: reversed.  Land trust beneficial interest is personal property; not real property.  As a result, the lis pendens recording didn’t affect the corporate beneficiary’s interest in the Property.

Rules/reasoning:

– A beneficiary’s interest in a land trust is personal property and is not considered real estate;

– To create a security interest in personal property, a creditor must look to Article 9 of the UCC;

– Assignment of a beneficial interest in an Illinois land trust transfers an interest in personal property and does not give the assignee a direct interest in the real estate subject to the trust;

– A lien on a beneficial interest is not a lien on the real estate itself;

– A corporation will be deemed an alter ego of a controlling shareholder where the corporation is inadequately capitalized, doesn’t issue stock or observe corporate formalities, fails to pay dividends, is insolvent, has no records and nonfunctioning officers;

– Illinois has a general reluctance to pierce the corporate veil and a party seeking to pierce must make a substantial showing on all these factors;

– A lis pendens notice can only be filed when real estate is involved (735 ILCS 5/2-1901); it is not proper to file in connection with a personal judgment against someone

(¶¶ 15-18)

Here, the Shareholders had no legal interest in the Property.  They were shareholders in a corporation that was a beneficiary of the land trust that held title to the Property.  The corporate beneficiary’s interest in the land trust was personal property.  Because of this, the Shareholders interest in that corporate beneficiary was also personal property.

The net effect: plaintiff could not impress a lien against the Property in efforts to enforce its guaranty judgments against the Shareholders. Instead, Plaintiff should have filed a UCC financing statement (in the Secretary of State’s office) to lien the beneficial interest in the land trust.  Since the shareholders had no definable legal interest in the Property (it was owned by the land trust), plaintiff couldn’t assert a constructive trust against the Property foreclosure sale proceeds.

Take-away:  A factually convoluted and tortured case that illustrates the challenges creditors face trying to untangle complex webs of corporate protection to reach a controlling individual’s assets.  If in the creditor’s position, in addition to filing a UCC statement, I think I would issue third-party citations on the land trust entity and the corporate beneficiary.  Then, I would try to impress a lien or seek a turnover order as to any of the Shareholders interests in either the land trust or the corporate beneficiary.

All About Charging Orders – When the Judgment Debtor Is an LLC Member

ChargeGetting a judgment against an LLC member can trigger a high-anxiety response.  That’s because the normal post-judgment collection rules set out in Code Section 2-1402 and Supreme Court Rule 277  don’t cleanly apply.  

Section 30-20 of the LLC Act (805 ILCS 180/30-20) states that a creditor’s exclusive remedy is to obtain a “charging order” against the LLC member’s “distributional interest.”  Illinois cases describe  Section 30-20 as a special remedy designed to allow a creditor of an LLC member to realize the value of the debtor’s distributional interest in the LLC and also protect both the LLC’s ability to function and the other members’ LLC interests.

The LLC Act defines “distributional interest” as a “member’s interest in distributions by the limited liability company.”  A distributional interest is not salary, wages, draws or reimbursement. To reach an LLC member’s wages, for example, a creditor should still utilize a third-party citation on the LLC and seek a turnover of any wages to be paid to the debtor.

To obtain a charging order, the creditor files an application or motion with the Court (“Motion for Charging Order”) and requests a charging order on the LLC member’s interest in the LLC.  The Motion is served on the debtor by regular mail and the creditor does not have to name the LLC as a party defendant. 

The court also isn’t required to have jurisdiction over the LLC for a charging order to issue against the member-debtor.  See, Bank of America, N.A. v. Freed, 1-11-0749 et al., 2012 WL 6725894 (Ill. App. Ct. Dec. 28, 2012) (LLC is not a necessary party to creditor’s charging order application).

The charging order impresses a lien (a hold) on the debtor’s LLC interest and any distributions coming due to the debtor can be paid to the creditor.  The lien on the distribution can also be foreclosed by the creditor filing a petition to foreclose the lien.  The debtor’s LLC interest can then be sold by the Sheriff or a private property – much like with any other asset sale.  Any sale proceeds the debtor’s distributional interest garners can be applied to the judgment amount.

To summarize, then, an LLC member’s judgment creditor should follow this four-step enforcement process: (1) file a motion for a charging order against the LLC member’s distributional interest; (2) serve the charging order on the LLC’s manager and registered agent (so they know to forward the distribution to the creditor), (3) (if the debtor doesn’t redeem and the judgment isn’t satisfied after turnover of the distribution) file a motion to foreclose the charging order (appoint someone to evaluate and sell the distributional interest); and (4) schedule either a public or private sale of the debtor’s distributional interest.  I also serve a third-party citation directly on the LLC and ask for a turnover order on any wages, draws or other payments (that aren’t distributions) to the debtor.

Post-Judgment Statutory Changes

Effective January 1, 2012, several statutes that govern Illinois judgment enforcement practice took effect.  The key statutory change as it relates to enforcing judgments against LLC members is Code Section 12-112.5.  This Section speaks directly to the charging order remedy and provides:

Sec. 12-112.5. Charging orders. If a statute or case requires or permits a judgment creditor to use the remedy of a charging order, said remedy may be brought and obtained by serving any of the various enforcement procedures set forth within this Article XII or by serving a citation pursuant to Section 2-1402. If the court does not otherwise have jurisdiction of the parties, the law relating to the type of enforcement served shall be used to determine issues ancillary to the entry of a charging order such as jurisdiction, liens, and priority of liens.

The comments to revised Section 5-112.5 make it clear that while a charging order is still the exclusive remedy for a creditor to impress a lien on an LLC member’s distributional interest, the creditor can use citation/supplementary proceedings under Code Section 2-1402 and Rule 277 to obtain that charging order in the first place.

Going forward, and in light of Section 112.5 and until there are more published cases that more thoroughly examine the interplay between Section 112.5 with LLC Section 30/20, judgment creditors of an LLC member should (1) serve a citation on the debtor, (2) serve a third-party citation on the LLC (via its registered agent or manager); and (3) file a motion for a charging order against the debtor’s LLC interest.

Once the charging order enters, the creditor can either receive distributions until the judgment is satisfied or try to more quickly monetize the debtor’s LLC distribution by filing a petition to foreclose the charging order lien.  A foreclosure sale buyer of the distributional interest will have rights to future distributions but does not get to exercise voting rights or make LLC business decisions.