Is The Legislative Reaction to Cypress Creek a Fix in Support of Lien Claimants?

Interior of a Transperth B-series train at Clarkson, Western Australia. :Mitchell JohnsonThe much anticipated legislative fix for the LaSalle Bank c. Cypress Creek 1 case has stalled in the State Senate.  House Bill 3636 seeks to change the language of Section 16 of the Illinois Mechanics Lien Act to deal with the Illinois Supreme Court’s decision that puts properly secured construction lenders on equal footing with lien claimants during the apportionment of sale proceeds following a foreclosure.

The Illinois House of Representatives passed the bill on April 14.  The version passed by the House took away the equal footing put in place by Cypress Creek and added language to Section 16 stating that lenders “shall not be preferred to the value of any subsequent improvements” and gave the lien claimants preference as to the value of “all” improvements placed on the property during construction “whether or not” they were provided by the lien claimant.

If you followed the decisions, the House bill basically enacts the method of apportionment and damage calculation that the Illinois Third District Appellate Court had awarded in the opinion that was appealed to the Illinois Supreme Court.

After the House passed the bill, it went to the Senate where it was amended with the following language:

“When the proceeds of a sale are insufficient to satisfy the claims of both previous incumbrancers and lien creditors, the proceeds of the sale shall be distributed as follows: (i) any previous incumbrancers shall have a paramount lien in the portion of the proceeds attributable to the value of the land before any improvements;  and (ii) any lien creditors shall have a paramount lien in the portion of the proceeds attributable to the value of all subsequent improvements made to the property.”

This amendment is a little tricky.  It keeps the distinction of the House bill, but appears to go on to say that courts should first award from the sale proceeds the full amount of the lenders payment for the land, and then, after that award, give the remaining proceeds to lien claimants.  I

It’s the use of the word “paramount” that’s confusing.  A quick search of the Illinois statutes shows that the word is most often used in the preamble of acts to discuss the purpose and importance of the act.   

When it is used in the statutory language with purpose, “paramount” is used to establish or express a priority of right:

• 755 ILCS 50/5-5
  
• 735 ILCS 5/8-1209
• 615 ILCS 5/26
• 820 ILCS 310/21

Garners Modern American Usage defines paramount as “superior to all others” or “most important”.

If the added words of the Senate bill don’t change the method of distribution and award amounts established by the House bill, then they shouldn’t be added.  As it reads, the Senate bill would do away with the method for calculating monetary awards of foreclosure proceeds established in both the Appellate and Supreme Court Cypress Creek cases and appears to award the proceeds of a sale in the amount of the full amount of the land value first to the lender and then would take whatever remains from the sale proceeds and give it to the mechanic’s lien claimants… if not, why add “paramount”?

The bill appears to have stalled in the Senate for now.  But anyone concerned about the changing rights of contractors and lenders should keep an eye its progress.

Illinois Legislature Passes Modification for Private Right of Action Under The Home Repair and Remodeling Act

Amanda Bicknell - Home Repair in South DakotaSenate Bill 2540 was sent to Governor Quinn for signature on Friday.  The bill eliminates an ongoing issue prevalent in some recent judicial opinions and dissents regarding a private right of action under the Illinois Home Repair and Remodeling Act (815 ILCS 513).

The debate was sparked in recent opinions like K. Miller Constr. Co. v. McGinnis, 394 Ill. App. 3d 248, 913 N.E.2d 1147 (1^st Dist. 2009); Smith v. Bogard, 377 Ill. App. 3d 842, 879 N.E.2d 543 (4^th Dist. 2007); and Central Illinois Electrical Services, LLC v. Slepian, 358 Ill.App.3d 545, 831 N.E.2d 1169 (3^rd Dist. 2005).  The appellate courts have been reaching different conclusions about the rights and remedies asserted under the act and the Illinois Supreme Court has yet to chime in on the matter, although Artisan Design Build v. Bilstrom remains on the Leave to Appeal Docket for this term.

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Court Rules information provided from Inspection and Testing that is used for construction remains protected by Economic Loss Doctrine

Spray fireproofing on an I-beamThe GC hired Piasa to install drywall frame, spray-on fireproofing as well as acoustical and EIFS work.  The GC also hired Patriot to provide inspection and testing of the fireproofing material.  Part of Patriot’s contract required Patriot to report and deficiencies in the fireproofing to the GC and Piasa.  The project specs and manual called for this testing to occur as the fireproofing was installed and for prompt reporting of any deficiencies.

Piasa installed fireproofing and Patriot inspected it.

Piasa, was subcontractor on a project and was terminated by the GC.  Piasa filed this complaint against the GC for breach of contract and the surety for requesting monies it claimed it was owed, after a counterclaim was filed against Piasa, Piasa sued Patriot for negligent misrepresentation alleging that any defects it might be found liable for with regard to the fireproofing should be passed on to Patriot because Patriot had the responsibility for the testing.

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The Economic Loss Doctrine Bars Suits For Negligence Where Only The Building Gets Damaged?

CASE STX480.jpgA recent Illinois Third District opinion has helped to clarify the economic loss doctrine’s application in the state and it’s a necessary read for any material suppliers and subcontractors.

The facts of Westfield Ins. Co. v. Birkey’s Farm Store, Inc. (3d Dist. Case no. 3-09-0501) are relatively easy to follow.  Plaintiff’s bought a tractor that had an added auto steer system from Birkey’s.  The tractor was made by CNH.  The tractor caught fire and was extensively damaged.  Plaintiff’s sued Birkey’s and CNH alleging counts in negligence and product liability amongst others.  Birkey’s and CNH moved to dismiss the negligence and product liability claims arguing they were barred by Illinois’ application of the economic loss doctrine.

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Are Courts Finally Willing To Entertain Reasonable Liquidated Damages Clauses?

Land sales contract. Sumerian clay tablet, ca. 2600 BC., Taken by Marie-Lan Nguyen“It is true that, when people make contracts, they usually contemplate the performance rather than the breach.” – The Common Law, Oliver Wendell Holmes, Jr.

As the sophistication of contracting parties has grown, Holmes’ comment can be read today as an admonishment as much as it can be understood to express the mindset of contracting parties.  The body of case law on liquidated damages clauses in contracts that’s been created since Holmes first published The Common Law is proof that contemplation of the breach is now a necessary part of the contemplation of performance.

Today’s opinion, Ner Tamid Congregation of North Town v. Krivoruchko (IL N.D., Doc. No. 08 C 1261) is a must read for understanding that in the formation of a contract, the debate is far from dead between allowing sophisticated parties to commingle liquidated damages with the right to sue in a hybrid “election of remedies clause” and a simple Illinois public policy against those clauses.

The opinion from Judge Cole is a summation of the origins and state of the law regarding both the interpretation of contracts and liquidated damages clauses in agreements fit for a textbook.  Similar sets of facts are currently being litigated in courts across the nation given the economic downturn and the bursting real estate bubble. 

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