Published on:

Apportioning Proceeds When There Isn’t Enough to Go Around

In LaSalle Bank N.A. vs. Cypress Creek 1, LP (Edon Construction et al.), 950 N.E.2d 1109 (2011), 242 Ill.2d 231 (Feb. 25, 2011), the Illinois Supreme Court ruled on the thorny problem of how to apportion proceeds from a foreclosure sale between the mortgagee bank and mechanics lien claimants when there weren’t enough proceeds arising from the foreclosure sale to pay both in full. In other words, who gets paid and who gets the shaft according to Sec. 16 of the Illinois Mechanics Lien Act?

Holdings

Here’s what the Court decided:

#1 Sec.16 of the Mechanics Lien Act gives lien claimants priority only as to the value of work in place (materials and labor).

#2 The Illinois S. Ct. case of Clark v. Moore, 64 Ill. 273 (1872) indicates that while the contractor is entitled to the value of unpaid work and materials used to improve the property (which would be in its Mechanics Lien), the value of paid-for work and materials should benefit the mortgage lender (mortgagee), not title holder (mortgagor) or the contractor.

#3 In dividing sale proceeds between the mortgagee and the lien claimant, Illinois Courts have used one of two analyses:

(a) Market Value approach;

(b) The Contract approach.

Courts have also used subordination rules to supplement their analysis.

Conclusion

Under the facts of this case the Court determined that the value of unpaid work in place (the liened sum) should be tendered to the Contractor, except for those improvements paid for with mortgage funds or construction loan funds, which should inure to the Mortgagee. All other sums should go to the Mortgagee as well.

Mechanics Lien or construction law question of your own? See our Construction Primer and feel free to contact us for a confidential consultation.

Published on:
Updated: