There has been a relatively strong run, recently, of courts reaching what I think are the correct results in mechanics lien cases. In that vein, a very recent decision in Illinois provides some guidance on when a lien claimant may, and may not, file a valid lien if the lien claimant will receive some benefit from the improvement to the property (other, of course, than the contract price of the improvement). Long story short – “an owner or co-owner may not claim a lien against his or her own property” Bonhiver v. State Bank of Clearing, 331 N.E.2d 390, 398 (1975), but (and this is a big but) the corporate form must be examined in determining ownership interests.
Background
an owner or co-owner may not claim a lien against his or her own property”, but the corporate form must be examined in determining ownership interests. In the recent case, Peabody-Waterside Dev., LLC v. Islands of Waterside, LLC, 2013 IL App (5th) 120490, P5 (Ill. App. Ct. 5th Dist. 2013), the mechanics lien at issue arose out of the construction of a development. Islands of Waterside, LLC (“Islands”) is a limited liability company with two members, Peabody-Waterside, LLC (“Peabody”) and Praxis-Waterside, LLC (“Praxis”). Islands owns property in Illinois being developed as the “Islands of Waterside” development. The Islands LLC agreement entitles Peabody and Praxis each a 50% share of the profits and losses resulting from the development of the Islands of Waterside property.
To prepare for developing the property, site preparation and grading work needed to be performed on the land. All of the bids solicited by Islands were much higher than expected, and so, Islands hired Peabody to do the work on a “cost-plus” basis. That is, for the actual cost incurred plus a contractor fee of 15%. Peabody performed the work and submitted a bill for approximately $4.5 million. Islands did not pay Peabody, and Peabody filed a mechanics lien and breach of contract action. The trial court dismissed the mechanics lien claim because Peabody was jointly interested in developing the property and, as such, was “not the type of claimant that is entitled to a mechanic’s lien under Illinois law.” Peabody appealed the decision.
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Ownership, Mechanics Liens, Corporate Form, & Lien Claimants
It is well-settled in Illinois that an owner or co-owner may not assert a mechanics lien against his or her own property. It follows that a joint-venturer may not file a lien against the property of a joint-venture as each individual joint-venturer co-owns the joint-venture’s property. It was asserted in Peabody that since Peabody was entitled to a 50% share of any profits stemming from Islands’ development of the property, Peabody was doing the grading and site preparation work for its own direct benefit – like a joint-venturer. In fact, it was argued that the relationship between Peabody and Praxis constituted a joint-venture under Illinois law, as a joint-venture is an “association of two or more persons to carry out a single enterprise for profit”. The trial court bought this argument, and held that Peabody could not claim a mechanics lien for the work performed.
That finding though, failed to take into consideration some very important points.
The appeals court agreed with the trial court’s statement that co-owners of a property are not allowed to file mechanics liens against that property, but disagreed as to the application to this case. As stated by the appeal court “Peabody is not a co-owner of the property”, and the “”jointly interested” finding ignores the corporate form of Islands and the nature of the relationship between a limited liability company and its members”. There is a distinct and significant difference between a joint-venturer and a member of an LLC. An LLC is a distinct legal entity, and a joint-0venture is not. Therefore, “co-venturers are personally liable for the debts associated with the joint venture, and the co-venturers are the co-owners of the venture property” while “membership in a limited liability company does not confer any ownership interest in the property, real or personal, of the LLC”.
If courts are to strictly construe the mechanics lien laws to the detriment of potential lien claimants, they must strictly construe the mechanics lien law protections, as well.The only thing a member of an LLC owns is its membership interest in the LLC. The trial court in this case confused sharing in the profits and losses of an LLC with being a co-owner of the LLC’s property. Peabody and Islands are two distinct legal entities, and Peabody does not own any of Islands property. This is the reason that a creditor of an LLC member cannot seize the LLC’s property to satisfy a debt.
The appeals court determined that because Peabody had no ownership interest in Islands’ property, Peabody’s mechanics lien was valid.
This is, I think, the correct decision. Whether or not it sits especially well – Peabody was, in truth, performing work for which it would receive a significant benefit other than the contract price – this is the correct interpretation of the law. Mechanics lien laws are strict in many ways, and defining who is entitled to be a mechanics lien claimant is one of them. If courts are to strictly construe the mechanics lien laws to the detriment of potential lien claimants, they must strictly construe the mechanics lien law protections, as well.