Lien Law Online Elert for 4/8/2013 - Illinois

On February 11, 2013, Governor Quinn signed House Bill 3636 into law, effective immediately. The bill addresses two sections of the Illinois Mechanics Lien Act (the “Act”): Section 16 and Section 34. With respect to Section 16, House Bill 3636 overturns the controversial Cypress Creek decision (LaSalle Bank National Association v. Cypress Creek 1, LP, 242 Ill. 2d 231 (2011)) and clarifies how to apportion foreclosure proceeds under the Act between lenders and contractors. The amended Section 16 of the Act reads as follows: No incumbrance upon land, created before or after the making of the contract for improvements under the provisions of this act, shall operate upon the building erected, or materials furnished until a lien in favor of the persons having done work or furnished material (hereinafter "lien creditor") shall have been satisfied, and upon any questions arising between incumbrancers and lien creditors, all previous incumbrances shall be preferred only to the extent of the value of the land at the time of making of the contract for improvements, but shall not be preferred to the value of any subsequent improvements, and each lien creditor shall be preferred to the value of all the subsequent improvements erected on said premises, whether or not provided by the lien creditor, and the court shall ascertain by jury or otherwise, as the case may require, what proportion of the proceeds of any sale shall be paid to the several parties in interest. All incumbrances, whether by mortgage, judgment or otherwise, charged and shown to be fraudulent, in respect to creditors, may be set aside by the court, and the premises freed and discharged from such fraudulent incumbrance. 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 at the time of making of the contract for 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. The amended Section 16 settles the dispute created by Cypress Creek by giving contractors preference over a prior incumbrancer to the extent of all improvements to the property, including improvements provided by other contractors. House Bill 3636 also amended Section 34 of the Act. Section 34 allows an owner to serve on a mechanic's lien claimant a notice to proceed to file suit and if not done in thirty days the lien is extinguished. The notice that is given must provide a warning in at least 10 point bold face type: Failure to respond to this notice within 30 days after receipt, as required by Section 34 of the Mechanic's Lien Act, shall result in the forfeiture of the referenced lien.