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03/29/96 LYONS SAVINGS v. GASH ASSOCIATES

March 29, 1996

LYONS SAVINGS, N/K/A SUPERIOR BANK, FSB, PLAINTIFFS,
v.
GASH ASSOCIATES, ET AL., DEFENDANTS. PAINT WORKS, INC., PRO-TECH, INC., TRI-STATE CARPETING & DECORATING, INC., AND LEO HEIN CONSTRUCTION, COUNTERPLAINTIFFS-APPELLANTS, V. LASALLE NATIONAL BANK, AS TRUSTEE UNDER TRUST NO. 10-39721-09, LYONS SAVINGS N/K/A SUPERIOR BANK, FSB, DHC SERVICES CORP., UNKNOWN OWNERS, AND UNKNOWN LIEN CLAIMANTS, COUNTERDEFENDANTS-APPELLEES.



Appeal from the Circuit Court of Cook County. Honorable CLIFFORD MEACHAM, Judge Presiding.

The Honorable Justice Buckley delivered the opinion of the court: Wolfson, J., and Braden, J., concur.

The opinion of the court was delivered by: Buckley

The Honorable Justice BUCKLEY delivered the opinion of the court:

Appellants, Paint Works, Inc. (Paint Works), Pro-Tech, Inc. (Pro-Tech), Tri-State Carpeting & Decorating, Inc. (Tri-State), and Leo Hein Construction, Inc. (Leo Hein), brought mechanics' lien claims asserting that they have priority over certain funds set aside from the sale of property foreclosed upon by mortgagees. The trial court ruled that (1) appellants failed to prove that they enhanced the value of the property, (2) some of appellants' improvements were non-lienable, and (3) Leo Hein had failed to perfect its lien for a portion of its work. Appellants contend that all of these holdings are in error.

In 1985, appellants provided services, labor, and material for a building in Rosemont, Illinois, managed by Diversified Holding Corp. (DHC) for a total cost of $100,908.44. They subsequently recordedmechanics' liens totaling $78,411.55. At the time this work was done, the building was previously incumbered by four properly recorded mortgages, one of which was held by appellee, Lyons Savings & Loan Association (Lyons). In 1987, the mortgagees foreclosed on the property, and forced a foreclosure sale which took place on November 3, 1988. At the time the property was sold, the mortgages totaled more than $11 million. The property was sold for $4,005,000, and the order of foreclosure provided that $150,000 will be retained from the proceeds of the sale for distribution to valid lien holders. Only the first two mortgages were fully satisfied at the sale; Lyons held the third mortgage, which was not fully satisfied. Appellants claim that their work enhanced the value of the property by an amount equal to the contract price, and that under the Mechanics' Lien Act 770 ILCS 60/0.01 et seq. (West 1994), they have priority over the amount of their liens from the funds set aside. Lyons claims that it has priority over the entire amount set aside because it holds a prior and properly recorded mortgage and appellants have failed to prove enhancement.

After a trial in the chancery division of the Circuit Court of Cook County, the trial court found that appellants had failed to present any evidence that they enhanced the value of the property, and, therefore, the Mechanics' Lien Act does not entitle them to any part of the funds set aside from the foreclosure sale. The trial court also found that Pro-Tech's cleaning services were non-lienable, and that Paint Works' and Tri-State's labor in removing and replacing miniblinds and moving furniture was non-lienable. Finally, the trial court found that Leo Hein had failed to perfect its lien for the first phase of its work.

Section 16 of the Mechanics' Lien Act provides in relevant part that "upon questions arising between incumbrancers and lien creditors, all previous incumbrances shall be preferred to the extent of the value of the land at the time of making the contract, and the lien creditor shall be preferred to the value of the improvements erected ***." 770 ILCS 60/16 (West 1994). Therefore, in order to have priority over a mortgagee, mechanics' lien claimants whose contracts with the owner are made after the mortgage is recorded, must prove that they have enhanced the value of the property. If they fail to prove this, then the mortgage will have complete priority over the liens. Commercial Mortgage & Finance Co. v. Woodstock Construction Co., 51 Ill. App. 2d 61, 65, 200 N.E.2d 923, 925 (1964). Appellants claim the trial court erred in finding that they failed to prove "the value of the improvements erected." 770 ILCS 60/16 (West 1994).

Relying on Moulding-Brownell Corp. v. Delfosse Construction Corp., 304 Ill. App. 491, 26 N.E.2d 709 (1940), the trial court found thatthe lien claimants must prove the value of their enhancements by applying the market value theory. Generally, under the market value theory, the value of the enhancements equals the market value of the property after the improvements are made minus the value of the property before the improvements are made. Moulding-Brownell, 304 Ill. App. at 498, 26 N.E.2d at 712.

In Moulding-Brownell, the property at issue was previously incumbered by a mortgage when the owners contracted with the lien claimants to build a restaurant. The mortgagee and the lien claimants later foreclosed on the property, and forced a liquidation sale. The sale did not raise sufficient money to satisfy both the mortgagee and the lien claimant, and both parties claimed priority. Moulding-Brownell, 304 Ill. App. at 493-94, 26 N.E.2d at 710. The court interpreted section 16 (which has not been amended since its adoption in 1903) to provide that mechanics' lien claimants must prove enhancement under the market value theory. Moulding-Brownell, 304 Ill. App. at 498, 26 N.E.2d at 712. The court explained that an "enhancement is the increase in market value of the property by reason of the improvement ***, and is not affected by the cost of labor or material, the original amount of the claim, or the balance due thereupon." Moulding-Brownell, 304 Ill. App. at 498, 26 N.E.2d at 712.

In this case, the lien claimants did not attempt to prove enhancement under the market value theory at trial. Therefore, the trial court found that they had failed to prove enhancement, and that the incumbrancer had priority over the funds in dispute. On appeal, the lien claimants argue that it would have been impossible for them to apply the market value theory because the improvements they made were so minor, given the value of the property. We agree.

The record shows that appellants' total contract price was $100,908.44. Their lien claims total $78,411.55. Theodore Kowalski, appellants' expert witness, testified that since this was a multi-million dollar property, and the improvements were so relatively meager, the market value theory would have been impossible to apply accurately. He testified that the degree of variance that can generally be accepted with regard to market value is 10%. Since 10% of the value of the property far exceeds the lien claims, the market value approach is inappropriate for determining the value of these improvements.

Other appellate court decisions have held that the contract price is the appropriate measure of the lien claimants' improvements. Noel State Bank v. Blakely Real Estate Improvement Corp., 321 Ill. App. 594, 53 N.E.2d 621 (1944); AA Erickson Brothers., Inc. v. Jenkins, 41 Ill. App. 2d 180, 190 N.E.2d 383 (1963). In Noel, the court weighed priorities between a prior incumbrancer and a mechanics' lien claimant, who had provided labor and materials for minor sewer work to an existing structure. The contract price was $8,000, and the lien was for $5,980. Subsequent to these improvements, the incumbrancer foreclosed on the property, and a sale of the property failed to raise enough money to satisfy both the incumbrance and the lien. After the sale, $5,980 was set aside until a determination could be made as to priority between the lienor and the incumbrancer. Noel, 321 Ill. App. at 596, 53 N.E.2d at 622.

The court found that "it is almost a matter of common knowledge" that sewers enhance the value of property. Noel, 321 Ill. App. at 605, 53 N.E.2d at 626. The court held that the value of the enhancement was the amount of the contract price, and, therefore, the mechanics' lien of $5,980 had priority over the prior incumbrance. Noel, 321 Ill. App. at 605, 53 N.E.2d at 626.

Erickson also involved relatively minor improvements to an existing building. In that case, the plaintiff provided labor and materials to repair and restore some of the building's brick work. The court found that since the contract price for the work was $1,050, the value of the ...


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