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.

Court reaffirms that Receivership is the rule in commercial foreclosure actions, with few exceptions

Block 37It’s becoming apparent that apart from having financing in place to pay off the balance of a loan, no mortgagor in a commercial foreclosure action is going to be able to defeat a mortgagee’s request to appoint a receiver. 

Consider the recent case of Bank of America, N.A. v. 108 N. State Retail LLC et al. (Doc. No. 1-09-3523).  The matter involves the Block 37 project in downtown Chicago.  A consortium of lenders led by Bank of America filed suit to foreclose their interests in the retail and entertainment development when the developer defaulted on the terms of the loan.  According to the opinion, the developer signed several letters during the term of the project acknowledging the default at the request of the lenders to keep the project funded.  The events giving rise to the default were a failure by the developer to have $5 million in liquid assets and a failure to make sure the funds available under the loan equaled or exceeded the budget to complete the construction of the project as required by the loan agreement.

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Can A Mortgagor Ever Show Good Cause For Not Appointing A Receiver For Non-Residential Property?

It’s an interesting question that’s finally been put to the Illinois First District Appellate Court.

Part 17 of the Illinois Mortgage Foreclosure Law (735 ILCS 5/15-1101 et seq.) is dedicated to the rules surrounding possession of the property during foreclosure.  Enacted in 1987, the Illinois statute drastically limits a trial court’s discretion regarding the appointment of a receiver and essentially turns the appointment into a mandatory condition provided a mortgagee can show it is entitled to possession of the property.  When a mortgagee is entitled to possession there is a presumption in favor of the appointment and a mortgagor wishing to retain possession has the burden of overcoming that presumption by showing “good cause” for NOT appointing a receiver.  See, 735 ILCS 5/15-1702(a) and 1701(b)(2).

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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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