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Lasalle Bank National Association v. Cypress Creek 1

February 25, 2011

LASALLE BANK NATIONAL ASSOCIATION,
APPELLANT,
v.
CYPRESS CREEK 1, LP EDON CONSTRUCTION ET AL.,
APPELLEES.



The opinion of the court was delivered by: Justice Garman

Opinion

JUSTICE GARMAN delivered the judgment of the court, with opinion.

Chief Justice Kilbride and Justices Thomas, Karmeier, and Theis concurred in the judgment and opinion.

Justice Freeman dissented, with opinion, joined by Justice Burke.

OPINION

The issue in this case is how to distribute foreclosure sale proceeds between a mortgagee and mechanics lien claimants when the mortgage predated the liens, the foreclosure sale proceeds are insufficient to satisfy all claims, and the mortgagee has paid for several improvements to the property through construction loan disbursements under section 16 of the Mechanics Lien Act. 770 ILCS 60/16 (West 2006). The circuit court of Will County subrogated the mortgagee and gave it priority with respect to those improvements for which it paid and gave the mechanics lien claimants priority with respect to the value of their individual improvements. The appellate court reversed, holding that the mortgagee was entitled to subrogation for payment of perfected mechanics liens, but that the value of those improvements paid for by the mortgagee where no lien was filed and perfected was to be first applied to the satisfaction of the mechanics liens. 398 Ill. App. 3d 592, 600. For the following reasons, we reverse the appellate court on this point and hold that the value of the foreclosed property that is attributable to those improvements paid for by the mortgagee should be applied first toward the satisfaction of the mortgage.

BACKGROUND

LaSalle Bank loaned $8,018,151 to Cypress Creek, LLP, for the development of 13.79 acres of land in Bollingbrook, Illinois, into senior apartments. The loan was secured by a mortgage and security agreement, which were recorded on June 13, 2003. Construction began on the development and Cypress hired appellees, Eagle Concrete and Edon Construction, to perform work on the development. LaSalle funded a total of eight construction draws before June 2005, when it determined that there was no longer enough money in the trust to complete the project. In July 2005, LaSalle filed to foreclose on the mortgage. The following November, Eagle and Edon recorded mechanics liens for $63,478 and $285,825.80, respectively.

In April 2006, a judgment of foreclosure and sale was entered against Cypress. The trial court found that the balance due on the mortgage totaled $8,621,110. The order of judgment was subsequently amended to reflect payment of $5,577,540, leaving an amount due on the mortgage of $3,043,570. LaSalle bought the property at a sheriff's sale in May 2006 for $1.3 million. Edon and Eagle filed to foreclose their mechanics liens and their actions were consolidated with the mortgage foreclosure proceeding.

In September 2007, a trial was held to determine the priority of lienholders and to distribute the proceeds of the sheriff's sale. At trial, Edon, Eagle, and three other mechanics lien claimants argued for priority of their liens over the mortgage. The court heard testimony that, through the loan disbursements, LaSalle paid $99,917 in engineering costs, $2,842.50 for environmental reports, and $8,538 for utilities. LaSalle also paid $30,000 to Basic Development in satisfaction of their lien, which predated the mortgage by one month. In an order dated October 30, 2007, the court found that the value of the land before any improvements were made was $1,360,000, or 40% of the total value of the property, and that the value of enhancements, including those paid for by LaSalle, totaled $2,068,699, or 60% of the total value. Based on these findings, the court determined that 40% of the proceeds of the sheriff's sale should go to the mortgagee in satisfaction of the mortgage and the remaining 60% should be divided among those who had improved the land. The court conducted a proportionality analysis and allocated sale proceeds according to the following table:

Expense of sale: $1,542 Receiver's fees and expenses: $746,244 Remaining proceeds ($552,214): Value attributable to land: $215,100 Value attributable to all improvements: $331,328.40

The court applied the $215,100 attributable to the land toward the satisfaction of the mortgage and subrogated LaSalle Bank to the amounts it paid for construction costs, engineering costs, environmental reports, and utilities, as well as the amount it paid toward the satisfaction of Basic Development's perfected lien. It then found the proportion of the total value of the improvements to which each party was entitled by dividing the value of each party's improvements by the total value of the improvements, $2,068,699. The court concluded that Eagle's lien for $63,478 accounted for approximately 3% of the value of the improvements and Edon's lien for $285,827 accounted for approximately 15%. LaSalle was entitled to credit for 76% of the value of the improvements, and the three other lienholders, with liens amounting to a total of $131,629, were credited with a total of 5.8% of the improvements. The court therefore awarded $50,000 and $7,300 to Edon and Eagle, respectively. LaSalle was subrogated to $256,514 for the improvements it funded and the remaining lienholders were awarded a total of $20,300. In total, LaSalle was awarded $471,614, with $215,100 attributable to the value of the land before any improvements were made and $256,614 attributable to those improvements it funded. Edon and Eagle filed motions for modification of judgment, which were denied in January 2008.

Edon appealed the allocation of sale proceeds and Eagle joined the appeal. Edon and Eagle first argued that the mechanics lien claimants have full priority over a mortgagee under section 16 of the Mechanics Lien Act and that, therefore, the trial court should have satisfied their liens in total before disbursing any funds to LaSalle as mortgagee. 398 Ill. App. 3d at 596. They also argued that the trial court erred in subrogating LaSalle to the status of a mechanics lien claimant for amounts it paid for lienable work. Id. at 596-97. LaSalle cross-appealed the trial court's denial of its request for attorney fees. Id. at 594. The appellate court, with majority, concurring, and dissenting opinions, affirmed LaSalle's priority as mortgagee to those foreclosure sale proceeds attributable to unimproved land (id. at 598), but reversed the trial court's subrogation ruling, holding that LaSalle was only entitled to be subrogated to the extent that it paid perfected mechanics liens (id. at 600). The court therefore ordered that the remaining construction and development costs to which the trial court subrogated the bank be allocated proportionally between the mechanics lien claimants. Id. The appellate court also reversed the trial court's denial of LaSalle's request for attorney fees. Id. at 601.

LaSalle filed a petition for rehearing on the subrogation ruling and the application of that ruling to the three lien claimants which had not appealed the trial court's decision. The petition was granted and, on January 15, 2010, the appellate court filed its second opinion with majority, concurring, and dissenting opinions. The court retained its ruling on the subrogation issue, but ordered that the value attributable to the improvements paid with loan disbursements be allocated proportionally only between the two appellants, Edon and Eagle.

This court granted LaSalle's petition for leave to appeal. Ill. S. Ct. R. 315 (eff. Feb. 26, 2010).

ANALYSIS

The issue before this court concerns the apportionment of foreclosure sale proceeds as between a mortgagee and mechanics lien claimants when the proceeds are insufficient to satisfy the mortgage and the mechanics liens. Apportionment is governed in this situation by section 16 of the Mechanics Lien Act (770 ILCS 60/16 (West 2006)). Questions of statutory construction are questions of law and reviewed de novo. People v. Perry, 224 Ill. 2d 312, 324 (2007).

In matters of statutory construction, we endeavor to "ascertain and give effect to legislative intent." Id. at 323. We first must look to the plain language of the statute as the best indicator of legislative intent, considering the statute in its entirety. Id. Where the language is clear and unambiguous, we will apply it as written. Id. Only where the language is ambiguous do we resort to extrinsic aids to determine legislative intent. Id. at 323-24.

Plain Language

The Mechanics Lien Act affords some protection to contractors who contribute labor or materials to a construction project or who provide services such as an architect or engineer by giving them a lien on the subject property. 770 ILCS 60/1 (West 2006). The Act modifies the common law first-in-time, first-in-right rule (see 27A Ill. L. and Prac. Mortgages §50 (2003)) by affording lienholders partial priority over pre-existing mortgages when the proceeds of a foreclosure sale are insufficient to satisfy all claims:

"No incumbrance upon land, created before or after the making of the contract under the provisions of this act, shall operate upon the building erected, or materials furnished until a lien in favor of the persons having done work or furnished material shall have been satisfied, and upon questions arising between incumbrancers and lien creditors, all previous encumbrances shall be preferred to the extent of the value of the land at the time of making of the contract, and the lien creditor shall be preferred to the value of the improvements erected on said premises, and the court shall ascertain by jury or otherwise, as the case may require, what proportion of the proceeds of any sale shall be paid to the several parties in interest. All encumbrances, whether by mortgage, judgment or otherwise, charged and shown to be fraudulent, in respect to creditors, may be set aside by the court, and the premises freed and discharged from such fraudulent incumbrance." 770 ILCS 60/16 (West 2006).

Historically, this provision has been interpreted by the appellate court to give each mechanics lien claimant priority only to the extent of the increased value of the property due to that claimant's improvements on the property. See, e.g., Commercial Mortgage & Finance Co. v. Woodcock Construction Co., 51 Ill. App. 2d 61, 64-65 (2d Dist. 1964); Moulding-Brownell Corp. v. E.C. Delfosse Construction Co., 304 Ill. App. 491, 500 (1st Dist. 1940). Edon and Eagle urge us to adopt the Third District's decision in this case and hold that section 16 of the Mechanics Lien Act entitles mechanics lien claimants to be preferred to the added value of all lienable improvements on the land made subsequent to the time the mortgage was entered into. The mortgagee, then, would be entitled to ...


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