Mechanics’ Lien Claimants Beware: Failing to Name the Owner’s Lender-Mortgagee in Your Foreclosure Lawsuit May Invalidate Your Lien

Seasoned construction contractors and counsel likely already appreciate the highly complex and technical nature of mechanics’ lien statutes and know that any misstep along the way could sink their right to recovery. What they may not appreciate, however, is that an Illinois appellate court introduced yet another potential pitfall during the pandemic when it held in CB Construction & Design, LLC v. Atlas Brookview LLC (“CB Construction”) that the contractor forfeited its lien rights when it failed to include the owner’s lender/mortgagee in its lawsuit seeking to foreclose on its mechanics lien.[1]

Background

The property on which the project in CB Construction was situated was a multi-family residential building that the owner had purchased with the proceeds of a loan from TPG Re Finance 2 Ltd. (“TPG”). In addition to the mortgage interest recorded against the property by TPG, a security interest in leases and rents from the property had been recorded by Wells Fargo Bank, N.A. (“Wells Fargo”).[2]

The owner subsequently contracted with CB Construction and Design, LLC (“CB”) to renovate the units and common areas of the property. After completing its work, CB:

• Claimed it was still owed $1,439,531.08.[3]
• Filed a mechanics lien against the property which prompted the owner to serve CB with a Section 34 demand, requiring CB to file suit to foreclose its lien within 30 days or lose its lien.[4]
• Filed a complaint for breach of contract and mechanics lien foreclosure within 30 days of the demand.
• Named “other defendants yet to be determined” but did not identify TPG or Wells Fargo as named defendants.[5]

The owner sought to dismiss CB’s mechanics lien claim alleging that CB failed to timely join TPG and Wells Fargo as necessary parties within the statutory time limit to bring suit. The trial court accepted the owner’s argument and dismissed CB’s mechanics lien claim with prejudice.[6] On appeal, the Illinois Appellate Court, First District, affirmed. 

To begin, the First District noted that the language of 770 ILCS 60/11(b) in the Mechanics Lien Act states:

Each claimant shall make as parties to its pleading (hereinafter called ‘necessary parties’) the owner of the premises, the contractor, all persons in the chain of contracts between the claimant and the owner, all persons who have asserted or may assert liens against the premises under this Act, and any other person against whose interest in the premises the claimant asserts a claim.”[7]

The Court’s Ruling and Its Effects

Because CB sought a court determination that its lien was “senior and superior to any claim of right, title or interest in or to the real property,” the First District concluded that the banks, which held liens on the banks, were determined to be necessary parties under the statute.[8]

Nor was it sufficient to include a generic “John Doe” style placeholder; the First District held that, once the trigger for suit is started, the claimant must bring suit against all necessary parties within the statutory limitations period, which (at least in CB Construction) was 30 days due after the owner’s acceleration notice. The court held that CB’s failure to join TPG and Wells Fargo as parties to its complaint within 30 days of the owner’s demand resulted in forfeiture of its lien.[9]

In holding as it did, the First District rejected CB’s argument that, notwithstanding 770 ILCS 60/34 that requires a claimant to file suit within 30 days after a proper demand is made, CB still had two years to bring suit under 770 ILCS 60/9, as to the other parties. The First District held that the same time period applied to all defendants.

The First District further rejected an argument that CB could simply add the necessary party at any time under 770 ILCS 60/11 of the Illinois Mechanics Lien Act, holding that this section only deals with “unknown” parties, and the lenders in this case had recorded their interests prior to CB’s mechanics lien filing, so the lenders were not “unknown.” While CB was ostensibly still able to pursue its contract-based claim, it had no right to maintain a lien on the property. 

Comparing Similar Cases

Courts in several other states have come to a similar conclusion as the one in CB Construction.

• Glasser & Glasser, PLC v, Jack Bays Inc.

 For instance, in Glasser & Glasser, PLC v. Jack Bays Inc., the Virginia Supreme Court held that under that state’s specific statute, all parties with an interest in the property must be named as defendants in any mechanics lien lawsuit and such failure requires the mechanics lien lawsuit to be dismissed.[10]

• Sims v ACI Northwest, Inc.

Likewise, the Idaho Supreme Court in Sims v ACI Northwest, Inc., held a lien holder was a necessary party to any mechanics lien lawsuit.[11]

• Welty Bldg. Co., Ltd. v. Indy Fedreau

The Indiana Court of Appeals in the case of Welty Bldg. Co., Ltd. v. Indy Fedreau Co., LLC also came to the same conclusion.[12]

The Take-Away

These cases demonstrate that failure to follow the letter of the mechanics lien law can have disastrous consequences inasmuch as lien rights are concerned.

Contractors (or their attorneys) should make to perform an accurate title search immediately prior to filing a notice of lien and bringing suit. They should also ensure all “known” lien holders are made defendants in any lawsuit for a foreclosure of a mechanics lien.

Article Content is Not Legal Advice. This article is for informational purposes only. The content in this article is not legal advice and should not be construed nor relied upon as such. This is not a substitute for personal legal advice.

[1] 2021 IL App (1st) 200924.

[2] Id. at ¶ 5.

[3] Id. at ¶ 6.

[4] Id. at ¶ 7 (citing 770 ILCS 60/34).

[5] Id. at ¶ 8.

[6] Id. at ¶¶ 11-12.

[7] Id. at ¶ 23 (emphasis added).

[8] Id. at ¶ 25.

[9] Id. at ¶ 30 (emphasis added).

[10] 285 Va. 358, 369, 741 S.E.2d 599, 605 (2013).

[11] 157 Idaho 906, 342 P.3d 618, 624 (2015).

[12] 985 N.E.2d 792, 800 (Ind. Ct. App. 2013).